Professional Documents
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EXAMINER/(S) : MR L MOLATLHWE
MS S BROWN
INSTRUCTIONS
Softcare (Pty) Ltd (Softcare) is medium sized chemical manufacturing company based in
Uitenhage. The company’s product range includes various cleaning materials and a
personal care range. The disruptions of the past year due Covid-19, negatively impacted
material purchases and subsequently production. When the company eventually
managed to buy raw materials, this was at either a higher price or a different quality
product compared to the one the company normally purchases. At the same time, the
company managed to increase its sales on the back of high demand for cleaning
detergents and sanitisers which were already part of the cleaning range. Despite this
increase, the company made losses in several products in the cleaning range.
Softcare uses a standard marginal costing system and has established the following
information regarding the production and sales of San100. The production of San100
comprise the mixing of three key raw materials: alcohol (ALX), other chemicals (OC1)
and a fragrance (FR1). These raw materials are combined according to a predetermined
standard mix. The final product is then bottled into 10 litre bottles and sold to industrial
users who buy in bulk. Notwithstanding the increased demand for sanitisers which hugely
boosted the sales volume for San100, as well as enabling the company to charge a higher
selling price, San100 experienced the highest losses amongst Softcare’s product ranges.
These losses are of grave concern to management and they are considering ways in
which to restore the product to profitability as it used to be one of the best performing
sanitiser products in their product range.
Production and sale information for the financial year ending 31 March 2021.
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NELSON MANDELA UNIVERSITY
MANAGEMENT ACCOUNTING 3 – RGKV301
JUNE 2021
Required: Marks
a) Calculate the following production and sales variances from the information
above in as much detail as possible:
i. Materials price
ii. Materials mix
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iii. Materials yield
iv. Sales price margin
v. Sale volume
3
NELSON MANDELA UNIVERSITY
MANAGEMENT ACCOUNTING 3 – RGKV301
JUNE 2021
Iron Man Limited (Iron Man) is a company that processes iron ore to produce two main
joint products, steel and crude iron (generally called pig iron). These products are
produced in the quantity ratio of 6:4, respectively. The two joint products are sold in
hardware stores across South Africa as well directly to heavy users of steel.
Manufacturing process
Pig iron and steel are complementary products, meaning that customers purchasing
the steel are also likely to purchase pig iron. Whereas there is an option to process
these products further, the joint products are normally sold at split-off point without
further processing.
Normal input of 100 000 kgs of iron ore produces a total of 90 000 kgs of joint products
per month. The difference between the normal input and the joint products produced
is nitrogen gas. All nitrogen gas produced is sold to a local merchant at R0.50 per kg,
without any capacity limits.
During the month of March, joint production costs amounted to R400 000. These joint
costs are allocated to products on the physical unit’s method. In an effort to boost
sales in hardware stores, a further R75 000 in joint marketing costs was incurred
during the month. This cost is apportioned equally between the joint products and is
not incurred if the products are purchased directly from Iron Man.
Special order
Iron Man was recently approached by Iron Woman Limited (Iron Woman), a company
that manufactures construction equipment using steel rods. Iron Woman offers to
purchase 15 000 steel rods from Iron Man, with each steel rod weighing 5kgs.
Iron Man has the machinery required to further process the steel into steel rods which
was purchased two years ago at a cost of R500 000. The machine has been idle for
the last two years due to skills shortages and is depreciated at 20% per annum.
The following additional information has been made available to you:
1. Iron Man has 10 000 kgs of iron ore in stock. If it is not used on the order, it will
be used in the following months production. The iron ore was originally
purchased at a cost of R4 per kg, and the current replacement cost is R5 per
kg. In order to meet the special order, an additional 35 000kg of iron ore will be
required.
2. Unprocessed steel is sold at R10 per kg, whereas Iron Woman is willing to pay
Iron Man, R70 per steel rod.
3. Current employees are available to work overtime at a cost of 1.5 times their
normal rate of R150 per hour to fulfil the Iron Woman order. There is no
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NELSON MANDELA UNIVERSITY
MANAGEMENT ACCOUNTING 3 – RGKV301
JUNE 2021
additional capacity within their normal working hours. It will take existing
employees 20 hours to further process the steel into rods.
4. Delivery costs of R0.50 per kg of steel is paid to deliver the steel to hardware
stores, however, Iron Woman will be collecting the steel rods directly from Iron
Man’s premises at no cost.
5. Additional fixed costs of R55 000, as well as additional variable costs of R9 per
steel rod will be incurred if the steel is processed further.
6. The marketing costs normally allocated to steel will not be incurred should the
special order be accepted.
7. Pig iron sales will decrease by 40% without steel as its complimentary product,
as loyal customers will no longer support Iron Man. Pig iron has a selling price
of R15.
Required: Marks
a) Using essential calculations, assess whether or not Iron Man should
accept Iron Woman proposal of further processing steel into steel rods.
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Support your conclusions with brief reasons for excluding certain
amounts.
b) Explain the accounting treatment for the nitrogen gas revenue assuming
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the special order does not take place.
c) Calculate the value of joint products based on the allocation method in
use, and assuming the special order is not accepted. 4
Presentation & Layout (1)