MAC3701 Question Bank 2016

MAC3701/2016/Question bank
Question bank for
APPLICATION OF MANAGEMENT
ACCOUNTING TECHNIQUES
MAC3701
Semester 1
Department of Management Accounting
This question bank is only available in English,
These questions must be used to improve examination technique

and topic understanding.
Define tomorrow
CONTENT
Page
QUESTION 1 ................................................................................................................................................. 3
QUESTION 2 ................................................................................................................................................. 4
QUESTION 3 ................................................................................................................................................. 5
QUESTION 4 ................................................................................................................................................. 7
QUESTION 5 ................................................................................................................................................. 8
QUESTION 6 ................................................................................................................................................. 9
QUESTION 7 ...............................................................................................................................................10
QUESTION 8 ...............................................................................................................................................11
QUESTION 9 ...............................................................................................................................................12
QUESTION 10 .............................................................................................................................................14
QUESTION 11 .............................................................................................................................................16
QUESTION 12 .............................................................................................................................................17
QUESTION 13 .............................................................................................................................................19
QUESTION 14 .............................................................................................................................................21
QUESTION 15 .............................................................................................................................................22
SOLUTION - QUESTION 1 .........................................................................................................................24
SOLUTION - QUESTION 10 .......................................................................................................................49
2
QUESTION 1 26 Marks
A South African company, Soda Ltd, currently makes use of a standard absorption costing system
for planning and control purposes.
This costing system is now under review by the newly appointed cost accountant. He has started
preparing a statement that reconciles the budgeted and actual profit of Soda Ltd based on the
information supplied below. He needs your help however to obtain the missing figures.
The following budget data relate to the production of Product SoDa for November. The product gets
manufactured by mixing two types of raw materials, So and Da.
Cost
Raw material input: So (0,4kg @ R6/kg) R2,40
Raw material input: Da (0,6kg @ R16/kg) R9,60
Raw material cost per kg input R12,00
Yield 96%
Raw materials cost per kg output R12,50
Fixed manufacturing overhead per kg of output R0,40
Total standard cost per kg of output R12,90
Budget data for product SoDa for the period is detailed below:
Sales 72 000kg
Production 70 000kg
SoDa opening inventory (valued at R25 800) 2 000kg
Selling price per kg R22
Fixed production overheads R28 000
The fixed production overhead absorption rate is based on the budgeted number of kilograms
produced. All inventories are valued at standard cost.
Actual data for product SoDa for the period was as follows:
Sales 71 000kg
Production 69 000kg
Selling price per kg R23,00
Fixed production overheads incurred R27 800
Purchase cost per kg of raw material So R6,50
Purchase cost per kg of raw material Da R15,80
Input of raw material So 29 900kg
Input of raw material Da 40 100kg
REQUIRED
Complete the statement that reconciles the budgeted and actual profit for product SoDa for
November. Show the missing variances as set out below. You needn’t rewrite the reconciliation (26)
statement, simply indicate the missing figures showing all your calculations clearly.
3
Reconciliation statement R Marks
Budgeted profit: ? [1]
-Budgeted sales ? [1]
-Budgeted cost of sales
-Budgeted production cost ? [1]
-Opening inventory 25 800
Variances: F/A*
Sales margin price variance ? ? [2]
Sales margin volume variance ? ? [3]
Material price variance 6 930 A -
-So 14 950 A -
-Da 8 020 F -
Material mix variance 19 000 ? [½]
-So ? ? [3]
-Da ? ? [3]
Material yield variance ? F [½]
-So ? ? [3]
-Da ? ? [3]
Fixed overhead expenditure variance ? ? [1]
Fixed overhead volume variance ? ? [1]
Actual profit: ? [1]
-Actual sales revenue 1 633 000
-So (194 350)
-Da ? [1]
-Fixed overheads incurred (27 800)
-Opening inventory ? [1]
*F/A = “Favourable” / “Adverse” [CIMA adapted]
QUESTION 2 50 Marks
Soaps Ltd is a company that processes and distributes washing powders to wholesalers around the
Gauteng province. The company currently processes the Hand washing powder and the Auto washing
powder in 2kg packets. The company uses the direct costing method for inventory valuation purposes.
The standards per unit based on the monthly budgeted processing and sales units of 10 000 Hand
washing powders and 12 000 Auto washing powders are as follows:
Notes Hand Auto

Selling price R55 R75
Direct material A (R10 per kg) 1 R20 R30
Direct material B – Packet (2kg) R10 R12
Direct labour (R50 per hour) R8,34 R10
Manufacturing overheads (R5 per labour hour) 2 R8,66 R12
Selling and distribution costs 3 R3 R3
Notes
1. Direct material A – Available in limited supply. Only 50 000 kg will be available to Soaps Ltd
per month.
2. The total budgeted fixed manufacturing overheads per month is R150 000. These are allocated
on a ratio of 2:1 between Auto washing powder and Hand washing powder.
4
3. The variable component of the selling and distribution cost is R1 per unit for each of the
products.
The actual results for the month ended 30 November 2015 were as follows:
Hand Auto
Units processed and sold 8 000 10 000
Selling price R56 R72
Direct material A R144 000 R320 000
Direct material B – Packet (2kg per unit) R80 000 R110 000
Direct labour R72 000 R95 000
Manufacturing overheads R90 000 R140 000
Selling and distribution costs R25 000 R30 000
The actual fixed manufacturing overheads and fixed selling and distribution costs for the month were
as budgeted.
The company did not have opening or closing inventories of finished units or direct material.
REQUIRED
(a) Determine the budgeted variable overhead cost per product for both products. (10)
(b) Determine the production mix that will maximise profit for the following month. (12)
(c) Calculate the budgeted break-even units of Soaps Ltd. (10)
(d) Calculate the following variances for the month ended 30 November 2015:
(i) Sales price variance for the Auto washing powder. (2)
(ii) Sales mix variance per product/ packet and in total. (5)
(iii) Direct material B – Packet price variance per product and in total. (3)
(iv) Variable overheads expenditure variance per product and in total. (6)
(v) Variable selling and distribution costs for the Hand washing powder. (2)
QUESTION 3 20 Marks
Fine Pine Ltd (Fine Pine) is a South African company that specialises in the manufacturing of wooden
office furniture. The company has received an order from ABC Ltd to design and manufacture 20
wooden office tables. The tables will be completed over two months and delivered at the end of June
2015.
One wooden table requires:

• 3 metres of varnished wood
• 25 gram packet of nails
• 3 litres of glue
1. Fine Pine will not have the necessary internal capacity to design the required office tables. The
company will contract a designer for this order at a total cost of R5 000.
5
2. The varnished wood for these tables will be purchased from a local supplier at the current
purchase price of R100 per metre. The wood will be varnished at the suppliers’ premises at an
additional cost to Fine Pine of R20 per metre. The varnishing will be done by two experienced
workers from the supplier who each earn a salary of R4 000 per month.
3. 200g Nails are in inventory at present. The cost of these nails was R1 000 per kilogram at the time
that they were purchased. Nails are used in all of the tables, and the current wholesale price is
R1 200 per kilogram.
4. Fine Pine manufactured tables 9 months ago that required similar special glue, and they currently
have the exact quantity that is required of the special glue. The glue will expire within three weeks
of the tables being completed, and will become toxic after the expiry date. The glue will have to be
disposed of in a manner currently required by legislation. The glue in inventory originally cost the
company R3 000, and will be disposed of at a cost of R5 000 if it is not used in this order.
5. The company bought a saw machine two years ago at a cost of R500 000, to cut wood into the
required sizes. The machine has an estimated useful life of 5 years. The machine will undergo its
normal annual maintenance, a month after the special order at a cost of R40 000. This scheduled
annual maintenance will not affect the delivery date of the tables.
6. In order to meet the deadline three casual employees will be hired to work on the contract at a cost
R2 500 each per month. These employees will be supervised, in addition to his normal
responsibilities, by the company factory supervisor who earns a monthly salary of R10 000.
7. Fine Pine owns the manufacturing facility. The company pays the local municipality monthly rates
of R3 000. Completed tables will be stored at a warehouse which the company leases at a monthly
cost of R2 500. The lease agreement is for the next five years.
8. The monthly fixed factory manufacturing overheads are normally R55 000, but it is expected to
increase to R58 000 over the next two months, due to additional cash expenditure being required
as a result of this order.
REQUIRED
(a) Determine the total minimum price for the 20 tables that should be charged for the order from
ABC Ltd. Clearly indicate all the costs that should and should not be considered for the special
order and the reasons for their inclusion/ exclusion. Ignore VAT.
(15)
(b) Briefly discuss five other factors that Fine Pine should take into consideration before
accepting the order from ABC Ltd. (5)
6
QUESTION 4 20 Marks
Dazzle Ltd manufactures two products, namely Giggle and Wiggle.
Annual sales budget of Dazzle Ltd for 2015:
Product Volume Selling price Revenue

(units) (R) (R)
Giggle 10 000 100 1 000 000
Wiggle 8 000 90 720 000
1 720 000
Standards per unit of Giggle and Wiggle:
Giggle Wiggle
Raw material (R10 per kg) R17,50 R25,00
Labour (R30 per direct labour hour) R37,50 R27,00
Overheads (R12 per machine hour) R18,00 R12,00
The annual fixed overhead budget amounts to R57 500. The total fixed overhead amount represents
common (indirect) fixed costs and can only be avoided if neither of the products are produced.
REQUIRED
(a) Calculate the variable overheads per machine hour. (3)

(b) Calculate the variable overheads per unit of Giggle and Wiggle respectively. (2)
(c) Calculate the breakeven units of Dazzle Ltd for 2015 based on the standard product
mix. (6)
(d) Only one raw material is used in the production process. The raw material is not
available in the local market, and has to be imported. Due to import restrictions, only
30 000kg can be imported annually.
Determine the product mixture that will maximise profit taking the raw material
(5)
constraint into account.
(e) If in addition to the raw material constraint mentioned in (d) above, a machine hour
constraint (of 21 000 machine hours) also exists and assuming that the linear
programming model should be used, state the objective function as well as the input
constraints necessary to maximise profits for Dazzle Ltd. Also show the maximum and
minimum sales limitation.
(You only need to formulate the linear programming model. No graphs are required) (4)
7
QUESTION 5 28 Marks
Blue Bags (Pty) Ltd manufactures and sells two types of bags: Handbags and Sporty Bags. The
company uses a direct (variable) standard costing system. There was no inventory on hand on
1 April 2014.
The following information relates to the six month-period that ended on 30 September 2014:
1. Sales and variable data:

Handbags Sporty Bags
Number of bags manufactured and sold:
Budgeted (units) 1 000 250
Actual (units) 900 300
Standard selling price per bag R430 R560
Actual total sales value R405 000 R145 800
Standard variable manufacturing cost per bag* R180 R200
Actual material purchased and used (R32 per metre) R51 840 R18 240
Budgeted variable selling costs R12 000 R2 375
*Included in the standard variable manufacturing costs per bag, are the following raw material
standards:
Handbags Sporty Bags
Standard material cost per R54 R72

bag (R36 per metre)
2. Fixed costs:
• Rental of an administrative building (unavoidable for the next five years): R13 500 per
month
• Budgeted fixed manufacturing costs amounting to R65 000 in total for the six-month period
(used to calculate a budgeted company-wide overhead recovery rate based on production
units; unavoidable unless the company no longer manufactures any products).
REQUIRED
(a) Calculate the following based on the above variable costing system:
(6)
(i) Sales margin mix variance for the six month-period
(4)
(ii) Sales margin volume variance for the six month-period
(2)
(iii) Material purchase price variance for the six month-period
(b) Explain how the use of absorption costing instead of direct costing would affect the sales (8)
margin mix variance. Include calculations in your explanation
8
(c) Calculate the following based on budgeted figures:
(i) Total budgeted breakeven sales value of the company for the six month-period
(5)
(ii) Budgeted breakeven sales quantity for the handbags product for the six month-
period based on the following assumption: on 31 March 2014 the sporty bag
product line was discontinued and the standard material purchase price per
metre was adjusted downward by 10%. (3)
QUESTION 6 30 Marks
Daisy CC operates a standard costing system and manufactures beaded necklaces for children. They
plan to produce and sell 10 000 necklaces per month.
Standard cost per necklace: R

Selling price per unit 40
Material (200g) 6
Labour (0,5 hours) 10
Variable overheads (variable to material) 4
Fixed overheads amount to R50 000 per month and are allocated to production per labour hour.
Actual results for April 2014 are as follows:

Number of necklaces produced 10 000
R
Material purchased 2 500kg 78 750
Direct labour 4 850 hours 94 575
Variable overheads 43 000
Fixed overheads 45 250
Additional information:
1. There were no raw materials, work-in-process or finished goods inventory at the beginning or
end of April 2014.
2. Material issued to production = 2 050 kg.
3. Material is recorded at actual cost and the results of the company are accounted for on the
absorption costing basis.
4. The actual sales for April 2014 amounted to R410 000 (10 000 necklaces).
REQUIRED
(a) Calculate the actual breakeven sales volume in units for April 2014. (5)
(b) Prepare a statement reconciling the budgeted profit for April 2014 with the actual
profit and provide sales, material, labour, variable and fixed overhead variances in (25)
as much detail as possible.
9
QUESTION 7 20 Marks
Brite Nite (Pty) Ltd manufactures light bulbs. The company uses a variable (direct) standard costing
system and has two product types, the Extra Bright and the Energy Saver. No inventory is kept, so
production volumes equal sales volumes.
The following information represents an extract from the company records for August 2014:
Standard labour information

Standard productive time per Extra Bright light bulb 5 minutes
Standard productive time per Energy Saver light bulb 9 minutes
Standard clock hour rate R30 per hour
Standard idle time provision 15% of clock hours
Actual labour information

Total labour cost for the month R827 200
Total productive hours worked (of which 7 425 were for Extra Bright) 23 265
Total idle hours (of which 825 were for Extra Bright) 2 585
The company rounds off productive work hour rates (standard and actual) to two decimals.
Budgeted sales information for the month
Sales value Standard selling price Standard

per unit contribution
percentage
Extra Bright R3 600 000 R30 30%
Energy Saver R4 050 000 R45 60%
Actual sales information for the month
Sales value Sales volume

Extra Bright R3 520 000 110 000 units
Energy Saver R4 356 000 88 000 units
REQUIRED
(a) Calculate the labour rate variance (in total for the company). (3)
(b) Calculate the idle time variance (split per product type). (4)
(c) Calculate the labour efficiency variance (split per product type). (4)
(d) Mention what a possible reason for the variance in (a) could be, assuming that the (1)
standards provided are correct.
(e) Assume an adverse total labour efficiency variance. Mention a possible reason for this, (1)
assuming that the standards provided are correct.
10
(f) Calculate the sales margin mix variance. Use contribution per unit in your calculations (4)
and not sales value per unit.
(g) Mention what a possible reason for the sales margin mix variance could be, (1)
assuming that the standards provided are correct.
(h) Briefly explain why using currently attainable cost standards will provide management of (2)
Brite Nite (Pty) Ltd with more meaningful information than using ideal cost standards.
QUESTION 8 19 Marks
Swift Sailing Ship Manufacturers has two divisions: the Pacific Division and the Atlantic Division. The
Pacific Division produces a component that is used by the Atlantic Division.
Information about the component is as follows:
Sales R200 per unit

Variable manufacturing cost R 80 per unit
Fixed manufacturing overhead R 50 per unit
Expected external sales in units 12 000 units
The Pacific Division can manufacture up to 15 000 components per year. The Atlantic Division needs
1 500 units of the component per annum for a product they manufacture.
Extract from the summary divisional financial statements for the year ended 30 June 2015:
Statement of financial position:

Pacific Atlantic
R’000 R’000
Non-current assets 3 000 3 600
Current assets 1 200 1 440
Total controllable assets 4 200 5 040
Divisional equity 2 000 2 400

Long-term borrowings 1 400 1 680
Current liabilities* 800 960
Total equity and liabilities 4 200 5 040
*Current liabilities are made up of normal trade payables and other creditors
Statement of comprehensive and other income:

Pacific Atlantic
R’000 R’000
Revenue 8 000 9 650
Operating costs (7 200) (8 640)
Controllable operating profit 800 1 010
Interest paid ( 140) ( 168)
Profit before tax 660 842
11
1. It is not the normal nature of this company to borrow or to supply loans. The cost of capital for
the divisions is estimated at 12% per year.
2. Annual rate of simple interest on the long term loans is 10%.
3. The respective divisions may not use their own discretion on how they borrow money. Head
office is responsible for all financing decisions.
REQUIRED
(a) Determine the minimum transfer price per component that the Pacific Division would be (1)
willing to accept?
(b) Determine the maximum transfer price per component that the Atlantic Division would (1)
be willing to pay?
(c) If the Pacific Division produces 15 000 units and is able to sell all of these units (1)
externally in a highly competitive market, determine the correct transfer price per
component.
(d) Calculate the Return on Investment (ROI) for the year ended 30 June 2015 for the (4)
Pacific and the Atlantic divisions respectively.
(e) Calculate the Residual Income (RI) for the year ended 30 June 2015 for the Pacific and (4)
the Atlantic divisions respectively.
(f) State which method of performance evaluation (i.e. ROI or RI) would be more useful (2)
when comparing divisional performance and why.
(g) Evaluate whether each of the following statements is true/false: (Only write
“true”/”false”)
(i) If head office expenses are allocated to the divisions based on gross (1)
income, they should be excluded from the controllable profit calculation.
(ii) Employment equity statistics of the respective divisions should be ignored

when assessing the performance of the divisions. (1)
(h) Explain the difference between managerial and economic performance and state (4)
whether it includes controllable and/or non-controllable items, or not.
QUESTION 9 30 Marks
CAS Ltd is a manufacturer of computers as well as computer parts. These are manufactured in two
separate divisions that are managed by two separate management teams. The company management
is investigating the possibility of transferring computer parts between the two divisions. Currently
Division A manufactures motherboards and then sell these to the external market. Division B
assembles computer parts to produce completed computers. Division B currently acquire
motherboards from an external supplier.
You have been provided with the following budgeted trial balances for the financial year ending
30 April 2016. The budgets were prepared without taking into consideration the possibility of
transferring computer parts between the divisions:
12
Division A Division B
Number of units produced and sold 10 000 6 000
R R
Sales 8 800 000 21 000 000
Direct materials 2 740 000 8 200 000
Direct labour 2 000 000 9 800 000
Variable manufacturing overheads 430 000 580 000
Fixed manufacturing overheads 400 000 1 200 000
External variable selling costs 450 000 220 000
Fixed selling costs 70 000 180 000
Head office allocated administration overheads 300 000 400 000
Finance costs 100 000 100 000
Controllable investment 3 000 000 4 000 000
1. Division A has an annual production capacity of 10 000 units. The division currently sells 80% of
its annual production capacity to the export market, the balance is sold in the local market. After
the budget was completed, the Rand has severely weakened, against all of the major export
currencies. CAS Ltd prices their computers in foreign currencies to their export market.
2. Division B produces 6 000 completed computer units, using parts which it currently purchases
from an outside supplier. Management of High Rise Ltd are considering the possibility to instruct
Division A to transfer 4 000 motherboards to Division B. These parts are currently bought from
the outside supplier at a cost of R880 per unit. If the transfer system is implemented, Division B
will save delivery cost amounting to R5 per computer unit and an ordering costs of R2 per
computer unit in respect of the transferred units.
3. The company’s weighted average cost of capital is 10%. High Rise’s head office is responsible
for all the financing decisions, and the respective companies may not use their own discretion on
how they borrow funds.
REQUIRED
(a) Determine the minimum transfer price per unit that Division A will be willing to transfer at to (6)
Division B.
(b) Determine the maximum transfer price per unit that Division B will be willing to pay for units (4)
transferred from Division A.
(c) Determine whether the management of Division A would be willing to transfer 4 000 (11)
motherboards to Division B as opposed to selling to their export market, given the recent
weakening of the Rand against major export currencies, and assume the agreed transfer price
is R825 per unit. Motivate your answer and show all calculations. Compare contribution from
selling externally and contribution from transferring.
(d) Determine the budgeted return on investment of Division B. Ignore the internal transfer. (5)
(e) Determine the budgeted residual income of Division B. Ignore the internal transfer. (4)
13
QUESTION 10 30 Marks
Big Five Ltd is a divisionalised toy company that produces and sells a wide range of toys. The
divisional managers will receive performance bonuses when a divisional return on investment of 20%
or more is generated by the respective divisions in 2014. The shareholders of Big Five Ltd are upset
that some of the divisional managers have received performance bonuses, as the company as a
whole suffered a loss in 2014.
Basic Toy Division
The Basic Toy Division sells one type of toy only. The divisionalised variable (direct) statement of
profit/loss for 2014 for the Basic Toy Division is given below:
R
Sales (42 500 toys) 850 000.
Less: Variable cost of sales (R6 per toy) (255 000)
Less: Variable sales and administrative costs (R1,50 per toy) ( 63 750).
Contribution 531 250.
Less: Fixed production cost (300 000)
Less: Fixed sales and administrative cost ( 31 250)
Divisional profit 200 000.
The Basic Toy Division’s controllable profit for 2014 was R250 000 and the controllable investment
amounted to R1 150 000.
Advanced Toy Division
The Advanced Toy Division currently purchases basic toys from an outside supplier at a cost of R15
per toy and modifies them to become specialised toys. The manager of the Advanced Toy Division is
convinced that they can use the toys manufactured by the Basic Toy Division in the creation of their
advanced toy range. This would enable the Advanced Toy Division to increase its profits. The
managers of the Basic Toy Division and the Advanced Toy Division have to negotiate the transfer
price of these toys. An internal transfer of basic toys between these divisions would lead to a saving in
the variable sales cost of 50 cents per toy for the Basic Toy Division, based on the assumption that all
costs would be in line with 2014.
Advanced Toy Division: proposed new toy range
The manager of the Advanced Toy Division recently invested R500 000 in the expansion of their
factory to manufacture a new range of advanced toys. The full cost price per unit of this type of toy at
the expected level of demand amounts to R15. The expected annual demand for these toys will be as
follows:
Probability Number of
units
15% 18 000
35% 24 000
40% 27 500
10% 29 000
The target rate of return on capital invested for the proposed new toy range is 20% per annum.
14
Handmade Toys Division
The Handmade Toys Division has hired a carpenter to create 32 handcrafted identical sets of Big Five
animal toys, made from wood. The target market for these toys is foreign-touring celebrities visiting the
Kruger National Park. The carpenter charges R300 per hour.
The first set of animals took the carpenter eight hours to create. The total time spent on the first two
sets of animals was 15,36 hours. The learning curve is expected to continue throughout the production
of the 32 sets of animals.
The divisional residual income of the Handmade Toys Division for 2014 was R80 000. The cost of
capital of controllable investments was R160 000 for the year.
REQUIRED
(a) Determine whether the manager of the Basic Toy Division received a performance (2)
bonus based on the 2014 results.
(b) Calculate the breakeven quantity as well as the breakeven sales value of the Basic Toy (4)
Division (at a divisional level) for 2014.
(c) Calculate the minimum percentage increase in sales volume required if the current (3)
selling price is decreased by 5%, to ensure that the 2014 total contribution for the Basic
Toy Division remains unchanged.
(d) Calculate how many units the Basic Toy Division should sell if this division’s manager (3)
wants to earn a target profit of 25% on total sales. Base your calculations on the current
information and ignore the effect of (c) above.
(e) What is the minimum transfer price per toy that the manager of the Basic Toy Division (2)
would be willing to accept if the division has sufficient spare capacity and the manager is
more concerned about the company’s profit than his bonus?
(f) What is the maximum transfer price per toy that the manager of the Advanced Toy (1)
Division would be willing to pay?
(g) Determine the target mark-up per toy for the proposed new range of advanced toys. (4)
(h) Determine the target price per toy for the proposed new range of advanced toys. (1)
(i) Calculate the amount to be paid by the Handmade Toys Division to the carpenter in the (4)
production of the 32 sets of wooden animals.
(J) Determine the maximum controllable investment which would have ensured the (4)
manager of the Handmade Toys Division receiving a performance bonus.
(k) Evaluate whether the following statements are true or false:
i. Transfer pricing should lead to goal congruence for the company as a whole. (1)
ii. If a transferring division has no spare capacity, the minimum transfer price to be set
should be equal to the external market price less savings on internal group (1)
transfers.
15
Mr Zenzele is the owner of a small building enterprise. He has investigated the following project as his
business has spare capacity over the next few months.
Contract for the extension of classrooms for a local school:
Mr Zenzele prices a contract by adding 100% to variable costs to cover overheads and profit. He
calculates variable costs as the actual cost of materials valued on a FIFO basis, plus the estimated
wages of direct labour. For this contract he has prepared the following detailed information:
1. Material
This contact requires four different types of material.
Material Quantity (units) Price per unit

Needed for Already in Purchase Current Current
contract inventory price of units purchase resale price
in inventory price (R)
(R) (R)
A 2 200 400 6 10 8
B 300 300 30 34 28
C 900 600 48 35 27
D 400 800 15 18 11
Material A and B are in regular use. Neither C nor D is currently used. Material C has no foreseeable
use in the business. Material D could be used as a replacement of other material costing R16 per unit
currently used in other jobs.
2. Labour
The contact will require 6 months to complete. Two builders currently employed at an annual wage
cost of R60 000 each will be required. As an incentive for them to complete the contract in time it will
also be necessary to pay them a bonus of R1 000 each. Without this contract they would be retained
at their normal pay rates. If the contract is accepted their function will be performed by temporary
workers engaged for the contract period at a total cost of R49 000.
Four casual labourers would also be employed specifically for the contact at a cost of R5 000 each.
3. Equipment
Two types of equipment are required for this contract: general purpose equipment already owned by
Mr Zenzele which will be retained at the end of the contract, and specialised equipment to be
purchased second-hand, which will be sold at the end of the contract.
The general-purpose equipment cost R43 000 two years ago and is currently depreciated on a
straight-line basis over an eight-year life (with an estimated scrap value of R3 000). When not being
used by Mr Zenzele, the general purpose equipment is hired to outside companies for R5 000 per
month.
16
The price for the relevant used specialised equipment amounts to R25 000. This equipment can be
sold at the end of the contact for R18 000.
4. Premises
The contract will require the use of a premises on which Mr Zenzele has a five-year lease at a fixed
rental of R8 000 per year. If Mr Zenzele does not get the contract the premises will probably remain
empty.
5. Administrative expenses
This contract will incur cash administrative expenses estimated at R7 000.
REQUIRED
(a) Calculate the price at which Mr Zenzele would tender for the classroom extension (6)
contract if he used his pricing method.
(b) Calculate the tender price so that Mr Zenzele would neither gain nor lose by taking the (10)
contract (i.e. the relevant cost)
(c) Discuss any other non-financial factors that Mr Zenzele should take into account when (3)
considering this contract.
Gymnastics (Pty) Ltd uses a highly automated manufacturing process with no human intervention (and
therefore no labour) to produce unique gymnastic equipment. The company makes use of a direct
costing system.
The standard cost for one of its products, the Gym-indoor, for the month of June 2015 was as follows:
The standard cost per unit of product Gym-indoor:
Material Kg requirement Cost per kilogram Cost

(kg) (R) (R)
X 4 30 120
Y 2 16 32
Z 2 8 16
8 168
Total budgeted fixed production overheads R725 000
In order to arrive at the budgeted selling price per unit Gym-indoor, the Gymnastics applies a 80%
mark-up on the standard variable cost. The company budgeted to manufacture and sell 10 000 units
of Gym-indoor during June 2015. There was no budgeted opening or closing inventory of product
Gym-indoor.
17
The actual results for product Gym-indoor for June 2015 were as follows:
Material Material purchased and issued to Cost

production
(kg) (R)
X 40 000 1 260 000
Y 18 000 288 000
Z 22 000 165 000
80 000
Actual production and sales (units) 10 200

Actual selling price per unit R305
Total fixed production overheads for June 2015 R778 000
REQUIRED
(a) Prepare a statement reconciling the budgeted profit to the actual profit in respect of the (22)
Gymnastics (Pty) Ltd for June 2015 in as much detail as permitted by the information
provided.
You needn’t calculate any material mix variances or material yield variances. Assume
that the combined material mix variances, in total, amount to R16 000 favourable
(consisting of a R32 000 favourable variance for Material Y and an adverse variance of
R16 000 for material Z) and that the combined material yield variance is R33 600
favourable in total.
Your total reconciliation should clearly indicate the relationship between the following:
• the budgeted profit
• the standard profit
• the actual profit
• material purchase price variance (per material type and in total)
• material usage variance (per material type and in total)
• all other applicable variances
(b) Provide possible reasons for the following variances:
(i) total material price variance (2)
(ii) total material mix variance (2)
18
QUESTION 2 CONSISTS OF THREE (3) INDEPENDENT PARTS
PART A 28 Marks
JJ Beverages Ltd is a soft drinks company that operates two divisions, the Fruit Division and the
Energy Division. The company has been in operation for the past 15 years. The company use return
on investment (ROI) as a performance measure for its divisions. The company’s cost of capital is 14%.
The following extracts were taken from the trial balances of the divisions for the year ended 31
December 2015:
Fruit Division Energy Division
Gross Income R320 000 R350 000

Target return on investment 18% 20%
Controllable investment R1 000 000 R1 050 000
Additional Information
1. The gross income was determined before taking the following expenses into account:
• Rental amount paid is R70 200 for the Fruit Division and R95 000 for the Energy Division.
• Sundry expenses were R33 200 for the Fruit Division and R44 600 for the Energy Division.
• Allocated head office expenses were allocated based on gross income and it was R15 000
and R18 000 for the Fruit and Energy Divisions respectively.
2. New investment
• Due to strong competition and technological advancement, the existing machinery is

unable to keep up with the current soft-drink demand and so the Energy Division plan to
invest in a new machine to improve efficiency and also increase production capacity.
• The new machine will cost the Energy Division R500 000 and the related insurance cost
will be R2 000 per month.
• The new machine will be located in the same premises as the other existing operational
machines. The company pays R95 000 per annum rental for the building where the existing
machines are located.
• A new technical operator will be hired at a cost of R9 500 per month to operate the new
machine, but John Plank, the operational supervisor, will also be responsible for
supervising the new machine’s operation in addition to supervising the existing machines.
• It is estimated that the new machine will save the Energy Division 5% of its related annual
sundry expenses.
• Both the economic and the useful life of the new machine are expected to be 5 years.
• The expected annual sales from the new machine is R380 000.
19
PART B 12 Marks
The Energy Division sells two types of products, namely Energy D (ED) a high caffeine energy drink
and Energy T (ET) a low caffeine energy drink. Both products use common raw material at the
beginning of the production process. Below is the budgeted information regarding both energy drinks
for the 2016 financial year:
Raw material per product

• 2 litres of material A for ED
• 4 litres of material A for ET
• 3kg of material B for ED
• 2kg of material B for ET
Raw material cost

• Material A cost R4 per litre.
• Material B cost R8 per kg.
Budgeted sales
• Product ED 10 000 units
• Product ET 8 000 units
Finished opening inventory as at 1 January 2016 is 2 000 units for ED and 500 units for ET. The
division plan to hold 800 units of each product at 31 December 2016. Opening inventories of raw
materials are 5 000 litres material A and 3 000 kilograms of material B at 1 January 2016. The division
also plans to hold 4 500 litres and 3 500 kilograms respectively of raw materials at 31 December 2016.
The following are provisions for damages and deterioration of items held in store:
Product ED : Loss of 70 units

Product ET : Loss 90 units
Material A : Loss of 600 litres
Material B : Loss of 300 kg
PART C 10 Marks
The past years results have shown that the product ED as a high caffeine product is extremely sought
after, in comparison with its competitors. The Energy Division is considering increasing the quantities
in production in order to export the high caffeine product to other countries as part of an expansion
program in 2 years’ time.
Additional information
• Opening WIP is 2 000 units as at 01 January 2016 (100% complete in terms of material; 10%
complete in terms of conversion).
• Put into production during the year 3 600 units and units completed total 2 800.
• Normal loss is 10% of units that reach the wastage point and wastage occurs when the process
is 30% complete.
20
• Closing WIP is 800 units (100% complete in terms of material and 60% in terms of conversion).
• The company uses the FIFO method of inventory valuation.
REQUIRED
PART A
(a) Determine the return on investment for both divisions before the acquisition of the new (8)
machine.
(b) Determine the residual income for both divisions before the acquisition of the new (5)
machine.
(c) Calculate the return on investment of the new machine and on the basis of this, advise if (12)
the Division should invest in this machine. Annualise all your calculations.
(d) Calculate the residual income of the new machine. (3)
PART B
(e) Determine the total material purchases budget for the 2016 financial year. (12)
PART C
(f) Prepare the quantity statement for the 2016 financial year using the long-method. (8)
(g) Briefly explain when the short-cut method is allowed to be used. (1)
(h) Briefly explain under which circumstances the FIFO and the Weighted average methods (1)
will yield similar results.
Iyogathi Ltd manufactures a single product by means of a single manufacturing process and uses a
process costing system.
The following information is available for April 2015:
1 April 2015: Work-in-process: 50 000 units

• Material - 100% complete R 88 750
• Conversion cost - 25% complete R 44 000
150 000 units placed into production in April 2015:

• Material R267 250
• Conversion costs R120 900
Units completed and transferred during April 2015: 147 500 units
21
30 April 2015: Work-in-process: 15 000 units
• Material - 100% complete
• Conversion cost - 60% complete
Additional information
1. Material is added at the beginning of the process.

2. Conversion costs are incurred evenly throughout the process.
3. Normal losses are estimated at 15% of the input that reaches the wastage point.
4. Losses occur at the end of the process.
5. Iyogathi Ltd values their inventory according to the weighted average method.
REQUIRED
(a) Prepare the following statements for Iyogathi Ltd for the month of April 2015: (8)
(i) Quantity statement (3)
(ii) Production cost statement (Round cost per equivalent unit to two decimals) (12)
(iii) Cost allocation statement
(b) Determine whether the short-cut method can be applied in the preparation of a quantity (2)
statement for Iyogathi Ltd for the month of April 2015 if losses no longer occur at the end
of the process, but when the process is 30% completed?
Answer “Yes” or “No”. Briefly motivate in no more than two sentences.
Junior Sports (Pty) Ltd has two divisions, each specialising in specific sports codes. The financial
manager of Junior Sports (Pty) Ltd recently resigned and the management team needs the advice of a
management accountant for important business decisions that they face.
TENNIS DIVISION
The Tennis Division currently sells two types of tennis racquets for children – a Wilson racquet and a
Babolat racquet. The Babolat racquets are becoming increasingly popular. The sales forecast for July
2015 of the Tennis Division, based on 400 Babolat racquets and 200 Wilson racquets are as follows:
Babolat Wilson
(R) (R)
Selling price per unit 550 350
Variable cost per unit 400 220
Common (indirect) fixed costs for these two racquets for June 2015 amounted to R35 200. The
common fixed costs can only be avoided if neither of the two racquet types are sold as they relate to
the cost of common facilities. It is expected that the fixed cost will increase by 7,5% in July 2015.
22
Management of the Tennis Division is considering discontinuation of the Wilson racquets. If they
discontinue the Wilson racquets, they forecast the sales for the Babolat racquets for July 2015 to
increase to 600 racquets. The Babolat racquet will then be sold at a 10% discount.
RUGBY DIVISION
The Rugby Division uses a unique machine that stretches the leather for the different types of leather
rugby balls they sell. The Rugby Division is planning their production levels for July 2015 for the
different types of rugby balls. The following information is provided relating to the sales forecast for
July 2015:
XTreme ball AveJoe ball Intro ball

Selling price per ball R675 R400 R280
Variable cost per ball R260 R250 R120
Machine minutes required per ball 30 18 15
Sales demand (no of balls) 200 1 000 800
It is not possible to increase the machine hours of the Rugby Division’s leather-stretching machine
beyond 540 operating hours per month in the short term.
REQUIRED
(a) (i) Calculate the total budgeted breakeven sales value of the Tennis Division for July (8)
2015. Ignore the possibility of discontinuing the sales of the Wilson tennis racquets.
(ii) Calculate the budgeted breakeven sales value of the Tennis Division for July 2015 (4)
assuming that management decide to discontinue production of the Wilson tennis
racquets.
(iii) Advise management whether it would be a good business decision to discontinue (5)
the sales of the Wilson tennis racquets or not. Assume that the respective forecast
sales levels are accurate.
(Support your answer with appropriate calculations and comments regarding the
different options. Also consider a non-financial factor).
(b) Calculate the total budgeted contribution of the Rugby Division for July 2015 based on the (7)
optimum product mix.
23
SOLUTION - QUESTION 1
Reconciliation statement R
Budgeted profit: 655 200
-Budgeted sales 1 584 000

-Budgeted cost of sales
(72 000 kg x R12,90) (928 800)
-Budgeted production cost
(70 000 kg x R12,90) 903 000
-Opening stock 25 800
(2 000kg x R12,90)
Variances: F/A*
Sales margin price variance 71 000 F
Sales margin volume variance 9 100 A
Material price variance 6 930 A
-So (R6,50 – R6,00) x 29,900 kg 14 950 A
-Da (R15,80 – R16) x 40,100 kg 8 020 F
Material mix variance 19 000 F

-So 11 400 A
-Da 30 400 F
Material yield variance 22 500 F

-So 4 500 F
-Da 18 000 F
Fixed overhead expenditure variance 200 F

Fixed overhead volume variance 400 A
Actual profit: 751 470

-Actual sales revenue
(71 000 kg x R23) 1 633 000
-So (29 900 kg x R6,50) (194 350)
-Da (40 100 kg x R15,80) (633 580)
-Fixed overheads incurred (27 800)
-Opening stock
(2 000 units x R12,90) (25 800)
*F/A = “Favourable” / “Adverse”
Budgeted sales (72 000kg x R22) = R1 584 000

Budgeted profit (balancing figure)
= Budgeted sales – (Budgeted COS + Opening stock)
= R 1 584 000 – (R903 000 + R25 800)
= R 1 584 000 – R928 800
= R 655 200
24
Sales margin price variance
In formula terms the variance is calculated as follows:

= [(Actual selling price – Standard cost) – (Standard selling price – Standard cost)] x
Actual sales volume
= [(R23,00 – R12,90) – (R22 – R12,90)] x 71 000 kg
= [R10,10 – R9,10] x 71 000 kg
= R71 000 F
or R717 100 – R646 100 = R71 000 F*
Note that the standard cost is deducted from both the actual and standard selling price. Therefore the
above formula can be simplified by omitting standard cost so that:
Sales price variance:

= (Actual selling price – Standard selling price) x Actual quantity sold
= (R23,00 – R22,00) x 71 000 kg
= R1 x 71 000 kg
= R71 000 F
or R1 633 000 – R1 562 000 = R71 000 F*
Sales margin volume variance
= (Actual units sold – Budgeted sales units) x Standard unit profit margin
= (71 000kg – 72 000 kg) x (R22 - R12,90)
= (1 000 kg) x R9,10
= R9 100 A
Or R646 100 – R655 200 = R9 100 A
Material mix variance

= (Actual quantity used in standard mix proportions – Actual quantity used) x Standard
price
Actual usage in Actual usage Standard Mix variance
budgeted in actual price R
proportions proportions
So 70 000 x 0,4/1 29 900 R6 11 400 (A)
= 28 000
Do 70 000 x 0,6/1 40 100 R16 30 400 (F)
= 42 000
19 000 (F)
Total number of kilogram issued to production = 29 900 kg + 40 100 kg

= 70 000 kg
Total kg required for 1 kg of standard output unit = 0,4 kg + 0,6 kg and ratios 0,4/1 or 0,6/1
25
Alternative way of presenting the material mix variance:
Actual input Actual input Variance Std price Variance

@ std mix @ actual mix kg R R
kg kg
So 28 000 (40%) 29 900 1 900 6 11 400 A
Da 42 000 (60%) 40 100 1 900 16 30 400 F
70 000 70 000 - - 19 000 F
Alternative way of presenting the material mix variance:
Or: So: R168 000 – R179 400 = R11 400 (A)

Da: R672 000 – R641 600 = R30 400 (F)
= R19 000 (F)
Material yield variance

= (Actual yield – Standard yield from actual input of material) x Standard cost per unit of output
Input allowed for Actual usage Difference at Yield

actual output in standard standard price variance
or mix R
Input allowed for proportions
actual yield
So 69 000 ÷ 0,96 28 000 = (750) x R6 4 500 (F)
= 71 875 x 0,4
= 28 750
Da 69 000 ÷ 0,96 42 000 = (1 125) x R16 18 000 (F)
= 71 875 x 0,6
= 43 125
22 500 (F)
We have already arrived at these numbers in our material mix variance calculations.
Alternative way of presenting the material yield variance:
So: [(69 000 / 0.96 – 70 000) x 0,4] x 6 = 4 500 F

Da: [(69 000 / 0.96 – 70 000) x 0,6] x 16 = 18 000 F
= 22 500 F
So: (71 875 – 70 000) x 0,4 = 750 x 6 = 4 500 F

Da: (71 875 – 70 000) x 0,4 = 1 125 x 16 = 18 000 F
= 22 500 F
Alternative way of presenting the material yield variance:
Or So: R172 500 – R168 000 = R 4 500 F

Da: R690 000 – R672 000 = R18 000 F
= R22 500 F
26
Proof: Material yield variance (total without split)
Actual total input 70 000kg

Standard yield 96%
Expected output 67 200kg
Actual output 69 000kg
Variance 1 800kg F
Std price per kg x R12,50
Variance R22 500 F
Fixed overhead expenditure variance

= Budgeted fixed overheads – Actual fixed overheads
= (R28 000 – R27 800)
= R200 F
Fixed overhead volume variance

= (Actual production units – Budgeted production units) x Std fixed overhead rate
= (70 000 kg – 69 000 kg) x R0,40
= R400 A
Actual profit (balancing figure)

= Actual sales revenue less (Actual production cost + Opening stock)
= R1 633 000 – [194 350 + 633 580 + 27 800 + 25 800]
= R1 633 000 – R881 530
= R 751 470
Actual production cost: Da

= (40 100 kg x R15,80)
= R633 580
Opening stock
= (2 000 units x R12,90)
= R25 800
27
(a) Determine the budgeted variable overhead cost per product for both products
Hand washing powder = ((R8,66 / R5 ) X R1,75)) R3,03.
Auto washing powder = ((R12 / R5 ) X R1,75)) R4,20.
Variable overhead per labour hour R

Hand washing powder = (R8,66 X 10 000) 86 600
Auto washing powder = (R12 X 12 000) 144 000
Total budgeted overheads 230 600
Less: Fixed manufacturing overheads (150 000)
Budgeted variable overheads R80 600
Total budgeted labour hours = (R230 600/ R5 per hour ) 46 120

Budgeted variable overhead = (R80 600/ 46 120) R1,75 per labour hour
(b) Product mix that will maximise profit Hand Auto
Contribution per unit R R

Selling price 55 75
Less: Direct material A (20) (30)
Less: Direct material B – Packet (10) (12)
Less: Direct labour (8,34) (10)
Less: Variable overheads (3,03) (4,20)
Less: Selling and distribution cost (1) (1)
Contribution R12,63 R17,80
Kg per unit (R20/10) and (R30/10) 2 3

Contribution per kg (R12,63/2) and (R17,8/3) R6,32 R5,93
Ranking 1 2
Required
Hand washing powder (10 000 X 2kg) 20 000
Auto washing powder (12 000 X 3kg) 36 000
Total required 56 000
Available direct material 50 000
Shortage 6 000
Optimum production mix

Hand washing powder = 10 000 units
Hand washing powder (10 000 X 2kg) = 20 000 kg

Available to manufacture Auto (50 000kg – 20 000kg) = 30 000 kg
Units of Auto to be manufactured (30 000 / 3kg) = 10 000 units
28
(c) The budgeted break-even units of Soaps Ltd
OPTION 1
Formulae = Total fixed costs/ Contribution per batch
= [(R150 000 + (R2 X 10 000 ) + (R2 X 12 000 )]/ R169,95
= (R150 000 + R20 000 + R24 000)/ R169,95
= R194 000/ R169,95
= 1 142 batches
Hand washing powder = 5 710 (1 142 X 5)
Auto washing powder = 6 852 (1 142 X 6)
Contribution mix
Hand washing powder = R 63,15 (R12,63 from part b X 5 )
Auto washing powder = R106,80 (R17,80 from part b X 6 )
Total contribution = R169,95.
OR
OPTION 2
Formulae = Total fixed costs/ Contribution per batch

= [(R150 000 + (R2 X 10 000 ) + (R2 X 12 000 )]/ R339,90
= (R150 000 + R20 000 + R24 000)/ R339,90
= R194 000/ R339,90
= 571 batches.
Hand washing powder = 5 710 (571 X 10)

Auto washing powder = 6 852 (571 X 12)
Contribution mix
Hand washing powder = R 126,30 (R12,63 from part b X 10 )
Auto washing powder = R 213,60 (R17,80 from part b X 12 )
Total contribution = R339,90.
(d) Variances
(i) Sales price variance for the Auto washing powder

= (Actual price – Budgeted price) X Actual sales units
= (R72 – R75) X 10 000
= R30 000 (A)
(ii) Sales mix variance per product and in total
Product Actual units Actual units in Contribution Variance

budgeted margin (Part b)
proportions
Hand 8 000 8 182 R12,63 R2 299 (A)
Auto 10 000 9 818 R17,80 R3 240 (F)
TOTAL 18 000 18 000 R941 (F)
29
Actual units in budgeted proportions
Hand = 8 182 ((10 000/ 22 000) X 18 000)).
Auto = 9 818 ((12 000/ 22 000) X 18 000)).
(iii) Direct material B – Packet price variance per product and in total
OPTION 1 - TOTAL
Product Budgeted expenditure Actual Variance

expenditure
Hand (R10 X 8 000) = R80 000 R80 000 R0
Auto (R12 X 10 000) = R120 000 R110 000 R10 000 (F)
TOTAL R200 000 R190 000 R10 000 (F)
OPTION 2 - PER UNIT
Product Budgeted expenditure Actual expenditure Variance

per unit per unit
Hand R10 R10 R0 * 8 000 units
= R0
Auto R12 R11 = R1 * 10 000 units
R10 000 (F)
TOTAL R10 000 (F)
(iv) Variable overheads expenditure variance per product and in total
OPTION 1 - PER UNIT
Product Budget cost Actual cost per Actual volume Variance

per unit unit
Hand R3,03 C R5 8 000 R15 760 (A)
Auto R4,20 C R4 10 000 R 2 000 (F)
TOTAL 18 000 R13 760 (A)
Actual cost per unit

Hand = R5 ((R 90 000 – R 50 000)/ 8 000)).
Auto = R4 ((R140 000 – R100 000)/ 10 000)).
Allocated fixed manufacturing overheads

Hand = R 50 000 (R150 000 X 1/3).
Auto = R100 000 (R150 000 X 2/3).
30
OPTION 2 – TOTAL
Product Budget cost Actual cost Variance

Hand R24 240 R40 000 R15 760 (A)
Auto R42 000 R40 000 R 2 000 (F)
TOTAL R13 760 (A)
Budgeted cost in actual units

Hand = R24 240 (R3,03 X 8 000).
Auto = R42 000 (R4,20 X 10 000).
Actual cost per unit

Hand = R40 000 (R90 000 – R50 000).
Auto = R40 000 (R140 000 – R100 000).
Allocated fixed manufacturing overheads

Hand = R 50 000 (R150 000 X 1/3).
Auto = R100 000 (R150 000 X 2/3).
(v) Variable selling and distribution costs for the Hand washing powder
Actual expenditure less Budgeted expenditure
[(R25 000 – (R2 X 10 000) – (R1 X 8 000) ]
(R5 000 – R8 000)
R3 000 (F)
31
(a) The minimum price that Fine Pine should charge

R
1 Designer Fee – It is incurred specifically for the order. 5 000
2 Raw Wood ((20 tables X 3 metres) X R100)) – Incremental costs. 6 000
2 Wood Varnish ((20 tables X 3 metres) X R20)) – Incremental costs. 1 200
2 Salaries – Varnishing workers – Irrelevant – It is paid by their employer. 0
3 Nails – Original cost of nails in inventory represent a historic/ sunk cost. 0
3 Nails - Incremental costs. (20 tables X [R1200 per kg / 40] = 20 tables x R30 for 600
25g).
4 Glue – Original cost of glue is a historic/ sunk cost. 0
4 Glue – Savings on the disposal as glue will now be used on this order. (5 000)
5 Machine – Original cost of the machine is a sunk cost. 0
5 Machine – Depreciation is not a cash flow item. 0
5 Machine – Scheduled annual maintenance is not a cost specific to this order, as it 0
has to be done whether or not the order is accepted.
6 Casual employees - (R2 500 X 3 employees x 2 months) – Incremental costs. 15 000
6 Factory supervisor – Supervisor is permanently employed by the company and will 0
be paid whether or not the order is accepted.
7 Monthly rates – Rates are not specific to the order. 0
7 Warehouse rental – Irrelevant as it is not specific to the order. 0
8 Fixed overheads – ((R58 000 – R55 000) X 2 months)) – Incremental costs. 6 000
8 Fixed overheads – R55 000 is irrelevant as it will continue to be incurred whether or 0
not the order is accepted.
Minimum price 28 800
(b) Other factors Fine Pine should take into consideration
The credit profile of ABC Ltd to ensure the company will be able to pay for the order.
The designer’s experience and profile to do the design of the tables required for the order.
If there will be any form of additional training required by casual employees.
Consider if Fine Pine will have all the necessary capacity to take on the order.
Consider the impact of the order on the capacity of the machine and its normal performance.
32
a) Variable overhead cost per hour
Total overheads: R
Giggle = 10 000 units x R18 180 000
Wiggle = 8 000 units x R12 96 000
276 000
Less: Fixed overhead cost (57 500)
Total machine hours = R276 000/R12 per machine hour = 23 000 machine hours
Variable overheads per hour = R218 500/23 000 hours = R9,50 per hour
b) Variable overheads per unit
Giggle: 18/12 x R9,50 = R14,25 per unit

Wiggle: 12/12 x R9,50 = R 9,50 per unit
c) Breakeven units based on the standard product mix
Standard product mix:

Giggle : Wiggle
10 000 : 8 000
5:4
Number of “batches” to break even

= Total fixed cost / Contribution per batch
= R57 500/(5 x [100 – 17,50 – 37,50 – 14,25] + 4 x [90 – 25 – 27 – 9,50])
= R57 500/(5 x R30,75 + 4 x R28,50)
= R57 500/(R153,75 + R114)
= R57 500 R267,75
= 214,75 batches
Based on standard product mix, this amounts to:

Giggle: 214,75 x 5 = 1 073,75 units ≈ 1 074 units
Wiggle: 214,75 x 4 = 859,00 units
33
d) Product mixture that will maximise profit, taking the raw material constraint into account
Product Contribution per Kg per unit Contribution per Ranking

unit kg
Giggle R30,75 17,50/10 R30,75/1,75 kg **
=1,75 kg =R17,57
Wiggle R28,50 25,00/10 R28,50/2,5 kg
=2,5 kg =R11,40
** or recognising: Maximum units of product Giggle should be produced
Requirements:
Giggle 10 000 units 1,75 kg per unit = 17 500 kg
Wiggle 8 000 units 2,5 kg per unit = 20 000 kg
Required = 37 500 kg
Available: = 30 000 kg
Shortage: = 7 500 kg
Produce 10 000 units of Giggle (the full demand) and
(30 000 – 17 500) = 12 500 kg left for Wiggle, thus produce 5 000 units of Wiggle
e) Linear programming model
Maximise 30,75 G + 28,50 W where G = Giggle; W = Wiggle
Subject to:
Raw material: 1,75 G + 2,5 W ≤ 30 000
Machine hours: 1,5G + 1 W ≤ 21 000
Maximum and minimum sales limitation:

0 ≤ G ≤ 10 000
0 ≤ W ≤ 8 000
or if G ≥ 0 and W ≥ 0
and G ≤ 10 000 and W ≤ 8 000
34
(a) (i) SALES MIX VARIANCE

(Actual sales volume – actual sales volume in budgeted proportions) x standard contribution per bag
Product Actual Actual sales Difference Standard Sales margin
sales volume in in volume contribution mix variance
volume budgeted (bags) (R) (R)
proportions
(bags) (bags)
(1) (2) (3) = (1) – (4) (3) x (4)
(2)
Handbag 900 960 (60) 238,00 (14 280) (A)
(see below)
Sporty bag 300 240 60 350,50 21 030 (F)
(see below)
1 200 1 200 Total 6 750 (F)
Total budgeted sales volume = 1 000 + 250 = 1 250
Actual sales volume in budgeted proportions (Handbag)

= 1 200 x 1 000 / 1 250
= 960 handbags
Actual sales volume in budgeted proportions (Sporty bag)

= 1 200 x 250 / 1 250
= 240 sporty bags
Standard contribution Handbag Sporty bag

Total Per unit (R) Total Per unit
(R)
Standard selling price 430 000 430 140 000 560
Less: Std variable costs per bag (192 000) (192) (52 375) (209,50) .
Std variable production costs per 180 000 180* 50 000 200*
unit
Std variable selling costs per unit
(12 000 / 1 000 = R12 per 12 000 12 2 375 9,50
handbag)
(2 375 / 250 = R9,50 per sporty
bag)
Standard contribution per bag 238 000 238 87 625 350,50
÷ 10 000 ÷ 250 units
units
= R238 = R350,50
per unit per unit
Student could show workings in total or per unit

35
(a) (ii) SALES MARGIN VOLUME VARIANCE

(Actual sales volume – budgeted sales volume) x standard contribution per bag
Product Actual Budgeted Difference Standard Sales margin
sales sales in volume contribution volume
volume volume (bags) (R) variance (R)
(bags) (bags)
(1) (2) (3) = (1) – (4) (3) x (4)
(2)
Handbag 900 1 000 (100) 238,00 (23 800) (A)
Sporty bag 300 250 50 350,50 17 525 (F)

1 200 1 250 Total 6 275 (A)
(a) (iii) MATERIAL PURCHASE PRICE VARIANCE

(SP – AP) x AQ purchased
Material Standard Actual Difference Actual quantity Material
price (per price (per in price purchased purchase
metre) metre) (per metre) (metres) price
variance (R)
(1) (2) (3) = (1) – (4) (3) x (4)
(2)
Handbag 36 32 4 51 840/32 6 480 (F)
= 1 620
Sporty bag 36 32 4 18 240/32 = 570 2 280 (F)
Total 8 760 (F)
Alternative 1:
Handbags (36 – 32) x 1 620 = R6 480 (F)
Sporty bags (36 – 32) x 570 = R2 280 (F)
Total = 6 840 (F) + 2 280 (F) = R8 760 (F)
Alternative 2:
Or simply (36 – 32) x (1 620 + 570) = 4 x 2 190 = R8 760 (F)
Alternative 3:
Actual cost – (AQ purchased x SP) or [AP x AQ] - (AQ purchased x SP)
Handbags 51 840 – (1 620 x 36) = 51 840 – 58 320 = R6 480 (F)

Sporty bags 18 240 – (570 x 36) = 18 240 – 20 520 = R2 280 (F)
Total = 6 840 (F) + 2 280 (F) = R8 760 (F)
Or simply (51 840 + 18 240) - (1 620 + 570) x 36 = 70 080 – 78 840 = R8 760 (F)
36
(b) ABSORPTION COSTING vs DIRECT COSTING APPROACH:
• Formula changes (or standard profit needs to be calculated)

• Bonus for std profit = Handbag R186 and
• Bonus for std profit = Sporty bag B R298,50
• Fixed manufacturing overhead rate needs to be calculated or R52
• Stating/showing in calc that ASV and ASV in budget proportion remains the same
• Total variance stays constant because a company-wide rate per unit is used for allocating
fixed manufacturing costs
• Per product amounts decrease to Handbags R11 160 (A) and Sporty Bags R17 910 (F).
The formula would change to the following:
(Actual sales volume – actual sales volume in budgeted proportions)

X standard profit margin per bag
I.e. standard profit margin per bag instead of standard contribution per bag has to be calculated and
used.
Standard profit per bag:
R R
Standard contribution per bag (the same as previously) 238,00 350,50

Less: Standard fixed production overhead cost per bag (52,00) (52,00)
Standard profit margin per bag 186 298,50
To calculate the standard fixed production overhead cost per unit we have to calculate the fixed
production overhead recovery rate per unit as the budgeted fixed production overheads divided by the
budgeted production (bags):
= 65 000 / (1 000 + 250)
= 65 000 / 1 250
= R52/bag
(Actual sales volume – actual sales volume in budgeted proportions) will remain the same as
before but this will be multiplied by R186 (handbags) and R298,50 (sporty bags) instead of the
contribution per respective bag:
Product Difference in Standard profit Sales margin

volume (bags) (R) volume variance
(R)
(1): (from 1(i)) (2) (1) x (2)
Handbag (60) 186,00 (above) (11 160) (A)
Sporty bag 60 298,50 (above) 17 910 (F)
Total 6 750 (F)
37
If Blue Bags (Pty) Ltd uses an absorption costing system, they will arrive at the same total sales
margin mix variance than with the direct costing system (R6 750 (F)) as a company-wide rate per
unit is used for allocating fixed manufacturing costs.
However, the individual amounts for the two products that contribute to the sales margin mix variance
will be less than before as they are now based on standard profit, which is less than standard
contribution due to the subtraction of fixed manufacturing overheads based on an overhead absorption
rate.
(Previously the amount pertaining to handbags was R14 280 (A) and now it is R11 160 (A) – i.e.
R3 120 less – and the variance amount pertaining to sporty bags was
R21 030 (F) and now it is R17 910 (F) – i.e. also R3 120 less.)
(c) (i) TOTAL BUDGETED BREAKEVEN SALES VALUE

Based on the budgeted figures:
Sales mix (budgeted) = 1000 : 250

= 4 : 1
Contribution in sales mix: (4 x R238) + (1 x R350,50) = R952 +350,50 = R1 302,50
Breakeven units = Total fixed cost .

Contribution per unit in mix ratio
= (R13 500 x 6) + R65 000

R1 302,50
= R81 000 + R65 000

R1 302,50
= R146 000/R1 302,50
= 113 x 5 units per sales mix
= 565 units in total
Breakeven Q Breakeven Value

Handbags = 4/5 x 565 = 452 units x R430 = R194 360
Sporty bags = 1/5 x 565 = 113 units x R560 = R 63 280
Total = R257 640
38
ALTERNATIVE
Sales mix (budgeted) = 1000 : 250
Contribution in sales mix: (1 000 x R238) + (250 x R350,50) = R238 000 + R87 625 = R325 625
Breakeven VALUE = Total fixed cost .

Contribution ratio
=(R13 500 x 6) + R65 000

R325 625/R570 000
= R81 000 + R65 000 Total budgeted sales

= 1 000(430) +
0.571 (rounded) 250(560)
= 430 000 + 140 000

= R146 000/0.571 = R570 000
= R255 692 (rounded up)
(c) (ii) Total budgeted breakeven quantity of the company for the six month-period based on
the following assumption: the sporty bag product line was discontinued before 1 April
2014 and the standard material purchase price per meter was adjusted downward by 10%.
BREAKEVEN SALES QUANTITY
= Fixed costs / contribution per unit

= [(13 500x6) + 65 000] / 243,40
= R146 000 / R243,40
= 599,84 units
= 600 HANDBAGS (rounded UP)
Calculation for new standard contribution:
Handbag
R
Standard selling price 430,00 .
Less: Std variable costs per bag (186,60) .
Std variable production costs per 174,60
unit (180 – 54/36 x 36 x 10%)
Std variable selling costs per unit 12 .
Standard contribution per bag 243,40 .
Alternative:
New standard contribution per bag = 238,00 + (10% x R54) = R243,40
Breakeven sales quantity = R146 000/ R243,40 = 600 rounded up
39
(a) Calculation of actual breakeven sales units for April 2014
Breakeven sales = Fixed costs .

Contribution per unit
= R45 250
R20,78
= 2 177,57
≈ 2 178 units
Calculation of contribution per unit
R
Selling price (R410 000 ÷ 10 000 units) 41
Less: Variable costs
Material
R78 750 ÷ 2 500kg = R31,50 per kg
R31,50 x 2 050kg = R64 575 ÷ 10 000 units = R6,46 6,46
Labour
R94 575 ÷ 10 000 units = R9,46 9,46
Variable overheads 4,30
= Contribution per unit R 20,78
Note:
Please take note that this question required you to calculate the actual breakeven sales volume. You
should thus have used actual and not standard information.
In the calculation of the contribution per unit, you could have calculated the total contribution first and
then divided it by 10 000 necklaces to get to a “per unit” contribution-figure.
(b) Calculation of budgeted profit

R
Sales 40
Less costs: 25
Material 6
Labour 10
Variable overheads 4
Fixed overheads 0,5 hours x R10 5
Profit per unit 15
Total budgeted profit = 10 000 units x R15 = R150 000
40
Calculation of actual profit
R
Sales 410 000
Less costs: 247 400
Material (R78 750 ÷ 2 500) x 2 050 64 575
Labour 94 575
Fixed overheads 0,5 hours x R10 45 250
Profit per unit 162 600
Note:
If a standard costing question requires you to reconcile budgeted profit with actual profit, always
remember to show calculations for budgeted profit and actual profit separately as these are easy
marks that you do not want to miss. You could also have shown these calculations in brackets next to
the headings “budgeted profit” and “actual profit” in your reconciling statement.
R
Budgeted profit 150 000
Add/Less: Sales margin volume variance -
Standard profit 150 000

Sales margin price variance 10 000
=(actual selling price – budgeted selling price) x actual sales volume
= [(R410 000 ÷ 10 000) - R40) x 10 000
= R10 000 (F)
MATERIAL
Issuing price variance

(3 075)
= (standard price – actual price) x quantity of material issued to production
= [(R6 x 5) – (R78 750 ÷ 2 500)] x 2 050
= (R30 – R31,50) x 2 050
= R3 075 (A)
Material usage variance (1 500)
= (standard quantity of materials for actual production – actual quantity used) x
standard price per unit
= [(0,2 kg x 10 000) – 2 050 kg] x R30
= (2 000 kg – 2 050kg) x R30
= R1 500 (A)
41
R
LABOUR
Wage rate variance

2 425
= (standard wage rate per hour – actual wage rate) x actual labour hours worked
= [(R10 x 2) – (R94 575 ÷ 4 850)] x 4 850
= (R20 – R19,50) x 4 850
= R2 426 (F)
Labour efficiency variance
3 000
= (standard quantity of labour hours for actual production – actual labour hours) x
standard wage rate
= [(0,5 hours x 10 000) – 4 850 hours] x R20 per hour
= (5 000 – 4 850) x R20
= R3 000 (F)
VARIABLE OVERHEADS
Variable overhead expenditure variance

(3 000)
= (budgeted variable overheads for actual input volume – actual variable overhead
cost)
= (R4 x 10 000) – R43 000
= R40 000 – R43 000
= R3 000 (A)
Note: Variable costing system: The total sales margin variance gets split into a sales margin price
variance and a sales margin volume variance. The sales margin price variance is the difference
between the actual selling price and the standard selling price multiplied by the actual sales volume.
The sales margin volume variance is the difference between the actual sales volume and the
budgeted sales volume multiplied by the standard contribution margin. In this exam question, the
actual units sold were equal to the budgeted units and therefore the sales margin volume variance
would be equal to zero.
Also take note that where more than one type of product is manufactured and sold, the sales volume
variance is subdivided further into a mix and quantity variance. In this exam question, only one type of
product was sold, therefore no sales mix and sales quantity variance should have been calculated.
Refer to your study guide to see how sales variances get treated in an absorption costing system.
In any manufacturing process where more than one type of raw material is used, one of the basic
requirements is that these raw materials must be combined in a specific proportion. The mix and yield
variances therefore only arise when more than one type of material is used to manufacture a product
and the combination results in different final output quantities. In certain circumstances, the mix and
yield variances are therefore a further analysis of the usage variance.
In this exam question, only one type of raw material was used, therefore no material mix and material
yield variances should have been calculated.
It is always important to read the scenario very carefully to identify which variances are applicable.
42
R
FIXED OVERHEADS

4 750
= (Actual fixed overhead costs – budgeted fixed overhead costs)
= (45 250 – 50 000)
= R4 750 (F)
Volume capacity variance
(1 500)
= (actual hours of input – budgeted hours of input) x standard fixed overhead rate
= ( 4 850 - 5 000) x (R50 000 ÷ 5 000)
= R1 500 (A)
Volume efficiency variance
1 500
= (standard quantity of input hours for actual production – actual input hours) x
standard fixed overhead rate
= [(0,5 x 10 000) – 4 850] x R10
= R1 500 (F)
Actual profit R 162 600
F = Favourable and A = Adverse
(a) Labour rate variance

Standard Actual rate per Difference Actual clock Labour rate
rate per clock hour in rate hours variance
clock hour R
Extra Bright 30 32② 2 8 250① 16 500(A)
Energy Saver 30 32② 2 17 600① 35 200(A)
51 700(A)
Or simply:
(SR – AR) x AH worked
= (30 - 32②) x (23 265 + 2 585)
= -2 x 25 850
= R51 700 p (A)
① Actual clock hours:

Extra Bright:
7 425 + 825 = 8 250
Energy Saving:
23 265 – 7 425 + (2 585 – 825)
= 15 840 + 1 760
= 17 600
43
② Actual rate per clock hour
= Actual labour costs / Actual clock hours
= 827 200 / (23 265 + 2 585)
= 827 200 / 25 850
= R32
(b) Idle time variance
Actual Standard hours Difference Standard work Idle time

productive based on in hour rate per variance
hours allowed idle productive productive hour R
time hours
Extra 7 425 8 250 x 85% 412,5 30/0,85 = 35,29 14 557,13(F)
Bright = 7 012,5
Energy 23 265 – 7 425 17 600 x 85% 880 35,29 31 055,20(F)
Saving = 15 840 = 14 960
45 612,33(F)
OR
Extra Bright
(A Prod Hours – Expected actual WH based on std. idle time %) x Std WH rate
= (7 425 – 8 250 x 85%) x (30/0,85)
= (7 425 – 7 012,50) x 35,29
= 412,50 x 35,29
= R14 557,125 (F)
Energy Saver
(A Prod Hours – Expected actual WH based on std. idle time %) x Std WH rate
= (15 840 – 17 600 x 85%) x (30/0,85)
= (15 840 – 14 960) x 35,29
= 880 x 35,29
= R31 055,20 (F)
(c) Efficiency variance
Standard Actual Difference Standard rate Efficiency

productive hours productive in per productive variance
allowed for hours productive hour R
actual output hours
Extra 5/60 x 110 000 7 425 1 741,67 35,29(b) 61 463,53(F)
Bright = 9 166,67
Energy 9/60 x 88 000 15 840(b) -2 640 35,29 93 165,60(A)
Saver = 13 200
31 702,07(A)
44
(d) Labour was more expensive than expected: There may have been unexpected salary or wage
increases due to, for example, labour union negotiations.
- Incorrect recording of wage computation/recording.
(e) Workers took longer than required to produce products (while working i.e. when not idle): The
quality of materials used could have been inferior to those used in the past.
(f)
Actual sales Actual sales Difference Standard Sales margin
volume (units) volume in in units contribution mix variance
budgeted margin per R
proportions unit (R)
(units)
Extra 110 000 113 137 (3 137) 9 28 233 (A)
Bright (or 113 143)* (or (3 143))* (or 28 287(A))*
Energy 88 000 84 863 3 137 27 84 699 (F)
Saving (or 84 857)* (or 3 143)* (or 84 861 (F))*
198 000 198 000 56 466 (F)
(or 56 574 (F))*
* Due to rounding differences
Budgeted proportions
Budgeted sales volume
Extra Bright: 3 600 000 / 30 = 120 000
Energy Saving: 4 050 000 / 45 = 90 000
Total = 120 000 + 90 000 = 210 000
Budgeted proportions
Extra Bright: 120 000 / 210 000 = 57,14%
Energy Saving: 90 000 / 210 000 = 42,86%
Actual sales volume in budgeted proportions
Extra Bright: 57,14% x 198 000 = 113 137 units or 113 143 units (rounding difference)
Energy Saving: 42,86% x 198 000 = 84 863 units or 84 857 units (rounding difference)
Standard contribution margin per unit calculations:
Extra Bright:
R30 x 30% = R9
Energy Saving:
R45 x 60% = R27
45
(g) There was a proportionate move in the sales mix towards the product with the higher
contribution per unit because of, for example, a change in customer preference/problems of one
type versus the other type/delivery issues, etc.
(h) Ideal cost standards are virtually impossible to achieve and it will demoralise
managers/employees if their performance is measured against unrealistic targets, whilst
currently attainable cost standards can be achieved under efficient operating conditions and is a
better control tool, although they might be difficult to achieve. Ideal cost standards assume
perfect conditions (this is not a realistic assumption) – no normal idle time, normal spoilage, etc.
are allowed by ideal cost standards although these issues are integral parts of a business.
(a) R 80 per unit or the variable manufacturing cost

(b) R200 per unit or the market price
(c) R200 per unit or the market price
(d) Return on investment (ROI)
Pacific Division
ROI = Controllable “operating” profit/Controllable investment

= R800 000/R3 400 000
= 23,53%
Atlantic Division
ROI = Controllable “operating” profit/Controllable investment

= R1 010 000/R4 080 000
= 24,75%
Note: The controllable operating profit was given in this question. Take note that it rightfully excludes
interest on the loan. As the current liabilities are made up of normal trade payables and creditors, it
should be taken into account in the calculation of the controllable investment. It has a credit balance
and should thus be subtracted from the gross controllable assets.
(e) Residual income (RI)
Pacific Division
RI = Controllable profit less cost of capital of controllable investment

= R800 000 – (R3 400 000 x 12%)
= R800 000 – R 408 000
= R392 000
46
Atlantic Division
RI = Controllable profit less cost of capital of controllable investment

= R1 010 000 – (R4 080 000 x 12%)
= R1 010 000 – R 489 600
= R 520 400
(f) ROI = better measure
• easier for comparing divisions

• it is a relative measure
• "(i.e. based on percentage returns)"
(g) i. True: The divisions cannot control these costs; therefore it should be excluded.
ii. False: Non-financial performance measures (which might influence the long-term
sustainability of the business) should also be considered.
(h) Managerial vs economic performance:
The term managerial performance is used to refer to assessing the performance of the
manager (person) at the profit centre and the investment centre level in the organisation.
The performance measure should only include controllable items.
The term economic performance is used to refer to the performance of the division in
comparison to other divisions in the organisation and those of competitors.
It might include non-controllable and allocated costs.
(a) The minimum transfer price which Division A will sell at:
These are the variable costs which are unavoidable by Division A. R
Direct materials 2 740 000
Direct labour 2 000 000
Variable manufacturing overheads 430 000
Variable external selling costs 0
Total variable costs 5 170 000
Units produced 10 000
Variable cost per unit (5 170 000 / 10 000) 517
Lost contribution per unit ((10 000 X 318) – (6 000 X 318)/ 4 000)) 318
The minimum transfer price per unit is therefore 835
47
(b) The maximum transfer price which Division B will be willing to buy at:
This is the current market price plus all the savings. R
The current cost price 880

Add: Delivery costs savings 5
Ordering costs savings 2
The maximum transfer price 887
(c) Determine if management of Division A will be willing to sell at R825, with the weakening
rand:
Budgeted contribution from selling externally: R
Sales price per unit (8 800 000 / 10 000) 880 or 3 520 000
Less: Variable costs ((517 + (450 000/ 10 000)) (562) or (2 248 000)
Contribution per unit – selling externally 318 or 1 272 000
Budgeted contribution from transferring 4 000 internally and selling balance externally:
R
Agreed transfer price 825 or 3 300 000
Unavoidable variable costs ((562 – (450 000/ 10 000)) (517) or (2 068 000)
Internal contribution 308 or 1 232 000
The external contribution per unit is R10 more if Division A sell to the external market (R40 000 total).
The management of Division A will be reluctant to transfer the 4 000 completed computer units to
Division B given the higher contribution from external sales (or alternatively as the transfer price is
below the minimum price).
The weaker rand against its major export currencies means that Division A will be receiving more from
its exports. The management of Division A will, therefore, require further compensation for this as the
minimum transfer price will increase.
However, the overall company financial objectives will have to be taken into consideration in
determining if the units should be transferred between the divisions to ensure goal congruence within
the company, for example unreliability of the existing supplier of motherboards or decrease in quality
of their product.
(d) The budgeted return on investment of Division B:
Formula = Controllable profit / Controllable investment

= R820 000 / R4 000 000
= 21%
48
Controllable profit: R
Total contribution (21 000 000 – 18 800 000) 2 200 000

Fixed costs (1 200 000 ½ + 180 000 ½) (1 380 000)
Controllable profit 820 000
(e) The budgeted residual income of Division B:
Formula = Controllable profit – Capital charge

= R820 000 – (R4 000 000 (1) X 10%)
= R820 000 – R400 000
= R420 000
(a) Return on investment = controllable profit/controllable investment

= R250 000/R1 150 000
= 21,74%
Conclusion: Yes, the manager would have received a performance bonus as the divisional ROI
>= 20%
(b) Breakeven quantity = Fixed cost/contribution per toy

= R331 250 .
R20 – R6 – R1,50
= R331 250
R12,50
= 26 500 toys
Breakeven value = Breakeven quantity x sales price per unit

= 26 500 toys x (R850 000/42 500)
= 26 500 toys x R20/toy
= R530 000
or Breakeven value = Fixed cost/contribution margin ratio

= R331 250/(R12,50/R20)
= R331 250/62,50%
= R530 000
49
(c) Given: Current total contribution = New total contribution
Let minimum percentage increase = x
Current total contribution = New total contribution
R531 250 = [42 500(1+x)] x [(R20 – 5%) -R7,50]
R531 250 = [42 500 + 42 500x] x [R19 – R7,50]
R531 250 = [42 500 + 42 500x] x R11,50
R531 250 = 488 750 + 488 750x
42 500 = 488 750x
0,0870 = x
x = 8,7%
Alternative solution for (c):

R20 x 95% = R19 new selling price
Sales – Variable cost = R531 250

Let number of units = x:
19x – 7,50x = 531 250
11,50x = 531 250
x = 4 6196
New volume – old volume = 46 196 – 42 500 = 3 696

3 696/42 500 = 8,7%
(d) Sales = Fixed cost + Variable cost + Profit

Let units = x
20x = R331 250 + R7,50x + 0,25(R20x)
20x = 331 250 + 7,50x + 5x
7,5x = 331 250
x = 44 166,6667
≈ 44 167 units/toys
{Student could also have used formula: Sales – Fixed cost – Variable cost = Profit}
Alternative solution for (d):
x = Fixed cost + planned profit

Contribution/unit
x = 331 250 + 25%(20x)

12,50
12,50x= 331 250 + 5x

7,50x = 331 250
x = 44 167 units
50
(e) Minimum transfer price (with spare capacity) = variable cost less internal cost saving
= R7,50 – R0,50
= R7
(f) Maximum transfer price = external market price

R15, price at which it could buy toys from external supplier
(g) Target mark-up = 20% x R500 000

25 000 (see * below)
=R100 000
25 000
=R4 per toy
*Expected nr of toys:
= (18 000 x 15%) + (24 000 x 35%) + (27 500 x 40%) + (29 000 x 10%)
= 2 700 + 8 400 + 11 000 + 2 900
= 25 000
(h) Target price per toy = Cost + mark-up

= R15 + R4
= R19
(i) Cumulative units Cum average time per set Total time
1 8 8
2 7,68 15,36
4 7,3728 29,4912
8 7,0779 56,6232
16 6,7948 108,7168
32 6,5230 208,7360
Learning curve = 7,68/8 = 96%.
Or: 8 x 32(log0,96/log2) = 8 x 32(-0,0408/0,6931) = 6,5236

6,5236 x 32 = 208,7555
Amount to be paid to carpenter:

208,7360 x R300 = R62 620,80
or 208,7555 x R300 = R62 626,65
51
(j) Residual income = Controllable profit less cost of capital of controllable investment.
Let controllable profit be equal to x
80 000 = x – 160 000
x = 240 000.
ROI = controllable profit/controllable investment

20% ≤ 240 000 / controllable investment
Controllable investment ≤ R1 200 000.
(k) (i) True

(ii)True
(a) Contract price using Mr Zenzele’s normal pricing method
Materials: R
A – In inventory 400 units x R6 2 400
A – To purchase (2 200 – 400) 1 800 units x R10 18 000
B – In inventory 300 units x R30 9 000
C – In inventory 600 units x R48 28 800
C – To purchase (900 – 600) 300 units x R35 10 500
D – In inventory 400 units x R15 6 000
Labour:
Builders – Normal wage 2 builders x 6/12 x R60 000 60 000
Builders – Once off bonus 2 builders x R1 000 2 000
Casual labourers 4 casual labourers x R5 000 20 000
Total variable costs 156 700
100% mark-up 156 700
Contract price 313 400
52
(b) Contract price using relevant costing
Materials: Comment R
A 2 200 units x R10 In regular use, should be replaced 22 000
B 300 units x R34 In regular use, should be replaced 10 200
C 600 units x R27 These can be sold at the resale price 16 200
C 300 units x R35 Additional units to be purchased 10 500
D 400 units x R16 Not in regular use and can replace 6 400
other material in other jobs
Labour:
Temporary workers To be employed only if contract taken 49 000
Builders – Once off bonus 2 builders x R1 000 To be incurred only if contract is taken 2 000
Casual labourers 4 labourers x R5 000 To be incurred only if contract is taken 20 000
Equipment:
General purpose 6 x R5 000 Opportunity cost of not renting it out 30 000
Specialised R25 000 – R18 000 Original cost less resale value 7 000
Premises Contract of lease already in place 0
Administrative expenses To be incurred only if contract is taken 7 000
Contract price 180 300
Note:
Comments were for clarity purposes only – it was not part of the required for the question.
(c) Factors to take into consideration:

• What are the expected weather conditions during the construction period?
• Are there contractual penalties for not completing the classrooms on time?
• Will the paying of bonuses set a precedent and its potential impact on staff morale?
• What are the labour law implications of letting the temporary workers go after six months?
• What are the long term benefits on the company’s business? Will this contract lead to
business being lost or perhaps to repeat business?
• What are the possibilities of renting out / leasing the premises?
• What marketing advantages are there to this project? It may be socially commendable and
responsible to build classrooms extension and this could be used improve Mr Zenzele’s
public image?
• Are temporary workers available and do they require any training?
• Will the required materials be available and what is the lead time on these materials?
53
(a) Prepare a statement which reconciles the budgeted profit to the actual profit of the
Gymnastics Division for June 2015 in as much detail as possible.
(Clearly indicate inter alia the budgeted profit, standard profit and actual profit; material
price-, material mix- and material yield variances per material type as well as in total; all
the other variances that are applicable).
R
Budgeted profit 619 000 .
Add: Sales margin volume variance 26 880(F)
Standard profit 645 880 .
Sales margin price variance 26 520(F)
Material purchase price variance 49 000(A)
Material usage variance 49 600(F)
Material mix variance 16 000(F)
Material yield variance 33 600(F)
Fixed overhead expenditure variance 53 000(A)
Actual profit R 620 000 .
Budgeted profit R
Sales (10 000 units x (R168 x 1,8))
or (10 000 units x R302,40) 3 024 000
Less: Marginal cost/material cost
(10 000 units x R168) 1 680 000
Less: Fixed production overheads
(R725 000 given) 725 000
R 619 000
Sales margin volume variance calculation

(Actual sales volume – budgeted sales volume) x standard contribution per unit
Actual sales Budgeted Difference Standard Sales margin
volume sales volume in volume contribution (R) volume variance
(units) (units) (units) (R)
(1) (2) (3) = (1) – (4) (3) x (4)
(2)
10 200 10 000 (200) 302,40 – 168 26 880(F)
= 134,40
54
Or alternative calculation:
= (Actual sales x standard contribution per unit) –

(Budgeted sales x standard contribution per unit)
= (10 200 x R134,40) – (10 000 x R134,40)
= R1 370 880 – R1 344 000
= R26 880 (F)
Standard profit
(Budgeted profit + sales margin volume variance)
= [R619 000 + R26 880(F)]
= R 645 880
Sales margin price variance

=(actual selling price – budgeted selling price) x actual sales volume
= [R305 – R302,40) x 10 200
= R2,6 x 10 200
= R26 520(F)
Alternative:
= (R305 x 10 200) – (R302,40 x 10 200)
= R3 111 000 – R3 084 480
= R26 520(F)
Material purchase price variance calculation

(Standard Price – Actual Price) x AQ purchased
Material Standard Actual price Difference Actual quantity Material
price (R per kg) in price purchased purchase
(R per kg) (R per kg) (kilograms) price
variance
(R)
(1) (2) (3) = (1) – (4) (3) x (4)
(2)
X 30 1 260 000 ÷ (1,50) 40 000 60 000 (A)
40 000 =
31,50
Y 16 288 000 ÷ 18 0,00 18 000 0
000 = 16,00
Z 8 165 000 ÷ 22 0,50 22 000 11 000 (F)
000 =
7,50
Total 49 000 (A)
55
OR alternative calculation:
Actual cost – (AQ purchased x SP) Or [AP x AQ] - (AQ purchased x SP)
X: R1 260 000 – (40 000kg x R30) = R1 260 000 – R1 200 000 = R60 000(A)
Y: R 288 000 – (18 000kg x R16) = R 288 000 – R 288 000 = R0
Z: R 165 000 – (22 000kg x R 8) = R 165 000 – R 176 000 = R11 000 (F)
Total variance: = R49 000(A)
Material usage variance

Material usage variance = (standard quantity of materials allowed for actual production
- actual quantity used) x standard price
Material Input Actual Difference Standard price Material
allowed for usage in quantity purchase
actual (kg) price
output variance
(Standard (R)
quantity
allowed for
actual
production)
(1) (2) (3) = (1) – (3) x (4)
(4)
(2)
X 10 200 x 4kg 40 000 800 R30 24 000(F)
= 40 800
Y 10 200 x 2kg 18 000 2 400 R16 38 400(F)
= 20 400
Z 10 200 x 2kg 22 000 1 600 R8 12 800(A)
= 20 400
Total 49 600(F)
OR alternative calculation for total material usage variance:
Material mix variance + Material yield variance
= 16 000(F) + 33 600(F) (given)
= 49 600(F)

= actual fixed overheads – budgeted fixed overheads
= R778 000 – R725 000 = R53 000(A) 53 000(A)
56
ACTUAL PROFIT .
Actual sales (10 200 units x R305) 3 111 000
Actual material cost: X: R 1 260 000
Y: R 288 000
Z: R 165 000 (1 713 000)
Fixed production overheads: ( 778 000)
620 000
(b) Provide possible reasons for the following variances:

(i) total material price variance
(ii) total material mix variance
(i) The material price variance is R49 000 adverse. This means that the company paid more
for the product than originally budgeted. The reason may be inflationary increases or failure
to identify the cheapest supplier.
(ii) The material mix variance is R16 000 favourable. The reason for this variance is because
the company used 2000kg less than expected of Material Y. The company also used
2000kg more than expected of Material Z, however Material Z is cheaper per kg and thus
the actual mix contained a lower proportion of the more expensive ingredient Y, and a
higher proportion of the less expensive ingredients Z than prescribed by the standard mix.
PART A
(a) Return on investment

R R
Gross income 320 000 350 000
Less: Controllable cost
Rental (70 200) (95 000)
Sundry expenses (33 200) (44 600)
Allocated head office expenses - -
Controllable profit 216 600 210 400
ROI = Controllable profit/controllable assets

= R216 600 / R1 000 000 = R210 400 / R1 050 000
= 21,66% = 20,03%
57
(b) Residual income
Residual income = Controllable profit – (Investment x cost of capital)
Fruit division = R216 600 - (R1 000 000 x 14%)
= R76 600
Energy division = R210 400 - (R1 050 000 x 14%)

= R63
(c) New investment

Energy Division
R
Income from new machine 380 000
Savings (R44 600 x 5%) 2 230
Gross Income 382 230
Less: controllable cost
Insurance (R2 000 X 12) 24 000
Machine operator (R9 500 X 12) 114 000
Supervisor Not relevant -
Depreciation (R500 000/ 5) 100 000
Rental Not relevant -
Controllable profit 144 230
Return on investment
Controllable investment = R500 000

Controllable profit = R144 230
ROI = R144 230 /R500 000

= 28,85%
Conclusion:
• The Energy Division should invest in the new machine.
• The ROI of the new investment 28,85% is higher than 20% targeted ROI.
(d) Residual income new investment
RI = R144 230 - (R500 000 x 14%)

= R74 230
58
PART B
(e) Production budget
Product ED Product ET
Units Units
Sales 10 000 8 000
Expected loss 70 90
Opening inventory (2 000) (500)
Closing inventory 800 800
Production required 8 870 8 390
Usage requirements: Material A and Material B

Material A Material B
Litres Kg
Product ED (8 870 x 2 litres ); (8 870 x 3kg ) 17 740 26 610
Product ET (8 390 x 4 litres ); (8 390 x 2kg ) 33 560 16 780
Usage budget 51 300 43 390
Expected loss 600 300
Opening inventory (5 000) (3 000)
Closing inventory 4 500 3 500
Material purchases budget 51 400 44 190
The material purchase cost

R
Material A (51 400 x R4 ) 205 600
Material B (44 190 x R8 ) 353 520
Total purchase R559 120
PART C
(f) Quantity statement for December 2016
Physical units Equivalent units
Input Output Raw materials Conversion cost

(units) Details (units) Units % Units %
2 000 WIP: 1 January 2016
3 600 Put into production
Completed from:
-Opening inventory 1 800 0 0 1 620 90
-Current production 1 000 1 000 100 1 000 100
Completed and transferred 2 800 1 000 100 2 620
Normal loss 560 560 100 168 30
Abnormal loss 1 440 1 440 100 432 30
WIP: 31 December 2016 800 800 100 480 60
5 600 5 600 3 800 3 700
59
Notes
Normal loss = 5 600 x 10%

= 560
Abnormal loss = balancing figure

= 5 600 – 2 800 – 560 – 800
= 1 440
Opening inventory
Output = (2 000 X 90%)
Conversion = (1 800 X 90%)
(g) Short-cut method

The short-cut method may only be used if all the different types of inventory reached and/ or
passed the wastage point in the current production period.
(h) Weighted Average & FIFO Method

The Weighted Average and FIFO methods will yield similar results when the quantity of
inventories and the input prices do not fluctuate significantly from month to month.
(a) i) Quantity statement for April 2015:

Physical units Equivalent units
Input Output Raw materials Conversion cost

(units) Details (units) Units % Units
50 000 WIP: 1 April 2015
150 000 Put into production
Completed and transferred 147 500 147 500 100 147 500
Normal loss 27 750 27 750 100 27 750
Abnormal loss 9 750 9 750 100 9 750
WIP: 30 April 2015 15 000 15 000 100 9 000
200 000 200 000 200 000 194 000
Notes
Normal loss = (200 000 – 15 000) x 15%

= 185 000 x 15%
= 27 750
Abnormal loss = balancing figure

= 200 000 – 147 500 – 27 750 – 15 000
= 9 750
60
ii) Production cost statement for April 2015:
Total Material Conversion

R R cost R
Work-in-process: 1 April 2015 132 750 88 750 44 000
Current production cost 388 150 267 250 120 900
Total 520 900 356 000 164 900
Equivalent units – per quantity statement 200 000 194 000
Equivalent cost per unit R2,63* R1,78 R0,85
Note:
*R1,78 + R0,85 = R2,63
Cost allocation statement for April 2015:

R
Completed and transferred 456 382,35
- Material: 147 500 x R1,78 262 550,00
- Conversion cost: 147 500 x R0,85 125 375,00
- Normal loss: (46 332,35 + 22 125) 68 457,35
Abnormal loss 30 167,65

- Material: 9 750 x R1,78 17 355,00
- Normal loss: (3 062,65 + 1 462, 50) 4 525,15
WIP: 30 April 2015 34 350,00

- Material: 15 000 x R1,78 26 700,00
Zero (these units did not
- Normal loss: reach the wastage point) 0,00
520 900,00
Calculate the rand value of the normal loss:

Normal loss for material: 27 750 x R1,78 = R49 395
Normal loss for conversion: 27 750 x R0,85 = R23 587,50
OR
Normal loss in total: 27 750 x R2,63 = R72 982,50
Allocate the rand value of the normal loss:
Material Units Calculation R

Completed and transferred 147 500 147 500/157 250 x R49 395 46 332,35
Abnormal loss 9 750 9 750/157 250 x R49 395 3 062,65
WIP – 30 April 2015 -
157 250 49 395,00
61
Conversion Units Calculation R
Completed and transferred 147 500 147 500/157 250 x R23 587,50 22 125,00
Abnormal loss 9 750 9 750/157 250 x R23 587,50 1 462,50
WIP – 30 April 2015 -
157 250 23 587,50
(b) Determine whether the short-cut method can be used:
Conditions for using the short-cut method:

The “short-cut” method can only be used under one condition:
ALL the units in the OUTPUT column of the quantity statement should have been subjected
to spillage or should have passed the wastage point in THIS (CURRENT) period.
This means that the opening WIP, the units started and completed and the closing WIP should all
have been included in the calculation of the lost units.
Test:
− Did WIP (1 April 2015) reach wastage point? Yes (25% will reach WP at 30% in the current
period).
− Did units placed into production completed from current production, excluding closing WIP reach
the wastage point? Yes (always, based on an assumption).
− Did WIP (30 April 2015) reach the wastage point? Yes (60% has passed the WP at 30% in the
current period).
YES, the short-cut method can thus be used.
(a) (i) Calculate the total budgeted breakeven sales value of the Tennis Division for July 2015,
ignoring the possibility of discontinuing the sales of the Wilson tennis racquets.
Sales mix (budgeted) = Babolat : Wilson = 400:200 = 2:1

Contribution of Babolat = R550 – R400 = R150 per unit
Contribution of Wilson = R350 – R220 = R130 per unit
Contribution per unit in sales mix: (2 X R150) + (1 X R130) = R430
Break-even units = Total Fixed cost .
Contribution per unit in sales mix
= R35 200 x 1,075

R430
= R37 840
R430
= 88 batches
62
Break-even value: Babolat = 88 batches x 2 Babolat racquets per batch x R550
= 176 racquets x R550 = R96 800
Break-even value: Wilson = 88 batches x 1 Wilson racquet per batch x R350

= 88 racquets x R350 = R30 800
Total Break-even value = R96 800 + R30 800 = R127 600
Alternative:
Sales mix (budgeted) = Babolat : Wilson = 400:200 = 2:1
Contribution of Babolat = R550 – R400 = R150 per unit
Contribution of Wilson = R350 – R220 = R130 per unit
Total contribution in sales mix: 400(R150) + 200(R130)
= R60 000 + R26 000
= R86 000
Break-even value = Total Fixed cost .
Contribution ratio
= R35 200 x 1,075 .

R86 000/R290 000
= R37 840
29,66% (Rounding: also accept 29,7%)
= R127 579,23 (Rounding: also accept R127 407,41)
(a) (ii) Calculate the budgeted breakeven sales value of the Tennis Division for July 2015
assuming that management decides to discontinue the sales of the Wilson tennis
racquets.
Break-even units = Total Fixed cost .

Contribution per unit
= R35 200 x 1,075 .

(R550 x 90%) – R400
= R37 840 .
R495 – R400
= R37 840 .
R95
= 398,31
= 399 racquets rounded up
63
Break-even value: Babolat = 399 racquets x R495
= R197 505
Alternative:
Contribution = 600 racquets x [R495 – R400] = R57 000
Sales value = 600 racquets x R495 = R297 000
Break-even value = Total Fixed cost .

Contribution ratio
= R35 200 x 1,075 .

R57 000/R297 000
= R37 840
19,19% (Rounding: also accept 19,2%)
= R197 186,03 (Rounding: also accept R197 083,33)
(a) (iii) Advise management whether it would be a good business decision to discontinue the
sales of the Wilson tennis racquets or not. Assume that management was able to forecast
the respective sales levels accurately.
(Support your answer with calculations, comments about the different options and also
consider a non-financial factor).
Babolat & Wilson racquets:

Contribution for Babolat: 400 racquets x R150 = R60 000
Contribution for Wilson: 200 racquets x R130 = R26 000
Total contribution: R60 000 + R26 000 = R86 000
Profit = R86 000 – Fixed cost R37 840 = R48 160
Babolat racquets only
Contribution for Babolat: 600 racquets x R95 = R57 000
Profit = R57 000 – Fixed cost R37 840 = R19 160
Fixed costs do not have to be considered as they are unavoidable.
Or only consider the contribution as the fixed costs are unavoidable.
Babolat & Wilson racquets yield a higher total contribution to cover the fixed cost compared to
selling only Babolat racquets
(R86 000 vs R57 000)
Babolat & Wilson racquets gives a higher profit than if you only sell Babolat racquets
(R48 160 vs R19 160)
Conclusion: Do not discontinue the sales of the Wilson tennis racquets.
Non-financial factor:
Customers would appreciate having more than one racquet to choose from (a basket of
goods), continue to sell both.
64
(b) Calculate the total contribution of the Rugby Division for July 2015 based on the
optimum product mix.
XTreme ball AveJoe ball Intro ball

Selling price per unit R675 R400 R280
Variable cost per unit R260 R250 R120
Contribution per unit R415 R150 R160
Hours required per ball 30/60 = 0,5 18/60 = 0,3 15/60 = 0,25
Contribution per hour R830 R500 R640
Rank (contr per hour) 1 3 2
Sales demand (no of balls) 200 1 000 800
Hours required for meeting sales

demand 100 300 200
Available hours 540
How to apply the available hours 100 Balance:240 200
Demand for split above 200 800 800
Contribution 200 x R415 800 x R150 800 x R160

R83 000 R120 000 R128 000
Total contribution R331 000
©
UNISA 2016
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MAC3701/2016/Question bank

Question bank for

Department of Management Accounting

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These questions must be used to improve examination technique

Notes Hand Auto

One wooden table requires:

Dazzle Ltd manufactures two products, namely Giggle and Wiggle.

Annual sales budget of Dazzle Ltd for 2015:

Product Volume Selling price Revenue

Standards per unit of Giggle and Wiggle:

(a) Calculate the variable overheads per machine hour. (3)

1. Sales and variable data:

Standard variable manufacturing cost per bag* R180 R200

Budgeted variable selling costs R12 000 R2 375

Handbags Sporty Bags

Standard material cost per R54 R72

Standard cost per necklace: R

Actual results for April 2014 are as follows:

Standard labour information

Actual labour information

Budgeted sales information for the month

Sales value Standard selling price Standard

Actual sales information for the month

Sales value Sales volume

Information about the component is as follows:

Sales R200 per unit

Statement of financial position:

Divisional equity 2 000 2 400

Statement of comprehensive and other income:

(ii) Employment equity statistics of the respective divisions should be ignored

Basic Toy Division

Advanced Toy Division

Advanced Toy Division: proposed new toy range

Contract for the extension of classrooms for a local school:

This contact requires four different types of material.

Material Quantity (units) Price per unit

This contract will incur cash administrative expenses estimated at R7 000.

The standard cost per unit of product Gym-indoor:

Material Kg requirement Cost per kilogram Cost

Total budgeted fixed production overheads R725 000

Material Material purchased and issued to Cost

Actual production and sales (units) 10 200

QUESTION 2 CONSISTS OF THREE (3) INDEPENDENT PARTS

Gross Income R320 000 R350 000

• Due to strong competition and technological advancement, the existing machinery is

Raw material per product

Raw material cost

Product ED : Loss of 70 units

The following information is available for April 2015:

1 April 2015: Work-in-process: 50 000 units

150 000 units placed into production in April 2015:

1. Material is added at the beginning of the process.

XTreme ball AveJoe ball Intro ball

-Budgeted sales 1 584 000

Material mix variance 19 000 F

Material yield variance 22 500 F

Fixed overhead expenditure variance 200 F

Actual profit: 751 470

Budgeted sales (72 000kg x R22) = R1 584 000

In formula terms the variance is calculated as follows:

or R717 100 – R646 100 = R71 000 F*

Sales price variance:

or R1 633 000 – R1 562 000 = R71 000 F*