FACULTY OF MANAGEMENT AND LAW

SCHOOL OF ACCOUNTANCY

ASSESSMENT OPPORTUNITY 3

MODULE: CMAB 040 JUNE 2019

MANAGEMENT ACCOUNTING & FINANCE IV
CMAC 080
ADVANCED MANAGEMENT ACCOUNTING AND FINANCE

TIME: 3 HOURS MARKS: 100

INTERNAL EXAMINERS: MS S MALATJI

MR T PHAHLAMOHLAKA
MR T MAGUNDA

INTERNAL MODERATOR: MR T CHIREKA

THIS PAPER CONSISTS OF …11…PAGES INCLUDING COVER PAGE

INSTRUCTIONS:
• All questions are compulsory and MUST be attempted.
• During reading and planning time only the question paper may be annotated. You must NOT start
writing on your answer booklet until instructed by the invigilator.
• Silent non-programmable calculators are allowed.
• Start every question at the top of a page.
• If you use tippex or pencil on your answer sheet, you do not qualify for a remark.
• Scratch out open spaces and empty pages.
 CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

QUESTION 1 [24 MARKS]

Cripsy Fresh (Pty) Ltd has two divisions, CripsyLoafs and CripsyKota. CripsyLoaf bakes soft mini loafs
which are sold to retail stores in the Mankweng area through normal marketing channels. CripsyKota
operates a food outlet near gate 2 of University of Limpopo where they prepare and sell kotas.

CripsyLoaf Cost Information

The mini loaf that CripsyLoaf bake is unique. It has the taste and look of white bread but it is baked
with the fibre and goodness of brown bread, with 6 vitamins and minerals added. The cost structure
per mini loaf baked by CripsyLoaf has been determined as follows:
R
Ingredients 3.76
Direct labour Note 1
Packaging 0.28
Total Manufacturing overheads Note 2
Note 1
Direct labourers are paid R25 per hour and they spend 6 minutes to make one mini loaf.
Note 2
Overheads are allocated based on labour hours. At production level of 5 000 mini loafs, the total
manufacturing overheads are R6 500, at production level of 4 000 mini loafs, total overheads are R6
000 and at production level of 3 000 mini loafs the total overheads are R5 800.

There are a lot of bakeries supplying baked products in the Mankweng area. As such, the customers
are very sensitive to price changes. The demand at different price levels is as follows:
Selling Price R10 R11 R11.20 R11.50
Demand 5 000 4 850 4 500 3 900

All the resources used in the production process are abundantly available except for labour hours which
is limited to 500 hours. The number of hours available can be increased to 520 hours if the direct labour
works overtime. If they work overtime, an additional cost of R750 will be incurred by the Cripsy loaf
division.

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CripsyKota cost information

CripsyKota’s version of a kota is not the old-school quarter loaf of normal bread, but rather a crispy
neatly hollowed and filled with chips, plus exciting additions like grilled chicken, ribs, prego steak and
chorizo to replace the traditional Russian sausages or polony. Currently, 800 kotas are sold at R35 per
kota. The maximum capacity of the CrispyKota division is 1 000 kotas.

The cost structure of one Kota is as follows for external sales:

R
Crispy roll 8.70
Chips and additions 15.50
Direct labour 1.50
Variable overheads 1.15
Fixed overheads 1.43

The crispy roll is currently being purchased from Lobels Bakeries Pty Ltd (hereafter referred to as
“Lobels”), a specialist bakery in Mankweng.
CripsyKota has been approached by University of Limpopo to provide them with 350 kotas for their
year-end function at a total contract price of R11 500. The university has requested the kotas packaging
to include the University logo. CripsyKota will incur an additional cost of R0.80 per kota for the
packaging.
In the most recent management meeting, divisional managers have been encouraged to work together
and make decisions that are in the best interest of the company as a whole. As such, the manager of
CripsyKota has approached the manager of CripsyLoaf to supply them with 350 rolls needed for them
to make the kotas for the special order. The crispy roll used for the kotas is smaller and it uses less
ingredients than the mini loaf therefore CripsyLoaf will save a cost of R1.34 for each roll they make.

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CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

YOU ARE REQUIRED TO:

a) Calculate the minimum transfer price at which CripsyLoaf would be willing to provide (13)
CripsyKota with the crispy rolls.

Please round all amounts to the nearest two decimal places.

b) Calculate the maximum transfer price that the manager of CripsyKota will be willing (7)
to pay for the crispy rolls.

Please round all amounts to the nearest two decimal places.

c) Explain the objectives of a good transfer pricing system. (4)
[24]

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 CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

QUESTION 2 [26 MARKS]

YBHO (Pty) Ltd (hereafter referred to as “YBHO”) is one of the largest construction companies in
Limpopo. YBHO’s head office is strategically located in Polokwane. The company is divisionalised and
managers are responsible for the profits and capital investment decisions for their divisions.
Construction activities are divided into three main operating divisions, Building Construction, Civil
Engineering and Earthworks.

Each year, bonuses are paid to the divisional managers using the following formula:
10% {Divisional Profit – [(WACC + 0.5) * divisional assets]}

The divisions’ results and net assets for the 2018 financial year is as follows:

Building Civil Earthworks

construction Engineering
Gross profit 3 233 749 10 985 455 7 677 990
Operating expenses of the division (1 032 785) (4 567 349) (2 457 345)
Head office costs Allocated
Accounting, legal and audit fees (325 432) (854 396) (574 329)
Other head office expenses (559 098) (1 043 976) (879 444)
Interest expense (198 349) (890 000) (456 005)
Profit before tax 1 118 085 3 629 734 3 310 867
Income tax expense (301 889) (1 088 920) (827 717)
Divisional profit 816 196 2 540 814 2 483 150

Divisional Net assets at book value 7 875 349 18 275 445 20 456 696

Head office allocated costs

Accounting, legal and audit fees for the divisions are managed at head office. The allocation to the
divisions is based on the actual expense incurred in relation to the services rendered for that division.
Other head office expenses include costs that cannot be traced to the individual divisions and they are
allocated to the divisions based on revenue.

Divisional net assets

Included in the net assets are non-current assets. The cost and accumulated depreciation of the non-
current assets at the end of the 2018 financial year are as follows:

Building Civil Earthworks

construction Engineering
Cost 5 253 780 15 235 455 17 897 090
Accumulated depreciation (1 552 795) (4 987 879) (2 347 345)

The Chief Financial Officer of YBHO is considering using Economic Value Added (EVA) for
performance measurement of the divisions since many companies in the construction industry have
adopted it. He is however not sure about how it is calculated and the implications it will have on the
performance measurement of the company.

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 CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

Additional Information
- YBHO does not want to discourage managers from investing in new assets. As such, they use
the original cost of assets in the calculation of return on investment and residual income.
- The weighted average cost of capital for YBHO is 12%.
- Assume a normal tax rate of 28%.
- Assume that that taxable income is the same as profit before tax

YOU ARE REQUIRED TO:

a Calculate the following:

(4)
i) Profit to measure the performance of the manager for the Building
construction division.
ii) Return on investment (ROI) to measure the performance of the Civil
engineering division. (6)
iii) Residual income (RI) to measure the performance of the Earthworks
division (6)
Clearly indicate with reasons where costs are excluded from the calculation.

b) Discuss the advantages and disadvantages of Economic Value Added (EVA). (4)
c) Discuss the appropriateness of the bonus scheme currently in use and recommend (6)
possible improvements.
[26]

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 CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

QUESTION 3 [50 MARKS]

You have recently been appointed as a new trainee accountant at Mamelodi Sundowns Inc. a local
financial and cost accounting managerial advisory firm, a firm formed by Pat Motsepe. Your manager
Pit Mosimane gave you a file and requested you to look into the clients’ costing matter for the year.

Client file contains the following information:

Client name : Kabo-Yellow (Pty) Ltd
Financial year end : 31 May
Registration number : 10203040

Notes on Kabo-Yellow (Pty) Ltd:

Kabo-Yellow (Pty) Ltd, known as “Kabo-Yellow” manufacturers two types of household gate remote
controls in its factory in Mankweng. The one type remote control is called the Touch-Screen remote
(TS), and is able to open and close using one touch of the remote. The other remote control is called
the Button-Control remote (BC), and requires the buttons to be pressed all the time the gate opens and
closes. Both remotes are manufactured in the same way, except for an additional component which is
added to the TS remote during its final stage. This has the effect that the difference in the unit cost
price between TS and BC is attributable to the cost of the additional component. Kabo-Yellow uses a
standard costing system to value its inventory, with material, work in progress and completed units
(remotes) being valued at standard cost in accordance with IAS 2.

The following condensed data for 2019 financial year is available. Nonetheless, your assistance is
required in assessing the data and explaining the variances in more detail.

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CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

Kabo-Yellow drafted budgeted income statement for the year ended 31 May 2019.
Notes R
Budgeted sales 11 000 remotes in total, which equals 4 111 250
production. Sold at R305 and R580 each for
BC and TS respectively.
The budget reflects a sales mix of 1:3,
where one TS is sold for every three BC’s
sold.
Less: budgeted cost of sales:
- Common materials 0.8 kg for each remote type at R115 per kg (1 012 000)
- Additional component for TS R155 per component (426 250)
- Labour cost Due to its specialty, TS takes 10% longer to (1 320 000)
produce than BC which takes 3 labour
hours. A total of 33 825 labour hours were
budgeted.
- Variable overheads cost Variable overheads are allocated on the (220 000)
basis of machine hours. Of the total 25 575
hours of machine hours anticipated, 65%
relates to BC. The rate is R8.6 per machine
hour.
- Fixed overheads cost:
- (BC) Fixed overheads are allocated on the basis (429 000)
- (TS) of completed units (remotes). (341 000)

Gross profit 363 000

Less: Budgeted non-manufacturing (40 000)
overheads cost:
- Common costs (allocated fixed (36 000)
head office costs)
- Selling and distribution (4 000)
Budgeted profit 319 000

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 CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

Kabo-Yellow actual information for the 2019 year:

Description[
Remotes produced (total) 12 500
Number of additional components for TS used (1 component for each TS produced) 2 500
Number of TS Remotes sold at R650 each 1 950
Number of BC Remotes sold at R400 each 8 500
Common materials: 15 755 kg of materials purchased, at a price of R100 per kg. A
total of 10 600 kg were issued to production. There was no inventory of common
materials at the beginning of the year.
3 000 additional components for TS were purchased at R175 each. Inventory of
additional components at the beginning of the year amounted to 350 components,
valued at R56 000.
A total of 25 600 labour hours used, at a rate of R45 per hour. TS took 12% longer to
produce than BC which took 2 labour hours.
18 000 machine hours used, of which 70% related to BC and variable overheads
allocated at a rate of R12 per machine hour.
Fixed overheads for BC R 550 000
fixed overheads for TS R398 500
Common costs:
Head office fixed costs R700 000
Selling and distribution R90 000

The intern has already prepared the actual statement of profit or loss for Kabo-Yellow (Pty) Ltd based
on absorption costing system as requested by the manager. The manager requested you to review the
statement and identify any errors made and suggest corrective actions.

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 CMAB 040/CMAC 080 ASSESSMENT OPPOTURNITY 3 2019

The following is the absorption costing statement prepared by the intern for your review:
Kabo-Yellow absorption actual statement of profit or loss for the year ended 31 May 2019
Calculations/notes R
Sales 12 500 *(650+400) 13 125 000
Less: Cost of sales: -2 204 525
Opening stock: 56 000
Common material 0
Additional components @350 units Provided 56 000
Plus Production costs: 3 355 000
-Common materials (15 755*100) 1 575 500
-Additional components ( 3 000 *175) 525 000
-Variable manufacturing overheads (18 000 *12) 216 000
-Selling and distribution cost 90 000
-Fixed overheads allocated
Skilled fixed overheads 550 000
Non-skilled fixed overheads 398 500
Less: Closing stock -1 206 475
- Common materials (15 755-10 600) *115 592 825
- Additional components (300+3 000-2 500)*175 148 750
- completed units (1 575,5+525+216+90)/12500 464 900
*2500
Excluded fixed costs because it
distort results.

Less: over recovery (429+341)-(550 +398.5) -178 500

Gross profit 10 920 475
Less: -Other costs 2 275 000
-Head office allocated fixed costs 700 000
-Labour (35 000* 45) 1 575 000
Actual profit 13 195 475

Additional information:
- There was no inventory of BC and TS Remotes at the beginning of the year.
- Common materials and the additional component inventory are carried at standard costs and
are use a first-in-first out (FIFO) basis.
- Material price variances are calculated using quantity purchased.
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- IGNORE effects of inflation, Capital Gains Tax, Value Added Tax and Corporate income tax.

YOU ARE REQUIRED TO:

(a) Critically analyse the absorption costing statement prepared by the intern by identifying (19)
the errors made and providing corrective actions for any error identified.
Notes:
• Present your answer in a tabular format.
(1)
• Do not re-prepare the absorption costing statement.
(b) Calculate the mix and yield variances for sales based on standard margin. (12)
(c) Calculate other variances and perform a reconciliation between budgeted and actual (18)
profit.
Note the following:
- Assume actual profit amounted to R464 151 for the 2019 year
- Assume fixed overheads volume capacity variance amounted to R644 765A and
fixed overheads volume efficiency variance amounted to R406 060A.
- No need to break variances into mix and yield variances.
- No need to break variances between the products for the purpose of a
reconciliation.
- Round off all amounts to the nearest rand

[50]

End.

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