MAC3701 301 - 2020 - 3 - B

MAC3701/301/3/2020
Tutorial Letter 301/3/2020

Question Bank
APPLICATION OF MANAGEMENT
ACCOUNTING TECHNIQUES
MAC3701
Semester 1 and 2
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.
MAC3701/301/3/2020
CONTENT
Page
1 LECTURERS AND CONTACT DETAILS................................................................................. 4
2 CONTENT FORMAT ................................................................................................................ 4
3 QUESTIONS ............................................................................................................................ 5
3.1 DELICIOUS CEREALS (PTY) LTD .......................................................................................... 5
3.2 KILO LTD ................................................................................................................................. 7
3.3 JUNIOR SPORTS LTD ............................................................................................................ 9
3.4 CALCULUS LTD .................................................................................................................... 12
3.5 MEHLARENG (PTY) LTD ...................................................................................................... 14
3.6 BEANCINO (PTY) LTD .......................................................................................................... 18
3.7 JJ BEVERAGES LTD ............................................................................................................ 21
3.8 HIGH RISE LTD ..................................................................................................................... 23
3.9 TENNIS BALL (PTY) LTD ...................................................................................................... 26
3.10 iNKUNZI TYRES (PTY) LTD .................................................................................................. 28
3.11 BUMBULO MILLING (PTY) LTD............................................................................................ 30
3.12 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD ............................................................. 32
3.13 ENERSOLAR (PTY) LTD ....................................................................................................... 36
3.14 PEARS LTD ........................................................................................................................... 40
3.15 DELIGHT SPREADS (PTY) LTD............................................................................................ 43
3.16 TEDDY FRENZY LTD ............................................................................................................ 46
3.17 ZAMA-ZAMA (PTY) LTD ....................................................................................................... 50
3.18 RATA-TEA (PTY) LTD ........................................................................................................... 53
3.19 MUFHIRIFHIRI BEEF (PTY) LTD ........................................................................................... 56
3.20 IMVULA (PTY) LTD ............................................................................................................... 60
3.21 BRIGHT & SHINE (PTY) LTD ................................................................................................ 63
3.22 AQUA FIRST (PTY) LTD ....................................................................................................... 67
3.23 ZAMBANI-CHIPS (PTY) LTD ................................................................................................. 71
3.24 S’KHOTHANE (PTY) LTD ...................................................................................................... 76
3.25 TZANEEN TRAMPOLINES (PTY) LTD ................................................................................. 80
3.26 UGOGO BAKKER (PTY) LTD ............................................................................................... 87
3.27 AFRiKAN-ROCK CEMENTS (PTY) LTD .............................................................................. 90
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4 SUGGESTED SOLUTIONS ....................................................................................................97
4.1 DELICIOUS CEAREALS (PTY) LTD ......................................................................................97
4.2 KILO LTD .............................................................................................................................101
4.3 JUNIOR SPORTS LTS .........................................................................................................105
4.4 CALCULUS LTD ..................................................................................................................111
4.5 MEHLARENG (PTY) LTD .....................................................................................................115
4.6 BEANICO (PTY) LTD ...........................................................................................................121
4.7 JJ BEVERAGES LTD ...........................................................................................................125
4.8 HISE RISE LTD ....................................................................................................................128
4.9 TENNIS BALL (PTY) LTD ....................................................................................................131
4.10 iNKUNZI TYRES (PTY) LTD ................................................................................................136
4.11 BUMBULO MILLING (PTY) LTD ..........................................................................................140
4.12 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD ............................................................144
4.13 ENERSOLAR (PTY) LTD .....................................................................................................149
4.14 PEARS LTD..........................................................................................................................155
4.15 DELIGHT SPREADS (PTY) LTD ..........................................................................................162
4.16 TEDDY FRENZY (PTY) LTD ................................................................................................167
4.17 ZAMA-ZAMA (PTY) LTD ......................................................................................................171
4.18 RATA-TEA (PTY) LTD .........................................................................................................176
4.19 MUFHIRIFHIRI BEEF (PTY) LTD .........................................................................................182
4.20 IMVULA (PTY) LTD ..............................................................................................................188
4.21 BRIGHT & SHINE (PTY) LTD ...............................................................................................192
4.22 AQUA FIRST (PTY) LTD ......................................................................................................200
4.23 ZAMBANI-CHIPS (PTY) LTD ...............................................................................................206
4.24 S’KHOTHANE (PTY) LTD ....................................................................................................211
4.25 TZANEEN TRAMPOLINES (PTY) LTD ................................................................................218
4.26 UGOGO BAKKER (PTY) LTD ..............................................................................................229
4.27 AFRiKAN-ROCK CEMENTS FIRST (PTY) LTD ...................................................................234
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1 LECTURERS AND CONTACT DETAILS
For an effective and efficient turnaround time, refer to MAC3701 site on the myUnisa for the lecturers’
contact details.
Cellphone no: 076 892 0520
E-mail:
Semester 1 – MAC3701-20-S1@unisa.ac.za
Semester 2 – MAC3701-20-S2@unisa.ac.za
You are urged to contact the lecturers should you experience specific problems regarding the content
of this course. Have your study material open when you contact us. Take note that enquiries with
regard to matters not relating to the content of the course (e.g. registrations, non-receipt of study
material, enquiries in respect of exam dates, venues, etc.) must not be directed to your lecturer but
can be e-mailed to the appropriate department’s e-mail address.
Whenever you write to a lecturer, please include your student number to enable the lecturer to help you
more effectively.
FACE-TO-FACE APPOINTMENTS THE WEEK BEFORE THE EXAMINATION

There will be no face-to-face appointments with students the week before the examination. This will
ensure lecturers are able to attend to all queries before the examination date.
2 CONTENT FORMAT
Quesitions in this question bank are accompanied by their suggested solutions. The questions are
contained in section 3 while the related suggested solutions are in section 4. These questions must be
used to improve your examination technique and the undestanding of various topics of the module.
To obtain the most benefit from the questions you must physically do the questions on your own,
unaided and under simulated examination conditions (including time limitations). Thereafter you must
then compare your attempt to the suggested solution. This process will enable you to identify where you
went wrong and understand why you went wrong.
TAKE NOTE!!
The majority of the questions in this question bank are from MAC3701’s past examination papers
and MAC3701’s past Assignment 2 questions. You are therefore urged to use these questions
as a gauge for both the standard and the integration level of the examination.
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3 QUESTIONS
3.1 DELICIOUS CEREALS (PTY) LTD 50 Marks
Delicious Cereals (Pty) Ltd (DC) is a medium-sized company that produces and sells two types of
cereals, corn cereal (CC) and whole-wheat cereal (WC) to all major retailers. Each of the two types of
cereals are sold to retailers in units of 1kg per box. The company operates from the Centurion area
(Pretoria) with most of its clients situated in and around the Gauteng Province. DC makes use of an
absorption costing system and all its inventory items are valued using the first-in-first-out (FIFO)
method.
The following extracts are from the budgeted and actual results for the year-ended 31 March 2016:
Notes Budget Actual
R R
Sales 1 4 750 000 4 900 000
Opening Inventory at 1 April 2015 2 37 800 37 800
Manufacturing cost for units produced in 2016 3 4 254 170 4 215 352
Selling and administrative cost 4 100 000 107 500
Notes
1. The budgeted annual sales volumes were 100 000 and 50 000 for CC and WC respectively. The
actual annual sales volumes were the same as the budgeted annual sales volumes for both
products. Selling prices were budgeted at R30,00 per unit of CC and R35,00 per unit of WC.
Throughout the year CC units were sold at its respective budgeted selling price and WC units were
sold at R38,00 per unit. The budgeted sales mix was 2:1 for CC and WC.
2. Opening inventory as at 1 April 2015 consisted of 1 000 units of CC and 500 units of WC at the
budgeted cost of R24 600 and R13 200 respectively. The fixed manufacturing overheads were
absorbed at R1,20 per unit for the 2015 financial year-end. For the year ended 31 March 2016, the
company had no opening and closing inventories for all types of raw material and work in progress.
3. The company had budgeted to produce 101 000 CC units and 51 000 WC units during the 2016
financial year. These budgeted units are equivalent to the company’s annual production capacity.
However, the actual annual units produced were 100 500 for CC and 50 300 for WC.
4. Total budgeted selling and administrative cost consists of 70% fixed cost and 30% variable cost.
Fixed costs are allocated at a ratio of 5:3 between the CC and WC. The budgeted variable cost per
unit was R0,20 and the actual variable cost per unit for the 2016 financial year was R0,25.
Additional information
1. The primary ingredient for CC is corn and for WC is wheat.
2. Both CC and WC use the same secondary ingredients (barley, sugar and vitamins). The combined
budgeted cost of the secondary ingredients was R7,00 per unit, and the combined actual cost of
the secondary ingredients was R6,00 per unit.
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3. The actual corn cost per kg for the 2016 financial year was R7,80 and the budgeted cost per kg of
corn for the same period was R8,00. Each unit of CC requires 0,5kg of corn. Both the budgeted
and the actual corn usage per unit were the same for the 2016 financial year.
4. The wheat used in WC is bought in kilograms. The budgeted cost per kg was R15,34. Each unit of
WC requires 0,5kg of wheat. The actual cost per kg was R15,50 and the actual usage was 0,6kg
per unit of WC.
5. Both CC and WC are sold in the same sized customised boxes made from the same soft-cardboard.
The budgeted cost of a customised box was R3,00 per unit. The actual cost of a customised box
was R3,02 per unit.
6. The budgeted direct labour rate was R50,00 per hour. The budgeted direct labour time to produce
each unit is 12 minutes for CC and 10 minutes for WC. Production employees can work
interchangeably between the two products. The actual direct labour minutes per unit were
equivalent to the budgeted direct labour minutes per unit for each of the two products. The actual
direct labour rate per hour was 5% higher than the budgeted direct labour rate per hour.
7. The budgeted and the actual variable manufacturing overheads per unit of each product was R2,00.
8. The budgeted annual fixed manufacturing overheads was R200 000. The actual fixed
manufacturing overheads for the 2016 financial year was R180 000. Fixed manufacturing
overheads are absorbed on the basis of units produced.
FIXED MANUFACTURING OVERHEADS

The company is investigating the possibility of using activity-based costing system for overheads
allocation. An initial analysis of the actual fixed manufacturing overheads established the following
relationships between the overheads and the activities:
Activity area Notes Total cost

R
Direct material ordering i 25 000
Factory rental ii 120 000
Packing process iii 15 000
Quality inspections iv 20 000
Total R180 000
i. In total the company orders direct raw material 10 times a month for each of products CC and WC
(i.e. a total of 20 orders per month).
ii. Total factory rental is allocated to products CC and WC in a ratio of 4:3 respectively.
iii. Finished units are packed on custom-made crates (CC-crate and WC-crate). 1 (one) CC-crate is
packed with 8 (eight) CC units and 1 (one) WC-crate is packed with 12 (twelve) WC units. CC units
cannot be packed on WC-crates and vice-versa.
iv. Quality inspections of units are strictly carried out as follows: every 5th unit of CC is inspected and
every 8th unit of WC is inspected.
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REQUIRED
(a) Determine the total budgeted contribution per product type by preparing the budgeted (18)
marginal cost statement of Delicious Cereals (Pty) Ltd for the year ended 31 March 2016
in as much detail as possible. The total column is not required. Round off all your workings
to the nearest rand.
(b) Calculate the total budgeted fixed manufacturing overheads allocated to both the corn (3)
cereals (CC) and whole-wheat cereals (WC) using the current basis of allocation for the
year ended 31 March 2016.
(c) Calculate the actual fixed manufacturing overheads per unit for the year ended (8)
31 March 2016, for both the corn cereals (CC) and the whole-wheat cereals (WC) using
the activity-based costing system.
(d) Assume there are no opening finished inventory units. Calculate DC’s total required (8)
budgeted units for the year ended 31 March 2016, to break-even on the total budgeted
fixed costs for the year.
(e) Calculate the following variances for the year ended 31 March 2016:
(i) Sales price variance for the whole-wheat cereals (WC). (2)
(ii) Direct material wheat usage variance. (3)
(iii) Direct labour rate variance for the corn cereal (CC). (3)
(iv) Fixed manufacturing overheads expenditure variance. (1)
(f) Briefly discuss the difference between quality costs and target cost. (2)
(g) Briefly discuss the difference between direct and absorption costing systems. (2)
3.2 KILO LTD 50 Marks
Kilo Ltd is a manufacturer of components that are used as parts for light motor vehicle engines. The
company prepared the following budgeted information for the period April to June 2017:
Product Ki Product Lo
R R
Selling price per unit 500 700

Direct labour (R30 per hour) 150 210
Direct material A (R10 per kg) 80 120
Direct material B (R15 per kg) 75 90
Variable overheads 50 60
Value of opening inventory 75 840 43 540
Units Units
Opening inventory units 1 000 800
Closing inventory units ? ?
Budgeted sales units 10 000 6 000
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1. The company plan to have closing inventory of 10% of the sales units for the budgeted period.
2. The company total fixed costs are R2 800 000 for the budget period.
3. Inventory on hand at 31 March 2017 is 12 000 kg of material A and 6 000 kg of material B.
4. Expected closing inventory on 30 June 2017 for both material A and B should be enough to produce
500 units of Product Ki and 400 units of Product Lo.
5. At the budget presentation meeting, the following amendments to the budget were approved:
5.1 The selling price per unit must be increased by 20% for both products;
5.2 Raw material price per kg for both material A and B must be increased by 10%.
DIVISIONALISATION
These products are managed by one senior manager. The chief executive officer (CEO) would like to
increase performance of the business and also ensure that the profits are maximised for both products.
One possibility would be to have two divisions, with each division taking responsibility for one of the
products, Product Ki and Product Lo.REQUIRED
For each question below please remember to:

 clearly show all your calculations in detail;
 where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
 round all your workings to two decimals, except where otherwise stated.
(a) Prepare the sales budget for the three months ending 30 June 2017. (2)
(b) Prepare the production budget for the three months ending 30 June 2017. (4)
(c) Prepare the direct raw material purchases budget for the three months ending 30 June 2017. (10)
(d) Determine the budgeted break-even units for the company for the three months ending 30
June 2017. (12)
(e) With regards to the divisionalisation:

(i) Briefly explain to the CEO the prerequisites for a successful divisionalisation. (2)
(ii) List issues that the CEO needs to consider when divisionalising. (3)
(f) Discuss the advantages and disadvantages of divisionalisation. Make use of information in
the question to support your discussion. (6)
(g) Determine the operating leverage for Division Ki and Division Lo. For purposes of answering
this part assume that each product is managed in a separate division, and budgeted sales
units equal normal production capacity.
Fixed costs are allocated to each division on the basis of direct labour hours and the
information above does not change. (5)
(h) Comment on the operating leverage of Division Ki and Division Lo including the method used
for fixed costs allocation in (g) above. (6)
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3.3 JUNIOR SPORTS LTD 50 Marks
Junior Sports Ltd has numerous divisions, each specialising in specific sports codes. The financial
manager of Junior Sports Ltd recently resigned and the management team needs the advice of a cost
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.
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.
GYMNASTICS DIVISION
The Gymnastics Division uses a highly automated manufacturing process with no human intervention
(and therefore no labour) to produce unique gymnastic equipment. This division 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 Division applies
a 80% mark-up on the standard variable cost. The division 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.
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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
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.
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REQUIRED
(a) (i) Calculate the total budgeted breakeven sales value of the Tennis Division for July
2015. Ignore the possibility of discontinuing the sales of the Wilson tennis racquets. (8)
(ii) Calculate the budgeted breakeven sales value of the Tennis Division for July 2015
assuming that management decide to discontinue production of the Wilson tennis
racquets. (4)
(iii) Advise management whether it would be a good business decision to discontinue
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). (5)
(b) Prepare a statement reconciling the budgeted profit to the actual profit in respect of the
Gymnastics Division for June 2015 in as much detail as permitted by the information
provided.
You need not 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 (22)
(c) Provide possible reasons for the following variances:
(i) Total material price variance (2)
(ii) Total material mix variance (2)
(d) Calculate the total budgeted contribution of the Rugby Division for July 2015 based on
the optimum product mix. (7)
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3.4 CALCULUS LTD 50 Marks
Calculus Ltd is a manufacturer of retail till scanner screens and fully assembled scanners which it
distributes to wholesalers around the country. Department A manufactures the scanner screens, and
Department B assembles the complete scanners. Currently Department B purchases the scanner
screens from an outside supplier.
DEPARTMENT A
Department A currently manufactures 10 000 scanner screens per month. Calculus Ltd is currently
considering buying the scanner screens from an outside supplier. The total budgeted costs per month
to manufacture 10 000 scanner screens are as follows:
R
Direct raw material 800 000
Direct labour 500 000
Variable manufacturing overheads 200 000
Fixed manufacturing overheads 100 000
Allocated corporate expenses 100 000
1. An outside supplier has offered to supply Calculus Ltd with 10 000 scanner screens at a price of
R165 per scanner screen.
2. Direct raw material are avoidable if the offer is accepted.
3. The direct labour employed in Department A will become redundant if the offer is accepted.
Department A will incur redundancy costs of R50 000 before they close down.
4. Variable manufacturing overheads are avoidable if the offer is accepted.
5. Fixed manufacturing overheads will be reduced by R50 000 in total in the month of acceptance of
the offer.
6. Allocated corporate expenses per month for Department A will reduce by 20% if the offer is
accepted. The total expenses for the company will, however, remain the same.
7. Department A currently sells all 10 000 scanner screens to the outside market at a selling price of
R200 per scanner screen.
DEPARTMENT B
Department B assembles the complete retail scanners using the scanner screens and other direct raw
material. The department uses a standard absorption costing system for planning and control purposes.
The standard per unit is as follows:
R
Selling price 450
Direct material – Screens (1 kg) 160
Direct material – Other (2 kg) 50
Direct labour 80
Variable manufacturing overheads 40
Fixed manufacturing overheads 50
The budgeted allocated corporate expenses for the month of March were R300 000.
The budgeted monthly sales units for the department are 10 000 retail scanners.
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The actual results for March 2017 were as follows:
Actual production and sales units 8 000
Selling price (per unit) R460
Direct material – Screens per unit (1 kg) R180
Direct material – Other per unit (2,5 kg) R40
Direct labour per unit R65
Variable manufacturing overheads per unit R45
The total fixed manufacturing overheads for the month of March 2017 were R490 000.
Allocated corporate expenses were R320 000.
There was no opening or closing inventories of direct raw material and finished scanners.
TRANSFER PRICING
Calculus Ltd is considering the possibility of transferring all the scanner screens manufactured by
Department A to Department B. Department B currently buys all the required scanner screens from an
outside supplier at a cost of R155 per unit, plus delivery cost per unit of R5. Department A sells all the
screens it manufactures to external customers. The two departments are managed by independent
management teams, and the performances of these teams are evaluated independently.
REQUIRED
(a) Determine if Department A should continue to manufacture the scanner screens or
whether they should purchase them. Show all your workings. Ignore any qualitative factors. (9)
(b) Briefly discuss five non-financial factors that Calculus Ltd should consider before deciding
to purchase the scanner screens from the outside supplier. (5)
(c) Calculate the following variances for Department B for the month of March 2017. Ignore
the possibility of transfer pricing:
(i) Sales margin price variance. (3)
(ii) Direct raw material purchase price variance – Screens. (3)
(iii) Direct raw material usage variance – Other. (3)
(iv) Variable manufacturing overheads expenditure variance. (2)
(v) Fixed manufacturing overheads volume variance. (2)
(d) Briefly comment on the possible reasons for the following variances:
(i) Sales margin price variance. (2)
(ii) Direct raw material purchase price variance – Screens. (2)
(iii) Direct raw material usage variance – Other. (2)
(iv) Fixed manufacturing overheads volume variance. (2)
(e) Determine the minimum transfer price at which Department A will be willing to sell the
scanner screens to Department B. (5)
(f) Determine if Calculus Ltd should introduce the transfer pricing system. Assume the
suggested transfer price is R170 per unit, and all other costs will be as budgeted per unit. (10)
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3.5 MEHLARENG (PTY) LTD 50 Marks
Mehlareng (Pty) Limited (aka Mehlareng Group [MG]) is a family owned company that operates from
the Tzaneen area of the Limpopo Province. The group operates two divisions, the Tree Plantation
Division (TPD) and the WoodWorkx Division (WWD). These divisions are managed by autonomous
management teams. The group uses a direct costing method.
MG’s financial year-end is 30 April. Inventory is valued using the first-in-first-out (FIFO) method. Cost
of capital is 12,5% per annum for the TPD and 13,0% per annum for the WWD. The target return on
investment (ROI) for each division is the respective cost of capital percentage plus (+) 1,5%. All
investment decisions/proposals are quantitatively assessed against the target ROI. All depreciable
assets are depreciated at 20% per annum on a straight-line basis.
TREE PLANTATION DIVISION (TPD)
The TPD owns a five hectare forestry farm which is subdivided into five plantation sites of one hectare
each. The division’s total plantation capacity for the five hectares is 12 500 trees. At any given point in
time, all the trees within one site are of the same age, however the ageing is different from one site to
the next. For example, when trees in site 1 are all two years old, then site 2 trees are all seven years
old. Only 20 year-old trees are harvested and only one site is harvested at a time. Irrespective of the
site being harvested, the harvest always yields the same number of output (trees). It takes the whole
year to fully harvest a site, and once harvested the trees then cut into logs. Each harvested tree
produces two logs of approximately the same size (length and width) and weight.
The production and sales of the logs is as follows:
Selling price to external customers per log R270

Total variable cost per log R125
Total fixed cost per annum R1 250 000
Currently the TPD sells 85% of its annual log production to the external market, however, if it were to
sell the logs to the WWD, it will save R2,50 per log on the variable selling cost. WWD requires 4 000
logs per annum for which MG is faced with the following two procurement options for its operations:
(i) WWD can buy the logs exclusively from an outside supplier at a purchase price of R275 per log.
This supplier is willing to offer a 8% discount on the purchase price if more than 3 500 logs per
annum are bought from them, or
(ii) WWD’s required logs are internally transferred from the TPD, who in turn will need to sacrifice
their existing annual sales to the external market accordingly.
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WOODWORKX DIVISION (WWD)
In the WWD, the logs are processed and converted into two types of products (wood); TopNotch (TN)
wood and Mashaya-shaya (MS) wood. TN and MS woods are sold to furniture manufacturing
companies. The following financial information was extracted from the management accounts for the
respective financial years.
Financial year-ending 30 April 2016 30 April 2017

Actual per unit Budget (Total)
TN MS Total TN MS
R R R R
Sales ? ? 11 137 500 5 657 850 6 789 420
Less: Variable cost of sales (267,50) (222,50) (4 226 125) (5 495 213)
Opening inventory ? ?
Direct raw material 195,00. 170,00. 3 281 250 3 676 875
Direct labour 45,00. 30,00. 937 500 894 375
Variable manufacturing cost 25,00. 20,00. 625 000 695 625
Less: Closing inventory ? ?
Variable selling cost 2,50. 2,50. 34 925 52 388
Contribution ? ? ? 1 431 725 1 294 207
Less: Fixed cost 1 692 623
Manufacturing overheads 1 278 000
Allocated head office cost 320 325
Selling cost 94 298
Net profit before tax ? ? ? ? ?
1. Information relating to WWD’s 2016 financial year-end actual results:
1.1. An extract from the 2016 financial year end management accounts reflected the following actual
results:
Detail TN MS Total
Opening inventory units: 1 May 2015 4 100 6 800 10 900
Total units produced 12 500 15 900 28 400
Sales R5 062 500 R6 075 000 R11 137 500
Controllable investment (depreciable assets at cost) R2 700 000
1.2. The division operated at 80% of its full production capacity throughout the 2016 financial year.
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2. The following information relates to WWD’s 2017 financial year budget:
2.1. The basis for the 2017 financial year budget is the 2016 financial year-end’s actual results.
2.2. The budgeted sales volumes are 13 970 and 20 955 for TN and MS respectively, while the unit
selling price is set to increase by 8% for each of the two products. The sales mix is expected to
remain unchanged at 2:3 for TN and MS respectively.
2.3. The division is expected to operate at full production capacity throughout the financial year.
2.4. Direct raw material, direct labour and variable manufacturing overheads will each increase by R15
per unit for each type of wood.
2.5. The variable and fixed selling costs per unit are expected to remain unchanged.
2.6. The total fixed manufacturing overheads (which also includes the annual depreciation charge) are
projected to increase as follows; a 50% probability that the increase will be 10%, a 30% probability
that the increase will be 11% and a 20% probability that the increase will be 8,5%.
2.7. Head office will allocate an additional R129 675 to the division.
2.8. Fixed selling costs are expected to remain at R38 328 and R55 970 for TN and MS respectively.
2.9. There are no plans to buy or sell any depreciable asset(s).
3. Proposal to change MG’s costing method for the 2017 financial year-end.
At the 2017 financial year-end budget presentation meeting the board ratified the following proposal:
3.1 MG should adopt International Financial Reporting Standards (IFRS) as its primary reporting
framework effective from 1 May 2016, the start of the financial year, and change its costing method
to the absorption costing method.
3.2 In line with IFRS, WWD’s fixed manufacturing overhead absorption rate per unit on 30 April 2016
was retrospectively calculated at R45 per unit. The budgeted absorption rate per unit for the 2017
financial year end is expected to increase to R49,50.
3.3 WWD’s allocated head office expenses are expected to be apportioned to products based on the
budgeted production volumes for the 2017 financial year.
3.4 All other information applicable to the budget will remain the same as in direct costing method.
BLACK INDUSTRIALIST DEVELOPMENT PROGRAMME (BIDP)

During the 2016 Black Industrialist Indaba (conference), MG was provisionally requested by the Minister
of the Department of Trade and Industry (DTI) to accept an invitation to join the Black Industrialist
Development Programme. The Minister immediately commissioned the Auditor-General (SA) to
undertake a feasibility study on MG to ascertain its suitability for the programme.
The feasibility study concluded that should MG accept the invitation from the Minister, the following
operational terms and conditions will apply to the arrangement:
(i) Each division is expected to retain their decision making autonomy with regards to depreciable
assets and operational funding.
(ii) WWD is expected to buy four (4) additional depreciable assets at R250 000 per machine. These
machines will be bought and brought into use on 1 May 2016.
(iii) The DTI will provide unconditional funding of R1 500 000 to the TPD to increase its controllable
investment (depreciable assets) base to R3 200 000. The new assets will be bought and brought
into use as from 1 November 2016.
(iv) The allocated head office cost for the 2017 financial year is budgeted at R175 000 for TPD. The
budgeted head office cost allocated to both divisions are reasonable.
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REQUIRED
 where necessary, indicate irrelevant amounts with a R0 (nil-value);
 round all your workings to two decimals.
In respect of the Tree Plantation Division (TPD)

(a) Assume that MG decides to adopt procurement option (ii). Calculate the total number of
logs that the TPD will have to sacrifice from its existing external market in order to fully
supply WWD’s log requirements. (2)
(b) Advise which one of the two procurement options will be the most beneficial from the
group’s (MG) perspective. Ignore qualitative factors. (5)
(c) List and briefly explain the transfer pricing method(s) which can be used for intermediate
products that have a perfectly competitive market. (2)
In respect of the WoodWorkx Division (WWD)
(d) Prepare the production budget in units for the 2017 financial year. (5)
(e) Briefly explain the concept of “computerised budgeting” and list two types of software
that are useful in the planning and control functions of the budget. (3)
(f) Briefly explain the margin of safety concept. (2)
(g) Based on the 2017 financial year budget. Calculate the margin of safety percentages for
each of the two products (TN and MS). Ignore the implications of both opening and closing
inventories. Ignore the proposal to change the costing method for the 2017 financial year-
end. (8)
(h) Briefly explain why the proposal to adopt IFRS would require a change in the costing
method from direct costing to absorption costing method. (3)
(i) Assume the production budget for the 2017 financial year is as follows:
TN MS
Sales 12 600. 18 400.
Plus: Closing inventory 3 000. 1 400.
Units required 15 600. 19 800.
Less: Opening inventory (2 200) (3 700)
Units produced 13 400. 16 100.
Draft the budgeted income statement for the 2017 financial year based on the absorption
costing method. Present each of the two products separately and the Total column is not
required. (10)
In respect of the “Black Industrialist Development Programme” (BIDP)
(j) A total budgeted net profit before depreciation and tax for the 2017 financial year of R718 950
for the TPD and R775 450 for the WWD was confirmed by the feasibility study.
(i) Calculate the budgeted return on investment (ROI) for the 2017 financial year for each
of the two divisions and advise MG if they should accept an invitation to join the BIDP.
Ignore qualitative factors. (6)
(ii) Calculate the budgeted residual income (RI) for the 2017 financial year for each of the
two divisions. (4)
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3.6 BEANCINO (PTY) LTD 50 Marks
Beancino (Pty) Ltd manufactures coffee products. The company has two divisions, managed by
independent management teams, namely the Coffee division, which manufactures instant coffee that is
sold to grocery retailers, and the Cappuccino division which manufactures instant cappuccino that is
sold to vending machine providers. Both the instant coffee and the instant cappuccino are sold in
powder form.
The Cappuccino division currently acquires the instant coffee from an external supplier at a purchase
price of R40 per kg. The company is investigating the possibility of transferring the instant coffee needed
by the Cappuccino division from the Coffee division. The Cappuccino division will save R3 per kg
procurement costs if the instant coffee is transferred internally.
CAPPUCCINO DIVISION - BUDGET INFORMATION
The division manufactures three types of products namely regular cappuccino (RCAP), flavoured
cappuccino (FCAP) and unsweetened cappuccino (UCAP) and uses 250g of instant coffee to
manufacture 1kg of cappuccino, regardless of the type of cappuccino manufactured.
The division is considering the discontinuance of the FCAP product and using this manufacturing
capacity to increase the production of RCAP and UCAP.
You are given the following budgeted data for the coming year.
Product RCAP UCAP FCAP Total

Production and sales
(in kg) 319 000 285 000 196 000 800 000
R R R R
Revenue 15 950 000 14 250 000 10 192 000 40 392 000
Costs 13 955 700 12 044 000 10 272 800 36 272 500

Direct material 8 294 000 7 125 000 5 880 000 21 299 000
Labour 2 073 500 1 881 000 1 470 000 5 424 500
Advertising 1 100 000 1 100 000 1 100 000 3 300 000
Depreciation of
manufacturing machines 95 700 85 500 58 800 240 000
Other overheads 2 392 500 1 852 500 1 764 000 6 009 000
Profit/(loss) R 1 994 300 R 2 206 000 (R 80 800) R 4 119 500
1. The budget assumes that:

 the Cappuccino division will run at 100% capacity;
 all units manufactured will be sold;
 all losses in the manufacturing process may be regarded as immaterial.
2. The allocation of the total labour cost between fixed and variable is as follow:
RCAP UCAP FCAP Total
R R R R
Fixed labour 957 000 855 000 588 000 2 400 000
Variable labour 1 116 500 1 026 000 882 000 3 024 500
Total R 2 073 500 R 1 881 000 R 1 470 000 R 5 424 500
The abovementioned fixed labour cost relates to fixed management and supervisor cost and has
been apportioned to each product on the basis of kilograms manufactured.
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3. The Cappuccino division has signed a three year marketing campaign contract with Extreme
Marketing. The amount due to Extreme Marketing for the budgeted period is R3 300 000 and the
cost is shared equally between the products.
4. The manufacturing machines can be used on any of the product lines therefore the depreciation
charge is apportioned to the products based on budgeted kilograms manufactured.
5. Ten percent of the other overhead costs for each product is fixed, while the remaining overhead
costs are variable.
6. Ceasing the manufacturing of the FCAP will eliminate 60% of the fixed labour charge relating to
FCAP and 50% of FCAP’s fixed overhead costs. The fixed overhead costs not eliminated will be
apportioned equally between RCAP and UCAP and the labour cost allocation basis will remain as
is.
7. The manufacturing of RCAP will be increased to 490 000kg and UCAP to 310 000kg, in order to
utilise the spare capacity created by the discontinuation of FCAP.
8. The selling price of UCAP will remain unchanged as the increased production will be absorbed by
the existing market demand. There will be no increase in the variable labour rate per unit as well
as the variable overhead rate per unit for UCAP.
9. RCAP’s selling price will decrease to R47 per kg in order to sell the increased product available
and the variable labour rate will increase with 20%. There will be no increase in RCAP’s variable
overhead cost per unit.
COFFEE DIVISION - BUDGET INFORMATION
The Coffee division has a maximum manufacturing capacity of 2 200 000kg instant coffee and is
budgeting to run at 95% capacity during the budget period. The budget assumes that all instant coffee
manufactured will be sold to external clients at a market price of R50 per kg.
The budgeted variable manufacturing cost per kg amounts to R20. The division incurs additional
budgeted costs of R8 per kg to package and deliver the instant coffee to all external customers.
BEANCINO (PTY) LTD - CURRENT YEAR INFORMATION
The company is evaluating the current year performance of the divisional chief operating officers, based
on the divisional return on investment. The company’s cost of capital is 18% per annum.
The head office is responsible for all long term financing agreements and also determines the rate and
the method of allocating the head office administration fees.
While the Cappuccino division is responsible for their own procurement function including negotiations
with suppliers, the Coffee division’s procurement function is managed by the head office, due to a
breakdown in Coffee division’s procurement function.
Head office delivers training services, at a standard tariff, to the divisions at the request of the divisional
management.
Each division is responsible for their own credit management of debtors, non-current assets investment
decisions, day to day cash management and other sundry expenses.
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The following actual financial results for the year were obtained from the respective divisional trial
balances:
Coffee division Cappuccino division

R'000 R'000
Revenue 100 000 36 700
Net income 28 200 9 400
Non-current assets 43 000 14 000
Debtors 10 800 3 600
Creditors 6 600 2 200
Bank overdraft 1 200 400
Long-term loan 7 500 1 400
Net income was determined before the following income and expenses were taken into account:
R'000 R'000
Interest paid on long term loan 800 100
Interest paid on bank overdrafts 55 15
Training services 2 160 720
Discount received from creditors 65 25
Discount allowed on debtors 80 30
Depreciation 1 200 450
Head office administration fee 2 000 734
Sundry expenses 10 800 3 600
REQUIRED

(a) Ignore the possibility of the internal transfer of instant coffee. Advise the Cappuccino
Division based on the budgeted information if the FCAP product should be discontinued or
not. Ignore all qualitative factors. Show all your calculations. (15)
(b) Briefly discuss five qualitative factors that should be considered before the discontinuation
of the FCAP product decision is taken. (5)
(c) Ignore the discontinuation decision. Determine
i. the minimum price per kg the Coffee division will be willing to transfer the instant coffee
at and
ii. the maximum price per kg the Cappuccino division will be willing to pay. (12)
(d) List four non-financial measures that can be used to evaluate the divisions’ performance
in terms of the quality and efficiency of the manufacturing process. (4)
(e) Compare the performance of the two divisions’ actual results based on:
i. Return on investment (round your answer to 1 decimal place) and
ii. Residual income (14)
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3.7 JJ BEVERAGES LTD 50 Marks
THIS QUESTION 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
1. Additional Information
1.1. 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 plan for the 2016 financial year
2.1. 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.
2.2. The new machine will cost the Energy Division R500 000 and the related insurance cost will be
R2 000 per month.
2.3. 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.
2.4. 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.
2.5. It is estimated that the new machine will save the Energy Division 5% of its related annual sundry
expenses.
2.6. Both the economic and the useful life of the new machine are expected to be 5 years. Assets are
depreciated on the straight line basis.
2.7. The expected annual sales from the new machine is R380 000.
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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.
 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.
 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.
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REQUIRED
PART A
(a) Determine the return on investment for both divisions before the acquisition of the new
machine. (8)
(b) Determine the residual income for both divisions before the acquisition of the new
machine. (5)
(c) Calculate the return on investment of the new machine and on the basis of this, advise if
the Division should invest in this machine. Annualise all your calculations. (12)
(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.
3.8 HIGH RISE LTD 50 Marks
High Rise Ltd is an investment company with a 100% shareholding in both Fine Pine Ltd and CAS Ltd.
These companies operate in two different industries.
FINE PINE LTD
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.
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.
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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.
CAS LTD
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:
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
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Additional information:
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
In respect of Fine Pine Ltd:

(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)
In respect of CAS Ltd:
(c) Determine the minimum transfer price per unit that Division A will be willing to transfer at
to Division B. (6)
(d) Determine the maximum transfer price per unit that Division B will be willing to pay for
units transferred from Division A. (4)
(e) Determine whether the management of Division A would be willing to transfer 4 000
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. (11)
(f) Determine the budgeted return on investment of Division B. Ignore the internal transfer. (5)
(g) Determine the budgeted residual income of Division B. Ignore the internal transfer. (4)
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3.9 TENNIS BALL (PTY) LTD 50 Marks
Tennis Ball (Pty) Ltd currently makes use of a direct costing system. The company manufactures and
sells two types of tennis balls, Deuce and Ace.
Both Deuce and Ace balls consist of rubber, fabric cover and other materials which can be regarded as
immaterial. The International Tennis Foundation (ITF) requires that certain standards are met in order
for tennis balls to get approved for use in tournaments. Deuce balls are low compression balls, which is
aimed at enhancing the enjoyment of the sport as they are designed to play "slower" and thereby allow
greater opportunity for players to rally. Ace balls are slightly harder, fast-speed balls which are intended
for use on “slower” court surfaces. Immediately after manufacturing the tennis balls, they are sold to
other companies who then test, grade and pack the balls into pressurised tins or tubes which maintain
the ball pressure whilst stored.
ACTIVITY-BASED COSTING SYSTEM

The chief financial officer (CFO) is considering implementing an activity-based costing system as this
system recognises the complexity of manufacturing and its multiple cost drivers, and helps with cost
management. Total budgeted fixed manufacturing overhead costs for June 2016 amounted to R21 000
using machine hours as basis (traditional approach).
The manufacturing overheads were further analysed for June 2016 and the following main activities and
cost drivers were identified as well as the manufacturing information for the same period:
Manufacturing
overhead cost
Activity Cost driver R
Crushing and extrusion of core compounds Crushing and extrusion machine hours 5 808
Adding glue Tumbling machine hours 1 484
Fabric covering Number of production runs 3 795
Branding of balls Branding machine hours 3 220
Quality inspections Number of inspections 6 693
R21 000
Deuce Ace
*Budgeted production volume (tennis balls) 860 1 040
Tennis balls manufactured per production run 20 40
Crushing and extrusion machine minutes per tennis ball 12 18
Tumbling machine minutes per tennis ball 15 9
Branding machine minutes per tennis ball 3 3
Quality inspections of units are performed as follows: every 10th Deuce ball and every 20th Ace ball is
inspected.
*The actual production volume for June 2016 was in line with the budgeted production figures.
STANDARD REQUIREMENTS
The standard requirements per tennis ball are as follows:
Deuce Ace
Direct material: Rubber (grams) 49 50
Direct material: Fabric cover (grams) 9 6
Direct labour (minutes) 18 15
Overall machine time (minutes) 30 30
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BUDGETED DATA FOR JUNE 2016
Deuce Ace
Sales volume (number of balls) 800 1 000
Selling price per ball (R) 40 35
Direct raw material: Rubber (per gram) 16c 16c
Direct raw material: Fabric cover (per gram) 8c 8c
Direct labour recovery rate (per direct labour hour) R20 R20
Variable overhead recovery rate (per direct labour hour) R2 R2
ACTUAL DATA FOR JUNE 2016

Deuce Ace
Sales volume (number of balls) 860 1 040
Actual sales R33 540 R39 520
Purchased and used direct raw material: Rubber - 90 kg for R13 500
Purchased and used direct raw material: Fabric cover - 10,8kg for R7 020
Direct labour rate: R18 per direct labour hour
Variable overhead rate: R1,80 per direct labour hour
Total fixed manufacturing overheads R25 000
JULY 2016 BUDGET

The production manager has the following information available for July 2016:
1. The budgeted units to be produced for July 2016 is 930 Deuce tennis balls and 1 260 Ace tennis
balls respectively.
2. The required minutes per product in terms of direct labour will remain the same as in June 2016.
3. The contribution per Deuce tennis ball will be R30,36 and the contribution per Ace tennis ball will
be R27,62.
REQUIRED
(a) Calculate the total budgeted manufacturing overheads allocated per product type for June
2016 using an activity-based costing (ABC) technique to assign the manufacturing
overhead costs. Round your activity rates to two decimal places. Round your final allocated
amounts to the nearest Rand. (14)
(b) Calculate the budgeted contribution per tennis ball for both Deuce and Ace product type
for June 2016 according to the direct costing system. (9)
(c) Calculate the sales price variance per product and in total for June 2016. (3)
(d) Calculate the sales volume contribution variance per product and in total for June 2016. (5)
(e) Calculate the sales mix variance per product and in total for June 2016. (5)
(f) Discuss the significance of the sales mix variance and give two possible reasons for a
favourable sales mix variance. (4)
(g) If direct labour hours for July 2016 is limited to 550 hours and it is the only expected
constraint, calculate how many Deuce and Ace tennis balls should be produced for July
2016 in order to maximise contribution for Tennis Ball Ltd. Round all your workings to 2
decimal places. (8)
(h) Advise the production manager how you would determine the optimum production
program if the rubber raw material also becomes a scarce resource in addition to the limited
direct labour hours (2)
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3.10 iNKUNZI TYRES (PTY) LTD 50 Marks
Mzwandile Nkunzi founded i-Nkunzi Tyres (Pty) Ltd (i-Nkunzi) in 2015, the year the company also
started operating in the South African motor-vehicles tyre industry. For the first two years of its operation,
the company planned to manufacture and distribute its tyres in the Western Cape region only, after
which the management team would prepare and evaluate a country-wide business feasibility study
based on the results of the Western Cape region.
The company only manufactures one type of motor-vehicle tyre called “Black-Beast” (BB).
COMPANY’S GENERAL INFORMATION

1. i-Nkunzi’s management team consists of the following individuals:
Name Designation Qualification(s)

Mzwandile Nkunzi Chief Executive Officer/Founder (CEO) Entrepreneur
Siyabonga Cele Production Director (PD) Industrial Engineer
Lerato Morake Chief Operating Officer (COO) CA(SA) and MBA
Chantelle Smith Chief Financial Officer (CFO) CA(SA) and CGMA
Ahmed Naidoo Planning & Strategy Director (PSD) MBA
2. The company’s financial year-end is 31 March and it operates for all the twelve months of the year
split into two periods, period 1 (April to September) and period 2 (October to March).
3. i-Nkunzi operates an absorption costing method.
4. The company’s annual normal production capacity is 6 000 units. Production and sales occurs
evenly throughout the year during each financial year.
5. The company’s after tax cost of capital is 12,50% per annum for both the 2016 and 2017 financial
years.
6. All of i-Nkunzi’s inventory items are accounted for on a first-in-first-out (FIFO) basis.
MANUFACTURING INFORMATION
7. At the management team meeting held on 1 April 2016, Chantelle Smith presented a budgeted
cost-volume-profit (CVP) analysis report for the 2017 financial year showing that i-Nkunzi should
earn a total budgeted net profit of R320 000 for the 2017 financial year if the company produced
and sold 5 000 units.
8. The budgeted product cost of each BB tyre for the 2017 financial year is R750 per unit, and is
made up as follows:
R
Direct raw material – 6kgs per unit 150,00
Direct labour 75,00
Variable manufacturing overheads 112,50
Fixed manufacturing overheads 300,00
Selling and administration cost 112,50
Total R750,00
8.1. The selling and administration costs are 60% fixed and 40% variable.
8.2. The weight of each BB tyre is 5 kilograms.
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9. Throughout any financial year, the company will absorb its fixed manufacturing overheads
proportionally based on its annual normal capacity (see point 4. above), and all over- or under-
recovery of fixed manufacturing overheads are treated as a period cost at the end of each six-
month period of the respective financial year and not as a product cost.
10. At the end of the 2017 financial year, an extract of the actual manufacturing and trading results
for each of the two periods reflected the following movements in finished inventory:
Financial year 2017
Period 1 2
Months Apr 2016 to Sept 2016 Oct 2016 to Mar 2017
Units Units
Opening inventory 500. 1 275.
Production 3 150. 2 000.
Available for sale 3 650. 3 275.
Less: Closing inventory (1 275) ( 900)
Sales 2 375. 2 375.
10.1. Except for the above finished inventories, the company had no other inventory items either at the
beginning or at the end of each of the 2016 and the 2017 financial years.
10.2. The actual variable manufacturing cost of each BB tyre during the 2016 financial year was R300
per unit and the fixed manufacturing overhead recovery rate for the same period was R290 per
unit.
10.3. The actual product cost of each BB tyre for the 2017 financial year was R750 per unit, and is also
made up in the same proportion as the budgeted product cost of each BB tyre (refer to point. 8
above).
REQUIRED
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts with a R0 (nil-value);
• Round all your workings to two decimals.
(a) Calculate the budgeted selling price per unit of BB tyre for the 2017 financial year based
on the CVP analysis report as presented by the CFO on 1 April 2016. (10)
(b) Briefly explain the difference between break-even point and margin of safety. (4)
(c) Calculate the budgeted break-even sales units for the 2017 financial year based on the
CVP analysis report as presented by the CFO on 1 April 2016.
Ignore the implications of the opening and closing inventory values. (9)
(d) Assume the actual selling price of each BB tyre is R860 per unit throughout the 2017
financial year. Prepare the actual income statements for each of the two six-month
periods for the 2017 financial year based on the absorption costing method.
The total column is not required. (12)
(e) Assume the actual selling price of each BB tyre is R860 per unit throughout the 2017
financial year. Prepare the actual income statement for Period 1 only of the 2017
financial year based on the direct costing method. (8)
(f) Reconcile and briefly explain the difference in Period 1’s reported net profit between
the income statement in (d) and the income statement in (e). (4)
(g) On the 25 February 2016, the Minister of Finance announced the introduction of new tyre
tax (levy) of R2,30 per kilogram on every new tyre sold effective from 01 October 2016.
Briefly advise i-Nkunzi about the possible implications of the tyre tax on its business. (3)
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3.11 BUMBULO MILLING (PTY) LTD 50 Marks
Bumbulo Milling (Pty) Ltd (Bumbulo) is a maize milling company in the Rustenburg area of the North
West Province. The company is 100% owned by the Bumbulo Family Trust established by Mr Farmer
Brawn, a sole representative of the trust on Bumbulo’s management team. The milling site is well
situated as the company can easily access maize corn from the farming community of both Gauteng
and the North West provinces. The company uses the direct costing method for inventory valuation.
THE MILLING SITE

The milling site has a maximum processing capacity of 1 000 tons of maize corn per month. A Miller is
fully responsible for the entire milling site’s operation. At the site maize corn is delivered by farmers,
where it is weighed, tested for moisture and then stored in silos. Water is then added at the beginning
of the milling process to separate the corn into different products. The milling process yields three (3)
separately identifiable products namely: Maize bean, Chop and Chaff (the outer layer of the corn).
The actual results for the month ended 31 May 2017 were as follows:
A total of 800 tons of maize corn were processed at the plant. The actual yields from these tons were
Maize bean (60%), Chop (35%) and Chaff (5%). The actual costs incurred in the milling process were
as follows:
R per ton
Maize corn purchase price 4 900
Delivery cost of maize corn 100
Offloading and pre-cleaning cost 80
Water and electricity cost 150
Processing and grading cost 60
Direct labour cost 100
R
Total fixed selling and administration costs 220 000
1. The maize bean is further grinded into maize meal at a cost of R80 per ton. Vitamins are also added
into the grinding process. Each ton of maize meal requires 200 grams of vitamins, at R1 per gram
of vitamin. The added vitamin grams do not increase the weight (tons) of the maize meal. The maize
meal is packed at a cost of R20 per ton. The selling price per ton of the maize meal was R8 900 in
May 2017 and the related selling and administration cost was R15 per ton.
2. At the moment Chop does not undergo any further processing. Chop is packed at a cost of R20 per
ton. The entire Chop production is usually sold to the external animal feed processors. The actual
selling price per ton of Chop in May 2017 was R6 900 and its related selling and administration cost
per ton was R15.
3. Chaff is also not processed any further. The company sells Chaff to local traditional chicken
breeders at a selling price of R500 per ton. The company delivers Chaff to these breeders at a cost
of R100 per ton. There are no other costs relating to Chaff incurred.
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PERFORMANCE MEASUREMENT
Mr Farmer Brawn and the management team have decided to expand their operations by investing in
an animal feed processing plant. This plant will produce animal feed for the livestock industry. To
maintain consistency across the group, the performance of this plant manager will also be measured
on the basis of return on investment (ROI). Based on this performance measurement technique,
Bumbulo’s manager(s) are entitled to receive a bonus if they meet or exceed the target return on
investment. The newly appointed animal feed processing plant manager (Kabelo Bupi), has however,
raised concerns about the fairness of the performance measurement system currently in place.
The following information has been gathered with regard to the proposed operational expansion:
1. Kabelo Bupi was appointed at an annual cost to the company of R550 000. He will take full
management responsibility of the plant‘s operations, long-term investment decisions, human
resource and the procurement functions.
2. New processing machinery will be bought at a cost of R7,2 million. The machinery will have an
initial processing capacity of 150 tons per month. All the tons processed will be sold. The estimated
useful life of this machine is 10 years from date of purchase.
3. An Animal feed specialist will be hired at an annual cost of R300 000. The specialist will be
responsible for the entire animal feed production process.
4. In addition to the already available delivery trucks, the company will invest in a 3-ton truck at a cost
of R350 000. This truck will be used 60% in the animal feed processing plant and 40% in the Milling
site. The truck will have an estimated useful life of 5 years.
5. Animal feed’s direct material (Chop) will either be purchased from the Milling site or from external
suppliers. At the moment the purchase price per ton of Chop in the market is R6 900. Additional
direct material required will cost R300 per ton.
6. Bumbulo will appoint three (3) full time general workers to work at the plant at a monthly total cost
to the company of R6 500 each.
7. Variable manufacturing overheads cost per ton will be R400.
8. Other fixed manufacturing overheads, excluding depreciation, related only to the animal feed
processing plant will be R50 000 per month.
9. The company’s annual target return on investment is 20% per annum.
10. The financing of the machinery and the truck will all be arranged by Bumbulo’s management team.
The initial indications are that the interest rate per annum will be 13%.
11. Animal feed will be sold to the retailers at a selling price of R9 900 per ton and the related selling
costs per ton will be R15.
TRANSFER PRICING
Bumbulo’s management team is considering the introduction of a transfer pricing system. The team
believes that the introduction of a transfer pricing system will benefit the company in the long run. This
will involve the transfer of Chop from the Milling plant to the Animal feed processing plant.
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REQUIRED

• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts with a R0 (nil-value);
• Round all your workings to two decimals.
(a) Briefly discuss the characteristics, classification and the treatment of product Chaff in
the management accounting records of Bumbulo Milling (Pty) Ltd. (4)
(b) Prepare the actual direct costing income statement of Bumbulo Milling (Pty) Ltd for the
month ended 31 May 2017. Joint costs are apportioned to joint products on the basis of
net realisable value (NRV) at split-off point method. The total column is required. Show
all your workings. (20)
(c) On the basis of return on investment determine if the animal feed processing plant
manager will receive a bonus or not. Show all your workings on an annual basis. (15)
(d) Based on Bumbulo Milling (Pty) Ltd’s entire operational activities and its management
structure briefly discuss whether or not you consider return on investment to be a fair
tool of performance measurement. (4)
(e) List the purposes of a transfer pricing system with reference to Bumbulo Milling (Pty)
Ltd. (4)
(f) Briefly discuss the possible implications of the proposed transfer pricing system on the
current performance measurement system of Bumbulo Milling (Pty) Ltd. (3)
Total [50]
3.12 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD 50 Marks
CHEMICAL EXPERIMENTS COMPANY (PTY) LTD
The Chemical Experiments Company (Pty) Ltd, a company based in Gauteng, has a divisional
organisational structure which consists of a Head Office and two divisions, namely Normal Division
and Extraordinary Division. Both divisions make use of a direct costing system and value their
inventory using a FIFO (first in first out) method.
Under the current transfer pricing policy, at the split-off point, the Normal Division transfers all the joint
products they produce to the Extraordinary Division at the current prevailing market prices. As transfer
prices impacts the profit (and thus performance measurement) of both divisions, Head Office feels it is
important to determine the most beneficial transfer pricing policy for the group as a whole.
NORMAL DIVISION: MAY 2017
Normal Division produces two joint products from the electrolysis of brine process, namely, chlorine
(Cl2) and sodium hydroxide (NaOH). A by-product, hydrogen (H2) is also produced from this process.
Notwithstanding the fact that currently all joint products are transferred to the Extraordinary Division, the
joint products can also be sold externally.
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Normal Division currently operates at full production capacity. The budgeted joint costs for the month
of May 2017 were R480 000. The budgeted output for May 2017, representing a normal month, from
the input of brine undergoing the electrolysis process was as follows:
Product Kilogram
Cl2 607 000
NaOH 684 000
H2 17 000
A regular market exists at split-off point for the full output of the by-product after being further packaged
into cylinders at a cost of R1,15 per kilogram.
The expected market selling prices for the products in May 2017, at split-off point are as follows:
Expected market selling
Product price at split-off point
R/kg
Cl2 2,24
NaOH 2,20
H2 8,85
EXTRAORDINARY DIVISION
In the Extraordinary Division, Cl2 and NaOH (inputs from Normal Division) are further processed into
super crazy chlorine (SCC) and top secret sodium hydroxide (TSSH) respectively. The further
processing of the input of Cl2 and NaOH results in a 10% normal loss that occurs at the beginning of
the process. The weight of one unit of product SCC and one unit of TSSH is equal to one kilogram (1kg)
each. You may therefore assume that the amount per kilogram will be equal to the amount per unit for
both of these products.
1. EXTRAORDINARY DIVISION MAY 2017 INFORMATION
1.1 The budgeted/standard further processing cost and the expected market selling prices for the
products in May 2017 are as follows:
Variable further Market selling price

Product processing cost
R/unit R/unit
SCC 0,75. 5
TSSH 2,80* 8
*Included in the budgeted variable further processing cost of R2,80 per unit of TSSH is direct
labour costs of R1,44 per unit. The standard direct labour requirement per unit of TSSH is 8 clock
minutes per unit. The idle time provision is 10% of the clock time.
1.2 The budgeted sales volume was equal to the budgeted production volume.
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1.3 Extract of actual results for May 2017:
1.3.1. The sales volume was equal to the production volume.
1.3.2. Additional information relating to the month:
SCC TSSH
Sales volume (units) 558 500 610 750
Selling price per unit (R/unit) 4,85 8,04
Direct labour @ R1,45/clock minute R4 049 125 R6 478 600
1.3.3. The factory foreman indicated that productive hours were 8% less than the actual hours clocked
during the month of May 2017.
2. EXTRAORDINARY DIVISION JUNE 2017 BUDGETED INFORMATION
The following information relates to the month of June 2017:
2.1 The sales demand for SCC and TSSH is expected to be 600 930 units and 584 820 units
respectively. The selling price of SCC and TSSH is expected to increase with 10% and 12%
respectively from their expected market selling prices of May 2017.
2.2 The standard variable further processing cost per unit of SCC and TSSH is expected to decrease
with 5c per unit and 8c per unit respectively from the May 2017 budgeted costs.
2.3 The direct labour requirement per unit of SCC and TSSH is 5 clock minutes, and 8 clock minutes
per unit respectively. The direct labour hours for June 2017 is limited to 100 000 clock hours as
staff members have indicated their intention for industrial action and will thus not be available as
initially expected.
SUGGESTED TRANSFER PRICING PRICE CHANGE IMPOSED BY HEAD OFFICE
It has been suggested by Head Office that Normal Division should transfer their full output of Cl2 and
NaOH to Extraordinary Division using a transfer price equal to actual variable cost. This has led to
quite a lot of unhappiness and numerous fiery debates within the company. The Normal Division saves
10c per kilogram of Cl2 transferred and 5c per kilogram of NaOH on administrative costs as a result of
transferring these products to Extraordinary Division instead of selling it to the external market.
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REQUIRED

 Clearly show all your calculations in detail;
 Where necessary, indicate irrelevant amount(s) with a R0 (nil-value);
 Round all your workings to two decimals, except where otherwise stated.
Question (a) relates to Normal Division

(a) Calculate and allocate the budgeted joint cost to product Cl2 and product NaOH
for May 2017 if Normal Division uses the physical measures method to allocate
joint cost. (5)
Question (b) should be answered from the perspective of the Chemical Experiments
Company (Pty) Ltd
(b) Determine whether the product Cl2 and product NaOH should be sold to the
external market by the Normal Division at split-off point or be further processed into
products SCC and TSSH in Extraordinary Division and then sold to the external
market.
Base your calculations on budgeted figures. (12)
Question (c)-(g) relates to Extraordinary Division and products SCC and TSSH
(c) Calculate the sales price variance per product and in total for May 2017. (3)
(d) Provide two (2) reasons for a possible favourable sales price variance. (2)
(e) Calculate the sales volume contribution variance per product and in total for
May 2017. (5)
(f) Calculate the idle time variance for product TSSH for May 2017. (6)
(g) Calculate the budgeted contribution for Extraordinary Division for June 2017 based
on the optimum production mix. (12)
Question (h) – (i) relates to the transfer pricing policy and the new suggested transfer
price
(h) From the viewpoint of the manager of the Normal Division, briefly discuss the
issues arising from the suggested transfer price by Head Office. (4)
(i) Calculate the maximum transfer price per kilogram of Cl2 at which Normal Division
would ideally want to transfer to Extraordinary Division if they were not forced to
transfer their products at actual variable cost. (1)
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3.13 ENERSOLAR (PTY) LTD 50 Marks
Enersolar (Pty) Ltd (Enersolar) is a Limpopo-based wholly-owned subsidiary of Maatla Energy Solutions
Ltd (a well-known South African energy group of companies). Enersolar has two divisions, namely the
Solar Panel division which manufactures solar panels, and the Energy Turbines division, which
manufactures energy turbines. The group makes use of the absorption costing system and all its
inventory items are valued using the first-in-first-out (FIFO) method.
SOLAR PANEL DIVISION

The Solar Panel division manufactures three types of solar panels which are sold to retailers across the
country.
During the budget presentation meeting, the group’s Chief Financial Officer (CFO) expressed concerns
about the Solar panel division’s allocation of the fixed manufacturing overheads and the impact thereof
on the budgeted gross profit percentages. She immediately ordered an investigation into the activities
that drives the allocation of these fixed manufacturing overheads.
1. Solar Panel division budgeted information for the month ending 31 March 2017 is as follows:
Product REGULAR SUPER HYPER TOTAL

Production and sales units 5 000 3 000 2 000 10 000
R’ 000 R’ 000 R’000 R’000

Revenue 80 000 55 500 48 000 183 500
Less: Costs of sales 75 200 53 700 49 400 178 300

Direct raw materials 29 000 19 500 20 000 68 500
Direct labour 24 700 20 700 18 400 63 800
Variable manufacturing overheads 16 500 10 500 9 000 36 000
Fixed manufacturing overheads 5 000 3 000 2 000 10 000
Gross profit/(loss) 4 800 1 800 (1 400) 5 200

Less: Non-manufacturing overheads
Variable selling costs 60
Fixed head office allocated costs 125
Fixed salary costs 261
Net profit 4 754
Gross profit percentage 6,00% 3,24% (2,92%) 2,83%
Additional budgeted information relating to the month ending 31 March 2017:
1.1. The total budgeted units of panels are equivalent to 100% monthly manufacturing capacity. All
losses in the manufacturing process may be regarded as immaterial.
1.2. The budget assumes that all panels manufactured during the month will be sold. The division had
no budgeted work in progress, opening and closing inventory for all types of panels.
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1.3. The direct raw materials used in the panels manufacturing process are mainly steel and other
components. The division currently makes use of the just-in-time (JIT) procurement technique for
the acquisition of the direct raw materials.
1.4. The fixed manufacturing overheads are expected to be absorbed by the three panels on the basis
of a pre-determined fixed manufacturing overheads absorption rate.
1.5. The variable selling costs are budgeted at R6 per unit for each type of panel.
1.6. The fixed head office allocated costs represent corporate sponsorship to the Department of
Energy’s golf week-end event. This amount is allocated monthly to all the companies within the
group on an arbitrary basis.
1.7. The fixed salary cost represents monthly salaries for five (5) administrative employees of the Solar
Panel division.
2. Investigation results of the allocation of the fixed manufacturing overheads
The investigation established that the current blanket allocation of the fixed manufacturing overheads
is not appropriate and should be revised. The proposal is to allocate these overheads on the basis of
the activities that drive these overheads, see below:
Fixed manufacturing
overheads
Activity driver Notes R
Number of production runs 2.1 1 485 000
Machine hours 2.2 1 599 600
Number of purchase orders 2.3 828 900
Number of quality inspections 2.4 6 086 500
R 10 000 000
2.1. Panels are manufactured in production runs. Regular’s production run contains 250 panels,
Super’s production run contains 200 panels, and Hyper’s production run contains 200 panels.
2.2. The division’s manufacturing process is predominately performed by specialised machines. The
machine time to manufacture each panel is 15 minutes for Regular, 30 minutes for Super and
57 minutes for Hyper.
2.3. The budget assumes a total of 20 working days for the month. Direct raw material purchase orders
as per the JIT manufacturing schedule will be placed every 3rd working day for the Regular panels,
every 5th working day for the Super panels and every 8th working day for the Hyper panels.
2.4. Quality inspections occur as follows: every 500th Regular panel is inspected, every 100th Super
panel is inspected, and every 20th Hyper panel is inspected.
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3. The following is an extract of the actual results for the month-ended 31 March 2017 for
product Hyper only:
3.1. Actual production schedule based on absorption costing system:
Hyper panels Number of panels R

Opening inventory: 1 March 2017 70 R1 715 000
Production 2 200 ?
Sales 2 150 ?
Closing inventory: 31 March 2017 ? ?
3.2. The opening inventory value of R1 715 000 included fixed manufacturing overheads absorbed at
a rate of R800 per unit and the related variable manufacturing costs per unit is equivalent to the
March 2017 budget.
3.3. An end-of-range sale was held in March 2017 whereby the Hyper panels were sold at 2% less
than the budgeted selling price.
3.4. The actual direct raw materials and direct labour actual price/rate were 5% higher than the
budgeted price/rate.
3.5. The actual variable manufacturing overheads per unit and variable selling costs per unit rates
were the same as the related budgeted unit prices.
3.6. The actual total fixed manufacturing overheads and the actual fixed salary costs were R1 950 000
and R55 500 respectively.
ENERGY TURBINES DIVISION
The Energy Turbine division has a monthly manufacturing capacity of fifty (50) turbines, thirty-five (35)
of which represent the current monthly existing external market. The selling price in the existing external
market is R3 800 per turbine and the related total variable costs are R2 600 per turbine.
The division was approached by Agrie SA (an agricultural conglomerate situated in Mpumalanga) to
prepare a quotation for a tender of twenty-five (25) high tech energy turbines.
Further details regarding the quotation:
1. The manufacturing of the proposed twenty-five turbines will require the installation of one (1)
Component A per turbine. Component A is regularly used by the division. The required
components are all available in inventory and were purchased at R1 500 per component. Each
component has a resale value and a current replacement cost of R1 550 and R1 700 respectively.
2. In addition to Component A, each of the proposed twenty-five turbines will require three (3) high
tech components (Component Z). Component Z’s can only be bought in batches of fifty (50) high
tech components per batch. The total cost per batch is R20 000. Although Component Z’s are in
regular use, the division does not currently have them in inventory.
3. The machine time to manufacture each turbine is 40 minutes and the cost is R300 per machine
hour. The machine was purchased 2 years ago with a R8 000 000 loan at 10,50% interest per
annum. The machine is depreciated over its intended economic useful life of 8 years.
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4. The normal direct labour time to manufacture each high tech turbine is 16 minutes. Due to
specialised nature of these high tech turbines overtime will be worked on only 12 of the 25
turbines. The normal direct labour rate is R180 per hour, and the overtime rate is 1,5 times the
normal rate. The direct labour is variable in nature.
5. The divisional manager attended the initial tender briefing at Agrie SA’s offices and had
subsequently re-visited their offices three (3) times at a cost of R1 200 per return-trip.
6. The fixed manufacturing overheads are allocated to the turbines on the basis of a pre-determined
fixed manufacturing overheads absorption rate of R1 500 per turbine. No additional fixed
manufacturing overheads will be incurred due to the manufacturing of these high tech turbines.
7. The division’s pricing policy is to add 20% mark-up on the total relevant costs for such quotations.
REQUIRED
(a) Determine the total budgeted number of each panels required by the Solar Panel Division
for the month of March 2017 to break-even. (12)
(b) Briefly discuss two (2) benefits to the Solar Panel Division of using the just-in-time (JIT)
direct raw materials procurement technique. (2)
(c) Assume a budgeted controllable investment of R250 000 000 for March 2017.
Calculate the Solar Panel Division’s annualised budgeted return on investment (ROI) for
March 2017. (2)
(d) Assume that Solar Panel Division implements the proposal to revise the allocation of the
fixed manufacturing overheads. Calculate the revised budgeted gross profit percentage of
each type of panel.
The Total column is not required. (10)
(e) The group’s CFO is of the opinion that the direct costing system could provide
meaningful information for assessing the economic performance of the Solar Panel
Division. Prepare the March 2017 actual income statement for product Hyper only based
on the direct costing system. (8)
(f) Determine the total price to be quoted by the Energy Turbines Division for the twenty-five
(25) high tech energy turbines as per Agrie SA’s request.
Give a reason for inclusion or exclusion of all items. Show all your calculations. (12)
(g) Briefly discuss four (4) qualitative factors which the Energy Turbines division should
consider before quoting the tender price to Agrie SA. (4)
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3.14 PEARS LTD 50 Marks
Pears Ltd (Pears) is a JSE listed telecommunications group of companies. Currently the group consists
of Division PearMobile (DPM), which produces PearMobile (PM) smart-phones only, and Division
PearTablet (DPT), which produces PearTablets (PT) only. In line with the latest technological trends,
Pears is also planning to expand its product offering to include smart-watches. DPM’s manufacturing
plant is in Polokwane while DPT’s manufacturing plant is in Cape Town. Pears have 20 retail outlets
across the country from which its products are sold to the public. The annual normal production
capacity is 20 000 PM’s and 12 000 PT’s. Both the production and sales of units occur evenly
throughout each financial year.
Although the group makes use of an absorption costing system for external reporting purposes, it
also uses a direct costing system for internal reporting purposes. All types of inventory are valued
using the first-in-first-out method. Fixed manufacturing overheads are absorbed at a predetermined
absorption rate based on the annual normal production capacity. The resulting over-/under recovery
is treated as period cost.
Pears’ cost of capital rate is prime-linked at 0,50% below the prime lending rate. The annual target
return on investment (ROI) is 11,00% for DPM and 11,50% for DPT.
1. ANNUAL GENERAL MEETING (AGM) FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2016
These resolutions/items were passed with no objections at the AGM held on 30 November 2016:
1.1. Head office will pay each division a performance bonus equal to 1,75% of their respective actual
2017 financial year sales figure only if such division meet or exceed its target ROI.
1.2. The values of inventory items as at 31 August 2016:
Inventory Item Units Inventory value
PM 550 R2 475 000
PT 1 200 R9 000 000
1.3. With reference to the inventory valuation as at 31 August 2016, 70% of the total manufacturing
costs of each product are variable in nature and the balance thereof is the absorbed fixed
manufacturing overheads.
1.4. The appointment of Dinatla Auditors RA(SA) as the groups’ external auditors. The divisional
managers have no influence on the appointment, including the fee negotiations, of the external
audit services.
1.5. The launch of the smart-watches (PearWatch) during the 2018 financial year.
2. EXTRACT OF THE ACTUAL RESULTS FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2017
2.1. The actual annual units produced (production) were 85% and 90% of the annual normal
production capacity for PM’s and PT’s respectively.
2.2. 16 800 units of PM’s and 11 000 units PT’s were sold at R7 200 per unit and R9 800 per unit
respectively.
2.3. The unit variable manufacturing cost increased by 6,00% for each product whereas the fixed
manufacturing overhead absorption rate increased by 2,00% for each product from the 2016
financial year actual amounts.
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2.4. The actual variable selling cost per unit were R12,00 and R14,00 for PM and PT respectively. The
actual fixed selling cost amounted to R980 000 for PM and R420 000 for PT.
2.5. Pears was found guilty of price-fixing and fined R80 000 000 by the Competition
Commission (CC). The allocation of fines to the divisions is approved by the head office. Pears is
only be liable for 50% of the fine imposed while its board of directors are personally and severally
liable for the other 50%. The head office paid Pear’s allocated portion of the fine and then
apportioned this portion 60% to DPM and 40% to DPT.
2.6. The actual legal fees paid by Pears in relation to the CC matter (see point 2.5 above) was
R7 500 000. The head office allocated the legal fees equally between the divisions. As a policy of
the group, all of Pears’ legal matters including the related legal fees are the sole responsibility of
the head office.
2.7. The head office allocated R250 000 audit fees to each of the two divisions for the annual external
audit by Dinatla Auditors RA(SA).
2.8. Controllable investments as at 31 August 2017 were R350 000 000 and R220 000 000 for DPM
and DPT respectively.
2.9. The South African Reserve Bank governor (Mr. Lesetja Kganyago) announced the adjustment to
the prime lending rate from 10,25% per annum to 10,50% per annum effective 18 March 2016.
The prime lending rate remained unchanged subsequently.
3. BUDGET INFORMATON FOR THE 2018 FINANCIAL YEAR

The following are an extract of the group’s approved budget for the 2018 financial year:
3.1. The demand and sales units for PM and PT is expected to be 18 000 and 12 000 units respectively.
3.2. The launch of the smart-watches
Pears will take-over Dom-lex Pty Ltd (a struggling but promising smart-watch producing company
from Nelspruit). Dom-lex will be converted into a new division “Division PearWatch (DPW)” to
produce and sell unisex wrist smart-watches (PearWatch (PW)). DPW is expected to start selling
PW’s from 01 March 2018.
3.3. Product testing time
All of Pears’ products are hand-tested at the centralized warehouse in Johannesburg before they
are made available for sale. Pears’ testing capacity is based on its seven (7) permanent
employees (testers). The clock hours and productive hours of each tester is eight (8,00) hours
and six-and-a-half (6,50) hours respectively per workday. During a 240-day working year, each
tester is required to take 20 working days compulsory annual leave. It takes one (1) tester 15
minutes to test one PM, 30 minutes to test one PT, and 12 minutes to test one PW. Although
qualified to test any of the three products, each tester can only test one of the products at a time.
3.4. Additional product information:
Division Division Division
PM PT PW
Demand and sales (units) ? ? 3 000
(R) per unit (R) per unit (R) per unit
Selling price 7 800 10 400 4 700
Variable manufacturing cost 4 950 8 100 3 200
Variable selling cost 14 16 5
3.5. The group budgeted R42 000 000 for annual fixed manufacturing overheads and R16 850 000 for
annual fixed selling costs.
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REQUIRED
(a) Calculate the actual closing inventory as at 31 August 2017 by completing the
table below:
DPM DPT
units units
Sales ?? ??
Closing inventory 31 August 2017 ?? ??
Units required ?? ??
Opening inventory 01 September 2016 ?? ??
Units produced ?? ??
(2)
(b) Briefly discuss four (4) reasons as to why Pears would use an absorption costing
system for external reporting, but also use a direct costing system for internal
reporting. (4)
(c) Prepare the actual income statement for DPM only for the 2017 financial year
based on the absorption costing system.
Ignore the possibility of the performance bonus. (10)
(d) Based on the actual results, assume that the actual profit before tax and
performance bonus for the financial year ended 31 August 2017 is R18 520 000
for DPM and R7 800 000 for DPT.
(i) Calculate the actual residual income for DPT only for the financial year ended (5)
31 August 2017.
(ii) Calculate the performance bonus, if any, that the head office will pay to DPT
only for the financial year ended 31 August 2017. (4)
(e) Calculate the budgeted margin of safety percentage for each of the three products
for the financial year ending 31 August 2018.
Ignore the impact of any possible constraints. (10)
(f) Calculate the group’s optimum number of products that can be available for sale
based on the 31 August 2018 budgeted information. (11)
(g) List four (4) qualitative factors that Pears would have considered when the decision
to centralize all the testing functions at a Johannesburg warehouse was made. (4)
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3.15 DELIGHT SPREADS (PTY) LTD 50 Marks
Delight Spreads (Pty) Ltd (DS) is a small enterprise that produces and sells two types of macadamia-
nut spreads; macadamia natural spread (MNS) and macadamia sweet spread (MSS). The losses which
occur in the production process are considered immaterial. Each type of spread is packed and sold in
a glass bottle containing 250g of spread. These bottled-spreads are mainly sold at food markets and
other flea markets.
DS is the brain child of three friends, Ester, Parusha and Sibongile. Ester and Parusha are mainly
responsible for the production function while Sibongile is responsible for the marketing, procurement,
finance and administrative functions. The three friends approved the following budget:
1. ANNUAL BUDGET FOR THE FINANCIAL YEAR-ENDING 31 OCTOBER 2017:

MNS MSS Total
R R R
Sales 1 795 200. 1 305 600. 3 100 800.
Less: Manufacturing cost of sales (1 532 500) (1 016 860) (2 549 360)
Direct raw material 889 440. 560 320. 1 449 760.
Direct labour 204 000. 152 320. 356 320.
Variable manufacturing overheads 228 480. 163 200. 391 680.
Packing material (glass bottles) 39 168. 26 112. 65 280.
Fixed manufacturing overheads 171 412. 114 908. 286 320.
Gross profit 262 700. 288 740 551 440.
Less: Administrative and selling costs (357 040)

Computer depreciation 16 000.
Insurance premiums 46 000.
Cleaning contract fees 50 000.
Administrative employee costs 60 000.
Selling costs (note 1.6) 155 040.
Sundry fixed costs 30 000.
Net profit before tax R 194 400.
The 2017 financial year budget was prepared on the basis of the following assumptions:
1.1. The selling prices were budgeted at R55 for MNS and R60 for MSS per unit. The budgeted sales
mix was 1,5:1 for MNS and MSS.
1.2. DS budgeted to produce 32 640 units of MNS and 21 760 units of MSS. All units produced are
expected to be sold in the same financial year.
1.3. Production and sales for both products occur evenly throughout the financial year.
1.4. No opening and closing inventory were budgeted for all types of inventories.
1.5. Fixed manufacturing overheads were allocated on the basis of budgeted production units.
1.6. The budgeted variable selling costs were R89 760 for MNS and R65 280 for MSS.
1.7. The spread manufacturing machine produces 10kg of MNS per one machine hour and 10kg of
MSS per one and half machine hours. This machine has a total annual production capacity of
1 900 hours. The machine can only produce one type of spread at a time.
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1.8. The following direct raw material standard cost and standard usage data relates to the
production of 1 kilogram spread. For example 200g of honey will be used in the manufacturing
of 1kg of MSS spread at a cost of R16 for 200g of honey.
MNS 1kg MSS 1kg
Direct raw material Grams R Grams R
used used
Macadamia nut chips and pieces 900 99 700 77
Macadamia nut oil 100 10 100 10
Honey 200 16
Total 1 000g R109 1 000g R103
1.9. The direct raw material and selling prices are expected to remain constant throughout the financial
year.
1.10. Sibongile used the unadjusted 2016 financial year actual prices for the 2017 direct raw material
budget.
2. GRAHAMSTOWN ARTS FESTIVAL
2.1. The results of the 2016 market research conducted by Sibongile indicated that should DS
showcase their spreads at the annual Grahamstown Arts Festival, the annual budgeted demand
for the MNS and the MSS spreads will increase to 40 000 units and 30 000 units respectively,
mainly due to the exposure to the new Eastern Cape market.
2.2. The total annual production capacity for the spread manufacturing machine will remain at 1 900
hours.
2.3. Although the recent severe drought negatively affected the supply and availability of the direct raw
material, it is still expected that DS will have access to all the required quantities of the direct raw
material to fully meet the increased annual demand for both spreads.
3. ACTUAL RESULTS FOR THE QUARTER ENDING 31 JANUARY 2017

MNS MSS
Sales (units) 9 000 7 000
Production (units) 9 100 7 200
Selling price per unit R 55 R60
Macadamia nut chips and pieces purchased 2 093kg at a total cost 1 224kg at a total cost
and issued to production of R251 160 of R146 880
Macadamia nut oil purchased and issued to 182kg at a total cost of 144kg at a total cost of
production R20 020 R15 841
Honey purchased and issued to production 432kg at a total cost of
R30 240
Variable manufacturing overheads R72 800 R50 400
Direct labour rate and hours per unit for the quarter were as per the standards used in the budget.
4. ACTIVITY BASED COSTING (ABC) METHOD

As part of the youth month celebrations Ester attended the African Farmers Association conference. An
ABC-session at the conference prompted her to table a proposal to investigate the possibility of
implementing ABC at DS.
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The investigation established the following relationships between the budgeted fixed manufacturing
overheads and the related activities:
Activity area Notes Total annual cost

R
Direct raw material ordering i 68 800
Quality inspections ii 52 500
Factory rental iii 165 020
Total budgeted fixed manufacturing overheads R286 320
i. Sibongile places three raw material orders for MNS and two orders for MSS per week. Assume
DS operates for 40 weeks of the year.
ii. Parusha is responsible for conducting the spreads quality inspections. For the 2017 financial year
a total of 6 528 and 7 253 quality inspections are expected to be conducted for MNS and MSS
respectively.
iii. The factory is used 20% for administrative purposes, 45% for the production of MNS and 35% for
the production of MSS.
REQUIRED
(a) Based on the current budget, the three friends are of the view that the company has
the capacity to achieve a target profit of R350 000.
Calculate the budgeted number of units per spread type that DS will need to produce
and sell to achieve the target profit of R350 000 for the 2017 financial year. (10)
(b) Determine the optimum production mixture that will maximize DS’s budgeted profit for
the 2017 financial year based on the impact of the Grahamstown Arts Festival market
research. For this question only, round all your workings (excluding Rand amounts) to
4 decimal places. (8)
(c) Briefly discuss how DS can improve on its budgeting process so as to closely align it
to the actual results. (6)
(d) By reference to the 2017 financial year budget, identify the type of costing method
used by DS. Provide at least one reason for your answer. (2)
(e) Calculate the following variances for the quarter ending January 2017:
(i) The macadamia nut chips and pieces purchase price variance for MNS only.
(3)
(ii) Direct raw material mix variance for the MSS. (For the purposes of this variance
round your percentages to two decimal places). (5)
(iii) Variable overheads expenditure variance per product and in total. (3)
(f) Briefly discuss the possible reasons for the macadamia nut chips and pieces
purchase price variance. (4)
(g) Calculate the total budgeted fixed manufacturing overheads for both MNS and MSS
for the 2017 financial year on an activity-based costing method. (6)
(h) Briefly contrast ABC with traditional costing method. (3)
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3.16 TEDDY FRENZY LTD 50 Marks
Teddy Frenzy Ltd (TF) is one of the largest manufacturers and online sellers of teddy bears in South
Africa. The company has a divisionalised structure and there are two (2) divisions within the company,
namely the Budget Bears division (BB) and the Exclusive Bears division (EB).
BUDGET BEARS DIVISION (BB)
BB manufactures and sells one (1) type of teddy bear called Fuzzy Wuzzy (FW). BB budgeted to sell
5 000 FW teddy bears each month. Sales are expected to take place evenly throughout the year.
Although BB has capacity to manufacture 5 600 FW teddy bears each month, they have an external
market for 5 000 of these teddy bears each month. BB manufactured 4 880 units in October 2017.
Direct Material
The direct material that BB use in the manufacturing of their teddy bears is fake fur fabrics, synthetic
leather, embroidery floss and plastic buttons for the eyes, glue and fiber for stuffing the teddy bears. BB
makes use of a mix of two different fibers for stuffing their teddy bears in order to arrive at the ideal
density that makes the teddy bear squeezably soft.
1. Extract from the standard direct material requirements of one (1) Fuzzy Wuzzy teddy bear:
Details R
Fake fur fabrics (R20 per metre) 10,00
Synthetic leather (200cm) 8,00
Plastic buttons (R0,50 per button) 1,00
Fiber
- Very fine fiber (100 grams) 12,40
- Thick wavy fiber (250 grams) 15,00
Other (embroidery floss and glue) 0,50
2. The following actual information relates to the direct material and was extracted from the
management accounts for the month of October 2017:
2.1 BB purchased 1 100 meters of fake fur fabrics at a total cost of R24 200 and 980 meters of
synthetic leather at a total cost of R37 240.
2.2 BB did not buy any plastic buttons, embroidery floss or glue in October 2017 as it still had
enough in inventory for all the FW teddy bears manufactured in October 2017. The actual
quantities of these direct material issued to manufacturing were in line with the standard.
2.3 BB obtained discounted prices when they purchased fiber from one of their suppliers as a result
of purchasing the fiber bales in bulk. See details below:
Very fine fiber 520 kilogram for R61 360

Purchased
Thick wavy fiber 1 250 kilogram for R54 272
Very fine fiber 475 kilogram
Issued
Thick wavy fiber 1 275 kilogram
3. The cost of placing an order for the plastic buttons amounts to R100 per order. The all-inclusive
inventory holding costs of the plastic buttons amount to R0,02 per plastic button.
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Direct labour: machine-related
The budgeted direct labour rate was R50 per hour for October 2017. The budgeted and actual direct
labour time to produce one FW teddy bear was 15 minutes. The actual direct labour rate per hour for
October 2017 was 8% higher than the budgeted direct labour rate per hour for the same period.
Direct labour: temporary sewing workers

Each temporary worker sews two FW teddy bears per workhour. Every temporary worker was paid R54
per clock hour in October 2017. The expected and actual idle time allowance for October 2017 was
10%.
Manufacturing overheads
From the period July 2017 to October 2017, BB incurred manufacturing overheads as per the
observations indicated in the information below. These costs were not in direct relation to the volume.
Period Number of FW teddy Manufacturing

bears manufactured overheads
R
Jul-17 5 020 20 450
Aug-17 5 180 20 580
Sep-17 5 010 20 400
Oct-17 4 880 19 980
The budgeted number of FW teddy bears expected to be manufactured for November 2017 is 5 000.
New stuffing machine

The chief operations officer (COO) of TF Ltd is considering investing in a new stuffing machine and
replacing the current one. The new high-quality stuffing machine uses considerably less electricity than
the current machine, is safer to use as it releases less airborne fluff and is expected to improve the
cuddliness of the teddy bears. Although the sales price per FW teddy bear is expected to increase as a
result of the improved cuddliness of these teddy bears, the budgeted production and sales volumes will
remain the same for both of these machines.
The following information is available regarding the two (2) machines:
Current stuffing New high-quality

machine stuffing machine
Total expected sales over the next 4 years: R9 000 000 ?

10% probability R9 050 000
Current resale value of the machine R5 000 -

Original cost price of the machine R50 000 R80 000
Accumulated depreciation to date R10 000 -
Estimated total variable costs per year R25 000 R10 000
Annual electricity and other fixed operating costs R8 000 R6 000
Remaining useful life 4 years 4 years
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Selling and administrative cost
The total actual amount of selling and administrative costs incurred during the month of October 2017
was R30 000. The actual variable portion was R1,50 per FW teddy bear, which was equal to the
budgeted amount. One-third (⅓) of the variable selling and administrative costs are only incurred on
sales to the external market.
EXCLUSIVE BEARS DIVISION (EB)
New proposed range: Glitter Glam (GG) teddy bears
The management of TF Ltd suggested that EB launches a new product range, called Glitter Glam (GG)
teddy bears using the FW teddy bears that BB manufactures and further converting them into an
exclusive new teddy bear adding costumes, ribbons and other accessories before packaging the bears.
EB plans to exploit the market by charging high initial prices to take advantage of the novelty appeal of
GG teddy bears.
Quality costs
EB believes that in today’s global environment, strategic goals should focus on quality, cost and time.
In order to pursue quality as a strategic goal, a good quality cost measuring system is needed. The
COO recently read that quality costs can be classified into four categories, namely prevention, appraisal,
internal failure and external failure costs. The following quality costs are incurred by EB:
Quality cost item Description

Reworking costs EB incurs costs to rework defective teddy bears that are discovered.
Fibers are sometimes caught in the seams of teddy bears or stiches are
missed.
Quality inspection costs EB pays a salary to a quality inspector that applies the final "hug test" to
evaluate the satisfactory cuddliness and provide quality control.
Warranty repair costs EB offers a one (1) year warranty to their customers for repairing defects
discovered by customers.
Training costs EB incurs costs for training their fabric cutters, sewing workers, stuffing
machine operators, bear surgeons, bear groomers and bear dressers.
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REQUIRED
(a) Calculate the following direct material variances of BB for the month of
October 2017:
(i) Fake fur fabrics purchase price variance for FW teddy bears. (2)
(ii) Synthetic leather purchase price variance for FW teddy bears. (2)
(iii) Fibre material mix variance per type of fibre and in total for FW teddy bears. (5)
(b) Provide two (2) reasons for a possible total favourable fibre material mix variance. (2)
(c) Determine the optimum number of orders of plastic buttons that BB has to place
in order to meet the annual expected demand for FW teddy bears. (4)
(d) Determine the actual total machine-related direct labour charge of BB for
October 2017. (2)
(e) Determine the actual total direct labour charge of BB for October 2017 for the
temporary sewing workers. (3)
(f) Based on the manufacturing overheads observations and using the high-low
method calculate the total budgeted manufacturing overheads for BB for
November 2017. (5)
(g) Advise the COO of TF Ltd whether to purchase the high-quality stuffing machine
or not. Consider both quantitative and qualitative factors.
Limit your qualitative factors to only two (2). Ignore the time value of money. (10)
(h) Assume that the external market selling price is R150 and the related contribution
is R56,50 per FW teddy bear.
Ignoring the possible replacement of the stuffing machine, calculate the minimum
transfer price per FW teddy bear which BB would be willing to accept if they are
required to transfer 1 000 of these bears to EB. (7)
(i) Categorise each of the quality costs incurred by EB into the correct quality cost
category. (4)
(j) Identify the pricing policy that EB intends to apply with their new proposed range
of GG teddy bears and indicate which stage these teddy bears are in the product
life cycle. Supply one (1) reason for each of your answers. (4)
Total marks [50]
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3.17 ZAMA-ZAMA (PTY) LTD 50 Marks
Zama-Zama (Pty) Ltd (Z-Z) is an established mining company situated in the Randfontein area of the
Gauteng Province. The company’s operations are divided into two divisions managed by two
independent management teams. The divisions are Open-cast mining and Ready mixture. The
company operates a transfer pricing system whereby the Open-cast mining division transfers some of
its production to the Ready mixture division. The company’s financial year-end is 31 December. An
absorption costing system is used and inventory is valued on a first-in-first-out (FIFO) basis.
Z-Z’s head office makes all the long-term borrowings decisions and it also allocates corporate expenses
at its discretion. All other decisions are made by the respective divisional managers.
The company’s budgeted after tax cost of capital for the 2017 financial year is 12% per annum.
OPEN-CAST MINING DIVISION
The Open-cast mining division produces two products, uranium, which is used in the energy industry
and clay, which is used in the manufacturing of ceramic tiles.
The following budgeted information was extracted for the month of January 2017 as prepared by the
management accountant:
Details Uranium Clay Total

R R R
Sales 5 445 000 3 430 000 8 875 000
Direct labour 2 475 000 1 568 000 4 043 000
Inspection and quality control 150 000 112 000 262 000
Total manufacturing overheads 2 556 000
Administrative employees’ salaries 120 000
Allocated corporate expenses 200 000
Total selling and distribution costs 510 000
Non-current assets 12 800 000
Trade receivables 3 600 000
Long-term borrowings 2 600 000
Trade payables 2 000 000
Additional information relating to the budget for the month of January 2017
1. The division’s budgeted monthly production, at full capacity, is 500 tonnes of uranium and 400
tonnes of clay. All the losses in the open-cast mining process are considered immaterial. There
were no opening inventories.
2. The budgeted monthly sales volumes are 495 tonnes of uranium and 350 tonnes of clay. The
external monthly demand for clay is limited to 350 tonnes.
3. The mined products are subjected to inspection and quality control before being delivered to
customers.
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4. Manufacturing overheads
4.1 The manufacturing overheads are semi-variable in nature and are allocated to products
based on the total monthly budgeted production tonnes.
4.2 The manufacturing overheads budget is based on the observations for the activity levels as
extracted from the 2016 financial year-end’s actual information as indicated in the Table
below.
Assume that the variable manufacturing overheads per unit will not change.
Total manufacturing overheads observation for the activity levels:
Month Total manufacturing Total tonnes

overheads produced
December 2016 R2 300 000 800
November 2016 R1 840 000 600
October 2016 R1 610 000 500
September 2016 R1 863 000 610
5. The total budgeted variable selling and distribution costs for uranium is R60 000 and for clay is
R49 700. Variable selling and distribution costs are only incurred on sales to external customers.
The other selling and distribution costs are fixed in nature.
READY MIXTURE DIVISION
The Ready mixture division manufactures a ready-mix (cement used in the tiles manufacturing process)
and uses a process costing system. In the Ready mixture division, the clay (input) is added at the
beginning of the process and then crushed and grinded (converted) into a ready-mix (output). The
conversion process results in a 2% normal loss per tonne of the input. The finished ready-mix is packed
in cement bags and sold to various ceramic tiles manufacturers. Ready-mix’s total budgeted monthly
manufacturing output is 245 tonnes and the related total monthly manufacturing capacity is 270 tonnes.
The following budgeted information was extracted for the month of January 2017 as prepared by the
management accountant:
R
Sales 3 864 000
Direct raw material 2 445 000
Direct labour 617 400
Packaging costs 75 950
Administrative employees’ salaries 60 000
Selling and delivery costs 30 000
Additional information relating to the budget for the month of January 2017
1. The division had no opening inventories of finished ready-mix or direct raw material.
2. The budgeted ready-mix sales volumes for the month are 230 tonnes at a selling price of R16 800
per tonne.
3. The direct raw material (clay) purchase price from the external suppliers is R9 780 per tonne.
Each direct raw material order cost R10 per tonne to place.
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4. Unless otherwise stated, all sales transactions attract both selling and delivery costs that are
independent of each other. These costs are variable in nature and their respective proportional
split is 45% selling cost and 55% delivery cost.
PROPOSAL FROM MOLEFEE (PTY) LTD
Molefee (Pty) Ltd, currently not a customer of the Ready mixture division, approached the division with
a special proposal to purchase 15 tonnes of the ready-mix. The Ready mixture division’s pricing policy
for similar proposals is to add a 10% profit on the total relevant costs. As per Ready mixture division
pricing policy, the costs of delivering all special/once-off orders are for the customer’s own account.
REQUIRED
For each question below please remember to
 clearly show all your calculations
 indicate irrelevant amounts with a ‘R0’
 round all your workings to two decimals
(a) In the absorption costing system there are two methods of allocating fixed
manufacturing overhead to products.
Identify Z-Z’s current method of allocating the fixed manufacturing overheads and
briefly compare the identified method to the other (second) method. (3)
(b) Calculate the total budgeted fixed manufacturing overheads allocated to the uranium
and clay products respectively, for January 2017. (5)
(c) Determine the budgeted residual (RI) income for the Open-cast mining division for the
month ending 31 January 2017. Ignore the internal transfer. (8)
(d) Determine the budgeted return on investment (ROI) for the Open-cast mining division
for the month ending 31 January 2017. Ignore the internal transfer. (1)
(e) Briefly discuss the purposes of a transfer pricing system within the context of Z-Z. (4)
(f) Assume the Ready mixture division will purchase all its budgeted clay requirements
from the Open-cast mining division.
Calculate the budgeted minimum transfer price per tonne that the Open-cast mining
division will be willing to accept for the transfer of the tonnes required by the Ready
mixture division. (8)
(g) Calculate the budgeted maximum transfer price per tonne that the Ready mixture
division will be willing to pay for the tonnes transferred from the Open-cast mining
division. (1)
(h) Based on the budget information of the Ready mixture division and the special
proposal to purchase 15 tonnes ready-mix by Molefee (Pty) Ltd, calculate the total
price that the Ready mixture division should charge for the 15 tonnes.
Clearly indicate all the costs that should and should not be considered for the proposal
and the reasons for their respective inclusion/exclusion. Ignore VAT. (10)
(i) Briefly discuss five (5) qualitative factors that the Ready mixture division should take
into consideration before accepting the proposal from Molefee (Pty) Ltd. (10)
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3.18 RATA-TEA (PTY) LTD 50 Marks
RataTea (Pty) Ltd (“RT”) owns a 1 000 hectare farm situated in the Cederberg region of the Western
Cape. The farm is situated in an unspoiled mountain wilderness area with an abundance of wildlife and
plants. RT uses a portion of the farm for its tea production plant and farm worker housing. RT is owned
and operated by the farm worker families living on the farm. Currently RT purchase all direct raw
materials from a number of external suppliers. These direct raw materials (dried rooibos leaves and
other herbs) are combined to produce different types of tea products.
RT’s financial year-end is 30 June and it operates for all the twelve months of the year. RT uses a direct
costing system and values inventory on the first-in-first-out (FIFO) basis. The targeted rate of return
on capital invested is 10% per annum.
1. Rooibos-ginger loose tea

RT is the only company that produces and sells rooibos-ginger loose tea made from a blend of two
direct raw materials: dried organic rooibos leaves and dried organic ginger. The rooibos-ginger loose
tea is one of RT’s best-selling products. There were no budgeted direct raw materials opening and
closing inventory for the 2018 financial year. The rooibos-ginger loose tea are packed in a box
containing 100 grams of the rooibos-ginger loose tea mixture.
1.1. The following details, relating to the rooibos-ginger loose tea, have been extracted from the
budget working papers for the financial year ending 30 June 2018:
1.1.1. RT estimated that it will produce 72 000 boxes of rooibos-ginger loose tea and sell 70 800 boxes of
rooibos-ginger loose tea evenly throughout the financial year.
1.1.2. The standard sales price is R40 per box of rooibos-ginger loose tea.
1.1.3. Direct raw materials required to produce the budgeted 72 000 boxes are:
Budgeted price per kg Total budgeted cost
Dried rooibos leaves R30 per kg R172 800
Dried ginger R200 per kg R288 000
1.2. The actual information for the month of June 2018 relating to the rooibos-ginger loose tea:
1.2.1. 6 100 boxes were sold for a total sales value of R256 200.
1.2.2. 6 500 boxes were produced.
1.2.3. The direct raw materials were purchased and issued to production as follows:
Purchased Issued
Dried rooibos leaves 600 kg for R21 000 585 kg
Dried ginger 150 kg for R30 000 97,50 kg
2. Insourcing of dried rooibos leaves production

As part of their growth strategy and potential cost saving, RT is investigating the feasibility of insourcing
the dried rooibos leaves production. This investigation revealed the following information:
2.1. Dried rooibos leaves production starts by planting seedlings that grow into rooibos bushes. The
rooibos bushes (green rooibos) are harvested by hand once a year, by cutting off the branches
30cm above the ground. Rooibos bushes are harvested three times before new seedlings must
be planted. The harvested green rooibos cuttings are cut into uniform lengths, fermented and
then dried in natural sunlight which turn the green rooibos into dried rooibos leaves with a reddish
colour.
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2.2. In order to meet the demand of their products, RT estimates that it will be required to produce
40 tonnes of dried rooibos leaves per year for a total of 120 tonnes over a three-year period.
2.3. If RT continues to buy the dried rooibos leaves from external suppliers, it is estimated that the
dried rooibos leaves purchase price will increase annually with 10% at the beginning of each
year. Year 1’s annual increase of 10% will be based on the actual June 2018 purchase price.
2.4. Ceder Conservation (Pty) Ltd (“CC”), a company that conserves the environment and provides
tourist accommodation and activities, currently leases 95% of the 1 000 hectare farm from RT
while RT utilises the remaining 5%. The lease contract with CC will expire in year 4 and the
monthly rental rate is fixed at R250 per hectare for the period of the contract. To have enough
farmland available to produce the required 40 tonnes of dried rooibos leaves per year if the
insourcing strategy is accepted, RT’s farm utilisation will have to increase to 15% and the area
CC leases will therefore reduce to 85%. CC is unaware of the proposed reduction in the hectares
available to it for rent.
2.5. If the insourcing strategy is accepted, RT will receive a once-off government grant of R1 100
000 during year 1 to purchase farm equipment. RT will purchase this farm equipment to the
value of R1 200 000 in the same month the grant is received.
2.6. RT obtained the following information from similar farms with regards to the production of
40 tonnes of dried rooibos leaves per year over a three-year period (Year 1 to Year 3):
2.6.1. Seedlings will be planted at the beginning of year 1 at a total once-off cost of R600 000.
2.6.2. The harvested green rooibos loses 4% of its weight during the cutting, fermentation and drying
processes.
2.6.3. Variable manufacturing overheads incurred during the cutting, fermentation and drying
processes are R8 per kg of harvested green rooibos. It is expected that the variable
manufacturing overheads rate per kg will remain the same throughout the three-year period.
2.6.4. During the harvesting period, migrant workers are employed to assist with the manual
harvesting. Migrant workers will be paid R30 per hour and can harvest 10 kg of green rooibos in
an hour. The labour rate per hour will remain constant over the three-year period.
2.6.5. Four (4) new farm workers will be permanently employed from year 1. The total combined
starting annual salary for these four farm workers is R240 000. The expected salary increase is
7,5% per year.
2.6.6. Fixed manufacturing cost are estimated to be R270 000 per year. The cost will remain constant
for the three-year period because of fixed amount contracts that will be negotiated with suppliers.
2.6.7. Dried rooibos leaves are exported internationally at an export cost of R5 000 per tonne and local
distribution costs to external clients are R1 000 per tonne. Distribution costs are for the account
of the rooibos producer.
3. Rooibos-espresso capsules
With the growth in popularity of coffee capsule machines and the increase in the sales of rooibos-
espresso capsules, RT is considering entering the rooibos-espresso capsule market within the next
three months. The expected investment to produce these capsules is R600 000. RT’s expected cost
price per package, containing 10 capsules, will be R25 and there is an expected annual demand of
4 000 packages. There are a number of established rooibos-espresso capsule producers and these
producers’ products are readily available at retailers at an average selling price of R50 for a package of
10 capsules.
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REQUIRED

 Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
 Round all your workings to two decimals, except where otherwise stated;
 Ignore all taxation implications.
(a) Calculate the following variances for the rooibos-ginger loose tea for the month
of June 2018:
(i) Sales price variance. (2)
(ii) Material mix variance per direct raw material type and in total. (4)
(iii) Material yield variance per direct raw material type and in total. (4)
(b) Briefly discuss two (2) reasons for a possible adverse material yield variance. (2)
(c) Advise RT’s management if they should insource the production of the dried
rooibos leaves or should continue purchasing the dried rooibos leaves from
external suppliers. The calculations should be for a three-year period.
Ignore time value of money implications. (18)
(d) Identify and briefly discuss four (4) qualitative factors that RT should consider
when making the decision to insource the production of the dried rooibos leaves. (8)
(e) Write a report to RT’s owners regarding the long-run (long-term) price setting for
the rooibos-espresso capsules and the rooibos-ginger loose tea. Your report must:
(i) Identify if RT is a price setting or a price-taking organisation in relation to the
rooibos-espresso capsules. Provide a reason for your answer. (2)
(ii) Identify if RT is a price setting or a price-taking organisation in relation to the
rooibos-ginger loose tea. Provide a reason for your answer. (2)
(iii) Provide a brief discussion of the limitations of the cost-plus pricing method. (2)
Present your report in the correct format, using appropriate headings.
(f) Calculate the target selling price per package for the rooibos-espresso capsules
using the targeted rate of return on invested capital approach. (4)
(g) The financial manager has heard that some loose tea producers are using process
costing. She is refreshing her process costing knowledge and has asked you to
explain the circumstances in which the short-cut method can be used in drafting a (2)
quantity statement.
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3.19 MUFHIRIFHIRI BEEF (PTY) LTD 50 Marks
Mufhirifhiri Beef (Pty) Ltd (MfB) is a beef-producing group of companies with a centralised head office
and two divisions that are managed by independent management teams, namely: the Feedlot Division
and the Abattoir Division. MfB’s current intragroup transfer price policy is to use a negotiated price.
The group’s entire operation takes place at its 330 hectares farm situated a few kilometres outside
Bloemfontein. The Feedlot Division purchases cattle from the auction barns only. These auction
barns are registered with both the Department of Agriculture, Forestry & Fisheries (DAFF) and the
Agricultural Products Agents Council (APAC). The Abattoir Division purchase cattle from feedlots and
slaughter them for sale to all major retailers across the Free State and the Northern Cape provinces.
The head office is fully responsible for the arrangement of the entire group’s long-term financing.
Unless specifically mentioned, all procurement, operational, working capital management, cash
management and short-term funding decisions of any division are solely made by the management
team of that respective division.
MfB makes use of the absorption costing system while all its inventory items are valued using the
first-in-first-out (FIFO) method. The company has a 31 May financial year-end.
1. THE FEEDLOT DIVISION
The feedlot has five (5) holding pens, each with a maximum holding capacity of 120 cattle. It is currently
operating at 75% of its maximum holding capacity. The division purchases the cattle once a month at
the beginning of each month. The division only buys Class B cattle. Class B cattle weigh 350 kilograms
(kg) each at the date of purchase. All the cattle are purchased on a cash basis only.
At the holding pens, the cattle are fed hay, maize chops, water and licks for a period of 30 days, after
which they are sold to abattoirs. Due to its well-researched feed rations, the feeding results in total
weight gain of 50kg per cattle. Only after the 30 day period feeding, are the cattle ready for selling.
The Feedlot currently sells 60% of its current operating capacity to the external market, the balance is
sold internally to the Abattoir Division as per the group’s transfer pricing policy.
Additional actual information for the month ended 31 May 2018:
1.1. On 01 May 2018, the price of the Class B cattle at the auction barn was R20 per kg. On this day,
the total number of cattle purchased by the division was equivalent to the division’s current level
of operating capacity.
1.2. On the last day of the month, the division sold all the cattle it had bought on 01 May 2018. The
selling price to the external market was R35,00 per kg. The internal transfer price to the
Abattoir Division was negotiated at R13 700 per each cattle. The external variable selling and
distribution costs was 1% of the related sales value.
1.3. The division employs direct labourers to assist with the delivery of the cattle purchased on the
first day of the month. These labourers are paid R140 per each cattle.
1.4. A Feedlot Division’s supervisor is responsible for supervising the direct labourers. She earns a
total monthly salary of R8 500. This salary is correctly included in the fixed production overheads
below (see 1.7 below).
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1.5. The feeding costs of hay, maize chops, water and licks totalled R1 350 000 for the month. The
division currently makes use of the economic order quantity (EOQ) technique for managing the
purchases of its cattle feed.
1.6. The division’s veterinary duties (cattle inspections and vaccinations) are contracted to Dr Pal, a
renowned animal veterinarian. This contractual agreement provides for two veterinary duty visits
per month. Dr Pal visited the feedlot on the 1st and the 31th at the cost of R0,20 per kg of each
cattle weight and R0,30 per kg of each cattle weight respectively.
1.7. Fixed production overheads totalled R1 000 000 for the month. This amount excludes any
deprecation charge.
1.8. Head office expenses of R100 000 for the month were allocated arbitrarily to the division.
1.9. The amounts of all components of the statement of profit or loss (income statement) occur evenly
throughout the financial year.
1.10. The division’s five (5) holding pens were constructed and brought to use on 01 June 2015 at a
total cost of R25,2 million. Each holding pen has a useful life of five (5) years. Deprecation is
calculated on the straight-line method over the useful life of the holding pens. The construction
cost was financed by a combination of: R20 million long-term loan repayable with a once-off
payment in year 2020; and the balance from the division’s cash resources. The long-term loan
bears interest at 12% per annum.
1.11. The division’s statement of financial position (balance sheet) as at 31 May 2018 reflects:
R2 million trade receivables and R1,6 million trade payables.
1.12. On 31 May 2018, although correctly reflected in the bank statement, the bookkeeper noticed
that the cattle purchases entry (see 1.1 above) were erroneously not recorded in the May 2018
cashbook. On 31 May 2018, the cashbook balance was R12 million. All the other cashbook
entries for the month and previous months were correctly recorded and accounted for.
2. THE ABATTOIR DIVISION
The division has a world class slaughtering facility with a maximum capacity to slaughter 135 cattle per
day and it operates for seven (7) days a week. The division purchases only Class B cattle from the
Feedlot Division and other feedlots across Southern Africa.
The feedlots deliver the cattle to the Abattoir Division’s abattoir-holding pen. The division’s slaughtering
process is recognised as a joint manufacturing process and the related joint costs are allocated to
the joint products based on the constant gross profit percentage method. This process
simultaneously yields three types of products, namely; the Premium cuts, the Standard cuts and the
Offal. The Offal is incidental to the slaughtering process. In addition to these products, the slaughtering
process results in waste products which have no scrap and/or sales value.
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EXTRACT FROM THE BUDGET INFORMATION FOR THE MONTH ENDING 31 MAY 2018:
FINANCIAL BUDGET Ref. Premium Standard Offal

cuts cuts
R R R
Sales 2.1 ? ? ?
Less: Cost of sales ? ? ?
Joint costs 2.2 ? ? ?
Further processing costs 2.3 90 000 100 000 200 000
Refrigerating costs 2.4 164 520 100 000 130 400
Gross profit ? ? ?
Less: other non-manufacturing costs 1 000 000 1 000 000 60 365
Variable cost 900 000 800 000 60 365
Fixed cost 100 000 200 000 0
Net profit before tax ? ? ?
2.1. The budgeted sales are based on the budgeted purchases and slaughter of 4 185 cattle. Each
cattle weigh 400kg and the standard output weight per each slaughtered cattle and the budgeted
selling prices are as follows:
Product Premium cuts Standard cuts Offal Waste

Output weight proportion 160 kg 192 kg 44 kg 04 kg
Selling price per kg R46,00 R42,50 R19,75 R0,00
2.2. The budgeted joint costs comprise of R56 million cattle purchasing and abattoir holding-pen
related costs and R2 million relating to the cattle slaughtering process.
2.3. The further processing costs includes the cost of sorting, cleaning and preparing the products for
distribution to the retailers.
2.4. The products are stored in three separate refrigerators, one refrigerator per product type.
2.5. The division’s minimum net profit percentage (ratio of net profit before tax to sales) per each joint
product is budgeted to remain at the historical level of 10%.
3. INVESTIGATION TO ESTABLISH THE HIDES DIVISION
The group executive management is considering establishing a hides processing plant to take full
advantage of the hides currently disposed-off as waste products by the Abattoir Division.
The estimated total investment to establish this plant is R4 million and the related required rate of return
is 8% per annum. The plant’s productive time is expected to be 7 hours a day for the full 220 working
days. Each working day is 8 hours, the first 0,5 hours relates to the plant set-up time and the last 0,5
hours relates to the cooling-off time. The processing capacity of this plant is 2 000grams of hides per
40 minutes of productive time. This processing capacity is equal to the estimated annual demand.
The processed hides of 3,5 kg per unit will be exported to Lesotho where it will be used in the design of
traditional outfits and as decorations. The total estimated production cost of each hide is R2 800.
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REQUIRED
For each question below, please remember to:
 round all your workings to two decimals, except where otherwise stated;
 ignore all taxation implications.
(a) Calculate the annualised actual return on investment (ROI) for the Feedlot Division
based on the month of May 2018.
To the extent that the information allows, components of the statement of financial
position (balance sheet) must be shown at their carrying amounts at year-end. (12)
(b) Pradesh Naidoo (the Feedlot divisional manager) is unhappy about the current intragroup
transfer price. He is of the view that at minimum, the transfer price should be between
R14 000 and R14 500 per each cattle.
(i) Assuming the external market sales of 525 cattle and the required internal
transfer is 200 cattle, calculate the minimum transfer price per each cattle
transferred to the Abattoir Division.
All the other information remain as given in the scenario.
(8)
(ii) Based on the calculated price per (b)(i) above; briefly comment on Pradesh’s view
about his proposed minimum transfer price range. (2)
(c) Briefly discuss three (3) qualitative factors that the Feedlot Division would have
considered in deciding to buy all the cattle from the auction barn as opposed to buying
from private cattle farmers. (6)
(d) Briefly discuss if the Feedlot Division can feasibly replace the EOQ technique with the
Just In Time (JIT) purchasing technique for the purchases of the cattle feed. Limit your
discussion to qualitative factors only. (2)
(e) Calculate the budgeted net profit percentage for the month ending 31 May 2018 for each
of the Abattoir Division’s applicable product(s) and comment whether each of these
products will meet the budgeted net profit percentage of 10%. (14)
(f) Assuming that the plan to establish the Hides Division is brought to fruition, calculate the
proposed target mark-up amount per unit of the hide using the “target rate of return on
invested capital” approach. (6)
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3.20 IMVULA (PTY) LTD 50 Marks
Imvula (Pty) Ltd (“Imvula”) is a medium-sized company that uses rubber imported from China to
manufacture and sell three different types of women’s rain boots namely Glossy, Fashion and Standard.
The manufacturing process is highly automated with very limited human intervention. The company
operates from the Rosslyn area in Gauteng and distribute the rain boots to retailers within South Africa.
Imvula’s financial year-end is 31 December and it operates for all the twelve months of the year. Imvula
uses an absorption costing system and values all its inventory items using the first-in-first-out
(FIFO) method.
1. Budget information for the financial year ending 31 December 2018
Following four years of consecutive decline in the market share, Ms Raindeer (the Chief Executive
Officer) is concerned that the continuing decline in sales demand will have an impact of the company’s
ability to break-even. The company’s in-house market research division established that Imvula’s
customer base is increasingly becoming socially and environmentally conscious, and are therefore
“voting with their feet” in protest to Imvula’s usage of rubber.
1.1. The following are extracts from the budget for the financial year ending 31 December 2018:
Glossy Fashion Standard

Selling price per unit R180 R250 R140
Gross profit per unit R90 R125 R70
Number of manufactured and sales units 48 000 24 000 72 000
Machine minutes per unit 30 min 45 min 15 min
Rubber used per unit (grams) 600g 700g 350g
1.2. A pair of rain boots is equal to one unit because rain boots can only be sold as a pair of boots.
1.3. The manufacturing and sales of the rain boots will occur evenly throughout the financial year.
1.4. Variable selling cost per unit is 2% of the selling price per unit.
1.5. The fixed manufacturing overheads are absorbed based on annual budgeted machine hours. The
related budgeted absorption rate was calculated at R40 per machine hour.
1.6. The fixed non-manufacturing costs were budgeted to be a total of R2 880 000 for the financial
year and the fixed selling costs to be a total of R1 000 000 for the financial year.
2. The following are extracts from the month of May 2018 actual results:
2.1. Finished goods production statement
Production statement (units) Glossy Fashion Standard

Opening inventory 0. 1 000. 2 000.
Plus: Manufactured 4 400. 1 800. 5 100.
Less: Sales (3 500) (2 250) (7 000)
Closing Inventory 900. 550. 100.
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2.2. The total fixed manufacturing overheads were R224 600.

2.3. The actual machine hours were 2 000 hours for Glossy, 1 500 hours for Fashion and 1 400 hours
for Standard.
3. Allocation of the fixed manufacturing overheads using activity-based costing

Ms Raindeer is considering a change from allocating the fixed manufacturing overheads (FMO) using
the traditional costing system to using an activity-based costing (ABC) system. The actual FMO for May
2018 were further analysed, and the following relationships between the actual FMO and the related
activities were established:
Activities Notes Total May 2018

cost
R
Logo printing 3.1 12 000
Quality inspections of boots 3.2 30 600
Machine costs 3.3 182 000
Total actual fixed manufacturing overheads for May 2018 R 224 600
3.1. Imvula’s logo is printed as follows:

3.1.1. Glossy: on the sole of each rain boot.
3.1.2. Fashion: on the sole and on both: the inner-side and the outer-side of each rain boot.
3.1.3. Standard: on the sole and the outer-side of each rain boot.
3.2. 1,5% of the Glossy units; 2,0% of the Fashion units and 1,0% of the Standard units were quality
inspected.
3.3. The machine cost is driven by the number of production/manufacturing runs. Glossy’s production
run contains 220 units, Fashion’s production run contains 180 units and Standard’s production
run contains 255 units.
4. Imvula’s rubber purchase agreement with Pemasok International Plc
Pemasok International Plc (Pemasok) a China based company, is Imvula’s only supplier of the rubber
used in the manufacturing of the rain boots. Pemasok’s customers are required to pay for the rubber
purchases in US dollars ($) only. Pemasok sells the rubber in kilogram denominations only. The
budgeted rubber purchase price for July 2018 is R20 per kilogram and it is based on the July 2018
R:$ exchange rate. With the strengthening of the South African Rand (R) in June 2018, the R:$
exchange rate is budgeted to stabilise at R1 = $0,085 for the entire July 2018 month. Imvula’s treasury
department has limited their R:$ foreign exchange currency exposure for the purchasing of rubber to a
maximum of $8 398 per month. The outstanding balance relating to the rubber purchases during any
particular month is fully settled at the end of that particular month.
5. Manufacturing resources
Unless otherwise stated, Imvula’s manufacturing resources are expected to be sufficiently available
throughout the 2018 financial year.
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REQUIRED
 where applicable, indicate irrelevant amounts/adjustments with a R0 (nil-value);
(a) Ignoring the possibility of the limitation of any manufacturing resource(s).

Assist Ms Raindeer with the calculation of the budgeted number of units for each
product that Imvula must sell in order to break even for the 2018 financial year. (12)
(b) Calculate the following standard costing variances for the month of May 2018:
i. Sales quantity variance per product. (6)
ii. Fixed manufacturing overheads volume efficiency variance for product Fashion only. (2)
(c) In responding to the findings of the market research, list and briefly discuss three (3)
social and environmental qualitative factors that Imvula should consider. (6)
(d) Calculate the total actual fixed manufacturing overheads allocated to each product for
the month of May 2018 using the activity-based costing (ABC) system. (9)
(e) Briefly motivate why Imvula would consider changing the basis of allocating the fixed
manufacturing overheads from the traditional costing system to the activity-based
costing (ABC) system. (2)
(f) Taking into account the purchase agreement between Imvula and Pemasok and points
1 and 2 below:
1. Assume the following contribution per unit for the month of July 2018:
Glossy Fashion Standard
Contribution per unit R108,00 R140,00 R87,50
2. Except for the assumed contribution per unit as per f(1) above, all the other budgeted
information remains as given in the scenario.
Calculate the optimal number of units that Imvula can manufacture and sell during the
month of July 2018.
For this question only round all your workings to 3 decimal places. (13)
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3.21 BRIGHT & SHINE (PTY) LTD 50 Marks
Bright & Shine (Pty) Ltd (BnS) is classified by the Department of Trade and Industry as a level 5 Broad-
Based Black Economic Empowerment (BBBEE) medium-sized company. The company manufacture
and sells two types of liquid soaps; Geza-Zandla (GZ) liquid hand-soap and Manzi-Phanzi (MP) liquid
floor-cleaning soaps. The hand-soap is manufactured in the GZ Division (GZD) while the floor-cleaning
soaps are manufactured in the MP Division (MPD). Currently, the manufactured liquid soaps are only
sold to corporate clients and government departments. Each liquid soap type is sold in a 20-litre closed-
plastic container. The company’s annual normal manufacturing capacity is 210 000 units of GZ’s and
180 000 units of MP’s in each 245 working days financial year. All the losses that occur in the liquid
soaps manufacturing process are considered immaterial. BnS uses a standard costing system. The
company makes use of an absorption costing system. All of BnS inventory items are valued using
the first-in-first-out (FIFO) method. The company’s financial year starts at 01 August each year. BnS’s
required and budget rate of return is 8,50% per annum. BnS uses Economic Order Quantity (EOQ)
technique to manage its direct raw material inventories.
1. GZ DIVISION (GZD)
1.1. Standard variable manufacturing costs of a one (1) 20-litre hand-soap container are as follows:
Direct raw material:
 15 000 millilitres of surfactants @ R18,50 per litre
 3 000 millilitres of sodium @ R12,50 per litre
 2 000 millilitres of colourant @ R6,50 per litre
Direct labour: 0,5 clock hours @ R12,00 per clock hour
Variable manufacturing overheads: R5,00 per unit
1 x 20-litre open-plastic container @ R5,00 per container
1 x Plastic container-lid @ R1,50 per lid
1.2. The division’s budgeted annual fixed manufacturing overheads for the 2018 financial year was
R1 365 000. The fixed manufacturing overheads are budgeted for and absorbed evenly
throughout the year at a predetermined absorption rate based on the normal manufacturing
capacity.
1.3. GZD’s standard gross profit on each 20-litre hand soap is 20% throughout each financial year.
1.4. The standard direct labour idle time is 12% per clock hour.
1.5. During each financial year, the manufacturing of the liquid soaps is budgeted to occur evenly
throughout the financial year. The annual manufacturing capacity for the 2018 financial year was
budgeted for at 92% of the annual normal manufacturing capacity.
1.6. GZD anticipated that 85% of the budgeted manufactured units during the 2018 financial year will
be sold during the same period. During each financial year, 20% of the annual budgeted sales
units are sold in the first quarter, 30% are sold in the second quarter, while the budgeted sales
units for quarter three (3) and quarter (4) four are always the same.
1.7. The division budgeted to incur R5,00 selling costs for each unit of hand-soap sold. A fifth of this
selling costs relates to fixed selling costs while the remainder relates to variable selling costs.
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1.8. The division is renting a storage warehouse from StoreAge (Pty) Ltd to store all the surfactants
required for manufacturing. All the surfactants requirements are bought from one supplier only.
GZD buys surfactants in quantities of 120 litres in a barrel. It cost R5 500 to place one order.
The division expects to incur holding costs (excluding required rate of return) of R2,50 per annum
per each litre of surfactants.
1.9. Below is an extract of the 2018 budgeted statement of financial position as at 31 July:
Notes Current Comparative

budget budget
2018 2017
Office building at carrying value (a) R10 175 000 R12 950 000
Accrued rent expense for one month: (b) R27 000 ?
StoreAge (Pty) Ltd
Notes to the budgeted statement of financial position:

(a) The office building was bought on 01 August 2015 for R18 500 000. The purchase price
was financed by a 20-year mortgage bond at a fixed interest rate of 11,25% per annum. It
is the policy of BnS not to capitalise any finance costs. This office building is depreciated
monthly on the straight-line method.
(b) The lease agreement with StoreAge (Pty) Ltd provides for the payment of the rent expense
monthly in arrears. This lease agreement also provides for a compulsory 6,50% escalation
clause of the rent expense on 01 January each year.
1.10. Except for all matters listed in 1.1 to 1.9 above, GZD’s other operating expenses were budgeted
at R2 700 000 for the 2018 financial year. These expenses are incurred evenly throughout the
financial year.
1.11. Below is an extract of the actual costs incurred for the financial year-ended 31 July 2018:
Item Cost
R
Direct raw material purchases:
 surfactants @ R18,00 per litre 47 314 800
 sodium @ R13,50 per litre 6 369 300
 colourant @ R6,90 per litre 1 860 240
Direct labour: 102 000 clock hours 1 275 000
Variable manufacturing overheads @ R5,50 per unit 910 250
Fixed manufacturing overheads 1 250 000
20-litre open-plastic containers: 169 800 units 933 900
Plastic container-lids: 169 800 units 251 304
1.12. The actual productive direct labour hours were 15% less than the hours clocked (see 1.11 above)
for the financial year ended 31 July 2018.
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1.13. The manufacturing statement for the financial year-ended 31 July 2018 reflects the following
actual results:
 All units manufactured were sold.
 No work-in-progress (WIP).
 Open-plastic containers and container-lids were issued as per the manufacturing
requirements.
 Direct raw materials were issued as follows:
- 2 612 000 litres of surfactants
- 469 500 litres of sodium
- 265 000 litres of colourant
1.14. The actual selling price of a 20-litre hand-soap was R465 per unit throughout the 2018 financial
year.
1.15. The division had no actual and budgeted opening inventories for the 2018 financial year.
2. MP DIVISION (MPD)
The MP division manufactures three types of liquid floor cleaning-soaps: Floor-starter (FST), Floor-
sparkle (FSP) and Floor-shiner (FSR). As part of the standard and budget setting process, the capacity
of these product lines has to be considered. MPD’s cost of capital is 8,15% per annum. The division
maintains a standard gross profit percentage of 25,00% throughout each financial year. The division is
headed by Ms. Cleaners, a Chemical Engineer. The management accountant made the following
information for the financial year ending 31 July 2018 available:
2.1. An extract of the standard costs per product reflect the following:
FST FSP FSR

R R R
Direct raw material 180,00 220,00 280,00
Direct labour 45,00 52,50 50,00
Variable manufacturing overheads 20,00 25,00 23,00
Selling and administration cost 25,00 25,00 25,00
FST FSP FSR

Monthly production and sales demand in units 4 200 4 900 5 600
2.2. The division’s budgeted annual fixed manufacturing overheads are R1 800 000 and are
absorbed evenly throughout the year at a predetermined absorption rate based on the normal
manufacturing capacity.
2.3. The total monthly selling and administration costs (see 2.1 above) are budgeted at R367 500,
60% of these costs are fixed in nature.
2.4. On 01 August 2017, the MPD entered into a supply agreement with the University of Polokwane
(UoP). In terms of the supply agreement, MPD will supply their full budgeted annual production
of the FST (50 400 units) floor cleaning-soaps to the UoP. FSTs will be supplied to the university
evenly throughout the 2018 financial year. The agreement fully binds MPD to supply FST as
agreed. It is the intention of MPD to fully honour the supply agreement with the UoP during the
2018 financial year.
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2.5. The manufacturing and the selling of units are expected to occur evenly and in the same
proportion throughout the financial year.
2.6. The floor cleaning-soaps manufacturing process includes two separate automated processes,
the mixing process and the finishing process. Each of these processes is performed by dedicated
machinery, a mixer and a finisher. The machine hours capacity and the related machine time for
each unit of 20-litre floor cleaning-soap are as follows:
FST FSP FSR Total monthly

per unit per unit per unit capacity
Mixing time in hours 1⁄ 1⁄ 1⁄ 3 450
4 4 2
Finishing time in hours 3⁄ 7⁄ 10⁄ 5 150
20 20 20
REQUIRED

 where applicable, indicate irrelevant amounts/adjustments with a R0 (nil-value);
(a) Draft GZD’s budgeted statement of profit and loss (income statement) for the six (6)
months-ended 31 January 2018.
Ignore the implications of the EOQ on the statement of profit and loss. (12)
(b) With regards to the budgeted purchases and the storing of the surfactants manufacturing
requirements for the 2018 financial year.
(i) Calculate the number of barrel(s) that the surfactants supplier will use to package
and fully deliver one (1) order of the direct raw material surfactants required by GZD. (4)
(ii) Calculate the budgeted number of orders to be placed. (2)

(c) Briefly discuss three (3) purposes of standard costing. (3)
(d) For the year ended 31 July 2018, calculate the following variances for the GZD:
(i) Sales volume variance. (2)
(ii) Direct raw material purchase price variance (per material type and in total). (3)
(iii) Direct raw material yield variance (per material type and in total). (4)
(iv) Direct labour idle time variance. (3)
(e) Calculate the budgeted annual optimum manufacturing mix for the MPD for the financial
year ending 31 July 2018. (9)
(f) Calculate the budgeted margin of safety units for FSP only for the 2018 financial year. (8)
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3.22 AQUA FIRST (PTY) LTD 50 Marks
AquaFirst (Pty) Ltd (Aqua) is a mineral water bottling and selling company. Its financial year end is
30 April each year. Aqua’s water bottling process is undertaken in two independent divisions; Division
Valley (DivVal) and Division Mountain (DivMou). DivVal is responsible for the manufacturing of all the
empty glass bottles while DivMou is responsible for the harvesting, preparing, distilling and the bottling
of the prepared mineral water. Notwithstanding the selling of the empty glass bottles from DivVal to
DivMou, Aqua does not currently have a transfer pricing system in place. The company uses first-in-
first-out (FIFO) method to value all its inventory types. Its cost of capital and the target return on
investment (ROI) is 11,50% and 12,50% per annum respectively. Each divisional manager is entitled to
receive a performance bonus provided their division meet or exceed the target ROI.
1. DIVISION VALLEY
DivVal’s maximum normal manufacturing capacity is 1 400 000 empty 500 ml glass bottles per annum.
The division’s market segmentation of [external sales: internal sales] is [35%:65%] for the 2018
financial year. The manufacturing of the empty 500 ml glass bottles occurs in proportion similar to the
division’s market segmentation throughout each financial year. The division’s profit mark-up on all
external sales is 25% on all-inclusive manufacturing costs. There is no profit mark-up on all internal
sales.
1.1. Information relating to the 2018 financial year budget:

1.1.1. The division is expected to manufacture and sell 85% of its normal manufacturing capacity.
1.1.2. The standard all-inclusive manufacturing costs of one (1) empty 500 ml glass bottle is:
Item Costs
Raw glass 600 grams @ R3,00 per kg
Bottle cap 1 steel cap @ R0,20 per cap
Direct labour 4,5 minutes @ R6,00 per direct labour hour
Variable manufacturing overheads R12,00 per direct labour hour
Fixed manufacturing overheads (absorption rate) R0,45 per unit
1.1.3. Variable selling cost is budgeted at R0,05 per each unit of 500 ml empty glass bottle and it is
only incurred for external sales. The total budgeted fixed selling cost is expected to be R105 000
for the financial year.
1.1.4. The fixed manufacturing overheads are absorbed based on the budgeted operating capacity.
1.2. Below is an extract of the actual management accounts for the 2018 financial year:
1.2.1. Income statement extract:
Details Notes External Internal Total
Sales sales R
R R
Sales (a) ? ? 4 587 075
Cost of sales (a) ? ? ?
Gross profit (a) ? ? ?
Variable and fixed selling cost (123 310)
Interest income on fixed deposit at iMali Bank 68 500.
Other operating expenses (b) (350 000)
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(a) Throughout the financial year the actual all-inclusive manufacturing costs per unit were
equivalent to the standard all-inclusive manufacturing costs. External sales were made at
an actual profit mark-up of 25% on all-inclusive manufacturing costs. The following units of
empty 500 ml glass bottles were actually manufactured and sold for the 2018 financial year:
(i) External units were 388 500.
(ii) Internal units were 721 500.
(b) Included in the actual other operating expenses of R350 000 are the following:
(i) Allocated head office expenses of R205 000.
(ii) R4 500 interest expense on the bank overdraft at iMali Bank, each division is solely
responsible for the management of its cash and cash equivalents.
(iii) R85 000 municipal rates and taxes for the head office’s administration building.
1.2.2. The division’s actual controllable investments as at 30 April 2018 was R2 050 000.
2. DIVISION MOUNTAIN
DivMou’s mineral water’s bottling process involves; (i) harvesting the natural fresh water from the
mountains; (ii) preparing and distilling the harvested water; (iii) adding the vitamins and/or flavouring
sugar to the prepared water; and lastly (iv) bottling the water into 500 ml glass bottles for sale. Adding
the vitamins and flavouring sugars does not increase the volume of the mineral water. The division
bottles and sells two types of mineral water: still mineral water (STW) and flavoured sparkling mineral
water (FSW). The same type of glass bottle is used for both types of mineral water and are only
differentiated by the bottle-caps. A blue bottle-cap is used for STW and a red bottle-cap for FSW.
DivMou purchases all its empty bottles (including the related colour-coded bottled caps)
requirements exclusively from DivVal.
A standard sales mix of 6:2 for STW:FSW is maintained throughout each financial year. At any point in
time, all of DivMou’s finished goods inventory is held in the same proportion as the standard sales mix.
No other types of inventories is held by the division.
The following information relates to the 2018 financial year budget:
2.1. The budgeted unit selling price per each 500 ml bottled water is R6,80 and R8,10 for STW and
FSW respectively.
2.2. The division is expected to sell a combined total of 393 750 litres of mineral water during the 2018
financial year.
2.3. Opening inventory is 75 000 units of 500 ml bottled mineral water. The 2017 financial year’s all-
inclusive actual mineral water manufacturing costs was R5,30 and R6,10 for STW and FSW
respectively.
2.4. DivMou is expected to operate at its maximum water-bottling capacity. DivVal’s budgeted internal
sales for the 2018 financial year represents DivMou’s maximum water-bottling capacity.
2.5. All the empty bottles to be purchased during the 2018 financial year are expected to be fully bottled
with the mineral water in the same proportion as the standard sales mix.
2.6. Empty bottles are currently purchased from DivVal’s at a price equivalent to DivVal’s all-inclusive
manufacturing costs, that is, no profit is made on all internal transfers.
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2.7. The budgeted variable manufacturing costs also includes the following:
Bottled Bottled
STW FSW
500 ml 500 ml
Prepared water @ R1,50 per litre ? ?
Vitamins per 500 ml bottle R0,25 R0,75
Flavouring sugars R0,00 R0,25
Bottle branding label R0,15 R0,15
2.8. The division’s total annual fixed manufacturing overheads (FMO) are budgeted for at R712 350.
The allocation of these fixed manufacturing overheads is based on the following relationships
between these overheads and the related activities that drive these overheads:
Cost drivers
Activity Cost
Bottled STW Bottled FSW
Water quality testing R163 350 Every 125th bottle is tested Every 160th bottle is tested
Water pump set-up R225 000 A total of 30 set ups A total of 45 set ups
Affixing branding label R324 000 ¼ minute per bottle ¼ minute per bottle
Total R712 350
2.9. The total annual fixed selling costs are budgeted at R150 000, 75% of which relates to STW. The
variable selling costs are expected to be R0,20 per bottle.
2.10. Budgeted annual other operating expenses of R280 000 are allocated equally between STW and
FSW.
AQUA’S 2017 EXTERNAL AUDIT MATTERS
Aqua’s external auditors raised the following “going concern assumption” matter with regards to the
2017 financial year end audit:
“Without qualifying our audit opinion, we bring your attention to the following matters that could directly
impact Aqua’s ability to continue operating as a going concern. The recent changes in the global
weather patterns, has led to widespread industry criticism and a call for an industry overhaul by
prominent environmentalist. Of serious concern is Aqua’s CO2 emission which is considered to be
amongst the highest in South Africa, mainly because of; (i) its bottle-manufacturing plant’s source of
energy is coal, (ii) its landfill site is the largest amongst its competitors and (iii) inadequate bottle-
recycling strategy. Lastly, we note with serious concern, the possibility of the introduction of sugar-tax
in South Africa considering the fact that one of the ingredients in Aqua’s flavoured sparkling mineral
water is flavouring sugar”
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REQUIRED

 Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
 Round all your workings to two decimals, except where otherwise stated;
(a) Identify the costing system used by Aqua for its internal reporting purposes and also for
assigning costs to its products. Briefly motivate your answer by making reference to the
relevant information from the scenario. (2)
(b) Calculate DivVal’s total budgeted number of internal sales units to DivMou for the 2018
financial year. (2)
(c) Assume that Aqua decides to introduce a transfer pricing system.
Calculate and recommend a budgeted minimum transfer price per one (1) 500 ml empty
bottle that the DivVal should charge DivMou for the 2018 financial year.
Provide one (1) reason to motivate your recommended minimum transfer price. (6)
(d) Calculate DivVal’s total budgeted fixed costs that would be used to calculate the division’s
budgeted break-even point for the 2018 financial year. (3)
(e) (i) Calculate DivVal’s actual residual income for the 2018 financial year. (6)
(ii) Based on the 2018 actual results, determine and comment if Leahandra Hendricks
(DivVal’s divisional manager) will receive a bonus or not.
The Total column is required. (3)
(f) Prepare DivMou’s production (manufacturing) budget in units for the 2018 financial year. (4)
(g) The below two assumptions must only be used for answering question (g)i. and (g)ii.
1. The assumed production (manufacturing) budget is as follows:
Production (manufacturing) budget STW units FSW units
Sales 555 300 185 100
Plus: Closing inventory 40 950 13 650
Units required 596 250 198 750
Units manufactured 540 000 180 000
2. All other DivMou’s 2018 budgeted information will remain as given in the scenario.
(i) Calculate the budgeted fixed manufacturing overheads per unit that DivMou will
(6)
allocate to STW and FSW for the 2018 financial year.
(ii) Prepare the 2018 budgeted statement of profit and loss (income statement) for product
STW only based on the absorption costing system. (10)
(h) Identify and briefly discuss four (4) qualitative factors from Aqua’s operations that could
possibly have a negative impact on the natural environment and on Aqua’s customers.
Make use of the relevant information from the scenario. (8)
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3.23 ZAMBANI-CHIPS (PTY) LTD 50 Marks
ZambaniChips (Pty) Ltd (Zambaa) is a member company of a diversified group of companies with a
centralised head office responsible for overseeing the group’s entire operations. Each member
company within the group has an independent management team of executive directors. Zambaa
manufactures and distributes two brands of potato-chips, the Barbecue potato chips (BBQ) and the
Wavy-lightly-salted potato chips (WLS). Zambaa makes use of an absorption costing system and
all its inventory items are valued using the first-in-first-out (FIFO) method.
The manufacturing takes place at its highly automated plant in the Pretoria Industrial area, which is just
outside the Pretoria CBD. The plant has a maximum annual manufacturing capacity of 22 million
packets of BBQ and 6 million packets of WLS. The potato chips manufacturing process starts at the
receiving-bay where received raw potatoes are examined for quality purposes. Raw-potatoes are then
peeled, sliced, colour-treated and fried into potato-chips. The fried potato-chips are then sorted into two
(2) different pots where the spices, salts and other ingredients are added. Each input of 1kg raw potato
yield 1kg of fried potato-chips. The fried potato-chips are finally sealed into individual packets of 125g
per packet.
The following extracts are from the company’s actual results for the year ended 31 March 2018:
Details BBQ WLS Total

R R R
Sales 280 000 000 65 000 000 345 000 000
Raw potatoes purchases 80 000 000 20 000 000 100 000 000
Direct labour (excluding directors’
40 000 000 10 000 000 50 000 000
remuneration)
Spices, salt and other ingredients 16 000 000 3 500 000 19 500 000
Packaging costs 2 000 000 500 000 2 500 000
Variable manufacturing overheads 4 000 000 1 000 000 5 000 000
Variable distribution costs 3 600 000 900 000 4 500 000
Fixed manufacturing overheads 16 000 000 4 000 000 20 000 000
Directors remuneration ? ? ?
Allocated head office expenses 3 000 000
Finance costs 1 500 000
Property, plant and equipment 500 000 000
Intangible asset – Trademarks 39 000 000
Long-term borrowings 105 000 000
Trade payables 34 500 000
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Additional notes relating to the extract of the actual results on the previous page:
Manufacturing and sales
In line with current demand, Zambaa manufactured and sold 20 million packets of BBQ and 5 million
packets of WLS.
Director’s remuneration
For the past 5 years including the current financial year, the company executive directors headcount
has remained at eight (8). The executive directors earn the same total annual remuneration. Seven (7)
of the eight (8) directors are administrative executives and the other director is Mr. Zungu, the
Production director.
Other additional information

Unless otherwise stated, manufacturing costs were allocated to products in proportion to the actual units
manufactured.
PERFORMANCE MANAGEMENT SYSTEM

One of the group’s strategic objectives is to attract and retain suitable and competent executive
directors. To achieve this, the remuneration committee designed and implemented, as part of the
group’s remuneration policy, a management incentive scheme. The terms of the scheme are such that
the executive directors are entitled to a performance bonus in line with their performance rating. The
executive directors’ performance ratings are based on the actual achieved return on investment (ROI)
only. The payment of the bonuses is the sole responsibility of the head office. The bonuses are paid in
the year following the year in which the bonuses were actually earned, for example, 2017 bonuses are
only paid in 2018. The bonus calculation is as follows:
Actual ROI Performance Bonus

rating
Less than 10% C 0% of annual directors remuneration
Between 10,01% up to 20% B 50% of annual directors remuneration
Above 20% A 80% of annual directors remuneration
In line with the 2017’s performance rating of “B”, the head office paid the 2017 year-end bonuses by
processing the below journal entry in the 2018 financial year:
Date Debit Credit

30 September 2017 Accrued bonuses R6 000 000
30 September 2017 Bank R6 000 000
Payment of the 2017 financial year bonuses to the 8 (eight) executive directors
The executive directors’ 2018 actual annual remuneration was 9,50% more than their 2017 financial
year’s actual annual remuneration.
Allocated head office expenses are allocated arbitrarily to the group companies.
As part of the centralised treasury function, the head office is also responsible for the management of
the group’s entire working capital.
Intangible assets - Trademarks are the brand names registered with the Companies and Intellectual
Property Commission (CIPC) under ZambaniChips (Pty) Ltd.
Unless specifically mentioned, all other procurement, operational and funding decisions of any member
company within the group are solely made by the executive directors of that respective member
company.
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BARBECUE POTATO CHIPS LOST BID
Zambaa recently lost a bid for a large new contract from Steinhopp for the supply of BBQ. Zambaa’s
submitted bid price was reportedly R0,12 per kg higher than that of the winning bidder. The executive
directors were very surprised by this loss as Zambaa only added 6% on the related total manufacturing
costs to arrive at a profit.
PROPOSED COST ALLOCATION SYSTEM

After losing the Steinhopp bid, the company’s executive committee (EXCO) agreed on the view that the
current costing allocation system might have significantly contributed to the overpricing of Zambaa’s
bid. The Chief Operating Officer immediately requested the Chief Financial Officer (CFO) to review the
current cost allocation system. The CFO explored several ways of refining the current cost allocation
system, including the allocation of the fixed manufacturing overheads. An initial analysis of the actual
fixed manufacturing overheads established the following relationships between the overheads and the
activities:
Activity area Notes Total cost
R
Potatoes ordering i 5 000 000
Quality inspections ii 7 000 000
Peeling and slicing iii 8 000 000
Total R20 000 000
Notes:
i. Total ordering costs are allocated to products BBQ and WLS in a ratio of 5:3 respectively.
ii. Quality inspection costs are allocated to the products based on the actual manufacturing output.
iii. The peeling and slicing is performed in production runs. Each production run consist of a 1 000
kg’s of raw potatoes.
EXTRACT OF THE MINUTES OF ZAMBAA’s EXECUTIVE COMMITTEE (EXCO) MEETING
Date: 15 February 2018
Attendance register:
Present: Apologies:
Mrs. McKenzie – Group’s Chief Executive officer Mr. Zungu – Zambaa’s Production director
Mr. Smith – Group’s Chief Financial Officer Mrs. Molefe – Zambaa’s Financial director
Mr. Molefe – Zambaa’s Chief Operating Officer Ms. Aboo – Zambaa’s Sales and
Distribution director
Mr. Khumalo – Zambaa’s Marketing director Mrs. Ledwaba – Zambaa’s Corporate
Affairs director
Ms. Snyman – Zambaa’s Strategic director
Mr. Van Zyl – Zambaa’s Human resource director
Mr. Mokoena (stand-in at meeting for the Production
director)
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The minutes of the previous EXCO held on 25 October 2017 were approved with no objections.
In accordance with the resolution passed on the 25 October 2017 to launch a new potato chips brand
the following items were presented to the EXCO:
1. Summary of key points presented by Mr. Khumalo:
(i) The proposed name for the new potato chips is Vita-Limon (V-L).
(ii) V-L will have reduced salt and spices, with the aim of penetrating the highly lucrative health
conscious market.
(iii) The monthly demand/volume of V-L is expected to be 12 500 packets of 125g each.
(iv) Marketing campaign to support V-L: four (4) billboards at a cost of R300 000 per billboard.
2. Summary of key points presented by Mr. Mokoena:
(i) The capital invested to support V-L: R13,2 million new plant and equipment to be used exclusively
for V-L.
(ii) To meet the expected annual demand of V-L’s, the manufacturing and the related sales will occur
evenly throughout the 2018 financial year.
3. Summary of key points presented by Ms. Snyman:
Although the target rate of return (RoR) for V-L is still uncertain, both the Strategic department and the
office of the CFO agree that the below table fairly represent the envisaged RoR for V-L:
Target RoR per annum Probability

11,50% 10%
9% 30%
10% 25%
8% 35%
4. Summary of key points presented by Mrs. McKenzie:
(i) The meeting approved the “target rate of return on invested capital” approach as the appropriate
long-term pricing policy for V-L.
(ii) The meeting is satisfied with Mrs. Molefe view that the cost to manufacture one (1) unit of V-L is
R8,49.
(iii) V-L will launch and start selling from 01 April 2018.
(iv) Mrs. Molefe is therefore mandated to utilise all the relevant available information to calculate the
target price for V-L.
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REQUIRED
(a) Critically analyse the structure of Zambaa’s management incentive scheme. Limit your
analysis to qualitative factors only. (6)
(b) By reference to the 31 March 2018 actual results, determine whether or not the executive
directors of Zambaa are entitled to receive bonuses. (10)
(c) The executive directors have opposing views about the treatment of Intangible assets –
Trademarks in the calculation of their bonuses.
From a performance measurement perspective, briefly discuss one (1) reason

supporting the inclusion of Intangible assets – Trademarks in the calculation of the
bonuses and also discuss one (1) reason supporting its exclusion. (2)
(d) Based on the 31 March 2018 actual results and the current cost allocation system,
calculate what the winning bidder’s price per kg of BBQ was for the Steinhopp bid. (10)
(e) Identity and briefly discuss seven (7) qualitative factors that Zambaa would have
considered in relation to submitting the bid to Steinhopp. (14)
(f) Assume that the proposed cost allocation system is adopted, allocate the total fixed
manufacturing overheads to BBQ and WLS for the financial year ended 31 March 2018. (4)
(g) Calculate the target price of V-L. (4)
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3.24 S’KHOTHANE (PTY) LTD 50 Marks
S’khothane (Pty) Ltd (S’khothane) is a boutique shoemaking company owned by two prominent
“tenderpreneurs”. The company’s year-end is 31 December and it operates for 220 days during each
financial year. It uses the variable costing system and all its inventory items are valued using the first-
in-first-out (FIFO) method. S’khothane specialises in the manufacturing and selling of adult-size,
limited edition and high-end crocodile leather shoes (Krocvellars). These shoes are made from the
leather of an endangered crocodiles of the Nile River. Krocvellars are only sold as a pair in a shoebox.
It therefore follows: a pair of shoes packaged in a shoebox is equivalent to one unit. Krocvellar, a
constant trending name on social media, is a local based brand name of choice amongst the South
African socialites and the high-ranking political figures.
1. The following information relates to both the 2018 and 2019 budgets:
1.1. Manufacturing capacity and sale units
The maximum shoe manufacturing capacity is 3 000 units per financial year. This level will be
maintained for the foreseeable future. In order to maintain their exclusivity, a limited number of units are
manufactured in each financial year. The number of budgeted units to manufacture and sell during each
financial year is linked to the numerical description of that calendar year. For example: in calendar year
1998, the budgeted manufacturing and sales units were 1 998 only, in calendar year 2007, the budgeted
manufacturing and sales units were 2 007 only, and so forth. This calendar year linked manufacturing
and sales trend will be maintained until the company reaches its maximum shoe manufacturing capacity.
1.2. Sales
S’khothane sells Krocvellars via two sales channels: (1) at each of their three retail stores in the
Gauteng Province (one at the OR Tambo International Airport, one at the Mall of Africa and one at the
Menlyn mall); and (2) an online store with country-wide delivery. The company’s contribution margin
ratio is 60%.
1.3. Manufacturing process and standard direct manufacturing costs
Krocvellars are handmade from start to finish. The process start with the buying of the crocodile leather
at R5 000 per metre (m). 450 millimetres (mm) crocodile leather is used in the manufacturing of one
shoe. S’khothane employs 25 men only shoemakers (direct labourers), some as young as 13 years.
Standard direct labour clock hour rate is at R10 per hour. The daily standard clock hours and the
related idle time is 11 hours and 2,2 hours per shoemaker respectively. It takes one shoemaker 12
productive hours to fully complete one shoe. Shoelaces are bought at R35 per shoelace. Each shoe
require 125 millilitres (ml) of specialised glue at a cost of R37,50 per shoe. Once the leather is sewed
and glued together, one rubber sole of R50 is attached to each shoe, followed by 350 mm innersole
bought at R450 per metre. Lastly, the shoe is quality inspected and polished at a combined cost of R5
per shoe. All the wastage that occur during the manufacturing process are immaterial.
Each pair of shoes is packaged in one (1) shoebox. These shoeboxes are currently bought from
Dibemba Plc, a Nigerian based shoebox supplier. The standard cost per shoebox quoted by Dibemba
Plc is N40 000 (forty thousand Nigerian Naira (N)). The standard cost of one shoebox is based on the
exchange rate of Nigerian Naira (N) to South African Rand (R) of N1:R0,005.
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1.4. Manufacturing overheads
The manufacturing overheads includes both the variable and the fixed portions. These portions are
calculated by reference to the observations of the previous financial year’s manufacturing costs and
activities. During the 2017 financial year, the highest manufacturing activity was 220 units in April with
manufacturing overheads of R135 000, while the lowest manufacturing activity was 50 units in
December with manufacturing overheads of R50 000. Although the variable portion will remain at the
2017 level, on 1 January 2018 the fixed portion is budgeted to increase by 6,50% from the 2017 level.
1.5. On-line selling and distribution costs
S’khothane has contracted the distribution of the shoes to Veterans Cadres Couriers (VCC). The
agreement provides for both variable and fixed distribution costs. This distribution contract is renewable
every three years; the latest renewal was on 1 January 2018 at fixed distribution costs of R150 000 per
month. S’khothane pays R400 per each unit sold online for the delivery to the customer door.
1.6. Other fixed costs
The company leases a 2 000 m2 property from the Eastern Cape Provincial Government and uses it as
its factory plant. This property is located in a poverty stricken and one of the most rural areas of the
province, with the unemployment rate ranging between 60% and 85%. The lease agreement is for a
period of 99 years and provides for monthly fixed payments of R25 per m2 for the entire lease term. As
at 31 December 2018, similar market related leases were at R150 per m2 per month with an 8,5% rent
escalation clause each year.
Monthly rent expense for the retail stores are budgeted as follows: R105 000 per month at the
OR Tambo International Airport, R100 000 per month at the “Mall of Africa” and R85 000 per month at
the Menlyn mall. Staff related costs are R25 000 per month for each of the three retail stores.
2. The following information was extracted from the 2018 financial year’s actual results:
Units manufactured 2 018

Selling price per unit R16 025
Leather purchases 2 000 m R11 300 000
Innersole purchases 1 600 m R552 000
Specialised glue purchases 506 000 millilitres R227 700
Direct labour 66 000 clock hours R561 000
All the wastage that occurred in the manufacturing process were regarded as immaterial. The actual
idle time was 1,5 hours per shoemaker per each working day.
Actual inventory as at:

Inventory item 1 January 2018 31 December 2018
Leather 0m 180 m
Innersole 0m 175 m
Specialised glue 0 millilitres 1 500 millilitres
Finished goods 45 units 0 units
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The actual physical inventory count on 31 December 2018 revealed that a total of 15 pairs of Krocvellars
were stolen across the three retail stores, down from 27 pairs in the 2017 financial year.
3. Business acquisition proposal
On 22 October 2018, S’khothane submitted a business acquisition proposal to Platinum Box (Pty) Ltd
(PlatBox), an exclusive top-end shoebox manufacturer valued at approximately R500 000. If acquired,
the S’khothane’s shoe manufacturing operations and PlatBox will operate as two (2) independent
divisions of the S’khothane group, namely; the Kroc Division and the Box Division (previously
PlatBox). Notwithstanding being in the same group, each division is expected to retain its identity,
culture, autonomy, market and profit objectives. If acquired, the group will adopt the absorption costing
system and start operating from 1 January 2019. The Box Division will be required to transfer all of the
Kroc Division’s 2019 financial year shoeboxes requirements at R120 per shoebox.
PlatBox’s maximum manufacturing capacity is 2 500 shoeboxes per year. The current operating
capacity is 2 000 shoeboxes per year. After being manufactured, the shoeboxes are quality inspected
and 1 in every 100 manufactured shoeboxes are discarded as damaged and not usable. This loss
is considered as a normal loss in line with the industry norm. PlatBox’s current external shoeboxes sales
is limited to its current undamaged shoeboxes manufactured.
Details Cost
Selling price R150 per shoebox
External selling and distribution costs R2,50 per shoebox
Direct raw material R50 per shoebox
Direct labour R25 per shoebox
Variable manufacturing overheads R35 per shoebox
Fixed manufacturing overheads absorption rate R12,50 per shoebox
Annual fixed administrative costs R6 000
4. Special order from the Department of Economic Affairs and Trade (DEaT)
After failing to clinch the PlatBox deal and subsequently closing down all the retail stores effective
1 January 2019, S’khothane received an online special order from the DEaT for 1 400 pairs of
Krocvellars. The DEaT is procuring the shoes for its 50 strong delegation it plans to take to the 2019
Global Economic Forum at Davos. Each DEaT delegate will receive one (1) pair of Krocvellar. All the
pairs not bought specifically for the delegates will be presented as gifts to the various foreign dignitaries
at Davos. After a special intervention by the country’s “political heavy-weights”, the Centralised Treasury
Department approved and immediately paid R30 000 000 to S’khothane for this special order.
The special order further provides for the following:

(i) Each shoe must be covered in a specialised cotton-like cloth cover at R5 per shoe.
(ii) The national coat of arms (national emblem) must be imprinted on each shoebox at a cost of
R15 per shoebox.
(iii) The name of each delegate must be printed in the inner side of each shoe at R7,50 per shoe.
S’khothane’s pricing policy on special orders is to add 45% profit on all total relevant costs.
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REQUIRED
For each question below, remember to do the following:
 Clearly show all your calculations in detail.
 Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil value).
(a) S’khothane is considering using only one sales channel and close down a channel with
a lower contribution per unit between the two channels.
i. Calculate the 2018 budgeted contribution per unit for each of the two sales channels
and briefly advise which one, if any, of the two sales channels should S’khothane
consider closing down?
(11)
In your advice, ignore qualitative factors.
ii. Assuming that S’khothane uses the retail store sales channel only, calculate the
budgeted margin of safety percentage for the 2018 financial year. (5)
iii. Briefly discuss 4 (four) qualitative factors that S’khothane would need to consider if
they were to decide to sell via the online sales channel only. (4)
(b) Calculate the following variances for the 2018 financial year:
i. Direct raw material purchase price variance for specialised glue only. (2)
ii. Direct raw material mix variance for leather and innersole only. Round the direct
raw material quantities to the nearest m or mm. (4)
iii. Direct labour idle time variance. (3)
(c) By reference to the S’khothane’s business model and its entire operations, discuss four
(4) ethical, social and legislative considerations that could possibly disrupt and/or
threaten the continued operations of S’khothane. (4)
(d) Assume that the business acquisition proposal is accepted. Calculate the minimum
transfer price per shoebox that the Box Division will be willing to accept for the transfer
of the shoeboxes to the Kroc Division during the 2019 financial year. (6)
(e) A reputable investigative-journalist from NtomeTsebe Press (NtP) asked Mrs
Whistleblower (S’khothane’s Management Accountant) to comment on the following:
“NtP has it on good authority that after failing to clinch the PlatBox deal, the DEaT
immediately facilitated a quick R30 million special order deal for S’khothane to
“allegedly” improve their financial position for a possible hostile takeover of PlatBox.”
i. As part of the comment, assist Mrs Whistleblower by calculating the special order
price based on S’khothane’s special order pricing policy and compare it to the
R30 million offered and paid by the DEaT.
For this (e)(i) question only, assume the direct manufacturing costs per unit and the
lost contribution per external sales unit amounts are R7 300 and R8 700 respectively. (9)
ii. Based on your calculated special order price in (e)(i) above, briefly comment
whether or not there could be merit(s) to the “allegations” about the DEaT special
order. (2)
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3.25 TZANEEN TRAMPOLINES (PTY) LTD 100 Marks
Tzaneen Trampolines (Pty) Ltd (TT) is a recently established family-owned company in Limpopo.
TT manufactures and sells two different types of square trampolines, namely Humpty-trampolines
(HT) and Dumpty-trampolines (DT). Trampolining is becoming increasingly popular all around the
country, as it serves as a source of exercise and fun at home. TT makes use of an absorption costing
system and all its inventory items are valued using the first-in-first-out (FIFO) method. TT’s year end
falls on 31 July of each financial year.
1. TT’S STANDARD AND BUDGETED INFORMATION FOR THE 2018 FINANCIAL YEAR
1.1 Inventory and manufacturing
The company had no budgeted opening inventory and no budgeted closing inventory for all types of
inventories for the 2018 financial year. To minimise possible wastage during each financial year, the
company budgets to manufacture the trampolines in direct proportion to its standard sales mix. The
budgeted manufacturing levels for the 2018 financial year were equal to the company’s normal
manufacturing capacity.
1.2 Sales
TT budgeted to sell 24 000 trampolines in the standard sales mix of 1 : 3 for HT : DT. The standard
selling price of HT and DT was set at R8 000 and R3 000, respectively.
1.3 Variable costs
Trampolines consist mainly of four basic components, that is, the tubing, steel springs, jumping mats
and safety pads made of foam. The tubing used to make the frame and the trampoline’s lower support
structure is made of galvanised steel and is bought at standardised lengths and widths from suppliers.
Currently, TT buys all its springs from Springs Galore CC, a renowned springs manufacturing specialist.
These springs are manufactured according to TT’s specifications. The jumping mats are made of woven
fibres. For safety purposes, foam safety pads are used to cover the springs of the trampolines.
TT employs factory workers (direct labourers) who operates various manufacturing machines. The
standard is to allow 10% idle time.
Standard variable costs requirements for one (1) HT and one (1) DT:
Requirements per unit

HT DT
Tubing (R150 per metre) 24 metres 6 metres
Steel springs (R5 per spring) 110 springs 80 springs
Jumping mat fabric (R50 per m2) 4 m2 3 m2
Safety pads (R1 per safety pad) 110 safety pads 80 safety pads
Direct labour (R100 per direct labour working hour) 8 working hours 4 working hours
Variable manufacturing overheads (R10 per machine hour) 6,5 hours 5,5 hours
Variable selling and administrative costs R50 R50
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1.4 Fixed costs
TT uses top-of-the-range machines that bend and punch holes in the tubes. These machines cut the
jumping mat fabric into the required sizes and sew D-rings into the fabric to hold the mat to the frames.
As quality control is extremely important to TT, all the trampolines manufactured are inspected regularly
to ensure that they meet established guidelines. Budgeted fixed manufacturing overheads of R5 000
000 for the 2018 financial year were allocated to products, based on the budgeted direct labour
working hours. The total annual normal manufacturing capacity of the factory workers was equal to
the budgeted annual working hours.
The company’s budgeted annual fixed selling and administrative expenses for the 2018 financial year
were R120 000 and they were allocated to products, based on the budgeted number of units sold.
1.5 Insurance
The company has taken out third-party insurance with SkyInsurers for possible litigation that might arise
from improper and/or unsafe use of the trampolines by consumers. The insurance premiums have not
yet been determined with certainty for the 2018 financial year. Indication are that, the fixed component
of the premium is expected to be R25 000 per month, and it is allocated equally to the products. The
variable component is based on the number of budgeted sales units and the probabilities of insurance
cost per sales unit. For HT, there is a 10% probability of R30 per unit sold, a 20% probability of R15 per
unit sold, a 25% probability of R40 per unit sold, and a 45% probability of R20 per unit sold. For DT,
there is a 15% probability of R20 per unit sold, a 25% probability of R40 per unit sold, a 40% probability
of R30 per unit sold, and a 20% probability of R10 per unit sold.
1.6 Administrative staff costs
Fixed administrative staff costs are budgeted for at R1 200 000 for the financial year, of which one third
(⅓) is allocated to HT and the remainder to DT.
2. TT’s ACTUAL RESULTS AND INFORMATION FOR THE 2018 FINANCIAL YEAR
2.1 Manufacturing and sales
The actual sales and the actual manufacturing levels were equal. 5 000 HTs were sold at R7 700 per
unit and 20 000 DTs were sold at R3 500 per unit. There was no actual opening inventory of any type
at the beginning of the 2018 financial year.
2.2 Variable costs and manufacturing information

HT DT
R R
Total tubing purchased @ R152,50 per metre 18 452 500 17 690 000
Steel springs (110 springs per HT; 80 springs per DT) 2 750 000 8 000 000
Jumping mat fabric (R50 per m2) 1 025 000 2 900 000
Safety pads (R1,05 per safety pad) 577 500 1 680 000
Direct labour (R80 per direct labour clock hour) (see note  below) 4 000 000 8 000 000
Variable manufacturing overheads (R9,95 per machine hour) 318 400 1 114 400
Variable selling and administrative costs 250 000 1 000 000
Note:The actual idle time percentage was double the percentage of the allowed (standard) idle time.
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2.3 Fixed costs
The actual fixed manufacturing overheads were R4 800 000. The actual fixed selling and administrative
costs were R130 000.
3. ACTIVITY-BASED COSTING (ABC) SYSTEM INVESTIGATION
The budgeted fixed manufacturing overheads (refer to section 1.4 above) was traditionally allocated to
the products based on the direct labour working hours (refer section to 1.3 above). TT’s chief financial
officer (CFO) has recently taken a cost accounting refresher course, where she learned more about the
activity-based costing (ABC) system as an alternative to the traditional costing system. She would like
to establish the effect of the ABC system on TT’s product costs. To undertake this exercise, the
management accountant established the following information:
3.1 Machine hours for each type of trampoline will remain as budgeted for.
3.2 Total budgeted cutting time is 65 000 hours, of which 0,5% relates to the cutting plant’s warm-up
time while the related cool-off time is 0,8%. 40% of the productive cutting time relates to HT, while
DT consumes the other 60% of the productive cutting time.
3.3 Every second unit of HT is inspected for quality control, while every tenth unit of DT is inspected.
3.4 For each product type, the set-up of machines occurs after every 500 units that are manufactured.
3.5 The budgeted manufacturing units are in line with the standard sales mix while the budgeted fixed
manufacturing overheads have been allocated to identified activities as follows:
Activities Cost driver R

Bending and shaping of the tubes Machine hours 2 220 000
Cutting of the jumping mat fabric Cutting time percentage 200 000
Quality inspection costs Number of inspections 1 350 000
Machine set-up costs Number of set-ups 1 230 000
4. ACQUISITION OF SPRINGS GALORE CC (SG)
As part of its growth strategy, TT acquired the entire shareholding of SG on 1 August 2018. SG is a sole
manufacturer of various steel springs of different shapes and sizes. During 2017, one of SG’s managers
(Ms. Lerato Ndlovu) was awarded the 2017 TopNotch Quality Manager award as voted by clients. TT
is expected to leverage off Ms Ndlovu’s excellent customer-care and leadership qualities. The
leadership style of both companies is the same. All the employees of SG have been retained and
integrated into the group. During the integration process, an unforeseen IT-related glitch affected the
August 2018 payroll run of the employees migrated from SG. This IT glitch resulted in the incorrect
calculation and short payment of their August 2018 salaries. These employees indicate their intention
to engage in a strike action until the matter is resolved. In the past, the staff turnover of SG has been
minimal.
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TT immediately restructured on 1 August 2018 and adopted a divisionalised structure consisting of two
divisions, namely the Springs Division (previously, Springs Galore CC) and the Trampoline Division
(TT’s previous trampoline manufacturing entity). A transfer pricing system was introduced, as the
Trampoline Division requires the springs from the Springs Division. The CFO wants the transfer price
to be set at a price that will motivate the managers of both divisions to act in the best interest of TT. It
is expected that the Trampoline Division will require 2 500 springs from the Springs Division for the 2019
financial year. The Springs Division has a capacity to manufacture 3 000 units of the springs which the
Trampoline Division requires. The Springs Division currently has an external market for 1 350 of these
springs. Financial information on the springs that meets the Trampoline Division's requirements:
R per unit
External selling price 5,00
Direct material 2,00
Direct labour 1,00
External variable selling costs 0,30
5. TT'S ACTUAL PERFORMANCE FOR THE MONTH ENDED AUGUST 2018
The performance of Springs Galore CC was measured according to its return on investment (ROI).
The performance of the Springs Division and the Trampoline Division in TT will now be measured
according to residual income (RI).
5.1 Extract from the statements of profit or loss (income statement)
Springs Division Trampoline Division

R R
Operating profit 2 475 000 7 240 000
Allocated head office expenses 12 500 12 500
Staff costs 275 000 408 000
Rates and taxes – administrative building 11 250 0
Rates and taxes – factory building 8 250 6 500
Legal expenses 55 000 65 200
5.2 Extract from the statements of financial position (balance sheet)
Springs Division Trampoline Division

R R
Total assets 43 180 000 45 500 500
Non-current assets 35 175 000 39 098 000
Current assets 8 005 000 6 402 500
Total equity and liabilities 43 180 000 45 500 500
Equity 4 429 600 23 512 850
Non-current liabilities 35 175 000 18 500 000
Current liabilities 3 575 400 3 487 650
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5.3. In the calculation of the operating profits of R2 475 000 and R7 240 000, where applicable, no
items listed in sections 5.1 to 5.2 above and sections 5.4 to 5.11 below were taken into account.
5.4. All the administrative decisions are the responsibility of head office. Therefore, the accountability
thereof rests with head office.
5.5. Head office expenses are arbitrarily allocated to the divisions.
5.6. In each division, 25% of the staff costs relate to administrative staff.
5.7. Included in the Springs Division’s non-current assets (NCAs) are R3 345 000 and R14 550 000
relating to an administrative building and a factory building, respectively. R17 520 000 of the
Trampoline Division’s NCAs relates to the factory building. The remaining non-current assets in
each division relate to various manufacturing assets used in the manufacturing factories of the
respective divisions.
5.8. On 31 August 2018, TT received three (3) property bond statements from SnabTec Bank. The
outstanding amounts in the statements of that day are equivalent to the related outstanding
amounts in the statement of financial position as at 31 August 2018. SnabTec Bank charges
finance costs/interest on the outstanding balances daily during a 365-day financial year.
Capital repayments are made at the end of each month.
The summary of these property bond statements are as follows:
Statement 1
Springs Division – administrative building
Days Date Opening Capital Finance Closing
balance repayments costs balance
30 30/06/2018 R3 450 000 R35 000 R28 356,16 R3 415 000
31 31/07/2018 R3 415 000 R35 000 R29 004,11 R3 380 000
31 31/08/2018 R3 380 000 R35 000 ? R3 345 000
Statement 2
Springs Division – factory building
30 30/06/2018 R15 000 000 R150 000 R123 287,67 R14 850 000
31 31/07/2018 R14 850 000 R150 000 R126 123,29 R14 700 000
31 31/08/2018 R14 700 000 R150 000 ? R14 550 000
Statement 3
Trampoline Division – factory building
30 30/06/2018 R18 000 000 R160 000 R147 945,21 R17 840 000
31 31/07/2018 R17 840 000 R160 000 R151 517,81 R17 680 000
31 31/08/2018 R17 680 000 R160 000 ? R17 520 000
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5.8. The divisional managers have been given full authority to make use of legal services, as and when
they need these services, at the standard fee agreed by head office.
5.9. Unless specifically mentioned, all other procurement, operational, working capital management
and funding/financing decisions are made by the respective divisional managers.
5.10. The cost of capital is 12% per annum for the Springs Division and 10% per annum for the
Trampoline Division.
REQUIRED
 Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil value).
(a) Prepare the budgeted statement of profit or loss (income statement) of TT for the 2018
financial year.
For the purposes of question (a) only:
 Show the amounts for product HT and product DT in separate columns.
 The total column is not required.
 Round your workings to the nearest rand.
 Ignore the prospect of making use of an activity-based costing system. (15)
(b) The cost accounting trainee of TT requires your assistance with calculating the following
variances for the 2018 financial year:
(i) Sales mix variance for HT, DT and in total (5)
(ii) Tubing purchase price variance for HT only (2)
(iii) Jumping mat fabric usage variance for HT only (2)
(iv) Direct labour rate variance for DT only (3)
(v) Direct labour idle time variance for DT only (4)
(c) Draft a report to the CFO and explain the following four costing questions:
(2)
1. Give a brief explanation of the term “common fixed costs”.
2. Give a brief explanation of the difference between a “semi-variable cost” and
(2)
a “semi-fixed cost”.
3. Give an explanation of whether, considering local circumstances in South Africa
and more specifically in the Springs Division, it is reasonable to classify labour (5)
cost as a variable cost.
4. Identify one (1) line item in the statement of profit or loss (income statement) to (1)
which a learning curve could be applied.
Presentation and the format of the report (1)
(d) Calculate the annual budgeted number of units per product type that TT will need to
manufacture and sell to achieve a monthly target profit of R750 000 during the 2018
financial year. (8)
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(e) “The optimal costing system is different for different organisations” (Drury, 2015). Briefly
explain the characteristics that TT’s CFO would have considered in the decision to
implement the most optimal costing system when comparing the ABC system to the
traditional costing system. (3)
(f) Calculate the total budgeted fixed manufacturing overheads per unit for the 2018
financial year allocated to each product type, if TT decides to implement an activity-
based costing (ABC) system. (10)
(g) Assume that both the jumping mat fabrics and the direct labour hours were not readily
available and were limited to 60 000 m2 and 80 000 work hours, respectively, for the
2018 financial year budget.
1. Establish and comment on whether both the jumping mat fabrics and the direct
labour hours are sufficiently available to meet the manufacturing requirements for
(6)
the 2018 financial year budget.
2. Based on your answer in (g)(1) above, recommend to TT the most suitable
technique that it can use to calculate the budgeted annual optimum manufacturing
mix. (1)
3. Assume that your answer in (g)(2) above is linear programming, formulate the
objective function and all the other applicable equations necessary to establish TT’s
budgeted annual optimum manufacturing mix for the 2018 financial year. (6)
(h) Determine the minimum transfer price per unit that the Springs Division will be willing
to transfer one spring to the Trampoline Division. (8)
(i) List three (3) qualitative factors that TT would have taken into consideration in relation
to the acquisition of Springs Galore CC. (3)
(j) 1. Calculate the actual residual income for the month ended 31 August 2018 for the
Springs Division and the Trampoline Division. (11)
2. Briefly discuss the actual residual income of the Springs Division in comparison to (2)
that of the Trampoline Division as calculated in (j)(1) above.
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3.26 UGOGO BAKKER (PTY) LTD 50 Marks
Ugogo Bakker (Pty) Ltd (“UB”) has for many years manufactured its own well-known brand of a savoury
cheese biscuit and various sweet biscuits exclusively for the retail consumer market.
The savoury cheese biscuit manufacturing takes place at the UB’s Middelburg Bakery (MB) and the
sweet biscuits are manufactured at its eMalahleni Bakery (EB). Ms Ugogo Bakker is the founder, owner
and the manger of UB. She is planning to retire in 2020 and as part of the succession plan she is training
her two daughters, Ms Rosemary Bakker and Ms Poppy Smith, to eventually take-over the business.
Ms Ugogo Bakker has therefore appointed her two daughters as managers of the respective bakeries.
UB’s financial year-end is 30 November and it operates for all twelve months of the year. The company
uses the first-in-first-out (FIFO) method of inventory valuation and prepares the management
accounts based on the absorption costing system.
1. eMalahleni bakery (EB)

EB manufactures two types of sweet biscuits: Chocolate chip (CC) and Chocolate-mint (CM) packed
into 200g packets (one 200g packet = one unit). The base dough of these two types of biscuits is similar,
with only the quantity of chocolate, the baking time and the flavouring being the main differences.
Ms Poppy Smith has provided the following budgeted information for the month of November 2018:
1.1. An extract of the standards per unit reflect the following:
Note CC CM
R R
Sales price 40,00 35,00
Prime costs 21,75 17,90
Variable manufacturing overheads 4,00 4,00
Fixed manufacturing overheads 1.3 4,20 3,60
Variable selling costs 2,00 2,00
1.2. November’s budgeted manufacturing and sales demand for CC and CM are 3 000 units and 2 800
units respectively.
1.3. Fixed manufacturing overheads are absorbed based on the budgeted oven baking time of each
product. The budgeted fixed manufacturing overheads absorption rate determined at the
beginning of the financial year representing a normal month is R12 per hour.
1.4. Ms Poppy Smith is extremely concerned about November’s manufacturing because two of the
twelve baking ovens broke down and must be repaired. The repairer is still waiting for the
necessary replacement parts before he can continue with the repairs. He has indicated that the
two ovens will be out of service for 5 working days each. Each baking oven normally operates for
22 working days in a month and seven hours per day.
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2. Middelburg bakery (MB)
MB was UB’s first bakery. This bakery operates a process costing system in the manufacturing of the
savoury cheese biscuit (SCB).
The SCB’s manufacturing process begins with the mixing of the direct raw materials (flour, butter,
cheese and eggs) followed by the kneading of the dough. The dough is then cut into the required forms
and baked. The baked biscuits are cooled and packaged into individual packets of 500 grams (g) each,
which represents one unit of SCB. These units are packed on pallets for distribution to various
supermarkets. Each pallet packs 48 units of the SCB.
All the direct raw materials required to manufacture SCB are added at the beginning of the
manufacturing process. Direct labour and manufacturing overheads are incurred evenly throughout
the manufacturing processes.
1 kilogram (kg) of the direct raw materials yield 1 kg of SCB biscuits. Normal losses in the form of
broken and rejected biscuits amount to 6% of the direct raw materials added. These broken and rejected
biscuits are identified at the 80% completion point of the manufacturing process. All broken and rejected
biscuits are sold to bird breeders at R10 per kg.
Actual information for the month of October 2018 was as follows:
2.1. On 30 September 2018 there was 200 kg of work in process (WIP) which was 60% completed.
The direct raw material costs included in this WIP was R4 000 and the direct labour and
manufacturing overheads was R6 000.
2.2. 1,3 tonnes of direct raw materials, costing R25 100 were added into the process.
2.3. The current direct labour and manufacturing overheads totalled R75 300.
2.4. 2 200 units were completed in the month.
2.5. On 31 October 270 kg of the WIP were 90% completed.
2.6. All completed units were sold in the current month at a selling price of R80 per unit. There were
no opening and closing finished inventory.
2.7. MB only uses Far & Wide Ltd to distribute the biscuits to the supermarkets’ central warehouses.
The agreement with Far & Wide Ltd stipulates a fixed monthly fee of R5 000 plus a cost of R100
per pallet transported.
2.8. MB’s office equipment was bought on 01 August 2015 for R130 000 and immediately brought into
use. On this day, the equipment’s resale value was estimated to be R10 000 at the end of its
useful life. This equipment is depreciated monthly on the straight-line method over its 5-year useful
life.
3. Wheat flour purchases and inventory management thereof

UB’s centralised procurement function is fully responsible for all the wheat flour inventory management.
The company currently uses the Economic Order Quantity (EOQ) technique to manage all its wheat
flour inventory requirements. The wheat flour used in both the Middelburg and the eMalahleni bakeries
is purchased in bulk from Golden Mills.
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UB uses approximately 24 tonnes of wheat flour annually in their manufacturing. Manufacturing takes
place evenly throughout each financial year, which consist of 300 working days. Wheat flour is currently
purchased at R 8 per kg. Safety stock amounts to the manufacturing requirements of three working
days. The estimated cost to place one order amounts to R1 200. Direct inventory holding costs
(excluding the required annual return on investment in inventories) amounts to R5 per kg. The current
required rate of return is 6% per annum and the current EOQ is 3 000 kg.
UB has been approach by another wheat flour supplier, New Mill, offering a purchase price of R7 per kg,
provided that orders are placed in batches of 1 500 kg per order. New Mill is situated further from the
bakeries and as a result the ordering costs will increase by 50% per order.
REQUIRED
 Where necessary, indicate irrelevant amounts/adjustments with a ‘R0’ (nil value).
(a) Assist Ms Poppy Smith by:

i. Calculating whether EB will be able to manufacture the required budgeted
number of CC and CM biscuits for the month of November 2018. (7)
ii. Calculating the budgeted monthly optimum manufacturing mix for EB for
the month of November 2018. (5)
(b) Prepare MB’s actual quantity statement for October 2018.
Where applicable, round your workings to the nearest unit of measure. (8)
(c) Based on your answer in (b), calculate MB’s equivalent cost per unit for
October 2018. (3)
(d) Using your calculations in (b) and (c), prepare MB’s statement of profit or loss and
other comprehensive income (income statement) for the month of October 2018.
Where applicable, round your workings to the nearest Rand. (12)
(e) With the imminent retirement of Ms Ugogo Bakker, briefly explain to her two
daughters, the five (5) benefits of divisionalising the two bakeries, with each
daughter independently managing one bakery. (5)
(f) Recommend to UB whether or not the special offer from New Mill should be
accepted. Support your recommendation with the appropriate and relevant
calculations.
Ignore any qualitative factors. (10)
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3.27 AFRiKAN-ROCK CEMENTS (PTY) LTD 100 Marks
Three months after her retirement as African Roots Cements Plc’s Chief Executive Officer, Dr. Christian
Myburgh, a registered CA (SA), used some of her R20 million severance package and R30 million
restraint-of-trade payout to start AfrikanRock Cements (Pty) Ltd (ARC). ARC, a direct competitor to
African Roots Cements Plc, is a South African based cement manufacturing company with a February
financial year-end. The company’s cement manufacturing process is recognised as a joint
manufacturing process. ARC makes use of an absorption costing system while all its inventory items
are valued using the first-in-first-out (FIFO) method.
On its incorporation, ARC appointed your audit firm as their first external auditors. During your firm’s
“understanding the client” meeting with ARC, Dr. Myburgh went mad about your question regarding the
brewing legal woes with African Roots Cements Plc. Angrily she responded: “After giving them 40 years
of my life, I expect better from them. It’s not my fault that our restraint-of-trade contract states three
months, they claim it was actually meant to provide for three years instead. I am worth way more than
R10 million a year, all peanuts if you ask me”.
As the audit senior on the ARC audit, you managed to gather the following information relating to the
2019 and 2020 financial years.
1. GENERAL INFORMATION
1.1. The cement manufacturing process
The process starts with the purchasing of two (2) key direct raw materials (limestone and silica) in
accordance to the set standard input ratio. The direct raw materials are then crushed and mixed together
to create three types of cements, a heavy-duty cement (HdC), a light-duty cement (LdC) and a floor-
tiling cement (FtC). The standard input ratio of the key direct raw materials to manufacture one (1)
kilogram (kg) of the aforementioned cements is 0,6kg of limestone and 0,4kg of silica. Upon the
completion of the cement manufacturing, the cements are packaged in a highly durable, heavy-duty
and custom-made paper bags of different sizes depending on the standard output weight of the product.
1.2. Audit planning meeting
During the audit planning meeting Dr. Myburgh said to you: “Just like in my African Roots Cements
days, I expected the entire cement manufacturing process to simultaneously yield three (3) types of
products crucial to the commercial viability of ARC, (i) the heavy-duty cement (HdC); (ii) the light-duty
cement (LdC); and (iii) the floor-tiling cement (FtC). However, my Production Manager made me aware
that, although incidental in nature and negligible in sales value, the cement manufacturing process
simultaneously yields a “mysterious” fourth cement (MfC). I nevertheless do not foresee that MfC will
have any influence on any of our operational and/or strategic decision(s)”.
1.3. Manufacturing capacity
ARC’s annual normal maximum manufacturing capacity is 35 million kilograms of cement. The budgeted
operating manufacturing capacity for the 2019 financial year is 75% of the aforementioned annual
normal maximum manufacturing capacity. During each financial year, ARC’s direct raw material inputs
into the cement manufacturing process yields the four (4) products in the following standard allocation
ratio: 45%:HdC, 1%:MfC, 30%:LdC and 24%:FtC. The fixed manufacturing overheads are allocated to
joint products based on a predetermined fixed manufacturing overheads absorption rate. This
absorption rate is based on the joint products’ annual budgeted number of units to be manufactured.
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1.4. Packaging of the products for selling
The size of the paper-bag used to package the manufactured cements is based on the product’s
standard output weight. The standard output weights and the standard selling prices for the 2019
financial year are as follows:
Product Output Unit selling

weight price
Heavy-duty cement (HdC) 75 kg R95,00
Mysterious-fourth cement (MfC) 05 kg R20,00
Light-duty cement (LdC) 50 kg R68,00
Floor-tiling cement (FtC) 25 kg R97,50
1.5. Further information gathered during the audit planning stage:
(i) At any given point in time, all finished goods inventory will already be packaged in their respective
paper-bags and ready for sale.
(ii) The company uses the physical measures method to allocate all the joint costs to the joint
products.
2. BUDGET INFORMATION FOR THE 2019 FINANCIAL YEAR
ARC’s Management Accountant is a second year, distance-learning B.Com Accounting student. With
his limited cost and management accounting knowledge, he was unable to complete the company’s
budget (as presented below) and the related information for the 2019 financial year. The below
information also contains a number of errors:
BUDGET INFORMATION Ref. HdC MfC LdC FtC

Packaged bag size per unit 75 kg 05 kg 50 kg 25 kg
Sales units 2.1 ? ? ? ?
Manufacturing units 2.1/2.2 ? ? ? ?
Closing inventory units 2.2 ? 0 ? ?
Direct labour minutes per unit 2.3 45 N/A 30 18
FINANCIAL BUDGET R R R R
Sales 2.1 14 136 000 1 050 000 9 690 000 23 234 250
Closing inventory 2.2 ? 0 ? ?
Direct labour costs 2.3 2 835 000 0 1 890 000 1 814 400
Joint costs 2.4 5 338 983 1 779 661 5 338 983 8 542 373
Packaging paper-bags costs 2.5 1 181 250 26 250 787 500 630 000
Fixed manufacturing overheads 2.6 ? 0 ? ?
Fixed selling and distribution costs 2.7 44 640 0 42 750 71 490
Variable selling and distribution costs 2.7 178 560 26 250 171 000 285 960
2.1. Both the manufacturing and selling of all units is expected to occur evenly throughout each
financial year. The sales amounts have been correctly calculated.
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2.2. The budgeted units to be manufactured and the closing finished goods are based on the
company’s current operating capacity as per 1.3 above. Closing inventory only relates to finished
goods. No opening inventory of all types was budgeted for in the 2019 financial year.
2.3. The budgeted direct labour costs are correctly calculated for all the products. The standard direct
labour rate per hour is the same for all the applicable products and is expected to remain constant
throughout the 2019 financial year. Direct labour costs are not incurred during the joint
manufacturing process.
2.4. The allocated joint costs correctly includes the budgeted purchases of: limestone at a standard
cost of R0,50 per kg and silica at a standard cost of R0,82 per kg. All of the budgeted direct raw
material purchases are expected to be fully issued to manufacturing. No direct raw material losses
are incurred in the manufacturing process. In addition to the direct raw materials costs, the
allocated joint costs also includes R4 515 000 budgeted costs for crushing and mixing the
limestone and silica.
2.5. All of ARC’s cements are packaged using the same type of heavy-duty paper. As a standard, one
(1) kg of the heavy-duty paper is required for packaging every 50 kg cement. The standard cost
of one (1) kg of heavy-duty paper is R5.
2.6. The budgeted predetermined fixed manufacturing overheads absorption rate is R10 per unit. It is
the accounting policy of ARC to treat the related under-(over) recovery as a period cost.
2.7. The budgeted selling and distribution costs have been correctly calculated. The fixed selling &
distribution costs are incurred evenly throughout each financial year.
2.8. Except otherwise stated or indicated, any other information has been correctly treated and/or
accounted for.
3. AN EXTRACT OF THE ACTUAL STATEMENT OF PROFIT OR LOSS FOR THE PERIOD-ENDED

31 AUGUSTS 2018:
STANDING INFORMATION Ref. HdC MfC LdC FtC

Packaged bag size per unit 75 kg 05 kg 50 kg 25 kg
Sales units 3.1 73 500 32 500 70 500 121 000
Manufactured units 3.1 91 875 32 500 88 125 151 250
Direct labour hours per unit 3.2 0,75 N/A 0,60 0,25
ACTUAL FINANCIAL DATA R R R R
Sales 3.1 7 203 000 682 500 4 653 000 11 555 500
Joint costs 3.3 3 307 500 0 3 172 500 5 445 000
Fixed manufacturing overheads 920 000 0 875 750 1 520 000
Other costs 3.4 ? ? ? ?
3.1. The company did not have opening inventory items of any type. Both the selling and
manufacturing of units occurred evenly throughout the period.
3.2. Actual direct labour rate was R30 per hour throughout the period.
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3.3. Information relating to the actual joint costs for the period:
(i) The total actual joint costs were correctly calculated and correctly allocated.
(ii) Included in the joint costs is the following direct raw material purchases: 9 517 000 kg of
limestone and 5 833 000 kg of silica purchased at R5 710 200 and R4 666 400, respectively.
All the direct raw materials actually purchased were issued to manufacturing in the same
proportion that they were actually purchased at.
3.4. Actual “Other costs” (packaging paper-bag costs per unit, variable selling & distribution costs per
unit and total fixed selling & distribution costs) were all equivalent to their related budgeted costs.
4. INVESTIGATION TO CHANGE THE ORGANISATIONAL STRUCTURE
ARC is investigating the possibility of diversifying its business operations to also include a bricks
manufacturing division (BMD). BMD will manufacture and sell three types of bricks: maxi-bricks (MB);
face-bricks (FB) and paving-bricks (PB). If the diversification plan is brought to fruition, ARC will
henceforth operate from a head office and two divisions: the current cement-manufacturing division
(CMD) and the new BMD. Except for the heavy-duty cement (HdC), which will be exclusively bought
from CMD, all the other direct raw materials (sand, water and clay) needed for the bricks manufacturing
process, will be bought from external suppliers. ARC will set up independent management teams to
manage each of the two divisions. Unless specifically mentioned otherwise, these management teams
will have direct influence over their respective division’s asset procurement, operational and funding
decisions.
4.1. ARC will also adopt a transfer pricing policy to facilitate the transfer of the required HdC from CMD
to BMD. The initial transfer pricing policy will be based on CMD’s 2020 financial year budget and
standards as per 4.2 below.
4.2. The following information was extracted from CMD’s 2020 financial year budget:
HdC’s 2020 FINANCIAL YEAR BUDGET INFORMATION and STANDARDS

Packaged output weight per unit 75 kg
Maximum annual manufacturing capacity in units 210 000
Annual demand/sales units to the external market only 185 000
Selling price per unit (refer to 4.3 below) ?
Direct labour costs per unit R22,50
Other variable manufacturing costs per unit (including joint costs) R43,50
Fixed manufacturing overheads absorption rate per unit R12,50
Variable selling & distribution costs on the external sales only R1,50
Fixed selling & distribution costs per unit R0,40
4.3. HdC’s standard selling price per unit is expected to increase by 8% from the 2019 financial year
standards.
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4.4. Dr. Myburgh has further confirmed the following for CMD’s 2020 financial year: cost of capital
percentage will be 9,50% per annum; projected controllable investments will be R77 520 000,
while the related projected profit before taxation is R17 442 000. This projected profit before
taxation was calculated after taking the following into consideration:
(i) Consultation fees of R1 000 000 for industrial engineers to improve the joint
manufacturing process.
(ii) Projected statutory external audit fees of R600 000. ARC’s external auditors are only
appointed and/or dismissed by ARC’s audit committee.
(iii) Allocated head office expenses of R210 000.
(iv) Cement manufacturing equipment depreciation of R370 000.
5. BMD’s PRELIMINARY INFORMATION FOR THE 2020 FINANCIAL YEAR
5.1. The following information relates to the 2020 financial year projected budget and/or standards:
FINANCIAL YEAR BUDGET/STANDARDS MB FB PB

Annual demand in units (bricks) 750 000 1 125 000 400 000
Brick-making labour time in minutes per unit 6 3 1,5
Selling price per unit R6,50 R10,50 R5,00
Direct raw material costs per unit (all included) R2,05 R4,25 R2,10
Brick-making labour costs per unit R? R? R?
Variable manufacturing overheads per unit R0,25 R0,50 R0,35
Fixed manufacturing overheads absorption rate per unit R0,50 R0,50 R0,50
Variable selling costs per unit R0,10 R0,10 R0,10
Fixed selling costs per unit R0,05 R0,05 R0,05
5.2. As a result of a highly competitive brick-makers’ labour market, BMD has structured an impressive
brick-makers’ retention policy for its 75 brick-makers. During each 365-days financial year, each
brick-maker will be entitled to a 20-days continuous compulsory annual leave. Furthermore, the
brick-makers will also be entitled to a 15-days continuous discretionary annual leave. Based on
the brick-manufacturing industry norm, there is a 40% and 60% probability that ⅓ and ⅔ of the
brick-makers, respectively, will exercise their discretionary annual leave entitlement. BMD will not
operate during the weekends in any of the 52 weeks during the financial year. BMD’s brick-makers
are qualified to make any of BMD’s bricks, however, each brick-maker can only make one-type of
a brick at a time. Subsequent to the signing-off of the national minimum wage by the President of
the Republic of South Africa, Mr. MC Ramaphosa, the BrickMakers Trade union (BricTU) and
BMD agreed on a standard brick-maker labour rate of R20 per hour for a 7-hour working day for
both the 2020 and 2021 financial years.
5.3. Except for the brick-making time, all the other resources needed for the brick-manufacturing
process, are expected to be available in unlimited supply.
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REQUIRED
 Where applicable, indicate irrelevant amounts/adjustments with a R0 (nil-value).
(a) Briefly comment on Dr. Myburgh’s response in relation to her brewing legal woes with
African Roots Cements Plc.
Your comment must specifically address the fundamental principle of integrity as expected
from a CA(SA). (3)
(b) Prepare ARC’s cement manufacturing/production budget in units for the financial year
(8)
ending 28 February 2019.
(c) Calculate the budgeted total contribution amount that ARC must generate for the 2019
financial year so as to break-even.
In answering this question, break-even units calculations are not required. (4)
(d) The audit partner on the ARC assignment raised the following two (2) review notes for your
attention in answering question (d)(i) and (d)(ii) below:
1. “I am of the firm view that the total budgeted joint costs for the 2019 financial year were
allocated incorrectly and that the allocation should be adjusted”.
2. “Although the budgeted annual joint costs of R16 485 000 and R4 515 000 have been
correctly casted to R21 000 000, I do not agree that this amount of R21 000 000 is the
correct joint costs amount to be allocated to the joint product(s)”.
(i) Calculate the correct total annual budgeted joint costs to be allocated to the joint
(6)
product(s) during the 2019 financial year.
(ii) Allocate the correctly calculated total annual budgeted joint costs in (d)(i) above to
the joint product(s). (3)
(e) The following is quoted from an e-mail you received from Dr. Myburgh during the 2019
financial year’s interim audit:
“I’m extremely unhappy about our current method of allocating joint costs to the joint
products”, is (are) there any other alternative method(s) we can consider in this regard?”
Draft a report to Dr. Myburgh wherein you briefly explain the other alternative method(s),
if any, of allocating joint costs to the joint products. (5)
(f) Calculate the following variances for the period-ended 31 August 2018:
(i) Sales price variances for HdC and FtC only (per product type and in total). (3)
(ii) Direct labour efficiency variance for product LdC only. (4)
(iii) Direct raw material purchase price variances (per material type and in total). (5)
(iv) Direct raw material mix variances (per material type and in total).
(5)
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(g) Prepare the actual statement of profit or loss and other comprehensive income (income
statement) for the period-ended 31 August 2018 for product LdC only.
Except for the over-/under-absorption of the fixed manufacturing overheads
(if applicable), ignore all the other possible standard costing variance(s). (12)
(h) As part of the organisational structure investigation, Dr. Myburgh requested you to:
(i) Calculate CMD’s projected residual income for the 2020 financial year. (5)
(ii) Calculate CMD’s projected return on investment for the 2020 financial year. (2)
(iii) List four (4) non-financial measures that can be used to evaluate CMD’s
performance in terms of the quality and efficiency of the cement manufacturing (4)
process.
(iv) In your own words, briefly explain the concept of benchmarking in the context of
(2)
CMD’s cement manufacturing process.
(i) Assuming that the BMD’s annual requirements of the HdC for the 2020 will be 150 000
units.
(i) Calculate (if any) the envisaged total contribution that CMD will lose during the 2020
financial year as a result of transferring 150 000 units of HdC to BMD.
(5)
(ii) Calculate the minimum transfer price that CMD will be willing to accept for the transfer
of each unit of HdC required by BMD during the 2020 financial year. (4)
(j) (i) Advise Dr. Myburgh whether the BMD will be able to fully meet all its 2020 financial
year annual demand for all the three (3) types of bricks. Motivate your advice with
(10)
necessary and applicable calculation(s).
(ii) Calculate the optimum mix of bricks that BMD will be able to manufacture and sell to
maximise its projected contribution for the 2020 financial year. (10)
For question (j)(ii), where applicable:
 Round the labour rate(s) to the nearest rand(s) and/or cent(s).
 All the other workings, round to two (2) decimal places.
Total marks [100]
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4 SUGGESTED SOLUTIONS
4.1 DELICIOUS CEAREALS (PTY) LTD
(a) Determine the total budgeted contribution per product type by preparing the budgeted
marginal cost statement of Delicious Cereals (Pty) Ltd for the year ended 31 March 2016 in
as much detail as possible. The total column is not required. Round off all your workings to
the nearest rand.
Calculation CC WC
Sales  3 000 000 1 750 000
Less: Variable cost of sales 2 597 400 1 398 765
Opening inventory  23 400 12 600
Barley, sugar, vitamins  707 000 357 000
Corn  404 000 -
Wheat  - 391 170
Box  303 000 153 000
Direct labour  1 010 000 425 000
Variable manufacturing overhead  202 000 102 000
Less: Closing inventory  52 000 42 005
Less: Variable selling and  20 000 10 000
administration cost
CONTRIBUTION 382 600 341 235
Calculations:
Details Calculations CC Calculations WC
 Sales 100 000 x R30 =3 000 000 50 000 x R35 = 1 750 000
 Opening inventory R24 600 – (1 000 units x R1,2) R13 200 – (500 units x R1,2)
= 24 600 – 1 200 = 23 400 = 13 200 – 600 = 12 600
Calculations CC Calculations WC
 Barley, sugar, vitamins 101 000 x R7 = 707 000 51 000 x R7 = 357 000
 Corn 101 000 x 0,5kg/u x R8
= 50 500 x R8 = 404 000
 Wheat 51 000 x 0,5kg/u x R15,34
= 25 500 x R15,34 = 391 170
 Box 101 000 x R3/box = 303 000 51 000 x R3/box = 153 000
 Direct labour 101 000 x 12/60 x R50/h 51 000 x 10/60 x R50/h
= 20 200 hours x R50/hour = 8 500 hours x R50/hour
= 1 010 000 = 425 000
 Variable manufacturing 101 000 x R2 = 202 000 51 000 x R2 = 102 000
overhead
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Details Calculations CC Calculations WC

 Closing inventory Units calculation: Units calculation:
1 000 + 101 000 – 100 000 500 + 51 000 – 50 000
= 2 000 units = 1 500 units
Variable manufacturing cost per Variable manufacturing cost per

unit: unit:
(707 000 + 404 000 + 303 000 + (357 000 + 391 170 + 153 000
1 010 000 + 202 000) / 101 000 + 425 000 + 102 000) / 51 000
= 2 626 000/101 000 = 1 428 170/51 000

= R26/unit = R28/unit or R28,003/unit
2 000 units x R26 = 52 000 1 500 units x R28 = 42 000

Also accept:
(1 500 units x R28,003 = 42 005)
 Variable selling and 100 000 x R 0,2 = R20 000 50 000 x R 0,2 = R10 000
administration cost
(b) Calculate the total budgeted fixed manufacturing overheads allocated to both the corn
cereals (CC) and whole-wheat cereals (WC) using the current basis of allocation for the year
ended 31 March 2016.
Corn cereal = 101 000/152 000 x 200 000 = R132 895
Whole-wheat cereal = 51 000/152 000 x 200 000 = R 67 105
R200 000
(c) Calculate the actual fixed manufacturing overheads for the year ended 31 March 2016 per
unit of cereal, for both the corn cereals (CC) and the whole-wheat cereals (WC), using the
activity-based costing system.
Corn (CC) Calculations Amount

Raw material ordering 10/20 X R25 000 R 12 500
Factory shop rental 4/7 X R120 000 R 68 571
Packing process 100 500/8 = 12 562,50 R 11 247
12 563/16 755 x R15 000
Quality inspections 100 500 / 5 = 20 100 R 15 240
20 100/26 388 x R20 000
Total overheads 107 558 R107 558
÷ Actual units produced 100 500 100 500 units
Rate per unit 1,07 R1,07 per unit
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Wheat (WC) Calculations Amount

Raw material ordering 10/20 X R25 000 R12 500
Factory shop rental 3/7 X R120 000 R51 429
Packing process 50 300 / 12 = 4 191,67 R 3 753
4 192/16 755 x R15 000
Quality inspections 50 300 / 8 = 6 287,5 R 4 760
6 288/26 388 x R20 000
Total overheads R 72 442
÷ Actual units produced 50 300 units
Rate per unit R1,44 per unit
(d) Assume there are no opening finished inventory units. Calculate DC’s total required units
for each product type for the year ended 31 March 2016, to break even on the total budgeted
fixed costs for the year.
Contribution per unit CC WC

Sales 30 35
Less: Variable costs per unit 26 28
Barley, sugar, vitamins 7 7
Corn 4 -
Wheat 7,67
Box 3 3
Direct labour 10 8,33
Variable manufacturing overhead 2 2
Less: Variable selling & admin 0,2 0,2
CONTRIBUTION per UNIT 3,80 6,80
Formula = Total fixed costs/ weighted contribution

Total fixed costs = R200 000 + R70 000 = R270 000
Weighted contribution per batch = (R3,80 x 2) + (R6,80 x 1)
= R7,60 + R6,80
= R14,40
Break-even batches = 270 000/14,40

= 18 750
18 750 x 2 = 37 500 units of CC

18 750 x 1 = 18 750 units of WC
= 56 250 units
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(e) Variances
(i) Sales price margin variance for the whole-wheat cereals.
= (Actual price – Budgeted price) X Actual sales units
= (R38 – R35) X 50 000
= R150 000 F.
(ii) Direct material wheat usage variance.

= (Actual usage – Standard usage) X Price per kg
= ((0,6 X 50 300) – (0,5 X 50 300)) X R15,34
= (30 180 – 25 150) X R15,34
= R77 160 (U).
(iii) Direct labour rate for the corn cereal.

= (Actual rate – Budgeted rate) X Actual hours
= (R52,5 – R50) X (12/60 X 100 500)
= (R2,5 X 20 100)
= R50 250 (U).
(i) Fixed manufacturing overheads expenditure variance.

= Actual expenditure – Budgeted expenditure
= R180 000 – R200 000
= R20 000 F.
(f) Briefly discuss the difference between quality costs and target cost.
Quality costs are costs incurred to ensure that a product sold or a service rendered meets and/ or
even exceeds customers’ expectations; and
A target cost is the allowable amount of cost that can be incurred on a product or a service so that
the required profit on the product or service can still be earned.
(g) Briefly discuss the difference between direct and absorption costing systems.
A direct costing system (also known as a marginal or variable costing system) assigns only
variable manufacturing costs to product cost whereas an absorption costing system assigns both
direct and indirect costs to cost objectives/products, which includes both fixed and variable
manufacturing costs.
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4.2 KILO LTD
(a) Prepare the sales budget for the three months ending 30 June 2017.
Products Units Selling price Revenue

R
Ki 10 000 (R500 X 1,2) = R600 6 000 000
Lo 6 000 (R700 X 1,2) = R840 5 040 000
11 040 000
(b) Prepare the production budget for the three months ending 30 June 2017.
Sales 10 000 6 000
Plus: Closing inventory 1 000 600
Total units required for the quarter 11 000 6 600
Less: Opening inventory 1 000 800
Total units to be produced 10 000 5 800
 Closing inventory Product Ki: 10 000 X 10% = 1 000

 Closing inventory Product Lo: 6 000 X 10% = 600
(c) Prepare the direct raw material purchases budget for the three months ending 30 June 2017.
Material A Material B
Product Ki  80 000  50 000

Product Lo  69 600  34 800
Total direct raw material required 149 600 84 800
Plus: Planned closing inventory 8 800 4 900
Product Ki (8 X 500); (5 X 500) 4 000 2 500
Product Lo (12 X 400); (6 X 400) 4 800 2 400
Less: Opening inventory (Given) 12 000 6 000
Total to be purchased 146 400 83 700
Price per kg (R10 X 1,1); (R15 X 1,1) R11 R16,50
Total purchases R1 610 400 R1 381 050

Units to be Quantity per Total raw Units to be Quantity per Total raw
produced unit material produced unit material
needed needed
Material A 10 000 (R80/R10) = 8 80 000 5 800 (R120/R10) = 69 600
12
Material B 10 000 (R75/R15) = 5 50 000 5 800 (R90/R15) = 34 800
6
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(d) Determine the budgeted break-even units for the company for the three months ending 30
June 2017.
Break-even point = Fixed cost

Contribution mix per unit
R 2 800 000,00
R 2 164,50
Batches = 1 293,60
 Rounded up = 1 294
Break-even units =
Product Ki (1 294 x 5) = 6 470
Product Lo (1 294 x 3) = 3 882
 Contribution mix per unit R

Product Ki R229,50 x 5 1 147,50
Product Lo R339,00 x 3 1 017,00
Total 2 164,50
 Contribution Product Ki Product Lo

R R
Sales (refer part (a)) 600,00 840,00
Variable cost 370,50 501,00
Variable overheads 50,00 60,00
Direct labour 150,00 210,00
Material A (R10 x 1,1 X 8); (R10 X 1,1 X 12) 88,00 132,00
Material B (R15 x 1,1 X 5); (R15 X 1,1 X 6) 82,50 99,00
Contribution 229,50 339,00
 Sales mix ratio

Product Ki = 10 000 : 5
Product Lo = 6 000 : 3
[12 marks]
(e) With regards to the divisionlisation:
(i) Briefly explain to the CEO the prerequisites of a successful divisionalisation

 For a successful divisionalisation, it is important that the activities of a division be as
independent as possible of other activities.
 Products Ki and Lo appear to be very independent of each other as they are components.
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(ii) List issues that the CEO needs to consider when divisionalising
 The current operational costs will increase as a result of divisionalisation. A new divisional
manager will have to be appointed as currently products are managed by one senior
manager.
 How are costs going to be separated between divisions as they are currently sharing fixed
costs?
 How is divisionalisation going to benefit Kilo Ltd? Will it result in better decision making?
 How will this impact on the reporting and the accounting system?
(f) Discuss the advantages and disadvantages of divisionalisation. Make use of information in
the question to support your discussion.
Advantages
 The appointment of the new manager will improve the decision making-process as he/she will
be responsible for one division and the current manager will be responsible for the other
division.
 Decisions will be made by managers who are familiar with the situation and are able to make
more informed decisions thereby improving the quality of decisions. Divisional managers will
be specialists on the components (Ki and LO).
 Decisions will also be made more quickly because the information does not have to pass along
the chain of command to and from top management.
 Delegation of responsibility to the divisional managers provides the CEO with greater freedom
to concentrate on the other strategic decisions of the business.
 Increased responsibility of the divisional manager increases the self-fulfilment and the
motivation of the divisional manager. This increased motivation can also motivate divisional
employees.
 Unprofitable activities will be identified quicker and could either be eliminated or turned around.
Disadvantages
 Divisions Ki and Lo may compete with one another excessively and take actions that
negatively affect another division.
 Lack of cooperation and coordination between divisions may lead to the company not
achieving overall organisational goals.
 Divisional managers could make decisions which are only to the benefit of their division and
not congruent with the overall company objectives.
 Divisionalisation could lead to duplication of activities resulting in unnecessary costs.
 The CEO and top management, by delegating decision making to divisional managers, may
lose control because they may not be aware of what is going on in the organisation as a whole.
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(g) Determine the operating leverage for Division Ki and Division Lo
Operating leverage = Contribution/Profit
Division Ki = R2 295 000/R773 261 

= 2,97
Division Lo = R2 034 000/R755 739 
= 2,69
 Direct labour hours

Normal production Labour hours per Total hours required
capacity unit
Division Ki 10 000 (R150/ R30) = 5 (10 000 x 5) = 50 000
Division Lo 6 000 (R210/ R30) = 7 ( 6 000 x 7) = 42 000
Total 92 000
 Allocation of fixed costs

Division Ki (50 000/92 000) x R2 800 000 = R1 521 739
Division Lo (42 000/92 000) x R2 800 000 = R1 278 260
 Profit Division Ki Division Lo

R R
Contribution (R229,50 x 10 000); (R339 x 6 000) 2 295 000 2 034 000
Fixed costs 1 521 739 1 278 261
Profit 773 261 755 739
(h) Comment on the operating leverage of Division Ki and Division Lo including the method
used for fixed costs allocation.
Division Ki
 The division has operating leverage of 2,97, which means that the company cost structure
system is such that variable costs are high and fixed costs are lower.
 The division will be able to report profit even when the division experiences wide fluctuation in
sales levels.
Division Lo
 The division has operating leverage of 2,69, which means that the company cost structure
system is such that variable costs are high and fixed costs are lower.
 The division will be able to report profit even when the division experiences wide fluctuation in
sales levels.
Fixed cost allocation

 The method used for allocating fixed costs appears to be very arbitrary; it may not reflect how
the building is occupied by both divisions.
 Occupation in terms of square meters; as the rent on building is based on area occupied.
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4.3 JUNIOR SPORTS LTS
(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
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 margin 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)
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(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
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 margin 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
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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.
(b) Prepare a statement reconciling the budgeted profit to the actual profit of the Gymnastics
Division for June 2015 in as much detail as permitted by the information provided.
Details R Ref
Budgeted profit 619 000 
Add: Sales margin volume variance 26 880F 
Standard profit 645 880 
Sales margin price variance 26 520F 
Material purchase price variance 49 000A 
Material mix variance 16 000F given
Material yield variance 33 600F given
Fixed overhead expenditure variance 53 000A 
Actual profit ( +  +  + 16 000 + 33 600 + ) 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 1 680 000
(10 000 units x R168)
Less: Fixed production overheads (R725 000 given) 725 000
R 619 000
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 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 880F
= 134,40
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 520F
Alternative:
= (R305 x 10 200) – (R302,40 x 10 200)
= R3 111 000 – R3 084 480
= R26 520F
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 Material purchase price variance calculation

(Standard Price – Actual Price) x AQ purchased
Material Standard Actual price Difference in Actual Material
price (R per kg) price quantity purchase
(R per (R per kg) purchased price
kg) (kilograms) variance
(R)
(1) (2) (3) = (1) – (2) (4) (3) x (4)
X 30 1 260 000 ÷ 40 000 (1,50) 40 000 60 000 A
= 31,50
Y 16 288 000 ÷ 18 000 0,00 18 000 0
= 16,00
Z 8 165 000 ÷ 22 000 0,50 22 000 11 000 F
= 7,50
Total 49 000 A
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 000A
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 000A
 Fixed overhead expenditure variance

= actual fixed overheads – budgeted fixed overheads
= R778 000 – R725 000 = R53 000A 53 000A
 ACTUAL PROFIT R
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
(c) Provide possible reasons for the following variances:

(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.
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(d) 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 (contribution 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
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4.4 CALCULUS LTD
(a) Determine if Department A should continue to manufacture or purchase the screens.
Details Costs to Costs to

manufacture purchase
R R
1 Direct raw material 800 000 0
2 Direct labour 500 000 0
3 Variable manufacturing overheads 200 000 0
4 Offer price (R165 X 10 000 Scanners) 0 1 650 000
5 Fixed manufacturing overheads 100 000 50 000
6 Allocated corporate expenses 100 000 80 000
7 Redundancy costs 0 50 000
Total monthly costs R 1 700 000 R 1 830 000
 (R100 000 X 80%)

Conclusion:
Calculus Ltd should continue manufacturing the scanner screens. It will cost R130 000 (R1 830 000 –
R1 700 000) more to outsource the manufacturing of scanner screens.
(b) Briefly discuss five non-financial factors that Calculus Ltd should consider before deciding
to purchase the scanner screens from the outside supplier.
 Possible decline in morale of the affected employees and employees of Department B.
 The ability of the outside supplier to deliver the required scanner screens on time.
 The quality standards of the outside supplier as poor quality may affect relations with
customers.
 The availability of other screens suppliers in case of unreasonable future price increases by
the outside supplier.
 The company’s reputation due to retrenchments and the reaction of labour unions.
(c) Calculate the following variances for Department B for the month of March 2017:
(i) 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
= [(R460 – R380) – (R450 – R380)] X 8 000
= (R80 – R70) X 8 000
= R80 000 Favourable (F)
 R160 + R50 + R80 + R40 + R50 = R380
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Note: This variance can be calculated as follows: (Actual selling price – Standard selling price)
X Actual quantity. This is because the standard cost is deducted from both the actual selling
price per unit and the standard selling price per unit.
(ii) Direct raw material purchase price variance – Screens

= (Actual price per kg – Standard price per kg) X Actual quantity purchased
= (R180 – R160) X 8 000 kg
= R160 000 Adverse (A)
(iii) Direct material usage variance – Other
= (Standard quantity usage – Actual quantity usage) X Standard material price
= ((2 kg X 8 000 units) – (2, 5kg X 8 000 units)) X (R50/2kg)
= (16 000 – 20 000) X R25
= R100 000 A
(iv) Variable manufacturing overheads expenditure variance
= (Standard cost per unit – Actual cost per unit) X Actual units produced
= (R40 – R45) X 8 000
= R40 000 A
(v) Fixed manufacturing overheads volume variance
= (Actual production – Budgeted production) X Standard fixed overhead rate per unit
= (8 000 – 10 000) X R50
= R100 000 A
(d) Briefly comment on the possible reasons for the following variances:
(i) Sales margin price variance

The sales department was able to secure a higher selling price per unit. This could have been
supported by the fact that the company was only able to produce 8 000 scanners instead of 10
000, leaving it with less scanners to sell at a higher price per unit.
(ii) Direct raw material purchase price variance – Screens

The inefficiency of the procurement department.
The current suppliers could have increased their selling price per screen.
(iii) Direct materials usage variance – Other.

The inefficiency of the production team of Department B.
Poor quality of the direct raw materials purchased.
(iv) Fixed manufacturing overheads volume variance.

The adverse fixed overhead volume variance arose due to the fact that the actual production
was lower than the budgeted production. The overhead charged to production is less than the
budgeted cost.
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(e) Determine the minimum transfer price at which Department A will be willing to sell the
screens to Department B.
The minimum transfer price is the costs which are unavoidable, plus lost contribution per unit as
Department A was selling all its production:
R
Unavoidable variable costs per unit  150
Plus: Lost contribution per unit  50
The minimum transfer price R200
 Unavoidable variable cost per unit

Direct raw material (R800 000/10 000) 80
Direct labour (R500 000/10 000) 50
Variable manufacturing overheads (R200 000/10 000) 20
Fixed manufacturing overheads 0
Allocated corporate expenses 0
Unavoidable variable cost per unit R150
 Lost contribution per unit R

Selling price per unit 200
Less: Variable cost per unit  150
Contribution per unit R50
Total contribution (R50 X 10 000) 500 000
Total units transferred 10 000
Lost contribution per unit (R500 000/10 000) R50
(f) Determine if Calculus should introduce the transfer pricing system.
Profit without the transfer pricing system Department A Department Calculus Ltd
B
R R R
Sales 2 000 000 4 500 000 6 500 000
Less: Direct material – Screens 1 600 000 1 600 000
Less: Direct material – Other 800 000 500 000 1 300 000
Less: Direct labour 500 000 800 000 1 300 000
Less: Variable manufacturing overheads 200 000 400 000 600 000
Less: Fixed manufacturing overheads 100 000 500 000 600 000
Less: Allocated corporate expenses 100 000 300 000 400 000
Profit R300 000 R400 000 R700 000
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Profit with the transfer pricing system Department A Department Calculus Ltd
B
R R R
Sales 1 700 000 4 500 000 6 200 000
Less: Direct material – Screens 0 1 700 000 1 700 000
Less: Direct material – Other 800 000 500 000 1 300 000
Less: Direct labour 500 000 800 000 1 300 000
Less: Fixed manufacturing overheads 100 000 500 000 600 000
Less: Allocated corporate expenses 100 000 300 000 400 000
Profit R 0 R300 000 R300 000
Conclusion:
The company makes a profit of R700 000 if Department A sells all its production to the external market.
However, if the units are transferred to Department B, the company makes a profit of only R300 000.
The introduction of the transfer pricing system will result in the company making lower profits. Calculus
Ltd should, therefore, not introduce the transfer pricing system.
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4.5 MEHLARENG (PTY) LTD
(a) Assume that MG decides to adopt procurement option (ii). The total number of logs that
the TPD will have to sacrifice from its existing external market in order to fully supply
WWD’s log requirements.
Units
TPD’s total annual plantation capacity (trees in 5 sites) 12 500
Annual total capacity in trees for 1 site (12 500 / 5) 2 500
Annual total capacity in logs for 1 site (2 500 x 2) 5 000
TPD’s current sales to external market (5 000 x 85%) 4 250

TPD’s current spare capacity per annum (5 000 – 4 250) 750
Logs required by WWD per annum 4 000

- Supplied from TPD’s current spare capacity 750
- Supplied from TPD’s existing external market sacrifice 3 250
(b) Advise which one of the two procurement options will be the most beneficial from the MG
group’s perspective. Ignore qualitative factors.
(i) Buying logs exclusively from an external supplier at R275 per log
 WWD’s annual requirement is 4 000 logs.

 The logs can be bought from an external supplier at R275 per log, and the supplier will allow
8% purchase discount if WWD purchases more than 3 500 logs per annum.
 As 4 000 > 3 500, WWD will therefore qualify for the 8% discount.
 The price that the MG group will pay for this option is R275 x 0,92 = R253 per log.
(ii) Internal transfer of logs from the TPD to the WWD
 TPD earns a contribution of R142,50 (R270 - R125 - R2,50) per log sold to external
customers.
 From the MG group’s perspective the R142,50 is an intercompany profit that will be
eliminated for reporting purposes.
 If this option is chosen, the group will nevertheless lose contribution earned by virtue of
sacrificing 3 250 sales units to the external market.
 From the MG group’s viewpoint, at minimum, TPD will need to charge a transfer price that
will cover its variable cost of production + compensation for contribution lost on the external
market sales, therefore
Transfer price (TP) = (Net) variable cost per unit + Lost contribution per unit
TP = (R125 – R2,50) + R117,81 ((R270 - R125 x 3 250)/4 000)
TP = R240,31 per log
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Conclusion
The option of buying the logs from an external supplier will cost the group R253 per log, whereas
transferring the logs from the TPD to the WWD will cost the group R240,31 per log. It will be beneficial
for the group to transfer the logs from the TPD to the WWD in the short term. It should, however, be
noted that in the long term, a number of variables/inputs directly relating to this decision might change
and as such the group might need to revisit the decision-making process.
(c) The transfer pricing method(s) that can used for intermediate products that have a
perfectly competitive market.
Market-based transfer prices – “In most circumstances, where a perfectly competitive market for
an intermediate product exists it is optimal for both decision-making and performance evaluation
purposes to set transfer prices at competitive market prices. A perfectly competitive market exists where
the product is homogeneous and no individual buyer or seller can affect the prices” (Drury 2015, 9th
ed., page 527).
(d) The production budget in units for the 2017 financial year.
2017 production budget TN MS

Sales 13 970. 20 955.
Plus: Closing inventory (balancing) 4 755. 1 370.
Less: Opening inventory  (3 100) (2 450)
Units to be produced  15 625. 19 875.
 TN: 12 500 (2016 production units) / 80% = 15 625

 MS: 15 900 (2016 actual production units) / 80% = 19 875
 2016 production budget
TN MS
Sales 13 500. 20 250.
Plus: Closing inventory (balancing) 3 100. 2 450.
Units produced 12 500. 15 900.
 TN: R5 657 850 / 13 970 = R405 per unit = 2017 budget selling price
R405/1,08 = R375 per unit = 2016 actual selling price
Therefore 2016 actual sales volume = R5 062 500 / R375 = 13 500 units
 MS: R6 789 420 / 20 955 = R324 per unit = 2017 budget selling price
R324/1,08 = R300 per unit = 2016 actual selling price
Therefore 2016 actual sales volume = R6 075 000 / R300 = 20 250 units
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(e) The concept of computerised budgeting briefly explained and listing two types of software
that are useful in the planning and control functions of the budget.
 It refers to budgeting by means of computer-based financial models consisting mainly of

mathematical inputs and outputs. (Drury 9th ed., page 387).
 Budgeting activities are performed by simply altering the mathematical statements (Drury 9th
ed., page 387).
 A detailed budget is typically loaded in the finance and other modules of the software, such as
production and inventory, and actual performance is measured against it (MO001/4/2017, page
97).
 Types of useful software packages in the planning and control function of the budget:
1. Enterprise resource planning (ERP)
2. Enterprise resource management (ERM)
3. Accounting information systems (AIS)
(f) The margin of safety concept briefly explained.
Margin of safety is the amount of sales in excess of a company’s break-even point and is calculated as
Expected sales less Break-even sales. It indicates the amount of sales a company can lose before it no
longer makes a profit. It is generally expressed in rand-sales value, but it can also be expressed as a
percentage.
The percentage margin of safety is calculated as: Expected sales – Break-even sales
Expected sales
(Drury 9th ed., page 178)
(g) Based on the 2017 financial year budget. The margin of safety percentages for each of the
two products (TN and MS). (Ignoring implications of: opening inventories, closing
inventories, and the proposal to change the costing method)
Budgeted margin of safety = (Expected sales – budgeted break-even sales)/Expected sales
TN MS
= (R5 657 850 - R4 455 810)/ R5 657 850 = (R6 789 420 - R5 346 972) / R6 789 420
= 21,25% = 21,25%
 Budgeted break-even sales
Formula = Total fixed costs  /Contribution per batch 

= R1 950 098 / R 354,50
= 5 500,9816... batches
≈ 5 501 baches
TN MS
Break-even units 11 002 16 503
TN: 5 501 batches x 2 ; MS: 5 501 batches x 3
Budgeted break-even sales R4 455 810 R5 346 972

TN: 11 002 units x R 405,00 (from question (d) above)
MS: 16 503 units x R 324,00 (from question (d) above)
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 Budgeted fixed cost
Manufacturing overheads ((R1 278 000 x 10% x [(50% x 10%) + (30% x 11%) R1 405 800
+ (20% x 8,5%)]) + R1 278 000
Allocated head office cost (R320 325 + R129 675) R450 000
Selling cost (R38 328 + R55 970) R94 298
R1 950 098
 Contribution per batch (Weighted contribution)

Contribution per unit TN MS
Budgeted selling price per unit (from question (d)) R405,00 R324,00
Less: Budgeted variable cost per unit  R312,50 R267,50
Budgeted contribution per unit R92,50 R56,50
Contribution per unit R92,50 R56,50

Sales mix 2 3
Contribution per sales mix R185,00 R169,50
Contribution per batch (R185 + R169,50) = R354,50
 Budgeted variable cost per unit

Calculations Cost per unit
TN MS TN MS
R R
Direct raw material R195 + R15 R170 + R15 210,00 185,00
Direct labour R45 + R15 R30 + R15 60,00 45,00
Variable manufacturing overheads R25 + R15 R20 + R15 40,00 35,00
Variable selling cost 2,50 2,50
Total variable cost per unit R312,50... R267,50...
(h) The reasons why the proposal to adopt IFRS would require a change in the costing system
from direct costing to the absorption costing method.
 MG is currently using the direct costing method.

 As a private company and not trading on any public stock exchange, there is no prohibition on
the group to use a direct costing method.
 With the adoption of IFRS as the primary financial reporting framework, it means that the direct
costing method can no longer be used for external reporting.
 This is because in terms of the inventory Standard of IFRS, International Accounting Standard
2 (IAS2), companies that present their annual financial statement in terms of IFRS are required
to adopt the absorption costing method.
 Therefore, post the adoption of IFRS, a company that was previously using the direct costing
method is expected to change its costing method to the absorption costing method.
 However, for internal reporting and decision making purposes, the direct costing method can
and should be used.
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(i) Budgeted income statement for the 2017 financial year based on the absorption costing
method.
Details Calculations TN MS
R R
Sales TN: 12 600 x R405(d) 5 103 000. 5 961 600.
MS:18 400 x R324(d)
Less: Manufacturing cost of sales (4 420 800) (5 603 650)
Opening inventory TN: 2 200 x R310 682 000. 980 500.
MS: 3 700 x R265
Production cost TN: 13 400 x R359,50 4 817 300. 5 063 450.
MS: 16 100 x R314,50
Closing inventory TN: 3 000 x R359,50 (1 078 500) (440 300)
MS: 1 400 x R314,50
Gross profit 682 200. 357 950.
Less: Selling cost (69 827) (101 970)
Variable selling cost TN: 12 600 x R2,50 31 500. 46 000.
MS: 18 400 x R2,50
Fixed selling cost 38 327. 55 970.
Less: allocated head office cost TN: (R320 325 + R129 675 ) x (204 407) (245 593)
13 400/29 500
MS: (R320 325 + R129 675 ) x
16 100 /29 500
Net profit for the period R 407 966. R 10 387.
, ,  and  Unit cost per product for each of the two financial years
Financial year 2016 2017
Product TN MS TN MS
Direct raw material cost R195,00 R170,00 R210,00 R185,00
Direct labour cost R45,00 R30,00 R60,00 R45,00
Variable manufacturing overheads R25,00 R20,00 R40,00 R35,00
Fixed manufacturing overheads R45,00 R45,00 R49,50 R49,50
Total unit cost per product R310,00 R265,00 R359,50 R314,50
(j) (i) The budgeted return on investment (ROI) for the 2017 financial year for each of the two
divisions and advise if MG should accept an invitation to join the BIDP. Qualitative factors
were ignored.
Return on investment (ROI) = Controllable profit / controllable investment
TPD WWD
= R403 950  / R2 710 000  = R485 450  / R2 960 000 
= 14,91% = 16,40%
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 Controllable profit TPD WWD
R R
Net profit before depreciation and tax 718 950. 775 450.
Less: Depreciation (490 000) (740 000)
R2 700 000 x 20% 540 000.
(R250 000 x 4) x 20% 200 000.
(R3 200 000 – R1 500 000) x 20% 340 000.
R1 500 000 x 20% x 6/12 150 000.
Plus: Allocated head office expense 175 000. 450 000.
Controllable profit 403 950. 485 450.
 Controllable investment TPD WWD

R R
Before BIDP 1 700 000. 2 700 000.
Plus: New assets 1 500 000. 1 000 000.
TPD: given ; WWD: (R250 000 x 4)
Less: Depreciation  (490 000) (740 000)
Controllable investment 2 710 000. 2 960 000.
Conclusion
 Target ROI for TPD = 14,00% (12,50% + 1,50%) and for WWD = 14,50% (13,00% + 1,50%).
 The calculated ROIs 14,91% and 16,40% for TPD and WWD, respectively, as per above.
 MG should therefore accept the invitation to join the BIDP because with the programme, the group’s
ROIs for the 2017 financial year are projected to be higher than the targeted ROIs for each of the
two divisions. TPD: 14,91% > 14,00% and WWD: 16,40% > 14,50%.
(ii) The budgeted residual income (RI) for the 2017 financial year for each of the two divisions.
Residual income = Controllable profit - Cost of capital of controllable investments
TPD WWD
= R403 950  - R338 750  = R485 450  - R384 800 
Residual income = R65 200 = R100 650
 Controllable profit: Refer to  in question j(i) above

 Cost of capital of controllable investments
TPD: R2 710 000 x 12,5% = R338 750
WWD: R2 960 000 x 13,0% = R384 800
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4.6 BEANICO (PTY) LTD
(a) Ignore the possibility of the internal transfer of instant coffee. Advise the Cappuccino
Division based on the budgeted information if the FCAP product should be discontinued
or not. Ignore all qualitative factors. Show all your calculations.
Discontinue Do not
FCAP discontinue
R FCAP (given)
R
Revenue 38 530 000 40 392 000
RCAP [R47 x 490 000] = 23 030 000
UCAP [R50 x 310 000] = 15 500 000
Direct material cost (20 490 000) (21 299 000)

[R8 294 000/ 319 000kg x 490 000kg] =
RCAP R12 740 000
[R7 125 000/ 285 000kg x 310 000kg] =
UCAP R7 750 000
Direct labour (5 424 500)

Fixed element [R2 400 000 - (R588 000 x 60%)] = R2 047 200 (2 047 200)
OR [(R957 000 + R855 000) + (R588 000 x
40%)
Variable element: (RCAP + UCAP = R3 174 000) (3 174 000)
RCAP [(R1 116 500/ 319 000kg x 120%) x 490 000kg]
= R2 058 000
UCAP [R1 026 000/ 285 000kg x 310 000kg] =
R1 116 000
Advertising [RCAP: R1 650 000 + UCAP: R1 650 000] (3 300 000) (3 300 000)
Depreciation [RCAP: R147 000 + UCAP: R93 000] (240 000) (240 000)
Other
overheads (6 009 000)
[(R 6 009 000 x 10%) - (1 764 000 x 10% x
50%)] = R 512 700 OR
Fixed element (512 700)
[((R2 392 500 + R1 852 500) x 10%) +
(R1 764 000 x 10% x 50%)
Variable element (RCAP + UCAP = R5 121 000) (5 121 000)
[(R 2 392 500 x 90%)/319 000kg x490 000kg] =
RCAP R3 307 500
[(R1 852 500 x 90%)/285 000kg x 310 000kg] =
UCAP R1 813 500
3 645 100 4 119 500
CONCLUSION
The profit with FCAP being produced is R474 400 (R4 119 500 - R3 645 100) higher than when FCAP
is discontinued. FCAP should therefore not be discontinued.
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(b) Briefly discuss five qualitative factors that should be considered before the
discontinuation of the FCAP product decision is taken.
 Impact of possible retrenchments/uncertainty on staff morale of both divisions. This may have a
negative effect on the output of employees.
 Labour law requires that trade unions be consulted before making a final decision on retrenching
employees. The possibility of retrenchments may lead to labour unrest on the premises, which
could disrupt production.
 Customers that buy a basket of cappuccino products may consider switching their whole basket
to another supplier.
 The possible impact of the discontinuation of FCAP on Beancino (Pty) Ltd’s brand value and/or
reputation in the market place should be considered.
 Investigate if there are other unexplored markets FCAP can be sold too and/or what impact a
revised marketing campaign may have on customers buying behaviour towards FCAP
 Investigate the impact of a revised marketing campaign on customers buying behaviour towards
FCAP
 Consider if there are any substitutes, except RCAP and UCAP that could be manufactured in
the place of FCAP.
(c) Ignore the discontinuation decision. Determine

i. the minimum price per kg the Coffee division will be willing to transfer the instant
coffee at;
ii. the maximum price per kg the Cappuccino division will be willing to pay.
(i) Minimum transfer price
Minimum transfer price per kg R

Variable cost 20,00
Opportunity cost per kg  9,90
Additional packaging 0,00
Minimum transfer price per kg R 29,90
Calculations:
Opportunity cost per kg

Total contribution on lost sales
(90 000kg  x R22 ) R1 980 000
Opportunity cost per kg transferred (R1 980 000/200 000kg) R9,90
 Coffee division lost sales quantity

Total available capacity 2 200 000 kg
Current capacity @ 95% (2 200 000kg x 95%) or (2 200 000 x 5%) 2 090 000 kg
Spare capacity (2 200 000kg – 2 090 000kg) 110 000 kg
Instant coffee quantity required by Cappuccino Division
[800 000kg x 0,25) i.e. 250g needed to produce 1kg] 200 000 kg
Quantity shortage i.e. lost sales quantity
(110 000kg – 200 000kg) (90 000 kg)
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 Contribution per kg on lost sales R
Market price per kg (given) 50,00.
Less: Variable cost per kg (20,00)
Less: Additional packaging and delivery cost to external customers (8,00)
Lost sales contribution per kg R 22,00
(ii) Maximum transfer price.
R
Cappuccino division market purchase price 40
Add: Procurement saving* 3
Maximum transfer price per kg R43
(d) List four non-financial measures that can be used to evaluate the divisions’ performance
in terms of the quality and efficiency of the manufacturing process.
 The actual coffee and cappuccino quantity manufactured vs the budgeted quantity to be
manufactured.
 Kg and percentage of defect coffee and cappuccino manufactured.
 Abnormal wastage kg and percentage for both coffee and cappuccino products.
 Number and percentage of customer complaints relating to coffee and cappuccino product
quality.
 Kg and percentage of coffee and cappuccino returned due to poor quality.
 Number and percentage of unplanned downtime of the plant.
 Kg and percentage of instant coffee/cappuccino recalled.
 Efficiency of labour based on idle time percentage and hours (standard vs actual).
(e) Compare the performance of the two divisions actual results based on:
i. Return on investment (round your answer to 1 decimal place)
ii. Residual income Performance management
(i) Return on investment (ROI)

Formula: ROI = Controllable profit / Controllable investment 
Coffee: R13 905’/R52 600’ = 26,4%
Cappuccino: R4 610’/R15 000’ = 30,7%
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 Controllable profit R'000 R'000
Net income 28 200 9 400
Add: Controllable income
Discount received from creditors 0 25
Less: Controllable expenses
Interest paid on long term loans 0 0
Interest paid on bank overdrafts (55) (15)
Training services (2 160) (720)
Discount allowed on debtors (80) (30)
Depreciation (1 200) (450)
Head office administration fee 0 0
Sundry expenses (10 800) (3 600)
Controllable profit R 13 905 R 4 610
 Controllable investments Coffee division Cappuccino division

R'000 R'000
Non-current assets 43 000 14 000
Debtors 10 800 3 600
Creditors - (2 200)
Bank overdraft (1 200) (400)
Long-term loan - -
Controllable investments R 52 600 R 15 000
(ii) Residual income
Formula: Residual income = Controllable profit - Cost of capital of controllable investment

Coffee: R13 905’ [from e(i)] - R9 468’  = R 4 437’
Cappuccino: R4 610’ [from e(i) ] - R2 700’ = R 1 910’
Calculation
 Cost of capital of controllable investment

Coffee: (R52 600’  x 18%) = R9 468’
Cappuccino: (R15 000’ x 18%) = R2 700’
Conclusion:
Even though Cappuccino division has a much lower residual income (R1 910 000) compared to the
Coffee divisions residual income (R 4 437 000) the Cappuccino division’s return on investment is 4,3%
higher than that of the Coffee division (30,7% vs 26,4%). When evaluating performance Beancino
should determine a fair weighting that will be allocated to each of these performance measurement
tools.
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4.7 JJ BEVERAGES LTD
THIS SUGGESTED SOLUTION CONSISTS OF THREE (3) INDEPENDENT PARTS
PART A
(a) Return on investment
Details Fruit Division Energy Division

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

Fruit Division Energy Division
= R216 600 / R1 000 000 = R210 400 / R1 050 000
= 21,66% = 20,03%
(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
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Return on investment
Controllable investment = R400 000 (R500 000 – R100 000)

Controllable profit = R144 230
ROI = R144 230 /R400 000

= 36,06%
Conclusion:
 The Energy Division should invest in the new machine.
 The ROI of the new investment 36,06% is higher than 20% targeted ROI.
(d) Residual income new investment
RI = Controllable profit less cost of capital charge

= R144 230 – R56 000 (R400 000 x 14%)
= R88 230
PART B
(e) Production budget
Details 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
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PART C
(f) Quantity statement for December 2016
Physical units Equivalent units
Input Output Raw materials Conversion

(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  560 560 100 168 100
30
Abnormal loss  1 440 1 440 100 432 100
30
WIP: 31 December 2016 800 800 100 480 1006
60
5 600 5 600 3 800 3 700
 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.
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4.8 HISE RISE LTD
(a) The minimum price that Fine Pine should charge for the 20 tables
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. 600
(20 tables X [R1200 per kg / 40] = 20 tables x R30 for 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 0
or not the order is accepted.
Minimum price R 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.
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(c) The minimum transfer price which Division A will be willing to transfer at:
These are the variable costs which are unavoidable by Division A. R

Direct materials 2 740 000
Direct labour 2 000 000
Variable external selling costs 0
Total variable costs R 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 R 835
(d) 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 R 887
(e) Determine whether the management of Division A would be willing to transfer 4 000
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:
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 R 318 or R 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 R 308 or R 1 232 000
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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. 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.
(f) Determine the budgeted return on investment of Division B. Ignore the internal transfer:
Formula = Controllable profit / Controllable investment

= R820 000 / R4 000 000
= 21%
Controllable profit: R
Total contribution (21 000 000 – 18 800 000) 2 200 000
Fixed costs (1 200 000 + 180 000) (1 380 000)
(g) Determine the budgeted residual income of Division B. Ignore the internal transfer:
Formula = Controllable profit – Capital charge

= R820 000 – (R4 000 000 X 10%)
= R820 000 – R400 000
= R420 000
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4.9 TENNIS BALL (PTY) LTD
(a) The total budgeted fixed manufacturing overheads allocated to each product for June 2016
using activity-based costing (ABC) technique.
Activity Deuce (R) Ace (R)

Crushing and extrusion of core compounds
Deuce: (R5 808 x 172/484); or (172 x R12/hour)
Ace: (R5 808 x 312/484); or (312 x R12/hour) 2 064,00 3 744,00
Adding glue 860,00 624,00
Deuce: (R1 484 x 215/371); or (215 x R4/hour);
Ace: (R1 484 x 156/371) or (156 x R4/hour)
Fabric covering
Deuce: (R3 795 x 43/69); or (43 x R55/prod. run)
Ace: (R3 795 x 26/69); or (26 x R55/prod. run) 2 365,00 1 430,00
Branding of balls
Deuce: (R3 220 x 43/95); or (43 x R33,89/hour); 1 457,00 1 762,00
Ace: (R3 220 x 52/95); or (52 x R33,89/hour);
Quality inspections
Deuce: (R6 693 x 86/138); or (86 x R48,50/inspection)
Ace: (R6 693 x 52/138); or (52 x R48,50/inspection) 4 171,00 2 522,00
Total R 10 917,00 R 10 083,00
WORKINGS FOR (a)
Calculation: number of activities per product type Deuce Ace Total
Actual production volume (tennis balls) (given) 860 1 040 1 900
Total no of production runs
(860 balls/20 balls per production run = 43);
(1 040 balls/40 balls per production run = 26) 43 26 69
Total no of crushing and extrusion machine hours
(12min/60 x 860 balls = 172);
(18min/60 x 1 040 balls = 312) 172 312 484
Total no of tumbling machine hours
(15min/60 x 860 balls = 215);
(9min/60 x 1 040 balls = 156) 215 156 371
Total no of branding machine hours
(3min/60 x 860 balls = 43);
(3min/60 x 1 040 balls = 52) 43 52 95
Total no of quality inspections
(860 balls/10 = 86);
(1 040 balls/20 = 52) 86 52 138
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OR Alternative calculation:
Calculation of overhead activity rates
Total
cost
Manufacturing driver Activity rate
overhead cost (see per cost
Activity Cost driver R above) driver R
① ② ①/②
Crushing and extrusion of Crushing and extrusion
core compounds machine hours 5 808,00 484 12,00
Adding glue Tumbling machine hours 1 484,00 371 4,00
Fabric covering No of production runs 3 795,00 69 55,00
Branding of balls Branding machine hours 3 220,00 95 33,89
Quality inspections No of quality inspections 6 693,00 138 48,50
(b) The budgeted contribution per tennis ball for both Deuce and Ace product type for the
month ending June 2016 according to the direct costing system.
Deuce Ace
Description PER UNIT PER UNIT
R R
Selling price per ball (given) 40,00 35,00
Less: Direct material – rubber
(49 x 16c); (50 x 16c) 7,84 8,00
Less: Direct material - fabric cover
(9 x 8c); (6 x 8c) 0,72 0,48
Less: Direct labour
(18/60 x R20); (15/60 x R20) 6,00 5,00
Less: Variable overheads
(18/60 x R2); (15/60 x R2) 0,60 0,50
Budgeted contribution per tennis ball R 24,84 R 21,02
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(c) Sales price variance per product and in total for June 2016
(Actual selling price – standard (budgeted) selling price) x actual sales volume
Product Actual Standard Difference Actual sales Sales price

selling price selling price in unit price volume variance
R R R (units) R
Deuce 39 40 1 860 860 A
Ace 38 35 3 1 040 3 120 F
Total R 2 260 F
A = Adverse; F = Favourable
(d) The sales volume contribution variance per product and in total for June 2016.
Budgeted Actual Standard contribution Sales volume

sales sales (from (b)) variance
Product volume volume Difference R R
Deuce 800 860 60 24,84 1 490,40 F
Ace 1 000 1 040 40 21,02 840,80 F
Total R 2 331,20 F
(e) Sales mix variance per product and in total for June 2016.
Sales mix variance = (Actual sales quantity - actual sales quantity in budgeted
proportions) x Standard contribution per unit for each product.
Standard
Actual contribution Sales mix
sales Actual sales p/u from (b) variance
Product volume in budget proportions Difference R R
844
Deuce 860 (1900 x 8/18 = 844,40) 16 24,84 397,44 F
1 056
Ace 1 040 (1900 x 10/18 = 1 055,60) 16 21,02 336,32 A
Total 1 900 1 900 R 61,12 F
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(f) Discuss the significance of the sales mix variance and give two possible reasons for a
favourable sales mix variance.
Significance:
 The sales mix variance explains how much of sales volume variance is due to a change in the
sales mix.
 The sales mix variance is of significance only when there is an identifiable relationship
(proportions) between the products and these relationships are incorporated into the planning
process.
 Where relationships between products are not expected, the mix variance does not provide
meaningful information, since it incorrectly suggests that a possible cause of the sales variance
arises from a change in the mix.
 Sales mix variances provide insight into market movements between Deuce and Ace products.
Possible reasons for a favourable sales mix variance: (2 marks available)

 Demand for the more profitable product (Deuce) being higher than anticipated.
 Increase in the production of the more profitable product (Deuce).
 Concentration of sales and marketing efforts (advertising) towards selling the more profitable
product (Deuce)
 Increase in the demand for the higher margin product (Deuce) (where demand is a limiting factor)
 Increase in the supply of the more profitable products due to for example addition to the production
capacity (where supply is a limiting factor)
 Decrease in demand or supply of the less profitable product (Ace)
(g) If direct labour hours for July 2016 is limited to 550 hours and it is the only expected
constraint, calculate how many Deuce and Ace tennis balls should be produced for July
2016 in order to maximise contribution for Tennis Ball Ltd. Round all your workings to
2 decimal places.
Details Deuce Ace

Contribution per tennis ball (given) R30,36 R27,62
0,3 hours 0,25 hours
Direct labour hours or minutes required per or or
tennis ball (18/60; 15/60) or (18 min; 15 min) 18 min 15 min
Contribution per direct labour hour R110,48 per
(R30,36/0,3; R27,62/0,25) R101,20 hour
Or per hour or
Contribution per direct labour minute or R1,84 per
(R30,36/18; R27,62/15) R1,69 per minute minute
Rank (according to contribution/direct labour hour) 2 1
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Direct labour available:

550 hours or 33 000 minutes
Direct labour hours needed for full production of 315 hours
Ace (1 260 balls x 0,25 hours per ball): or or
(1 260 balls x 15 minutes per ball): 18 900 min
Remainder available for production of 235 hours
Deuce (550 hours – 315 hours ) or or
(33 000 minutes – 18 900 minutes ) 14 100 min
No of Ace tennis balls to be produced:
(315/0,25 hours) or (18 900 / 15 min)
(full production) 1 260 balls
No of Deuce tennis balls to be produced: 783,3333333
(235/0,3 hours) or (14 100 / 18 min) or ≈783 balls
(h) Advise the production manager how to go about determining the optimum production
program if the Rubber raw material also becomes a scarce resource.
Linear programming is a mathematical technique that can be applied when more than one scarce
resource (being the direct labour hours and Rubber raw material) exist in order to determine the
optimum production program.
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4.10 iNKUNZI TYRES (PTY) LTD
(a) Budgeted selling price per unit of BB tyre for the 2017 financial year based on the CVP
analysis report as presented by the CFO on 1 April 2016.
Details Calculations Amount (R)

Profit (given) 320 000 A
Direct raw material R150 x 5 000 750 000 B
Direct labour R75 x 5 000 375 000 C
Variable manufacturing overheads R112,50 x 5 000 562 500 D
Fixed manufacturing overheads R300 x 6 000 1 800 000 E
Selling and administrative cost 562 500
- Variable R112,50 x 40% x 5 000 225 000 F
- Fixed R112,50 x 60% x 5 000 337 500 G
Therefore CVP sales value (A+B+C+D+E+F+G) R4 370 000

Budgeted selling price per unit (R4 370 000/5 000) R 874
(b) Briefly explain the difference between break-even point and margin of safety.
Break-even point is:
 that level of quantities where the entity will start making profit, sometimes referred to a
point where the entity neither makes a profit nor a loss.
 that is, a point where contribution made covers all the fixed cost. Because fixed cost do
not vary with sales volumes as does the variable cost, break-even analysis is therefore
based on the entity’s ability to match the fixed cost OR ability to match the cost that do
not change with the sales volume, that is fixed cost.
 Break-even formula = Total Fixed cost/contribution per unit.
Margin of safety (MOS) is:
 Margin of safety is the amount of sales over a company’s break-even point OR indicates
the amount of sales a company can lose before it actually stops to make a profit.
 Margin of safety formula = (Expected sales less break-even sale)/Expected sales
or = Expected sales unit less break even units
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(c) Budgeted break-even sales units for the 2017 financial year based on the CVP analysis
report as presented by the CFO on 1 April 2016.
Formula = Fixed Cost/Contribution per unit
Details Calculations Amount (R)

Selling price per unit Refer to (a) above R874 A
Less Variable cost per unit R382,50
 Direct raw material cost Given R150 B
 Direct labour cost Given R75 C
 Variable manufacturing Given R112,50 D
overheads
 Variable selling and admin cost R112,50 x 40% R45 E
Therefore Contribution per unit A - (B+C+D+E) R491,50 F
Total Fixed cost R1 800 000 + R337 500 R2 137 500 G
Therefore break-even units (R2 137 500/R491,50) 4 349
(d) Actual Income Statement according to the Absorption costing method
Details Income Statement

Period 1 Period 2
R R
Sales  2 042 500 2 042 500
Less Cost of sales (1 490 312) (1 514 063)
Opening inventory  295 000 812 813
Cost of production  2 008 125 1 275 000
Less Closing inventory  (812 813) (573 750)
Over recovery  45 000
Under recovery  (300 000)
Gross profit 597 188 228 437
Selling & administrative costs (275 625) (275 625)
- variable  106 875 106 875
- fixed  168 750 168 750
Net profit(loss) R321 563 (R47 188)
Calculations:
 R2 042 500 = R860 (given) x 2 375 (given)
 R295 000 = R590 [R300(given) + R290(given)] x 500
 R812 813 = R637,50 x 1 275
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 Cost of production:
Item Period 1 Period 2
Calculations R Calculations R
Direct Material 3 150 x R150(a) 472 500 2 000 x R150(a) 300 000
Direct Labour 3 150 x R75(a) 236 250 2 000 x R75(a) 150 000
Variable manufacturing 3 150 x R112,50(a) 354 375 2 000 x R112,50(a) 225 000
overheads
Fixed manufacturing 3 150 x R300(a) 945 000 2 000 x R300(a) 600 000
overheads
Total 2 008 125 1 275 000
 R812 813 = R637,50 x 1 275; R573 750 = R637,50 x 900

 R106 875 = R45,00 (R112,50 x 40%) x 2 375
 R168 750 = R67,50 (R112,50 x 60%) x 2 500 (5 000/2)
 Fixed Overheads over/(under) recovery calculations:
Details Calculations Amount

Period 1 Period 2 Period 1 Period 2
Normal capacity 6 000/2 = 3 000 6 000/2 = 3 000 3 000 3 000
Production units given given 3 150 2 000
FO charged 3 000 x R300(given) 3 000xR300(given) 900 000 A 900 000

FO absorbed 3 150 x R300(given) 2 000xR300(given) 945 000 B 600 000
Over(under) recover (B less A) R45 000 (R300 000)
(e) Actual variable costing income statement for Period 1
Details Calculations/Ref Period 1

R
Sales 2 375 (given) x R860 (given) 2 042 500
Less variable cost of sales (782 812)
Opening inventory 500 (given) x R300 (given) 150 000
Cost of production 3 150 (given) x R337,50 1 063 125
Closing inventory 1 275 (given) x R337,50 (430 313)
Less variable selling & admin [2 375 (given) x R45 ] (106 875)
Contribution 1 152 813
Less Fixed cost (1 068 750)
- manufacturing overheads [(3 000 x R300(given)] (900 000)
- selling and admin cost [2 500 x R67,50] (168 750)
Net profit R84 063
 Variable manufacturing cost per unit: R150 +R75 +R112,50 = R337,50
 Refer to related calculation in question (a) above.
 Refer to calculation  in question (d) above.
 Refer to calculation  in question (d) above.
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(f) Period 1 profit reconciliation and explanation between absorption and variable costing
system
Details Calculations/Ref. Period 1

R
Absorption profit period 1 From question (d) 321 563
Opening inventory 500 x R290 (given) 145 000
Closing inventory 1 275 x R300 (given) (382 500)
Variable profit period 1 From question (e) R84 063
The difference between variable and absorption costing will always the net change in inventory valued
at the fixed manufacturing overhead absorption rate of the related period.
(g) Tyre levy/tax implications (3 marks available)
1. The proposed tyre levy of R2,30 per kg is another form of an indirect taxation.
2. It will therefore be treated the same way as VAT is currently being treated.
3. Because each BB weighs 5kg, the unit selling price will be increased by R11,50 (that is R2,30 x
5kg’s).
4. It should however be noted the additional R11,50 (“additional revenue”) per each unit of BB does
not accrue to i-Nkunzi but accrues to the Republic of South Africa through the South African
Revenue Services (SARS).
5. i-Nkunzi will thus only be acting as a tax collecting agency on behalf of the South African
Revenue Services (SARS).
6. Therefore each R11,50 collected for each tyre sold will be paid over to SARS on terms to be
determined by SARS.
7. In summary, i-Nkunzi financial accounts will not be impacted by the proposed tyre levy because
the “additional cash” to be collected will not be for the benefit of i-Nkunzi and it will only be acting as
a conduit.
8. Increased selling price could lead to loss of competitive advantage in the tyre market.
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4.11 BUMBULO MILLING (PTY) LTD
(a) Briefly discuss the characteristics, classification and the treatment of product Chaff in the
management accounting records of Bumbulo Milling (Pty) Ltd.
 Chaff emerges incidentally from the production of Maize meal and Chop.
 The company’s continued operation is not dependent on the production of Chaff.
 The sales value of Chaff is relatively immaterial (minor) compared to Maize meal and Chop.
 Chaff can be classified and treated as a by-product in the management accounting records.
 The net proceeds from the sales of the Chaff should be used to reduce the total joint costs
before they are allocated to joint products.
(b) Prepare the actual marginal income statement of Bumbulo (Pty) Ltd for the month ended 31
May 2017. Joint costs are apportioned to joint products on the basis of net realisable value.
The total column is required. Show all your workings.
Details Maize Chop Total

R R R
Sales (R8 900 X 480) and (R6 900 X 280) 4 272 000 1 932 000 6 204 000
Less: Variable cost of sales 3 080 698 1 376 302 4 457 000
Joint costs  2 929 498 1 366 502 4 296 000
Grinding (R80 X 480) 38 400 0 38 400
Vitamins (R1 X 200g) x 480 ) 96 000 0 96 000
Packaging (R20 X 480) and (R20 X 280) 9 600 5 600 15 200
Selling costs (R15 X 480) and (R15 X 280) 7 200 4 200 11 400
Contribution 1 191 302 555 698 1 747 000
Less: Fixed costs 220 000
Selling and administration costs 220 000
Net profit R 1 527 000
 Joint production costs R

Maize price per ton (R4 900 X 800) 3 920 000
Delivery cost per ton (R 100 X 800) 80 000
Offloading and pre-cleaning (R 80 X 800) 64 000
Water and electricity (R 150 X 800) 120 000
Processing and grading (R 60 X 800) 48 000
Direct labour cost (R 100 X 800) 80 000
Total joint cost before net proceeds from the by-product 4 312 000
Less: Net sales value of by-product (R20 000 – R4 000) 16 000
(R500 X 40) - (R100 X 40) = R 16 000
Total joint costs to be allocated R4 296 000
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 Net realisable value of the joint products
Details Maize Chop
R R
Sales  4 272 000 1 932 000
Less: Further processing costs 151 200 9 800
Grinding (R80 X 480) 38 400 0
Vitamins (R1 X 200g x 480 ) 96 000 0
Packaging (R20 X 480) and (R20 X 280) 9 600 5 600
Selling costs (R15 X 480) and (R15 X 280) 7 200 4 200
Net realisable value R 4 120 800 R 1 922 200
Total net realisable value (R4 120 800 + R1 922 200) = R6 043 000
Allocation
Maize ((R4 120 800 / R6 043 000) X R4 296 000)) R2 929 498
Chop ((R1 922 200 / R6 043 000)) X R4 296 000)) R1 366 502
(c) On the basis of return on investment determine if the animal feed processing plant manager
will receive a bonus or not. Show all your workings on an annual basis.
Calculation of controllable income R

Sales ((150 X R9 900) X 12)) 17 820 000
Less: Controllable costs 16 153 000
Depreciation of Machinery (R7 200 000/ 10 years) 720 000
Plant Manager Salary 550 000
Animal feed specialist 300 000
Depreciation on truck (R350 000/ 5 years) X 60% 42 000
Purchase price of chop ((150 X R6 900) X12)) 12 420 000
Additional material cost ((150 X R300) X12)) 540 000
Employees ((3 X R6 500) X12)) 234 000
Variable manufacturing overheads ((150 X R400) X12)) 720 000
Fixed manufacturing overheads (R50 000 X12) 600 000
Finance costs Not controllable 0
Selling costs ((150 X R15) X12)) 27 000
Controllable income R1 667 000
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Calculation of controllable investment R
Processing machinery 7 200 000

Depreciation – Processing machinery (720 000)
Delivery truck R350 000 x 60% 210 000
Depreciation – Delivery truck (42 000)
Controllable investment R 6 648 000
The return on investment of processing plant:
Formula = Controllable profit / Controllable investment

= R1 667 000 / R6 648 000
= 25,08%
Conclusion
The return on investment of 25,08% is higher than the target of 20%. Therefore, the animal feed
processing plant manager will receive a bonus.
(d) Based on Bumbulo (Pty) Ltd’s entire operational activities and its management structure
briefly discuss whether or not you consider return on investment to be a fair tool of
performance measurement.
 The plant managers are fully responsible for the operations of the plants. This means that
they have full control over the controllable income, costs and investments in their respective
plants.
 Return on investment is a fair performance measurement tool as the managers fully control
the operating activities of their respective plants.
 Return on investment can encourage plant managers to make dysfunctional decisions.
Plant managers may decline investment opportunities with ROI, which is lower than their current
ROI, even if it may be more than the company’s target ROI.
 It is always better to have multiple performance measures.
 Return on investment does not consider qualitative factors.
 ROI is a relative measure (% return). This % return makes it easier to compare the divisions to
each other as well as to other companies with similar businesses.
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(e) List the purposes of a transfer pricing system with reference to Bumbulo (Pty) Ltd.
 To provide information that motivates divisional managers to make good economic

decisions. (or prevent dysfunctional decision making) The transfer pricing system will
encourage the miller and animal processing plant manager to make decisions which will benefit
the company as a whole and not only their respective plants and can therefore lead to goal
congruence.
 To provide information that is useful for evaluating the managerial and economic
performance of the divisions and/or the divisional managers. Given that the return on
investment is the performance measurement tool in place, each manager’s performance will be
assessed based on what they have control over.
 To ensure that divisional autonomy is not undermined. The miller and animal feed plant
manager are fully responsible for their operations, and make all the daily operational decisions.
 To intentionally move profits between divisions or locations. Profits will be moved between
the mill site and processing plant, as chop will be transferred resulting in transferred profits to
the animal feed processing plant.
 To make the managers of the divisions aware of the value of the goods transferred between
the divisions.
(f) Briefly discuss the possible implications of the proposed transfer pricing system on the
current performance measurement system of Bumbulo (Pty) Ltd
 Return on investment is calculated based on controllable profit of the Mill manager and the
Processing plant manager. The introduction of the transfer pricing system will affect the
controllable profit of both managers.
 The manager whose controllable profit will be negatively affected by the introduction of the
proposed transfer pricing system will be reluctant to agree to a transfer pricing system.
 The animal processing plant will have a monthly capacity of 150 tons; this will result in the milling
site having to sacrifice 150 production and sales units. The Milling site will require to be
compensated for lost contribution on the 150 tons.
 The introduction of the proposed transfer pricing system may result in conflict of interests
between the Mill manager and the Processing plant manager due to the current performance
measurement system.
 However, the overall company financial objectives will have to be taken into consideration
on the proposed transfer pricing system visions to ensure goal congruence within the
company.
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4.12 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD
(a) Calculate and allocate the budgeted joint cost to product Cl2 and product NaOH for May
2017 if Normal Division uses the physical measures method to allocate joint cost.
As a regular market exists, the joint cost for the period will be reduced (credited) by the total NRV
of the production of the by-product in the period concerned.
Calculation of joint cost:

R480 000 (given) – R130 900  = R349 100
 Net-proceeds from the by-product:

(R8,85 x 17 000kg) – (R1,15 x 17 000kg)
= R150 450 – R19 550
= R130 900
Joint cost allocated between the joint products based on physical measures:
Cl2 = 607 000kg/(607 000 + 684 000)kg x R349 100

= 607 000kg/1 291 000kg x R349 100
= R164 139,19
NaOH = 684 000kg/(607 000 + 684 000)kg x R349 100

= 684 000kg/1 291 000kg x R349 100
= R184 960,81
(b) Determine whether the product Cl2 and product NaOH should be sold to the external market
by the Normal Division at split-off point or further processed into products SCC and TSSH
in Extraordinary Division and then sold to the external market.
Product Incremental income

SCC Value after further processing: R
(607 000 x 0,90) x R5 2 731 500
Value at split-off point:
607 000 x R2,24 1 359 680
1 371 820
TSSH Value after further processing: R
(684 000 x 0,90) x R8 4 924 800
Value at split-off point:
684 000 x R2,20 1 504 800
3 420 000
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Product Incremental costs
SCC Further processing costs: R
(607 000 x 0,90) x R0,75 409 725
TSSH Further processing costs: R

(684 000 x 0,90) x R2,80 1 723 680
Product Conclusion on further processing or not

SCC Difference between incremental income and cost:
R1 371 820 – R409 725 = R 962 095
Conclusion: Process product Cl2 further into product SCC

TSSH Difference between incremental income and cost:
R3 420 000– R1 723 680 = R1 696 320
Conclusion: Process product NaOH further into product TSSH
(c) Calculate the sales price variance per product and in total for May 2017.
(Actual selling price – standard (budgeted) selling price) x actual sales volume
Product Actual Standard Difference Actual sales Sales price

selling price selling price in unit price volume variance
R R R (units) R
SCC 4,85 5,00 (0,15) 558 500 83 775 A
TSSH 8,04 8,00 0,04 610 750 24 430 F
Total R 59 345 A
A = Adverse; F = Favourable
(d) Provide two possible reasons for a favourable sales price variance.
 Decrease in the number of competitors in the market.

 Better marketing and aggressive sales campaign.
 Market prices increasing (price increase by competitors), followed by a price increase by
Extraordinary Division.
 Improved product differentiation and market segmentation allowing for sales price increases
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(e) Calculate the sales volume contribution variance per product and in total for May 2017.
Product Budgeted Actual Diffe- Standard contribution Sales

sales sales rence volume
volume volume R variance
R
SCC 546 300 558 500 12 200 R5 – R0,75 – R2,24 = R2,01 24 522 F
TSSH 615 600 610 750 (4 850) R8 – R2,80 – R2,20 = R3,00 14 550 A
Total R 9 972 F
(f) Calculate the idle time variance for product TSSH for May 2017.
Idle time variance

= (actual productive time – standard work time) x standard work rate
= (4 110 560  – 4 021 200 ) minutes x R0,20/minute 
= 89 360 minutes x R0, 20/minute
= R17 872 F
Calculations:
 Actual productive time = 4 468 000 clock minutes – 357 440 minutes or
= 4 110 560 work minutes
Standard work time = actual clock time x (1 – allowed idle time %)

= 4 468 000 clock minutes x 90%
= 4 021 200 minutes
 Standard work hour rate:
Standard clock minutes per unit of TSSH = 8 clock minutes (given)
Standard work minutes per unit of TSSH = 8 clock minutes x (1-10%)
= 7,20 work minutes
Standard clock direct labour cost per unit of TSSH (given) = R1,44 per unit
How many units can be manufactured per clock hour = 60 min/8 clock min per unit = 7,5 units
Standard labour cost for clock time per clock hour = R10,80 (7,5 units x R1,44 per unit)
Standard labour cost per unit of TSSH = R10,80/0,9 = R12 per work hour
= R12/60 = R0,20 per work minute
Alternatively:
Alternatively = (allowed idle time – actual idle time) x standard work rate
= (446 800  – 357 440 ) minutes x R0,20/minute 
= 89 360 minutes x R0,20/minute
= R17 872 F
The Actual productive time was 8% less than actual time clocked.
 Allowed idle time = actual clock time x allowed idle time %
= 446 800 clock minutes
 Actual idle time = R6 478 600/R1.45 = 4 468 000
= 357 440 minutes
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(g) Calculate the maximum contribution for Extraordinary Division for June 2017.
Details SCC TSSH
Contribution per unit 5,50 8,96

Sales (R5 x 1,1; R8 x 1,12)
Less: Transfer costs 2,24 2,20
Less: Variable further processing cost
0,70 2,72
(R0,75 – R0,05; R2,80 – R0,08)
Contribution per unit 2,56 4,04
Direct labour minutes required per unit 5 min 8 min

Contribution per direct labour minute
(R2,56/5; R4,04/8) R0,512 per min R0,505 per min
Rank (ito contribution/direct labour time) 1 2
Sales demand (units): 600 930 584 820
Direct labour minutes required to meet the 600 930 x 5min 584 820 x 8min
expected sales demand (minutes): = 3 004 650 minutes
= 4 678 560 minutes
3 004 650 + 4 678 560 = 7 683 210min
OR alternatively:
Total direct labour minutes required: 3 004 650 + 4 678 560 = 7 683 210 minutes
Total direct labour minutes available: 100 000 hours x 60 min = 6 000 000 minutes
Shortage: 1 683 210 minutes
Allocation:
First allocate direct labour minutes needed for 600 930 x 5
SCC limited to the expected sales demand: = 3 004 650
minutes
6 000 000
– 3 004 650
Remainder available for TSSH: = 2 995 350 min
2 995 350/8
Optimum Number of units to be produced = 374 418,75
600 930 units
≈ 374 418 units
600 930 x 4,80 374 418 x 6,24
Budgeted optimum contribution: = R2 884 464 = R2 336 368,32
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(h) From the viewpoint of the manager of the Normal Division, briefly discuss the issues
arising from the suggested transfer price by Head Office.
 If Normal Division were to make the transfers as suggested, their divisional profits would be
much lower than if it were to sell both products externally at split-off point as an external market
exists for their products.
 Extraordinary Division’s profits, however, would be much higher.
 Normal Division would be able to recover its variable cost of producing product Cl2 and product
NaOH, however, there is no profit for Normal Division under the suggested policy.
 Normal Division would be reluctant to transfer any products to Division Extraordinary.
 Normal Division will not have the opportunity to recover any apportioned fixed costs since
marginal cost does not include these.
 Normal Division’s manager would feel extremely demotivated if forced to transfer the products
to Extraordinary Division as it would make performance look poorer.
 Due to the fact that actual cost would be used rather than standard cost, Normal Division would
have little incentive to control the variable costs properly as it would pass all of the costs on to
Extraordinary Division.
 One of the primary purposes of creating a divisional structure is that autonomy (decision-making
power) gets granted to the divisions. If Normal Division is forced to transfer their products to
Extraordinary Division, their autonomy would be lost.
 The imposed transfer will result in Normal Division losing its external market and/or customer
confidence.
(i) Calculate the maximum transfer price per kilogram of Cl2 at which Normal Division would
ideally want to transfer to Extraordinary Division if they were not forced to transfer their
products at actual variable cost.
Cl2 = R2,24/kg – R0,10/kg

= R2,14/kg
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4.13 ENERSOLAR (PTY) LTD
(a) Determine the total budgeted number of each panels required by the Solar Panel Division
for the month of March 2017 to break-even.
Formula = Total fixed costs/ Weighted contribution per unit

= (R10 000 000 + R125 000 + R261 000) / R15 140 
= R10 386 000 / R15 140 
= 685,99 batches
≈ 686 batches (Rounded up)
Break even units

Regular = 3 430 Panels (686 batches X 5 sales mix)
Super = 2 058 Panels (686 batches X 3 sales mix)
Hyper = 1 372 Panels (686 batches X 2 sales mix)
 Weighted contribution
Details Regular Super Hyper Workings
Contribution R1 954 R1 594 R294 A
Sales mix 5 3 2 B
Weighted contribution R9 770 R4 782 R588 AxB
Total weighted contribution (R9 770 + R4 782 + R588) = R15 140
 Contribution per unit

Details Regular Super Hyper
R R R
Sales 16 000 18 500 24 000
Less: Direct raw materials 5 800 6 500 10 000
Less: Direct labour 4 940 6 900 9 200
Less: Variable selling costs 6 6 6
Contribution per unit R1 954 R1 594 R294
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(b) Briefly discuss two (2) benefits to the Solar Panel Division of using the just-in-time (JIT)
direct raw materials procurement technique.
 Inventory holding costs. It reduces inventory-holding/storage costs due to the minimum

inventory volumes of steel and other components warehoused at any given point in time.
 Working capital/Opportunity costs. It reduces the working capital tied up (investment) in
the steel and components’ inventory
 Risks of holding inventory. It reduces the risks associated with holding inventory namely,
the risk of damaging inventory, theft and inventory becoming obsolete.
 Inventory handling costs. It reduces the inventory-handling costs, as suppliers are required to
perform stringent quality inspections on the steel and other components before delivery and
guaranteeing their quality.
 Supplier service. It improves the quality of supplier services by giving fewer suppliers long-
term contracts thereby ensuring that they can plan in accordance with the panels
manufacturing schedules.
 Set-up times. It reduces the set-up times for each production run for the panels.
 Discounts. Receiving quantity discounts based on the long-term orders placed with
suppliers.
 Saving in supplier management cost. Savings in negotiating time and paper work due to
working with fewer suppliers.
(c) Assume a budgeted controllable investment of R250 000 000 for March 2017. Calculate the
Solar Panel Division’s annualised budgeted return on investment (ROI) for March 2017
Details R
Net profit (Given) 4 754 000
Add back: Head office allocate cost 125 000
Monthly controllable profit (A) 4 879 000
Annualised controllable profit (A X 12) * 58 548 000
Controllable investment 250 000 000
ROI = Annualised controllable profit/ Controllable investment
= 58 548 000/ 250 000 000
ROI = 23,42%
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(d) Assume that Solar Panel Division implements the proposal to revise the allocation of the
fixed manufacturing overheads. Calculate the revised budgeted gross profit percentage of
each type of panel.
Details Regular Super Hyper Total
R’000 R’000 R’000 R’000
Gross profit (given) 4 800 1 800 (1 400) 5 200
Add back: Traditional FMO* 5 000 3 000 2 000 10 000
Less: ABC FMO*  1 939,2 2 591,55 5 469,25 10 000
Production runs 660 495 330 1 485
Machine hours 430 516 653,6 1 599,6
Purchase orders 414,45 276,3 138,15 828,9
Quality inspections 434,75 1 304,25 4 347,5 6 086,5
Revised gross profit 7 860,8 2 208,45 (4 869,25) 5 200
Revised GP %  9,83% 3,98% -10,14% 2,83%
*FMO = Fixed manufacturing overheads

*ABC = Activity-based costing
 ABC Fixed manufacturing overheads allocation

Activity driver Regular Super Hyper
Production runs R33 000 x 20 = R660k R33 000 x 15 = R495k R33 000 x 10 = R330k
Machine hours R344 x 1 250 = R430k R344 x 1 500 = R516k R344 x 1 900 =
R653,60k
Purchase orders R69 075 x 6 = R414,45k R69 075 x 4 = R69 075 x 2 = R138,15k
R276,30k
Quality R43 475 x 10 = R43 475 x 30 = R43 475 x 100 =
inspections R434,75k R1 304,25k R4 347,50k
 Gross profit percentage calculations

Regular (R7 860,80/ R80 000) = 9,83%
Super (R2 208,45/ R55 500) = 3,98%
Hyper (-R4 869,25))/ R48 000) = -10,14%
Activity driver Regular Super Hyper Total R’000 R

A B C D = A+B+C E F = E/D
Production runs (5 000/ 250); 20 15 10 45 1 485 33 000
(3 000/ 200 ); (2 000/ 200)
Machine hours ((15/ 60) X 1 250 1 500 1 900 4 650 1 599,6 344
5 000)); ((30/ 60) X 3 000));
((57/ 60) X 2 000))
Purchase orders  6 4 2 12 828,9 69 075
Quality inspections 10 30 100 140 6 086,5 43 475
(5 000/ 500); (3 000/100)
(2 000/20)
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 Purchase order schedule:
R 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 6
S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4
H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2
12
(e) Prepare the March 2017 actual income statement for product Hyper only based on the direct
costing method
Details Workings R
Sales (R48m/2 000 x 0.98) x 2 150 50 568 000
Less: Variable Cost of sales 52 964 700
Opening inventory (R1,715m - (R800 x 70) 1 659 000
Direct raw materials  (R10 500 x 2 200) 23 100 000
Direct labour  (R9 660 x 2 200) 21 252 000
Variable manufacturing costs  (R4 500 x 2 200) 9 900 000
Less: Closing inventory (R24 660 x 120) 2 959 200
Variable selling costs (R6 x 2 150) 12 900
Contribution -2 396 700
Less: Fixed costs 2 005 500
Manufacturing overheads 1 950 000
Salary costs 55 500
Net profit - 4 402 200
 Variable manufacturing costs

Details Budget per unit Actual per unit
Direct raw material R20m/2 000 R10 000 R10k x 1,05 R10 500
Direct labour R18,4m/2 000 R9 200 R9,2k x 1,05 R9 660
Variable manufacturing overheads R9,0m/2 000 R4 500 R4 500
Variable manufacturing cost R23 700 R24 660
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(f) Determine the total price to be quoted by the Energy Turbines for the twenty-five (25) high
tech energy turbines as per Agrie SA’s request.
Give a reason for inclusion or exclusion of all items. Show all your calculations.
No Item Reason R
(1) Component A - Relevant as the components are used regularly in 42 500,00

Replacement cost manufacturing. (Incremental cost)
(2) Component Z - Purchase Relevant as the component is required specifically for 30 000,00
price the proposal or not in inventory, (Incremental cost) (In
regular use)
(3) Machine - Variable running Relevant as it varies with the number of turbines 5 000,00
cost manufactured. (Incremental cost)
(3) Machine - Original cost of Irrelevant as a sunk/ past cost -

R8 Million
(3) Machine - Interest on the Irrelevant as it is a financing decision -
loan/ Loan
(3) Machine - Depreciation on Irrelevant as it is a non-cash item -
original cost
(4) Direct labour - Normal Relevant as it varies with the number of turbines 1 200,00
hours manufactured. (Incremental cost)
(4) Direct labour - Overtime Relevant as it will be worked due to turbines proposal. 864,00
hours (Incremental cost) Or 874,80
(5) Divisional manager trips Irrelevant as it has been incurred already. It is -
sunk/past cost
(6) Fixed manufacturing Irrelevant - will be incurred even if the proposal is not -
overheads taken. Sunk cost
Opportunity cost of 10 Relevant as the contribution will be lost on the regular 12 000,00
regular turbines market.
Total relevant costs 91 564,00

Add: Profit (R91 564 x 20%) 18 312,80
Total price 109 876,80
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Calculations
(1) Component A - Replacement cost (R1 700 X 25 turbines)
(2) Component Z - Purchase price ((R20 000/ 50) X 3 components X 25 turbines))
(3) Machine - Variable running cost ((40/ 60 minutes) X R300 X 25 turbines)
(3) Machine - Original cost of R8 Million
(3) Machine - Interest on the loan
Machine - Depreciation on original
(3) cost
(4) Direct labour - Normal hours ((16/ 60 minutes) X R180 X 25 turbines))
(4) Direct labour - Overtime hours ((16/ 60 minutes) X (R180 X 1,5) X 12 turbines))
(5) Divisional manager trips
(6) Fixed manufacturing overheads
Opportunity cost of 10 regular
turbines ((R3 800 - R2 600) X 10 turbines))
(g) Briefly discuss four (4) qualitative factors which the Energy Turbines division should
consider before accepting the proposal from Agrie SA.
 Customer goodwill. A loss of customer goodwill due to the sacrifice of ten (10) turbines sold
in the current existing market.
 Increased demand. The actual demand in the current existing market could be more than the
expected demand and this can result in lost sales from regular customers.
 Credit profile. The ability of Agrie SA to pay for the turbines as the agricultural sector has
suffered from a persistent drought over the last few years, and this could have resulted in cash
flow difficulties.
 Future orders: The possibility of getting similar orders from Agrie SA in the future as there is
an increased emphasis on renewable energy in the agricultural sector due to carbon emissions.
 Employee morale. The morale of the manufacturing employees regarding working overtime
in order to make the deadline for the proposal.
 Contractual obligations. The consequences if Enersolar do not meet the contractual
implications as contained in the contract. ( i.e. penalties, etc)
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4.14 PEARS LTD
(a) Calculate the actual closing inventory as at 31 August 2017 by completing the table below:
Details DPM DPT

units units
Sales (given) 16 800 11 000
Closing inventory 31 August 2017 750 1 000
Units required 17 550 12 000
Opening inventory 01 September 2016 550 1 200
Units produced 17 000 10 800
 DPM: 20 000 x 85% = 17 000; DPT: 12 000 x 90% = 10 800
(b) Briefly discuss four (4) reasons as to why would Pears use an absorption costing system for
external reporting, but also use direct costing system for internal reporting.
1. As a JSE listed company, Pears is required to prepare and present its annual financial statement
in terms of IFRS (financial accounting standards) which requires that inventory should be valued
using the absorption costing method/system (IAS 2).
2. Absorption costing system is consistent with the decision-usefulness requirement of the financial
statements. It would therefore be beneficial to the external users/investors/potential investors
wishing to make economic, financial or investment decision about Pears.
3. Proponents of variable costing claim that is enables for the presentation of more useful information
for decision-making.
4. Pears’ management will require management accounts on a weekly/monthly or quarterly intervals
to be used for decision-making and variable costing method will provide such information.
5. Variable costing does not capitalise fixed overheads in unsaleable inventories and thus reduce
the extent of investment in inventories.
6. Direct costing system is able to reflect how much each products contributes to cover the fixed
costs.
7. Pears’ management has thus concluded that variable costing provides the more meaningful
information in assessing the economic and managerial performance of divisional managers.
Available marks [7] limited to maximum marks [4]
Source: Drury 9th Edition, page 152/153 and 162/163
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(c) Prepare the actual income statement for Division PearMobile only for the 2017 financial
year based on the absorption costing system.
Details DPM
Ref
R’000
Sales 120 960 
Less: Manufacturing cost of sales (79 110)
Opening inventory 2 475

Production (R56 763k + R23 409k) 80 172 
Less: Closing inventory 3 537 
Less Fixed overhead under recovery (4 131) 
Gross profit 37 719

Less: selling and administration cost (1 181,60)
Variable 201,60 
Fixed 980 given
Less: Other expenses (28 000)
Fine – Competition commission 24 000 

Audit fees 250 given
Legal fees 3 750 
Profit before tax 8 537,40
16 800 x R7 200 = R120 960k

 17 000 x R4 716(R3 339 + R1 377) = R80 172k
 [(R4 500 x 70% = R3 150 x 1.06= R3 339)+(R4 500 x 30% = R1 350 x 1.02)= R1 377)]
 (R2 475k x 70%)/550 = R3 150 x 1.06 = R3 339); (R2 475k x 30%)/550=R1 350 x 1.02= R1 377
 R2 475 000/550 = R4 500
 750 x R4 716 (R3 339 + R1 377) = R3 537k
 [(20 000 x R1 377) = R27 540k ] less [(17 000 x R1 377) = R23 409 ] = R4 131k
 (20 000 less 17 000) x R1 377 = R4 131k
 16 800 x R12 = R201,6k
 R80 000k x 50% x 60% = R24 000k
 R7 500/2 x 1 = R3 750k
 Refer to calculations in question (a) above
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(d) Based on the actual results, assume that the actual profit before tax and performance bonus
for the financial year ended 31 August 2017 is R7 800 000 for DPT.
(i) Calculate the actual residual income(RI) for DPT for the financial year ended 31
August 2017
Details DPT
R’000
Profit before tax (given) 7 800
Add back non-controllable expenses 20 000
Fine - competition commission 16 000

Audit fees 250
Legal fees 3 750
Less: cost of capital charge (22 000)
Residual income(RI) 5 800
Controllable investment 220 000
 R80 000k x 50% x 40% = R16 000k

 R220 000k(given) x 10,00% (10,50% less 0,50%) = R22 000k or
 (R220 000k(given) x 9,75% x 6/12) + (R220 000k(given) x 10% x 6/12) = R21 725k
(ii) Calculate the performance bonus, if any, that the head office will pay to DPT only for
the financial year ended 31 August 2017.
Details DPT
Controllable profit (see (d)(i)) R27 800 000
Controllable investment (given) R220 000 000
Return on investment 12,64%
Required ROI 11,50%
Conclusion: bonus requirement met because the actual
ROI of 12,64% is > than the required ROI of 11,50%
Bonus amount R1 886 500
 R27 800k/R220 000k = 12,64%

 11 000(given) above x R9 800(given) x 1,75% (given) = R1 886,5k
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(e) Calculate the budgeted margin of safety percentage for each of the three products for the
financial year ending 31 August 2018.
Details DPM DPT DPW

Expected demand and sales 18 000 12 000 3 000
Sales mix (alternatives in brackets) 18 (6) 12 (4) 3 (1)
Sales mix (alternative) 54,55% 36,36% 9,09%
Sales R7 800 R10 400 R4 700
Less: Variable manufacturing cost R4 950 R8 100 R3 200
Less: Variable selling cost R14 R16 R5
Contribution per unit R2 836 R2 284 R1 495

Weighted contribution (WC)  R17 016 R9 136 R1 495
WC Alternative mix (18,12,3) R51 048 R27 408 R4 485
Weighted contribution per batch R27 647
Fixed cost R58 850 000
Break even sales in batches R58 850 000/R27 647 = 2 128,622
Rounded batches 2 129
Break even units 12 774 8 516 2 129
Expected break even value R99 637,2k R88 566,4k R10 006,3k
Expected sales  R140 400k R124 800k R14 100k
Margin of safety percentage 29,03% 29,03% 29,03%
 DPM: R2 838 x 6 = R17 016; DPT: R2 284 x 4 = R9 136; DPW: R1 495 x 1 = R1 495
 R17 016 + R9 136 + R1 495 = R27 647
 R58 850 000
 DPM: 2 129 x 6 = 12 774; DPT: 2 129 x 4 = 8 516; DPW: 2 129 x 1 = 2 129
 DPM: 12 774 x R7 800 = R99 637,2k; DPT: 8 516 x 10 400 = R88 566,4k; DPW: 2 129 x R4 700
= R10 006,3k
 DPM: 18 000 x R7 800 = R140 400k; DPT: 12 000 x 10 400 = R124 800k; DPW: 3 000 x R4 700
= R14 100k
 Margin of safety (Rand values alternative)
DPM: (R140 400k – R99 637,2k)/R140 400k; DPT: (R124 800k – R88 566,4k)/R124 800k
DPW: (R14 100k – R10 006,3k)/ R14 100k
 Margin of safety ( units values alternative)
DPM:(18 000 – 12 774/18 000); DPT: (12 000 – 8 516/12 000); DPW: (3 000 – 2 129k/3 000k)
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(f) Optimum number of products that can be available for sale based on the 31Aug2018 budget
Details PM PT PW Total
Expected annual demand and sales 18 000 12 000 3 000
Testing time per unit in minutes (mins) 15mins 30mins 12mins
Annual testing time need in minutes 270 000 360 000 36 000 666 000
Available testing time in minutes 600 600
Shortage (666 000 less 600 600) 65 400
ALTERNATIVE WORKINGS IN HOURS
Testing time per unit in hours (hrs) 0,25hrs 0,50hrs 0,20hrs
Annual testing time need in hours 4 500 6 000 600 11 100
Available testing time in hours 10 010
Shortage (10 010 less 11 100) -1 090
Because of the shortage, testing time is therefore a limiting factor
Contribution per unit [see (e) above] R2 836 R2 284 R1 495
Contribution per limiting factor (mins) 189,07 76,13 124,58
Contribution per limiting factor (hrs) 11 344 4 568 7 475
Ranking it terms of “CPLF” 1 3 2
CPLF = Contribution per limiting factor

 PM: 18 000 x 15 = 270 000; PT: 12 000 x 30 = 360 000; PW: 3 000 x 12 = 36 000
 PM: 18 000 x 0,25 = 4 500; PT: 12 000 x 0,50 = 6 000; PW: 3 000 x 0,20 = 600
 Available testing time
Available testers (given) 7

Working day in a year (given) 240
Less: compulsory leave days a year (given) (20)
Productive working days a year per staff 220
Productive working hours per day (given) 6,5
Total working hours per year (7 x 220 x 6,5) 10 010hrs
Total working minutes per year (10 010hrs x 60) 600 600mins
 PM: R2 836/15min = R189,07; PT: R2 284/30min = R76,13; PW: R1 495/12mim = R124,58

 PM: R2 836/0,25 = R11 344; PT: R2 284/0,50 = R4 568; PW: R1 495/0,20 = R7 475
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(f) Optimum number of products that can be available for sale based on the 31Aug2018 budget
Details PM PT PW
All PearMobiles units produced first 18 000
Total testing times used in minutes 270k
Total testing times used in hours 4,5k
Remaining mins after PM (600,6k-270k) 330 600

Remaining hrs after PM (10 010k-4,5k) 5 510
Number of PearWatches produced second 3 000
Minutes used for 3 000 PW units 36 000
Hours used for 3 000 PW units 600
Remaining mins (330 600 – 36 000) 294 600

Remaining hours (5 510k – 600) 4 910
PT to produce 294 600/30min 9 820
PT to produce 4 910/0,5hrs 9 820
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(g) List four (4) qualitative factors that Pears would have considered when the decision to centralise
all the testing functions at a Johannesburg warehouse was made:
1. The physical capacity/size of the warehouse to perform all the required testing functions.
2. Logistical arrangements of transporting all the products to the testing warehouse from their
respective manufacturing plants (Polokwane, Cape Town and Nelspruit).
3. Lead time consideration resulting from logistical arrangement.
4. Safety consideration regarding the transportation and the safekeeping of products to/at the
warehouse in Johannesburg.
5. Turn-around time regarding the delivering the products to the retail outlets from the testing
plant.
6. Regional labour unions consideration with respects to moving the testing functions to
Johannesburg after manufactured at different plants.
7. Inventory movement control and safety thereof.
8. The need to maintain the same level of quality testing for all the products.
9. The impact of the loss of testing function autonomy by the divisions.
10. Employment/hiring of temporary workers.
11. Availability of time needed to train the newly hired staff.
12. South African labour laws.
13. Labour court disputes and possible damage to reputation as a results of these disputes
14. Possibility of utilising the spare manufacturing capacity at the plants for the testing function.
15. Consideration of the increased workload due to increased product offering.
16. Willingness to work overtime by the testers.
17. Possible resignations from testers who are unable/unwilling to relocate.
18. Possible retrenchments of testers who are unable/unwilling to relocate.
19. Consider the ability of the testers to transport themselves and report to duty.
20. Possible negative impact on the morale of the remaining testers/staff mainly due to resignation
and/or retrenchments of their colleagues.
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4.15 DELIGHT SPREADS (PTY) LTD
(a) The budgeted number of units per spread that DS will need to produce and sell to
achieve the target profit of R350 000 for the 2017 financial year.
Formula = (Total fixed costs + Target profit)/ Weighted contribution per batch
= (R488 320  + R350 000)/R31,38
= 26 715,11 batches
≈ 26 716 batches
Units to reach target profit

MNS (Breakeven units): 26 716 batches x 1,5 sales mix = 40 074 units
MSS (Breakeven units): 26 716 batches x 1 sales mix = 26 716 units
 Common fixed costs R

Computer depreciation 16 000
Insurance premiums 46 000
Cleaning contract fee 50 000
Administrative employee costs 60 000
Sundry fixed costs 30 000
Total common fixed costs R488 320
 Contribution per batch (Weighted contribution)
Contribution MNS MSS

R R
Selling price per unit 55,00 60,00
Less: Direct raw material 27,25 25,75
Less: Direct labour 6,25 7,00
Less: Variable overheads 7,00 7,50
Less: Packaging material 1,20 1,20
Less: Selling costs 2,75 3,00

Sales mix 1,50 1,00
Weighted contribution R15,83 R15,55
Contribution per batch (R15,83 + R15,55) = R31,38
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(b) The optimum production mixture that will maximise DS’s budgeted profit for the 2017
financial year based on the impact of the Grahamstown Arts Festival market research.
Optimum production mixture based on the ranking

MNS units (60 000 minutes required) = 40 000
MSS units ((114 000 minutes – 60 000 minutes)/2,25 machine minutes per unit)) = 24 000
 Required machine minutes

MNS ((40 000 units x 250 g)/1 000 g))/10kg x 60 minutes = 60 000 minutes
MSS ((30 000 units x 250 g)/1 000 g))/10kg x 90 minutes = 67 500 minutes
Total required minutes 127 500 minutes
Available machine minutes (1 900 hours x 60 minutes) = 114 000 minutes
Shortage = 101 500 minutes
Therefore, machine minutes are a limiting factor.
 Contribution per limiting factor MNS MSS

Contribution per unit from (a) R10,55 R15,55
Machine minutes per unit 1,5 2,25
((60 minutes/(10kg x 4 units per kg)) and
((90 minutes/(10kg x 4 units per kg))
Contribution per limiting factor R7,03 R6,91
Ranking in terms of contribution per limiting factor 1 2
Calculations based on machine hours

This calculation can also be based on machine hours. The calculations will be as follow:
Optimum production mixture based on the ranking
MNS-production (1 000 hours required) = 40 000 units
MSS-production:
(1 900 hours – 1 000 hours) = 900 hours available
900 hours /1,5 hours per 10kg = 600 batches of 10kg
600 batches x (10kg x 4 units per kg) = 24 000 units
 Required machine hours

MNS ((40 000 units x 250 g)/1 000 g))/10kg x 1 hour = 1 000 hours
MSS ((30 000 units x 250 g)/1 000 g))/10kg x 1,5 hours = 1 125 hours
Total required hours 2 125 hours
Available machine hours = 1 900 hours
Shortage = 225 hours
Therefore, machine hours are a limiting factor.
 Contribution per limiting factor MNS MSS

Contribution per unit from (a) R10,55 R15,55
Machine hours per unit 0,0250 0,0375
(1 hours/(10kg x 4 units per kg)) and
(1,5hours/(10kg x 4 units per kg))
Contribution per limiting factor R422,00 R414,67
Ranking in terms of contribution per limiting factor 1 2
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(c) DS can improve on its budgeting process to closely align it with the actual results as follow:
 Sales and production per month should be adjusted to include seasonality, i.e. which months do
they produce and sell more or less.
 The selling prices should include the expected price increase due to inflation and market forces.
 Raw material prices should include the expected price increases due to market forces.
 Other expenses should be adjusted with inflation and/or other expected price increases.
 Periodically revise the master budget, for example revise the budget every quarter to incorporate
new information that did not exist at the initial budgeting process.
 Monitor the production and sales actual outcomes and respond to deviations from planned
outcomes.
 Allocate to each manager the responsibility to prepare the budget for their area of speciality, for
example Sibongile should be responsible for the marketing, procurement and finance budgeting,
while Parusha and Ester should be responsible for production budget.
(d) With reference to the 2017 financial year budget identify the type of costing system used by
DS and provide at least one reason for your answer
Absorption costing system.
 DS’s total manufacturing cost also includes fixed manufacturing overheads.

 DS’s budgeted income statement correctly refers and calculated “gross profit” instead of
“contribution” which is synonymous with a variable costing system.
(e) Variances for the quarter ending January 2017:
(iv) The macadamia nut chips and pieces purchase price variance for MNS.
= (Actual price per unit – Standard price per unit) x Actual quantity purchased
= [(R251 160/2 093 kg) – (R99/900 grams x 1 000) x 2 093 kg
= (R120 – R110) x 2 093 kg
= R20 930 Adverse
(v) Direct raw material mix variance for the MSS.
Direct raw material Actual Actual usage in Standard Variance

usage budgeted mix price R
Nut chips and pieces 1 224 1 260 R110 R3 960 F
Nut oil 144 180 R100 R3 600 F
Honey 432 360 R80 R5 760 A
1 800 1 800 R1 800 F
 700/1 000 x 1 800 = 1 260

 100/1 000 x 1 800 = 180
 200/1 000 x 1 800 = 360
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(vi) Variable overheads expenditure variance per product and in total
Products Standard Actual units Allowed Actual cost Variance

cost cost R
MNS R7,00 9 100 R63 700 R72 800 R9 100 A
MSS R7,50 7 200 R54 000 R50 400 R3 600 F
Total R5 500A
(f) Possible reasons for the macadamia nut chips and pieces purchase price variance.
 The severe drought negatively affected the supply of direct raw material and this in turn could
have resulted in unexpected increases in the purchase price.
 The budget process implemented by DS did not take into consideration inflation price
increases.
 Sibongile could have failed to negotiate better prices with the suppliers.
 Sibongile could have failed to negotiate and obtain a purchase discount.
 Careless purchasing could have resulted in higher purchase prices
 Higher quality macadamia nut chips and pieces were purchased resulting in a higher price
(g) The total budgeted fixed manufacturing overheads for both MNS and MSS for the 2017
financial year on an activity-based costing system.
MNS MSS Total

R R R
Direct raw material ordering  41 280 27 520 68 800
Quality inspections  24 869 27 631 52 500
Factory rental  74 259 57 757 132 016
Total R140 408 R112 908 R253 316
 (R68 800 x 3/5) and (R68 800 x 2/5)

 (R52 500 x 6 528/13 781) and (R52 500 x 7 253/13 781)
 (R165 020 x 45%) and (R165 020 x 35%)
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(h) Contrast between Activity-based costing (ABC) and traditional costing method.
Details Traditional costing method ABC

Allocation  Allocate fixed manufacturing  Allocate fixed manufacturing
basis overhead cost to products and/ or overhead cost to products and/ or
services on an arbitrary “one services on the basis of activities.
volume”-driven basis.  Multiple activity rates based on actual
 A single absorption rate which is operation capacity.
calculated based on budgeted
operation capacity.
Costs Inexpensive to implement and Costly to implement and maintain.
maintain.
Ease of use Straightforward to use and implement. Complex to use and implement due to a
diverse set of activities which must be
identified, recorded and assigned to
each product and/or service.
Decision Product decisions are not Improved decision making as a result of
making independent resulting in often a more accurate allocation of overhead
distorted decisions. costs.
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4.16 TEDDY FRENZY (PTY) LTD
(a) Variances
(i) Fake fur fabrics purchase price variance for FW teddy bears.
= (Actual purchase price – standard purchase price) x actual quantity purchased
= [(R24 200/1 100 metres) – R20/metre (given)] x 1 100 metres

= (R22/metre – R20/metre) x 1 100 metres
= R2/metre x 1 100 metres
= R2 200 Adverse
(ii) Synthetic leather purchase price variance for FW teddy bears.
= (Actual purchase price – standard purchase price) x actual quantity purchased
= [(R37 240/980 metres) – R8 per unit/0,2(given)] x 980 metres

= (R37 240/980 metres – R40/metre) x 980 metres
= R1 960 Favourable
(iii) Fibre material mix variance per type opf fibre and in Total for FW teddy bears.
Direct raw Actual Actual quantity Standard Variance

material usage issued in budgeted price R
proportions
Very fine fibre 475 490 R12,40/0,1 R1 860 F
= R124
Thick wavy fibre 1 275 1 242,50 R15,00/0,25 R900 A
= R60
Total 1 750 1 750 R960 F
 1 750 X 100/350 = 490kg

Becuause of rounding, the accceptable range is 490kg to 507,50kg
 1 750 X 250/350 = 1 275kg
Becuause of rounding, the accceptable range is 1 242,50kg to 1 260kg
(b) Two reasons for possible total favourable fibre material mix variance
 A favourable mix variance may be the result of substituting the expensive fibre (VFF) with
cheaper fibre (TWF).
 There was a move towards using more of the cheaper input (TWF).
 A larger proportion of cheaper materials (TWF) is included in the mixture.
 Using a different mix of materials than initially expected. If the total material mix variance was
favourable, it indicates better efficiency, however product quality might suffer as a result or
output may be reduced.
 A favourable material mix variance will be the result of a cheaper mix of raw material than the
standard suggested, perhaps due to a shortage of a certain material component.
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(c) Optimum number of orders of plastic buttons that BB has to place in order to meet the
annual expected demand for FW teddy bears.
Number of orders to be placed annually
Number of orders = Total annual demand 

EOQ 
= 120 000 
34 642 
= 3,464
≈ 4 orders per annum (round-up principle)
 Calculation of total annual demand = expected sales per month x 12 months

= 5 000 teddies x 12 = 60 000 x 2 buttons per teddy
= 120 000 buttons
 Calculation of EOQ
2xDxO
EOQ = √
H
2 x 120 00x R100

= √
0,02
24 000 000
= √ 0,02
= 34641,01615
≈ 34 642 units (Rounded-up)
(d) The actual total machine-related direct labour charge for BB for October 2017.
(4 880 teddies in Oct / [60/15 teddies per hour]) = 1 220 hours X R54 = R65 880
OR
Alternative: 4 880 teddies in Oct X R13,50 per teddy = R65 880
(e) The actual total direct labour charge for BB for October 2017 for the temporary sowing
workers.
2 440 work hours X R60 = R146 400
 4 880 / 2 teddy bears per work hour = 2 440

 R54,00 (clock hour rate given) / ( 1 – 0,1) = R60,00 p/hr
 10% Idle time allowance rate (given)
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(f) Based on the manufacturing overheads observations and using the high-low method
Total cost for November 2017:

Cost function: y = ax + b
= 2x + R10 220
= 2 X (5 000) + R10 220
= R20 220
a = variable manufacturing overhead per unit

a = R600/300 units
a = R2 p/u
High-low method: Quantity Cost

Highest observation: August 2017 5 180 units R20 580
Lowest observation: October 2017 4 880 units R19 980
Difference:  300 units  R 600
(g) Advise the COO of BB whether to purchase the high-quality stuffing machine. Consider
quantitative and qualitative factors. Limit your qualitative factors to two (2) reasons.
Ignore the time value of money.
Details Comprehensive approach* Incremental
Retain current Buy high- approach*
machine quality
(R) stuffing
machine
(R)
Relevant income 9 000 000 9 032 000 32 000
Sales 9 000 9 027 000 27 000

000
Current resale value 0 5 000 5 000
Less: relevant costs 132 000 144 000 12 000
Original cost price 0 80 000 80 000
Accumulated depreciation to date 0 0 0
Estimated variable operating cost 100 000 40 000 -60 000
Electricity and other fixed operating costs 32 000 24 000 -8 000
NET-REVELANT INCOME 8 868 000 8 888 000 20 000
 (0,10 x R9 050 000) + (0,4 x R9 030 000) + (0,5 x R9 020 000) = R9 027 000
 25 000 X 4 years = R100 000
 10 000 X 4 years = R40 000
 8 000 X 4 years = R32 000
 6 000 X 4 years = R24 000
 R9 000 000 – R132 000 = R8 868 000; R9 032 000 – R144 000 = R8 888 000
* Either one of these approaches (comprehensive or incremental) is acceptable.
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Conclusion:
Based on the above calculations, the new high-quality stuffing machine should be purchased
because it would lead to increased net-income of R20 000 (R8 888 000 less R8 868 000) over
the next/following four years.
Qualitative factors:
(i) The safety of the workers are improved if the new machine is purchased.
(ii) The working conditions should improve if the new machine is bought.
(iii) The new machine should lead to increased productivity of workers.
(iv) Improved health of employees due to less airborne fluff and thus reduced allergies and
reduced sick leave.
(v) Training might be required to master the operation of the new machine due to unfamiliarity
thereof.
(vi) Better staff morale due to improved working conditions, better health, etc.
(vii) Increased customer satisfaction as the cuddliness and thus quality of the teddy bears are
improved
(h) Assume that the contribution earned from sales to the external market at a selling price of
R150, is R56,50 per FW teddy bear. Ignoring the possible replacement of the stuffing
machine, calculate the minimum transfer price per FW teddy bear which BB would be
willing to accept if they are required to transfer 1 000 of these bears to EB.
Minimum transfer price = Total incremental costs + lost contribution from external sales
Total number of units to transfer
= [(R93,50 – R0,50 (avoidable variable cost) X 1 000) + (R56,50 x 400)] / 1 000

= [(R93 X 1 000) + R22 600] / 1 000
= R93 000 + R22 600 / 1 000
= R115 600 / 1 000
= R115,60 per teddy
 Variable cost = Selling price per teddy – contribution earned from external sales
= R150 (given) – R56,50 (given)
= R93,50
 Avoidable cost = R1,50 x 1/3 = R0,50
 Lost sales
= Units transferred less spare capacity
= 1 000 – [(5 600 (given) – 5 000 (given)]
= 400 units lost sales
(i) Categorise each of the quality cost incurred by EB into the correct quality category
Cost Category
Reworking costs Internal failure costs
Quality inspection costs Appraisal costs
Warranty repair costs External failure costs
Training costs Prevention costs
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(j) Identify the pricing policy that EB intends to apply with their new proposed range of GG
teddy bears and identify in which stage these teddy bears are in the product life cycle.
Supply a reason for each of your answers
Pricing policy: Price skimming

Reason: EB initially sets high prices and exploits the market for GG teddy bears.
Stage: Introduction phase

Reason: Management of TF (Pty) Ltd suggested that EB launches a new product range.
4.17 ZAMA-ZAMA (PTY) LTD
(a) Identify Z-Z’s current method of allocating the fixed manufacturing overheads and briefly
compare the identified method to the other (second) method.
 ZZ’s current method being used is the traditional costing system.

 The traditional costing system allocates fixed manufacturing overheads to cost objects on
an arbitrary basis. This is done based on a single allocation base, which is the normal
operating capacity.
 The second method, namely the activity-based costing system, allocates fixed
manufacturing overheads to cost objects based on cause-and-effect cost allocations. This is
done on the basis of activities consumed by each cost object.
(b) Calculate the total budgeted fixed manufacturing overheads allocated to the uranium and
clay products respectively for January 2017.
Budgeted allocated fixed manufacturing overheads

Uranium Clay
R R
Allocated overheads  270 000 216 000
 Separation of manufacturing overheads using the high-low method

Cost Tonnes
R
Highest observation 2 300 000 800
Lowest observation 1 610 000 500
Difference 690 000 300
Variable manufacturing overheads per unit (R690 000/300) R2 300
 Calculation of the fixed manufacturing overheads R
Total budgeted manufacturing overheads (given) 2 556 000

Variable manufacturing overheads (R2 300  x 900 tonnes) (2 070 000)
Budgeted fixed manufacturing overheads R 486 000
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 Allocation of fixed manufacturing overheads
Uranium Clay
Total monthly production capacity in tonnes 500 400
Budgeted absorption rate (R486 000 /900 tonnes) R 540 R 540
Allocation (R540 x 500) (R540 x 400) R270 000 R216 000
(c) Determine the budgeted residual income (RI) of the Open-cast mining division for the month
ending 31 January 2017. Ignore the internal transfer.
Formula = Controllable income less cost of capital of controllable investments

= R1 776 450 – R1 728 000
= R48 450
Uranium Clay Total

 Budgeted controllable income R R R
Sales 5 445 000. 3 430 000. 8 875 000.
Less: Cost of sales (6 468 550)
Direct labour 2 475 000. 1 568 000. 4 043 000.

Inspection and quality control 150 000. 112 000. 262 000.
Manufacturing overheads  1 420 000. 1 136 400. 2 556 000.
Less: Closing inventory  (40 450) (352 000) (392 450)
Gross profit R2 406 450.
Less: Administration and selling costs (630 000)

Administrative employees' salaries 120 000.
Allocated corporate expenses 0.
Selling and distribution costs 510 000.
Budgeted controllable profit R1 776 450
Uranium Clay
 Manufacturing overheads R R
Fixed overheads (from part (b)) 270 000 216 000
Variable overheads
(R2 300 (from part (b)) X 500; R2 300 x 400) 1 150 000 920 000
R1 420 000 R1 136 000
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 Closing inventory Uranium Clay
Uranium production cost
(R2 475 000 + R1 420 000 + R150 000) R4 045 000
Clay production cost
(R1 568 000 + R 1 136 000 + R112 000) R2 816 000
Budgeted production units 500 400
Production cost per unit
(R4 045 000/500) (R2 816 000/400) R8 090 R7 040
Closing inventory (R8 090 x 5) (R7 040 x 50) R40 450 R352 000
Uranium: 500 – 495 = 5 units; Clay: 400 – 350 = 50 units
 Cost of capital of controllable investments R
Budgeted controllable investment 14 400 000

Non-current assets 12 800 000
Long-term borrowings (not controllable) 0
Less: Trade payables (2 000 000)
Cost of capital of controllable investments

(R14 400 000 x 12%) R1 728 000
(d) Determine the budgeted return on investment (ROI) for the Open-cast mining division for
the month ending 31 January 2017. Ignore the internal transfer.
= Budgeted controllable profit/Budgeted controllable investment

= R1 776 450 (from part (c))/R14 400 000 (from part (c) )
= 12,34%
(e) Briefly discuss the purposes of a transfer pricing system within the context of Z-Z.
A transfer pricing system provides information that motivates divisional managers to make good
economic decisions. This happens when actions that divisional managers take to improve the
reported profit of their divisions also improve the profit of the company as a whole. The transfer
pricing system provides the management teams of Open-cast Mining and Ready Mixture with the
incremental costs of and revenues from the transfer of clay, which enables the management teams
to compare these with sales to external customers. This motivates managers to implement
decisions which will benefit Z-Z as a whole and not just the individual divisions.
A transfer pricing system provides useful information for evaluating the managerial and economic
performance of divisions. The appropriate implementation of a sound transfer pricing system
ensures that the profits reported by the Open-cast Mining Division and the Ready Mixture Division
do not result in misleading divisional and managerial performance measuring.
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A transfer pricing system ensures that divisional autonomy is not undermined. The autonomy of
the Open-cast Mining Division and the Ready Mixture Division should be maintained to ensure
that they both work towards the same overall objectives of Z-Z.
A transfer pricing system intentionally moves profits between divisions. A sound transfer pricing
system can ensure the moving of profits between the Open-cast Mining Division and the Ready
Mixture Division through the sale of clay.
(f) Calculate the budgeted minimum transfer price per tonne that the Open-cast mining division
will be willing to accept for the transfer of the tonnes required by the Ready mixture division.
Budgeted minimum transfer price per tonne R
Direct labour (R1 568 000/400) 3 920,00

Variable manufacturing overheads (from part (b)) 2 300,00
Inspection and quality control (R112 000/400) 280,00
Selling and distribution costs -
Unavoidable variable costs 6 500,00
Lost contribution  2 526,40
Minimum transfer price per tonne R9 026,40
 External contribution per tonne R

Selling price per tonne (R3 430 000/350) 9 800,00.
Less: Direct labour (R1 568 000/400) (3 920,00)
Less: Variable manufacturing overheads (from part (b)) (2 300,00)
Less: Inspection and quality control (R112 000/400) ( 280,00)
Less: Selling and distribution costs (R49 700/350) ( 142,00)
External contribution per tonne R3 158,00
 Lost contribution per tonne

Total budgeted monthly production 400
Less: External sales tonnes (350)
Tonnes available for transfer without lost contribution 50
Total tonnes required for transfer including 2% loss (245/0,98) 250

Total tonnes to be sacrificed (250 – 50) 200
Total lost contribution (R3 158,00  x 200) R631 600,00
Lost contribution per tonne (R631 600,00/250) R2 526,40
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(g) Calculate the budgeted maximum transfer price per tonne that the Ready mixture division
will be willing to pay for the tonnes transferred from the Open-cast mining division.
R
Current external purchase price per tonne 9 780,00
Add: Ordering cost per tonne 10,00
Maximum transfer price per tonne 9 790,00
(h) Calculate the total price that the Ready mixture division should charge for the 15 tonnes.
Item Reason Amount Amount for

per tonne 15 tonnes
Direct raw material Relevant. Incurred in the 9 780,00 146 700,00
(R2 445 000/250) production of tonnes.
Direct labour Relevant. Incurred in the 2 469,60 37 044,00
(R617 400/250) production of tonnes.
Variable manufacturing Relevant. Incurred in the 490,00 7 350,00
overheads production of tonnes.
(R122 500/250)
Fixed manufacturing Irrelevant. Incurred irrespective 0 0
overheads of the proposal.
Packaging costs Relevant. Incurred in the 310,00 4 650,00
(R75 950/245) production of tonnes.
Administrative employees’ Irrelevant. Incurred irrespective 0 0
salaries of the proposal.
Selling costs Relevant. Incurred to sell the 58,70 880,50
(R30 000 x 45%)/230 tonnes.
Delivery costs Irrelevant. These costs are for 0 0
Molefee’s account.
Total cost per tonne 13 108,30 196 624,50
Add: 10% profit 1 310,83 19 662,45
Maximum price per tonne 14 419,13
Total price 216 286,95
(R14 419,13 x 15)
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(i) Briefly discuss five (5) qualitative factors that the Ready mixture division should take into
consideration before accepting the proposal from Molefee (Pty) Ltd.
Credit profile: The credit profile of Molefee should be considered to assess their ability to pay for
the tonnes. Credit checks and references should be done on Molefee.
Current selling price: The impact of the price for these tonnes on the current selling price. Is
there a possibility that the current market selling price will drop as the result of this?
Possible future orders: Is there a possibility of similar orders coming through from Molefee in
the future? Is there is a possibility that Molefee could become a full-time customer?
Increase in demand: There is a possibility that the actual demand in the regular market will
exceed the budgeted sales. The company may incur losses as there would be no tonnes to sell.
Instability in the mining sector: The ability to produce and deliver the tonnes within the required
timeframes given the instability of the mining sector owing to strikes. Are there penalties
associated with late delivery of tonnes to Molefee?
4.18 RATA-TEA (PTY) LTD
(a) Calculate the following variances for the rooibos-ginger loose tea for the month of
June 2018:
(i) Sales price variance

= [Standard selling price less Actual selling price] X Actual sales volume
= [R40 – R256 200 / 6 100 units] x 6 100
= [R40 – R42] x 6 100
= R 12 200 F
(ii) Material mix variance

= [Actual quantity in standard mix less Actual quantity used] X Standard price.
Material Actual Actual Units Standard Mix variance
quantity(kg) in quantity difference price per
standard mix (kg) in kg
proportions actual
kg proportions
kg
Dried
rooibos
leaves 546 585 -39 R30 R 1 170 A
Dried
ginger 136,5 97,5 39 R200 R 7 800 F
682,5 kg 682,5 kg R 6 630 F
 682,5 x 80% = 546; 682,50 x 20% = 136,0

 R 172 800 / R30 = 5 760 kg 80%
R 288 000 / R 200 = 1 440 kg 20%
7 200 kg 100%
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(iii) Material yield variance
= [Input allowed for actual output less Actual quantity in standard mix] X Standard price
Material Input allowed Actual quantity Units Standard Yield variance

for actual in standard mix difference price per
output proportions kg kg
kg kg
Dried
rooibos
leaves 520 546 -26 R30 R 780 A
Dried
ginger 130 136,5 -6,50 R200 R 1 300 A
650 kg 682,5 kg R 2 080 A
 6 500 x 0,08kg = 520

 6 500 x 0,02kg = 130
(b) Briefly discuss two (2) reasons for a possible adverse material yield variance.
 As a result of standard procedures not followed during the production process the actual
quantity of rooibos leaves and dried ginger used were more than the standard.
 Due to the drought, the rooibos leaves and dried ginger may have been of a sub-standard quality
resulting in an adverse material yield variance.
 Inefficiencies in the production processes resulted in more rooibos leaves and dried ginger
used.
 Machine and/or human error when processing resulted in more rooibos leaves and dried ginger
used.
 Unskilled/inefficient workers resulting in the wastage of rooibos leaves and dried ginger used
[Drury 9th edition, page 478 and CIMA]
(c) Advice RT’s management if they should insource the production of the dried rooibos
leaves or should continue purchasing the dried rooibos leaves from external suppliers.
The calculations should be for a three-year period. Ignore time value of money
implications.
① Tonnes of green rooibos

(120 tonnes dried rooibos leaves /(1- 0,04) = 125 tonnes green rooibos) 125 tonnes = 125 000kg
② Dried rooibos leaves purchase price @ June 2018

R21 000 / 600kg = R 35 per kg
R35 per kg x 1 000 = R 35 000 per tonne
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Comprehensive approach Purchase Produce
120 tonne 120 tonne
R R
Seedlings - 600 000
Variable manufacturing overheads - 1 000 000
125 000kg ① x R8
Direct labour – Migrant workers - 375 000
Hours required 125 000kg ① / 10kg per hour
= 12 500 hours
12 500 hours x R30 per hour
Direct labour – Farm workers - 775 350
Y1: R240 000
Y2 : (240 000 x 1,075) = R258 000
Y3 : (258 000 x 1,075) = R277 350
Fixed manufacturing costs - 810 000
R270 000 x 3
Government grant - (1 100 000)
Farm equipment - 1 200 000
Distribution costs (local & international) - 0
Purchase price 5 097 400 -
Y1: [R35 000② x (1+0,1) ] x 40 tonne
= R1 540 000
Y2: R1 540 000 x 1,1 = R1 694 000
Y3: R1 694 000 x 1,1 = R1 863 400
Rental income (8 550 000)
Purchase
((1 000 hectares x 95%) x R 250 per
hectare)) x 36 months
Produce
((1 000 hectares x 85%) x R 250 per (7 650 000)
hectare) x 36 months
Total (R3 452 600) (R3 989 650)
Conclusion:
RT should produce the dried rooibos leaves themselves because the company will generate a higher
net income/ saving of R537 050 (R3 452 600 – R3 989 650) over the 3 year period under review.
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Alternative:
Incremental approach Produce

120 tonnes
R
Seedlings 600 000
Variable manufacturing overheads 1 000 000
125 000kg ① x R8
Direct labour – Migrant workers 375 000
Hours required 125 000kg ① / 10kg per hour = 12 500 hours
12 500 hours x R30 per hour
Direct labour – Farm workers 775 350
Y1: R240 000
Y2 : (240 000 x 1,075) = R258 000
Y3 : (258 000 x 1,075) = R277 350
Distribution costs (local & international) 0
Fixed manufacturing costs 810 000
R270 000 x 3
Government grant (1 100 000)
Farm equipment 1 200 000
Purchase price (5 097 400)
Y1: [R35 000② x (1+0,1) ] x 40 tonne
= R 1 540 000
Y2: R1 540 000 x 1,1 = R1 694 000
Y3: R1 694 000 x 1,1 = R1 863 400
Rental income – lost income 900 000
(100 hectares x R 250 per hectare) x 36 months
Total (R 537 050)
Conclusion:
RT should produce the dried rooibos leaves themselves because the company will generate a higher
net income/ saving of R537 050 over the 3 year period under review.
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(d) Identify and briefly discuss four (4) qualitative factors RT should consider when making
the decision to insource the production of the dried rooibos leaves.
 Drought/ Weather conditions: The impact of drought/weather conditions on RT’s capability to

produce the required 40 tonnes per year.
 Shortfall in dried rooibos leaves produce: What will the effect be if RT is unable to produce
the required 40 tonnes of dried rooibos leaves per year? Will they need to curtail their current
tea production and/or will they be able to purchase the shortfall from external producers?
 Relationships with current suppliers. What will the effect be on RT’s relationships with their
existing suppliers? Will they be able to purchase any shortfall dried rooibos leaves from them or
will these suppliers not be willing to sell to RT because of the cancelled contracts?
 Relationship with Ceder Conservation (Pty) Ltd (CC). Will CC be prepared to continue to
lease the remainder of the farm if the hectares available to them are reduced or will CC consider
moving their business to another farm?
 Contract breach – CC lease contract. Are there any legal implications that RT should take into
account if they breach the contract? Are they allowed to one-sidedly change the contract?
 Availability of migrant workers. RT may have challenges securing the services of migrant
workers during harvest time, because they might already be committed to work on other farms.
 New farm workers housing: Is there sufficient housing available for the four new farm
workers? If they do not qualify for the housing benefit, how will it affect their work moral?
 New farm workers becoming shareholders: Will the new farm workers also be eligible to
become shareholders in RT? If not, what will the impact be on their moral? If they are eligible
how will it affect the current farm workers?
 Grant from government: Are there any clauses or requirements that has to be met in order to
qualify for the grant?
 Quality of rooibos leaves produced: Will RT be able to produce the same or better quality
rooibos leaves than those purchased from their current suppliers? If not, the quality of their
finished tea products may be compromised and they may lose customers as a result.
[maximum 8 marks]
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(e) Write a report to RT’s owners regarding the long-run (long-term) price setting for the
rooibos-espresso capsules and the rooibos-ginger loose tea. Your report must:
(i) Identify if RT is a price setting or a price-taking organisation in relation to the rooibos-
espresso capsules. Provide a reason for your answer.
(ii) Identify if RT is a price setting or a price-taking organisation in relation to the rooibos-
ginger loose tea. Provide a reason for your answer.
(iii) Provide a brief discussion of the limitations of the cost-plus pricing method.
Present your report in the correct format, using appropriate headings.
REPORT TO THE OWNERS OF RATA TEA (PTY) LTD

TO: RataTea (Pty) Ltd Owners
Date: XX May 2018
RE: Long-term price setting for the rooibos-espresso capsules and the rooibos-ginger loose tea
From: Student
It gives me great please to report the following to you in response to your question about the long-
term price setting
(iv) Price-setting vs a price-taking organisation: Rooibos-espresso capsules
RT is a price-taking organization about the rooibos-espresso capsules.

These capsules are readily available at retailers at an average selling price of R50 and RT has little
influence over the price of these capsules.
There are a number of established capsule producers and the competition between these producers
will ensure that no individual market player can influence the price.
(v) Price-setting vs a price-taking organisation: Rooibos-ginger loose tea

RT is a price-setting organization about the rooibos-ginger loose tea.
RT is the only manufacturer and the market leader in the production of the rooibos-ginger loose tea.
(vi) Limitations of cost-plus pricing method

“Cost-plus pricing has three major limitations. First, demand is ignored.
Second, the approach requires that some assumption be made about future volume prior to ascertaining
the cost and calculating the cost-plus selling prices. This can lead to an increase in the derived cost-
plus selling price when demand is falling and vice-versa.
Third, there is no guarantee that total sales revenue will be in excess of total costs even when each
product is priced above ‘cost’”
Should you require further clarity, please do not hesitate to contact me
Regards;
Student
[Drury 9th edition, pages 246 - 247]
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(f) Calculate the target selling price per package for the rooibos-espresso capsules using
the targeted rate of return on investment approach.
R
Target mark-up (R600 000 x 10%) / 4 000 units 15
Cost per unit given 25
Target price R 40
(g) The financial manager has heard that some loose tea producers are using process
costing. She is refreshing her process costing knowledge and has asked you to explain
the circumstances in which the short-cut method can be used in drafting a quantity
statement.
The short-cut method can be used when:
All the units in the output column of the quantity statement have been subjected to
spillage or have passed the wastage point in this (current) period.
4.19 MUFHIRIFHIRI BEEF (PTY) LTD
(a) Calculate the annualised actual return on investment for the Feedlot Division:
Return on investment Controllable profit

Controllable investment
R1 676 400,00
R19 330 000
8,67%
 Controllable profit
Details Alternative 1 Alternative 2
Monthly Annual
R’000 R’000
Revenue R3 780 + R2 466 6 246 74 952
Less: controllable costs 6 106,30 73 275,60
cattle purchase cost 3 150 37 800
external variable selling costs 37,8 453,60
direct labourers 63 756
feeding costs 1 350 16 200
Inspection/vaccination costs 01May 31,5 378
Inspection/vaccination costs 31May 54 648
depreciation-holding pens 420 5 040
finance cost 0 0
fixed manufacturing overheads 1 000 12 000
allocated head office expenses 0 0
Controllable profit 139,70 1 676,40
Controllable profit annualised 1 676,40
 External sales: [(350kg + 50kg) X 270 (450 X 60%)] X R35 p/kg = R3,78m
 Internal sales: R13,7k X 180 (450 X 40%) = R2,466m
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 Number of cattle purchased and sold:
Details Maximum Current operating
operating capacity of
capacity 75%
Number of holding pens (given) 5 5
Holding capacity cattle per pen 120 90 (120 X 75%)
Total cattle bought and sold 600 (120 x 5) 450 (90 X 5)
 450 cattle x 350kg x R20 = R3 150k
 R3 780 x 1% (given) = R37,8k
 R140 (given) x 450 = R63k
 given
 (350kg x R0,2) x 450 = R31,50k; [(350kg + 50kg) x R0,3 x 450] = R54k
 (R25 200k/5)/12 = R420k
 Controllable investment
Details Calculations R’000
Holding pens R25,2m – (R5,040m x 3) 10 080
Trade receivables given 2 000
Cash and cash equivalents R12m – R3,150m) 8 850
Controllable assets 20 930
Less: controllable liabilities R1 600k + R0 1 600
Trade payable given 1 600
Long-term loan not controllable 0
Controllable investments R20 930k less R1 600k 19 330
 Refer to controllable profit calculation
(b) Transfer pricing

(i) Calculating the proposed minimum transfer price:
 Calculation of spare capacity and allocation of cattle to transfer

Transfer needed (given) 200
Less: excess/spare capacity (600 less 525) 75
maximum cattle holding/operating capacity 600
less: “assumed” external cattle sales (given) 525
Supplied from sacrificed external sales 125
Details Per unit calculations Per unit Total

R R’000
Cattle purchase cost R3 150k/450 7 000 3 150
External variable selling External sales only 0 0
Direct labourers R63k/450 140 63
Feeding costs R1 350k/450 3 000 1 350
vaccination costs R85,50k/450 190 85,5
Incremental costs 10 330 4 648,5
Total incremental cost R10 330 x 200 2 066
Plus: lost contribution 2 206,25 441,25
Total transfer costs R2 066k + R176,5k 2 507,25
Minimum transfer price 12 536,25 12 536,25
 Refer to controllable profit calculation in question (a) above.

Refer to calculation  in question (a) above.
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Calculation of lost contribution
Details Per cattle (R) Total transfer(R)
External sales value 14 000 1 750 000
Less: incremental costs (10 330) (1 291 250)
Less: external selling costs (140) (17 500)
Lost contribution 3 530 441 250
 R10 330 X 125(sacrificed external sale cattle) = R1 291 250

Therefore lost contribution per unit transferred = R441 250/200 = R2 206,25
R3 780 000/270(external sales) = R14 000 x 125 cattle = R1 750 000
R37 800/270 cattle = R140 x 125 cattle = R17 500
R10 330 (incremental costs) + R2 206,25 = R12 536,25
R 2 066 000 (R10 330 x 200) + R441 250 = R2 507 250
Total column alternative cross check: R2 507 250/200 cattle = R12 536,25 per cattle
(ii) Comment on Pradesh’s view about his proposed transfer price
Pradesh’s view that the minimum transfer price will guarantee the Feedlot Division a minimum transfer
price of between R14 000 and R14 500 per cattle is not correct. Based on the calculations in b(i) above,
the proposed minimum transfer price for May 2018 that the Feedlot division should expect is +/- R12
536,25 per cattle and not a price between the R14k and R14,5k ranges per cattle. In fact, the current
negotiated transfer price of R13 700 is putting the Feedlot Division in a better financial position than his
proposed transfer price. If Pradesh’s minimum transfer price proposal were to be implemented, the
Feedlot division could potentially lose +/- R1 163,75 (R13 700 less R12 536,25) per cattle transferred
to the Abattoir Division.
(c) Briefly discuss three qualitative factors considered (auction barn cattle buying vs. private
farmer cattle buying.
No. LISTING DISCUSSION

1. Registration with The fact that the auction barns are registered with the regulatory
regulatory authorities authorities (both the Department of Agriculture, Forestry &
Fisheries (DAFF) and the Agricultural Products Agents Council)
would provide customers/potential customers with some sense of
comfort knowing that they are be dealing with an organisation that
is accountable to key regulatory authorities within the South African
agricultural space.
2. Health and safety MfB’s beef is ultimately aimed for human consumption and
consideration therefore health and safety consideration must always be
considered in deciding where the livestock is procured. By virtue of
being registered with the regulatory authorities, the auction barns
are therefore formalized market place, and have an obligation to
adhere to the health and safety regulations as prescribed by the
formal institutions they are affiliated to, in this instance the DAFF
and APAC). Although they can, private cattle farmers have no
obligation to register with any regulatory institution and as such are
not bound to any health and safety regulations.
3. Livestock availability As a formalised market place, the auction barns will most likely
consideration have sufficient and adequate stock at all times, whereas the same
cannot be said about various suppliers located across different
regions.
4. Consideration of The auction barns will present a better opportunity to deal with
unscrupulous suppliers reputable suppliers and therefore minimise the risk of falling victims
to unscrupulous livestock suppliers
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No. LISTING DISCUSSION

5. Fraud consideration The company will also consider the need to minimize if not
eradicate possible fraud stemming from factors such as, but not
limited to:
(i) Buying stolen livestock.
(ii) Buying from fraudulent supplier(s).
(iii) Defrauded into buying lower Class grades fronted as Class B.
6. Livestock quality MfB only buys Class B cattle and their customers expect beef
quality that is synonymous with Class B cattle. By only buying from
the auction barns, the company can minimise the risk of
compromised beef quality. To preserve and maintain their business
reputation in the market place, it is to be expected that the auction
barns will exercise strict quality control measures.
7. Safe environment Personal and/or property safety should also be considered. In most
consideration cases, a formalized market place tend to priorities the personal and
property safety of the people/customers that frequent their
business establishment. The unfortunate reality is that the same
cannot always be said about private business dealings.
8. After sale consideration The auction barns are likely to offer a formalized after sale services
where MfB will always have an opportunity and/or a platform to
lodge customer complaint should the need arise.
9. Independent verification Unlike buying directly from private cattle farmers taking their word
of the claims made by about their product quality and/or customer service, the auction
supplier(s) barns will act as an independent and knowledgeable verification
agents of all supplier claims.
10. Consideration of wide Although only Class B cattle are bought should the division’s
variety of livestock procurement requirement change in future, MfB will have
immediate access to wide variety of livestock of different quality,
size, age etc. to choose from.
11. Possibility of expanding With various potential supplier(s) and/or customer(s) present at the
business network auction barns, the auction barns present easy and immediate
access to untapped markets for immediate or future considerations.
12. Inventory management Auction barns will provide MfB with some level of certainty and/or
proper control over inventory management, primarily relating to:
(i) On time delivery of stock
(ii) Lead-time
(iii) Continuous and real-time livestock growth monitoring. That is,
maintain a watch-list for cattle movement from lower grades
to Class B grades
13. Time consideration Consideration of timeous delivery of cattle to avoid stock outs,
production interruptions and minimize idle time.
14. Social and business MfB should consider the reputation of the private sellers, both
reputation of the private within the communities and the business spaces they operate. It
sellers in relation to the will be advisable not to engage with any seller(s) with tainted or bad
auction barns business and social reputation
15. Logistical consideration  Consideration should be given regarding how the
logistical/transportation arrangements would differ between the
two alternatives
 Consideration of the safety of in-transit cattle/inventory for each
of the two procurement alternative
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(d) Briefly discuss if the Feedlot Division can feasibly replace the EOQ technique with the Just-
In-Time (JIT) purchasing technique for the purchases of the cattle feed. Limit your
discussion to qualitative factors only.
The introduction of JIT in a feedlot operation is not feasible as cattle feed continuously
throughout the day and night. The required feed therefore needs to be readily available each
day and all the time.
JIT is based on the premise of minimising inventory (feed) holding, this approach will not fit into
the cattle holding and feeding environment where the holding of the feed (investment in
inventory) is critical for the day-to-day survival of the cattle
(e) Comment on whether the Abattoir Division will meet the projected net profit percentage
for the month of May 2018
Details Premium Standard Total

cuts cuts
R R R
Revenue 30 801 600 34 149 600 64 951 200
Gross profit 4 620 240 5 122 440 9 742 680
Cost of sales 26 181 360 29 027 160 55 208 520
Less other costs 254 520 200 000 454 520
further processing cost 90 000 100 000 190 000
Refrigerating costs 164 520 100 000 264 520
Allocated joint costs (balancing figure) 25 926 840 28 827 160 54 754 000
Less: other non-manufacturing costs 1 000 000 1 000 000 2 000 000
Variable (given) 900 000 800 000 1 700 000
Fixed (given) 100 000 200 000 300 000
Net profit before tax 3 620 240 4 122 440 7 742 680
Net profit percentage 11,75% 12,07% 11,92%
Comment:
At 11,75% and 12,07%, each of the Abattoir’s joint products, that is the Premium cuts and the
Standard cuts are expected to meet and exceed the projected net profit percentage of 10%
 4 185 (given) x 160kg (given) x R46 (given) = R30 801 600

 4 185 (given) x 192kg (given) x R42,50 (given) = R34 149 600
 R30 801 600 + R34 149 600 = R64 951 200
 R30 801 600 X 15% = R4 620 240
 R34 149 600 X 15% = R5 122 440
 R9 742 680 / R64 951 200 = 15%
 R64 951 200 less R54 754 000 less R190 000 less R264 520 = R9 742 680
 Calculation of the total joint costs
Purchases & abattoir holding-pen cost 56 000 000
Cattle slaughter processing costs 2 000 000
Total “gross” joint costs 58 000 000
Less: net proceeds from by product 3 246 000
Sales 4 185 x 44kg x R19,75 3 636 765
Less: further processing costs given 200 000
Less: cold storage costs given 130 400
Less: non-manufacturing costs given 60 365
Total “net” joint costs to be allocated R58m – R3,246m 54 754 000
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 R90 000 (given) + R100 000 (given) = R190 000

 R164 520 (given) + R100 000 (given) = R264 520
 R30 801 600 less R4 620 240 = R26 181 360
 R34 149 600 less R5 122 440 = R29 027 160
 R30 801 600 less R90 000 less R164 520 less R4 620 240 = R25 926 840
 R34 149 600 less R100 000 less R100 000 less R5 122 440 = R28 827 160
 R4 620 240 less R1 000 000 (R900k + R100k) = R3 620 240
 R5 122 440 less R1 000 000 (R800k + R200k) = R4 122 440
 R3 620 240 / R30 801 600 = 11,75%
 R4 122 440 / R34 149 600 = 12,07%
 R7 742 680 (R3 620 240 + R4 122 440) / R64 951 200 = 11,92%
(f) Calculate the proposed target mark-up amount per unit of the hide using the “target rate
of return on invested capital” approach
Target price mark-up amount =
Capital invested x required rate of return

Expected annual demand
R320 000 
1 320 
= R242,42
 R4 000 000 X 8% = R320 000
 Expected demand
Details calculations
Productive hours per day given 7
Annual work days given 220
Total annual productive hours 7 hours X 220 days 1 540
Standard process capacity 2kg per 40mins

Process capacity per hour 2kg / 40mins x 60mins 3kg
Annual process capacity in kg 3kg x 1 540 4 620
Hide weight per unit given 3,5 kg
Hides annual demand in units 4 620kg / 3,5kg 1 320
Alternative calculation
1 540 x 60mins ÷ 40mins = 2 310 hours

2 310 hours x 2kg ÷ 3,5kg = 1 320
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4.20 IMVULA (PTY) LTD
(a) Ignoring the possibility limitation of any manufacturing resource(s). Assist Ms Raindeer
with the calculation of the budgeted number of units for each product that Imvula must
sell in order to break even for the 2018 financial year.
Details Glossy (G) Fashion (F) Standard (S)

Budgeted sales 48 000 24 000 72 000
Sales mix 2 1 3
Gross profit R 90,00 R 125,00 R 70,00
Add back: Fixed manufacturing overheads R 20,00 R 30,00 R 10,00

Less: Variable selling cost  (R3,60) (R5,00) (R2,80)
Contribution per sales mix R212,80 R150,00 R231,60
Weighted contribution R594,40

Total fixed costs R6 280 000
Fixed manufacturing overheads R2 400 000
Fixed selling costs R1 000 000
Fixed non-manufacturing costs R2 880 000
Break even sales in batches R6 280 000/R594,40 = 10 565,28
Break even units 21 132 10 566 31 698
 G: 30min/60min x R40 = R20; F:45min/60min x R40 = R30; S: 15min/60min x R40 = R10

 G: R180 x 2% = R3,60; F:R250 x 2% = R5,00; S: R140 x 2% = R2,80
 G: R106,40 x 2 = R212,80; F: R150,00 x 1 = R150,00; S: R77,20 x 3 = R231,60
 R212,80 + R150,00 + R231,60 = R594,40
 (R20 x 48 000) + (R30 x 24 000) + (R10 x 72 000) = R2 400 000
 G: 10 566 x 2 = 21 132; F: 10 566 x 1 = 10 566; S: 10 566 x 3 = 31 698
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(b) Calculate the following standard costing variances for the month of May 2018:
i. Sales quantity variance per product.
Product Actual units Budgeted Diff. Std. gross Variance

in std. mix  units profit
Glossy 4 250 4 000 250 R 90 R 22 500 F
Fashion 2 125 2 000 125 R 125 R 15 625 F
Standard 6 375 6 000 375 R 70 R 26 250 F
Total 12 750 12 000 R64 375 F
 Actual sale units: 3 500 + 2 250 + 7 000 = 12 750
 G: 4/12 x 12 750 = 4 250; F: 2/12 x 12 750 = 2 125; S: 6/12 x 12 750 = 6 375
 G: 48000/12 = 4 000; F: 24000/12 = 2 000; S: 72000/12 = 6 000
ii. Fixed manufacturing overheads volume efficiency variance for product Fashion only.
Product Std. quantity Actual Difference Standard Variance

of input hours hours absorption
for actual rate
production
Fashion 1 350 1 500 (150) R 40 R6 000 A
 1 800 units x (45/60 minutes) = 1 350
(c) In responding to the findings of the market research, list and briefly discuss three (3)
social and environmental qualitative factors that Imvula should consider.
 Pollution: Imvula should consider their CO2 emissions (air pollution) OR their responsible
disposal of waste rubber OR limiting water pollution.
 Conservation: Imvula should consider responsible use of water OR the possibility of using
recycled rubber.
 Health issues: Imvula should consider how to minimise the health risks to employees working
at the plant with rubber due to their exposure to possible toxic materials (fumes, etc).
 Social responsible supplier: Imvula should consider the labour and human right practices of
Pemasok and if it is ethical.
 Impact on the natural forest: A consideration of Pemasok manufacturing process mainly due
to deforestation.
 Laws and regulations: Imvula should consider their compliance with environmental laws.
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(d) Calculate the total actual fixed manufacturing overheads allocated to each product for
the month of May 2018 using activity-based costing (ABC) system.
Allocated FMO Glossy Fashion Standard Total

Logo printing  R2 640 R3 240 R6 120 R12 000
Quality inspections of boots  R13 200 R7 200 R10 200 R30 600
Machine costs  R72 800 R36 400 R72 800 R182 000
Total R88 640 R46 840 R89 120 R224 600
Activity
Total Cost
Glossy Fashion Standard rate
(A) (B)
B/A
No of units
manufactured 4 400 1 800 5 100
 Logo 2 6 4
printing (both soles) (both soles & (both soles &
inner + outer side) outer side
No. of logo’s 8 800 10 800 20 400
40 000 R 12 000 R 0,30
printed (4 400 x 2) (1 800 x 6) (5 100 x 4)
ABC allocation R2 640 R3 240 R6 120
(Activity rate x (8 800 x R0,30) (10 800 x R0,30) (20 400 x R0,30)
no of logos)
 Quality
inspections 1.50% 2.00% 1.00%
No. of quality 66 36 51
153 R 30 600 R 200
inspections (4 400 x 1,5%) (1 800 x 2%) (5 100 x 1,00%)
ABC allocation R13 200 R7 200 R10 200
(Activity rate x (66 x R200) (36 x R200) (51 x R200)
no of inspect)
Machine costs 220 180 255
No. of 20 10 20 R 182
50 R 3 640
production runs (4 400/220) (1 800/180) (5 100/255) 000
ABC allocation
(Activity rate x R72 800 R36 400 R72 800
no of production (20 x R 3 640) (10 x R 3 640) (20 x R 3 640
runs)
(e) Briefly motivate why Imvula would consider changing the basis of allocating the fixed
manufacturing overheads from the traditional costing system to the activity-based
costing (ABC) system.
“By using a greater number of cost centres and different types of cost drivers that cause activity
resource consumption, and assigning activity costs to cost objects on the basis of cost driver
usage, ABC systems can more accurately measure the resources consumed by cost
objects”.
“Traditional cost systems tend to report less accurate costs because they use cost drivers
where no cause-and-effect relationships exist to assign support costs to cost objects.”
Drury 9th edition, chapter 11, pages 260
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(f) Calculate the optimal number of units that Imvula can manufacture and sell during the
month of July 2018. For this question only round all your workings to 3 decimal places.
Details Glossy Fashion Standard Total

Budgeted annual 48 000 24 000 72 000 144 000
manufacturing and sales
Budgeted monthly 4 000 2 000 6 000 12 000
manufacturing and sales
Rubber kg per unit 0,60kg 0,70kg 0,35kg
Alternative 1 – Establishing direct material as a potential limiting fact

Monthly rubber required in kg 2 400 1 400 2 100 5 900
Available rubber in kg 4 940
Shortage kg 4 940kg less 5 900kg 960 kg
Therefore the availability of rubber is a limiting factor
Alternative 2 – Establishing cash resources as a potential limiting factor

Required Rands R48 000 R28 000 R42 000 R118 000
Required Dollars $4 080 $2 380 $3 570 $10 030
Available Rands $8 398/R0,085 R98 800
Available Dollars Given $8 398
Shortage (Rands) R98 800 less R118 000 R19 200
Shortage (Dollars) $8 398 less $10 030 $1 632
Therefore cash availability (R or $) to procure the needed rubber is a limiting
factor
Details Glossy Fashion Standard

Contribution per unit [given] R108,00 R140,00 R87,50
Contribution per limiting factor R180,00 R200,00 R250,00
CPLF (kg) 
Ranking 3 2 1
Standard manufactured first 6 000
Total rubber used in kg 2 100kg

Available kg for G & F 4 940 less 2 100 2 840kg
Fashion manufactured second 2 000
Total rubber used in kg 1 400

Available kg for G 2 840 – 1 400 1 440
Glossy manufactured 2 400
1 440/0,60kg
Therefore optimal manufacturing mix is:

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1. 6 000 Standards boots;
2. 2 000 Fashion boots; and
3. 2 400 Glossy boots
 G: 4 000 x 0,6 = 2 400; F: 2 000 x 0,7 = 1 400; S: 6 000 x 0,35 = 2 100

 Available kg rubber:
Details Workings Alternative1 Alternative2

Dollars available $ 8 398
Exchange rate R1 = $0,085 $0, 085 R1
Rands available to purchase rubber ($8 398/0,085) R98 800
Dollars needed per kg of rubber R20 x $0,085 $1,70

Rands needed per kg of rubber R20
Kg rubber that can be purchased 4 940kg 4 940kg
($8 398/$1,70 R98 800/R20
 G: R108/0,6 = R180; F: R140/0,7 = R200; S: R87,50/0,35 = R250
4.21 BRIGHT & SHINE (PTY) LTD
(a) GZD’s budgeted statement of profit and loss for the six months ended 31 January 2018
Item Calculations R
Sales R440 x 82 110 36 128 400
Less: Cost of sales 0 + 34 003 200 – 5 100 480 28 902 720
Opening inventory 0
Plus: Manufacturing cost 34 003 200
Variable manufacturing cost R345,50 x 96 600 33 375 300
Fixed manufacturing cost 96 600 x R6,50 627 900
Less: Closing inventory R352 x 14 490 (96 600 – 82 110) 5 100 480
Less: FMO under-recovery (210 000 x R6,50 x 6/12) – 627 900 54 600
Gross profit 7 171 080
Less: Selling cost 410 550
Variable selling costs 82 110 x R5 x 4/5 328 440
Fixed selling costs 82 110 x R5 x 1/5 82 110
Less: Finance costs R18 500 000 x 11,25% x 6/12 1 040 625
Less: Operating expenses 2 891 261
Depreciation (R12 950 000 – R10 175 000) x 6/12 1 387 500
Rent expense (R27 000/1.065 x 5) + (R27 000 x 1) 153 761
Other operating expenses R2 700 000 x 6/12 1 350 000
Profit before tax R2 828 644
 Standard selling price per unit: R352,00 / (100% – 20%) = R440
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 Total standard manufacturing cost per unit
Cost item Calculations R per unit

Direct raw material cost – surfactants 15 000/1 000 x R18,50 277,50
Direct raw material cost – sodium 3 000/1 000 x R12,50 37,50
Direct raw material cost – colourant 2 000/1 000 x R6,50 13,00
Direct labour 0,5 x R12,00 6,00
20-litre open-plastic container 5,00
Plastic container lid 1,50
Total variable manufacturing cost per unit 345,50
Fixed manufacturing cost R1 365 000 / 210 000 6,50
Total manufacturing cost per unit R 352,00
 Budgeting sales units/volume

Full annual normal manufacturing capacity Given 210 000
2018 annual manufacturing budget 210 000 x 92% 193 200
2018 annual sales units budget 193 200 x 85% 164 220
 First quarter sales unit budget: 164 220 x 20% = 32 844

 Second quarter sales units budget: 164 220 x 30% = 49 266
 Sales units budget for the 6 months ending 31 January 2018: 32 844 + 49 266 = 82 110
 Budgeted units to be manufactured: 193 200/2 or 193 200 x 6/12 = 96 600
(b) With regard to the budgeted purchases and the storing of the surfactants
(i) Calculate the number of barrels that the surfactants supplier will use to package
Alternative 1 – using milliliters Alternative 2 – using barrels
2xUxC 2xUxC
=√ =√
H+(P x i) H+(P x i)
2 x 2 898 000 x R5 500 2 x 24 150 x R5 500
=√(R2,50 =√(R300
+ (R18,50 x 0,085) + (R2 220 x 0,085)
R31 878 000 000 R265 650 000
=√ =√
R4,07 R488,70
= 88 473,36 = 737,28
≈ 88 474 litres (rounded up) ≈ 738 barrels (rounded up)
= 88 474 / 120 litres = 737,28
≈ 738 barrels (rounded up)
 193 200 (see (a) above) x 15 litres = 2 898 000

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 2 898 000 / 120 litres = 24 150
 R2,50 x 120 litres = R300
 R18,50 x 120 litres = R2 220
(ii) Calculate the budgeted number of orders to be placed.

Number of orders = Annual demand (manufacturing requirements) / EOQ
Alternative 1 – using milliliters Alternative 2 – using barrels

2 898 000 / 88 474 = 32,76 orders 24 150 / 738 = 32,72 orders
≈ 33 orders (rounded up) ≈ 33 orders (rounded up)
(c) Briefly discuss three (3) purposes of standard costing.
(i) Providing a prediction of future costs that can be used for decision-making purposes
Standard costs can be derived from either traditional or activity-based costing systems. Because
standard costs represent future target costs based on the elimination of avoidable inefficiencies,
they are preferable to estimates based on adjusted past costs, which may incorporate inefficiencies.
For example, in markets where competitive prices do not exist, products may be priced on a bid
basis. In these situations, standard costs provide more appropriate information because efficient
competitors will seek to eliminate avoidable costs. It is therefore unwise to assume that
inefficiencies are recoverable within the bid price.
(ii) Providing a challenging target that individuals are motivated to achieve

Research evidence suggests that the existence of a defined quantitative goal or target is likely to
motivate higher levels of performance than would be achieved if no such target were set.
(iii) Assisting in setting budgets and evaluating managerial performance

Standard costs are particularly valuable for budgeting because they provide a reliable and
convenient source of data for converting budgeted production into physical and monetary resource
requirements. Budgetary preparation time is considerably reduced if standard costs are available
because the standard costs of operations and products can be readily built up into total costs of
any budgeted volume and production mix.
(iv) Acting as control device by highlighting those activities that do not conform to plan and
thus alerting managers to those situations that may be "out of control" and in need of
corrective action
In a standard costing system, variances are analysed in great detail such as by element of cost,
and price and quantity elements. Useful feedback is therefore provided to help pinpoint the areas
in which variances have arisen.
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(v) Simplifying the task of tracing cost to products for profit measurement and inventory
valuation purposes
In addition to preparing annual financial accounting profit statements, most organisation also
prepare monthly internal profit statements. If actual costs are used, a considerable amount of time
is required in tracking costs for monthly costs to be allocated between cost of sales and inventories.
A data-processing system is required, which can track monthly costs in a resource-efficient manner.
Standard costing systems meet this requirement. Inventories and cost of goods sold are recorded
at standard cost and a conversion to actual costs is made by writing off all variances arising during
the period as a period cost.
Note that the variances from standard cost are extracted by comparing actual costs with standard
costs at the responsibility centre level, and not at the product level; therefore, actual costs are not
assigned to individual products.
Source: Drury (2015:440–441)
(d) For the year ended 31 July 2018, calculate the following variances for the GZD:
(i) Sales volume variance
Actual Budgeted Standard gross Variance

quantity quantity profit R
GZ (20-litre hand soap) 165 500 164 220 R88 (R440 – R352) R112 640 F
(see (a))
 R910 250 / R5,50 = 165 500

 R440 (standard selling price) less R352 (standard manufacturing cost) – refer to question (a)
above
Note
The given scenario provides for the following key points: (i) all units manufactured were sold, (ii) the
division had no work in progress, (iii) open-plastic containers were issued according to the
manufacturing requirements, and (iv) not all the purchased direct raw material was issued to
manufacturing. Based on this information, the actual number of units sold can only be established by
the amount of the variable manufacturing overheads incurred since variable cost varies with the
number of units manufactured and in this instance also sold.
(ii) Direct raw material purchase price variance (per material type and in total)
Direct raw Actual Standard Diff Actual Variance

material price price quantity R
Surfactants R18,00 R18,50 R0,50 2 628 600 R1 314 300 F
Sodium R13,50 R12,50 –R1,00 471 800 R471 800 A
Colourant R6,90 R6,50 –R0,40 269 600 R107 840 A
Total R734 660 F
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 R47 314 800 (given) / R18,00 = 2 628 600 litres
 R6 369 300 (given) / R13,50 = 471 800 litres
 R1 860 240 (given) / R6,90 = 269 600 litres
(iii) Direct raw material yield variance (per material type and in total)
Direct raw Input Actual usage in Diff Standard Variance

material allowed for standard price R
actual yield proportions
Surfactants 2 482 500 2 509 875 –27 375 R18,50 R506 437,50 A
Sodium 496 500 501 975 –5 475 R12,50 R68 437,50 A
Colourant 331 000 334 650 –3 650 R6,50 R23 725,00 A
Total R598 600 A
 165 500 x 15 litres = 2 482 500  (2 612 000 + 469 500 + 265 000) = 3 346 500
 165 500 x 3 litres = 496 500  3 346 500 x 15/20 = 2 509 875
 165 500 x 2 litres = 331 000  3 346 500 x 3/20 = 501 975
 3 346 500 x 2/20 = 334 650
(iv) Direct labour idle time variance
Item Actual Standard Diff Standard work Variance

productive productive hour rate R
hours hours
Direct 86 700 89 760 3 060 R41 738,40 A
labour R13,64
 102 000 x 85% = 86 700

 102 000 x 88% = 89 760
 R12,00 / 88% = R13,64
Note
Although not specifically asked in this question, you are urged to attempt calculating the following
variances using the same given information:
(i) sales price variance;
(ii) direct raw material mix variance (per material type and in total);
(iii) labour rate variance;
(iv) labour efficiency variance;
(v) variable overheads expenditure variance;
(vi) fixed overheads expenditure variance;
(vii) plastic container price variance; and
(viii) plastic container-lids price variance.
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(e) Calculate the budgeted annual optimum manufacturing mix for the MPD for the year
ending 31 July 2018.
Establishing if mixing time is a limiting factor FST FSP FSR Total

Monthly production and sales units (given) 4 200 4 900 5 600
Annual production and sales units 50 400 58 800 67 200
Mixing time (hours) per unit 0,25 0,25 0,50
Total required mixing time (hours) per annum 12 600 14 700 33 600
Available mixing time (hours) per annum 41 400
Less: Mixing time required for the UoP contract 12 600
Mixing time (hours) left for FSP and FSR 28 800
Less: Required mixing time for FSP and FSR 48 300
Shortage of hours ( 28 800 less 48 300) - 19 500
28 800 < 48 300; therefore, mixing time is a limiting factor (constraint)
 50 400 x 0,25 hours = 12 600 hours

 58 800 x 0,25 hours = 14 700 hours
 67 200 x 0,50 hours = 33 600 hours
 3 450 (given) x 12 months = 41 400 hours
 14 700 + 33 600 = 48 300 hours
Establishing if finishing time is a limiting factor FST FSP FSR Total

Monthly production and sales units (given) 4 200 4 900 5 600
Annual production and sales units 50 400 58 800 67 200
Finishing time (hours) per unit 0,15 0,35 0,50
Total required finishing time (hours) per annum 7 560 20 580 33 600
Available finishing time (hours) per annum 61 800
Less: Finishing hours needed for the UoP contract 7 560
Finishing time (hours) left for FSP and FSR 54 240
Less: Required finishing time for FSP and FSR 54 180
Surplus hours (54 180 less 54 240) 60
54 240 > 54 180; therefore, finishing time is NOT a limiting factor (constraint)
 50 400 x 0,15 hours = 7 560 hours

 58 800 x 0,35 hours = 20 580 hours
 67 200 x 0,50 hours = 33 600 hours
 5 150 (given) x 12 months = 61 800 hours
 20 580 + 33 600 = 54 180 hours
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Calculation of contribution per limiting factor
FST FSP FSR
R R R
Selling price 340 410 484
Less: Variable manufacturing cost 245 297,50 353
Less: Variable selling cost 10 10 10
Contribution per unit 85 102,50 121
Limiting factor (mixing time) 0,25 0,25 0,50
Contribution per limiting factor 340 410 242
Ranking 1# 2 3
#The division has entered into a fully binding supply agreement with the UoP to supply all its budgeted
annual production units of FST (50 400), and its intention is to honour the agreement fully. Therefore,
FST units will be produced first, regardless of the contribution of the product compared to that of the
other products.
 Contribution per limiting factor

FST: R85,00 / 0,25 = R340
FSP: R102,50 / 0,25 = R410
FSR: R121,50 / 0,50 = R242
 Calculation of the budgeted selling prices

Details FST FSP FSR Workings
R R R
Direct raw material 180 220 280 A
Direct labour 45 52,50 50 B
Variable manufacturing overheads 20 25 23 C
Total variable manufacturing costs 245,00 297,50 353,00 D = (A+B+C)
Fixed manufacturing overheads 10 10 10 E
Total manufacturing costs 255,00 307,50 363,00 F = (D+E)
Selling prices 340,00 410,00 484,00 G = F/0,75
FST: R255 / (100% – 25%) = R340

FSP: R307,50 / (100% – 25%) = R410
FSR: R363 / (100% – 25%) = R484
 Calculation of the budgeted variable selling cost

Monthly Annually
Total selling cost R367 500 R4 410 000
Less: Fixed selling cost R220 500 R2 646 000
Variable selling cost R147 000 R1 764 000
Variable selling cost per unit R10 p/u R10 p/u

R147 000 / 14 700 = R10 p/u
R1 764 000 / 176 400 = R10 p/u
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 Calculation of the fixed manufacturing overheads
Annually
Budgeted fixed manufacturing overheads R1 800 000
Normal annual manufacturing capacity 180 000
Fixed manufacturing absorption rate = R1 800 000 / 180 000 = R10 p/u
Therefore, the budgeted optimal manufacturing mix is as follows:

Available mixing time 41 400
Less: Mixing time used for 50 400 FST units (12 600)
Available for FSP and FSR 28 800
Less: Mixing time used for 58 800 FSP units (14 700)
Remaining for FSR units 14 100
Optimal manufacturing mix

FST: 50 400 units
FSP: 58 800 units
FSR: 28 200 units (14 100 / 0,5 hour)
(f) Calculate the budgeted margin of safety units for FSP only for the 2018 financial year.
Details FST FSP FSR

Expected demand and sales 50 400 58 800 67 200
Sales mix 6 7 8
Contribution per unit R85 R102,50 R121
Weighted contribution (WC) R510 R717,50 R968
Contribution per batch R2 195,50
Fixed costs R1 800 000 + R2 646 000
Breakeven sales in batches Fixed costs / Contribution per batch
R4 446 000 / R2 195,50 = 2 025,05
Breakeven units 12 156 14 182 16 208
Margin of safety units  38 244* 44 618 50 992*
 FST: 50 400 / 8 400 = 6; FSP: 58 800 / 8 400 = 7; FSR: 67 200 / 8 400 = 8

 From question (f) above
 FST: R85(f) x 6 = R510; FSP: R102,50(f) x 7 = R717,50; FSR: R121(f) x 8 = R968
 R510 + R717,50 + R968 = R2 195,50
 Fixed costs: R1 800 000 = fixed manufacturing overheads and R2 646 0000 = fixed selling cost
 FST: 2 026 x 6 = 12 156; FSP: 2 026 x 7 = 14 182; FSR: 2 026 x 8 = 16 208
 FSP: 58 800 – 14 182 = 44 618 units
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Note
*Take note that although the question did not require “margin of safety” to be calculated for all three
products, calculations cannot not be done per individual product in questions on (i) multi-product CVP;
(ii) breakeven; or (iii) margin of safety, but they must be done simultaneously for the entire company,
that is, for all the products together. Therefore, the calculations for the other products are also provided,
albeit not having been asked.
Furthermore, take note that in this instance, the question asked for a “margin of safety” UNITS, but it
could have asked for a “margin of safety” PERCENTAGE. Ensure that you are aware of these
differences and are able to calculate either one of the two variations.
4.22 AQUA FIRST (PTY) LTD
(a) Identify the costing system used by Aqua for its internal reporting purposes and briefly motivate
your answer by making reference to the relevant information from the scenario.
1. Identification:
Aqua uses the absorption costing system for both its internal reporting purposes and for
assigning costs to its products.
2. Motivation:
 By virtue of DivVal’s actual management accounts reflecting “Gross profit” and not “Contribution”
is consistent with the format of an absorption costing system statement.
 According to Drury: “absorption costing systems assigns both direct and indirect costs to cost
objects” (Drury, 2015: 49). Furthermore he states: “the term ‘overheads’ is widely used instead of
indirect costs…..Manufacturing overheads include all the costs of manufacturing apart from direct
labour and material costs” (Drury, 2015: 27)
 The fact that DivVal’s standard all-inclusive manufacturing costs of the empty glass bottles includes
fixed manufacturing overheads (FMO) (indirect costs) absorbed at R0,45 per unit is in itself
motivation that Aqua uses an absorption costing system.
 “With absorption costing method, a share of fixed production overheads are allocated to individual
products and are included in their production costs” (Drury, 2015: 155).
 The above statement by Drury is also consistent with Aqua’s operations and therefore further
motivates that Aqua uses an absorption costing system. In this regard, besides allocating direct
costs (glass bottles, prepared water and vitamins) to the bottled mineral water, DivMou also
allocates indirect costs (water quality testing costs, water pump set-up costs and water labelling
costs) to the bottled mineral water using ABC.
 By virtue of the fixed manufacturing overheads been allocated to the manufactured products in
each of Aqua’s two divisions, means that Aqua values all their finished inventory items inclusive of
both variable manufacturing costs and fixed manufacturing costs to the division’s respective
products, a phenomenon that is consistent with the absorption costing system.
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(b) Calculate DivVal’s total budgeted number of internal sales units to DivMou for the 2018
financial year.
DivVal’s maximum normal manufacturing capacity 1 400 000 bottles

Budgeted operating capacity (1,4 million bottles x 85%) 1 190 000 bottles
Budgeted internal sales units (1,190 million bottles x 65%) 773 500 bottles
(c) Calculate and recommend a budgeted minimum transfer price per one (1) 500 ml
empty bottle that the DivVal should charge DivMou for the 2018 financial year.
Provide one (1) reason to motivate your recommended minimum transfer price.
Calculation of minimum transfer price:
Details Calculations Per Total @
unit 773 500
units
Raw glass R3,00/1 000g x 600g R1,80 R1 392 300
Bottle cap given R0,20 R154 700
Direct labour cost R6,00/60mins x 4,50 mins R0,45 R348 075
VMO* R12,00/60mins x 4,50 mins R0,90 R696 150
External selling cost Only on external sales R0,00 R0,00
Total incremental costs R3,35 R2 591 225
Plus: Lost contribution R0,00 R0,00
Plus: Internal or (agreed) profit R0,00 R0,00
Recommended minimum transfer price per bottle R3,35 R3,35
(R2 591 225/773 500)
*VMO = variable manufacturing overheads
Reason:
Division Valley has enough manufacturing capacity to supply to both the internal and
external market. (i.e. no lost contribution). The minimum transfer price should therefore be:
Total incremental costs only.
(d) Calculate DivVal’s total budgeted fixed costs that would be used to calculate the division’s
budgeted break-even point for the 2018 financial year.
Details R
FMO R535 500
Fixed selling cost (given) R105 000
Total budgeted fixed cost R640 500
 1 190 000 x R0,45 (given) = R535 500
 Refer to question (b) above
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(e) (i) Calculate DivVal's actual residual income for the 2018 financial year. The Total column is
required
Details External Internal Total

R R R
Sales 1 845 375 2 741 700 4 587 075
Less: Cost of sales (1 476 300) (2 741 700) (4 218 000)
Gross profit 369 075 0 369 075
Less: Selling cost (123 310)
Plus: Interest income 68 500
Less: Other operating expenses (60 000)
given (350 000)
Allocated head offices expenses 205 000
Interest on bank overdraft 0
Municipal rates 85 000
Less: Cost of capital charge (235 750)
Residual income (R254 625 less R235 750) 18 515
 = given
 = 721 500 (given) x R3,80 (R3,35 per (c) + R0,45 (FMO per (d) above)) = R2 741 700
 = R4 587 075 – R2 741 700 or 388 500 (given) x R4,75 (R3,80 x 125/100) = R1 845 375
 = R1 845 375 x 100/125 or 388 500 (given) x R3,80 () = R1 476 300
 = R2 050 000 (actual controllable investment given) x 11,50% (given) = R235 750
(e) (ii) Based on the 2018 actual results, determine and comment if Leahandra Hendricks
(DivVal’s divisional manager) will receive a bonus or not
Return on investment = Controllable profit/Controllable investment
Controllable profit R254 265
Controllable investment R2 050 000
Return on investment (ROI) 12,40%
Comparing: DivVal’s actual ROI for the 2018 financial year is 12,40%, which is less than the
company’s targeted ROI of 12,50% (given) for the same period.
Conclusion: DivVal’s calculate actual ROI is 12,40% which is less than the targeted ROI of 12,50%,
it therefore follows that the DivVal did not meet or exceed the targeted ROI of 12,50%. As a result,
based on DivVal’s actual results for the 2018 financial year, Leahandra Hendricks will not receive a
bonus.
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(f) Prepare DivMou’s production (manufacturing) budget in units for the 2018 financial year.
Details STW FSW Total

Sales 590 625 196 875 787 500
Plus: Closing inventory 45 750 15 250 61 000
Units required 636 375 212 125 848 500
Less: Opening inventory (56 250) (18 750) (75 000)
Units manufactured 580 125 193 375 773 500
 = 393 750 (given) litres x 2 (each 1 litre bottles two (2) 500 ml bottles = 787 500 bottles
STW: 787 500 bottles x 6/8 (sales mix) = 590 625 units
FSW: 787 500 bottles x 2/8 (sales mix) = 196 875 units
 = STW: 75 000 (given) x 6/8 = 56 250 units; FSW: 75 000 (given) x 2/8 = 18 750 units
 = Budgeted operating (manufacturing) capacity = 1 190 000 bottles (see (b) above).
Internal sales (transfer from DivVal to DivMou) = 1 190 000 x 65% (given) = 773 500 bottles
STW: 773 500 bottles x 6/8 = 580 125 units
FSW: 773 500 bottles x 2/8 = 193 375 units
 STW: 56 250 + 580 125 – 590 625 = 45 750; FSW: 18 750 + 193 375 – 196 875 = 15 250
(g) (i) Calculate the budgeted fixed manufacturing overheads per unit that DivMou will allocate to
STW and FSW for the 2018 financial year.
Cost driver rates Calculation of number STW FSW

of activities
Water quality testing 540 000/125 = 4 320 4 320 x R30 = 1 125 x R30 =
Rate = R163 350/5 445 180 000/160 = 1 125 R129 600/540k R33 750/180k
= R30 per test 4 320 + 1 125 = 5 445 R0,24 p/u R0,19 p/u
Water pump set up 30 30 x R3 000 = 45 x R3 000 =
Rate = R225k/75 = 45 R90 000/540k R135 000/180k
R3 000 per s/up 30 + 45 = 75 R0,17 p/u R0,75 p/u
Affixing branding label 15/60 x 540k = 135k 135k x R1,80 = 45k x R1,80 =
Rate = R324 000/180k = 15/60 x 180k = 45k R243 000/540k R81 000/180k
R1,80 per minute 135k + 45k = 180k mins R0,45 p/u R0,45 p/u
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(g) (ii) Prepare the 2018 budgeted statement of profit and loss (income statement) for product
STW only based on the absorption costing system.
Details Calculations STW

R
Sales 555 300 (given) x R6,80 (given) 3 776 040
Less: Cost of sales 3 197 605
Opening inventory 56 250 (given) x R5,30 (given) 298 125
Plus: Manufacturing costs 540 000 (given) x R5,81 3 137 400
Less: Closing inventory 40 950 (given) x R5,81 237 920
Gross profit 578 435
Less: Selling cost 223 560
Variable selling 555 300 (given) x R0,20 (given) 111 060
Fixed selling R150 000 (given) x 75% (given) 112 500
Less: Other operating costs R280 000(given) x 50% (given) 140 000
Profit for the period R214 875
 All-inclusive manufacturing costs

Details Per unit Total
Empty bottles transfer R3,80 R2 052 000
Prepared water R0,75 R405 000
Vitamins R0,25 R135 000
Bottle branding label (given) R0,15 R81 000
Fixed manufacturing overheads (R0,24 + R0,17 + R0,45) R0,86 R464 400
All-inclusive manufacturing costs R5,81 R3 137 400
 R3,80 x 540 000 (given) = R2 052 000

 R3,35 [per question (c) + R0,45 (FMO per question (d) above] = R3,80
 R0,75 (given) X 540 000 (given) = R405 000
 R0,25 (given) X 540 000 (given) = R135 000
 (R0,24 + R0,17 + R0,45 (refer to question g(ii) above)) = R0,86
 540 000 x R0,86 = R464 400
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(h) Identify and briefly discuss four (4) qualitative factors from Aqua’s operations that could
possibly have a negative impact on the natural environment and on Aqua’s customers.
1. The harvesting of the natural fresh water from the (Bodibeng) mountain for commercial
purposes.
 Water is a natural resource that all living beings rely on for day-to-day survival.
 Traditionally water has always been accessible to everybody at no or little cost, however, the
emergence of many water-bottling companies (such as Aqua) mainly for commercial purpose is
threatening the right to this basic need for the majority of the people who might not afford to buy it.
 Being cognisant of the fact South Africa is a water-scarce country, Aqua’s harvesting of the water
for commercial purposes can easily be considered by many, including environmentalists as an
exploitation of the natural environment and an encroachment to the right to this basic need.
2. Aqua’s bottle-manufacturing plant is powered by coal.
 Coal is not regarded as an environmental friendly form of generating energy.
 To generate the energy needed to operate the bottle-manufacturing plant, Aqua will need to burn
the coal which in turn release plumes of carbon dioxide into the atmosphere around the area
(environment) within which it operates.
 It therefore follows that the atmosphere and the air quality surrounding Aqua’s plant will be polluted
and thus negatively affecting the health of not only the staff of Aqua, but also of the
people/community in close proximity to the plant.
 The air pollution will also have a negative impact on the natural environment (i.e. plants and
animals) surrounding the plant and will further contribute to extreme global weather patterns (global
warming).
3. Aqua’s landfill site is the largest amongst its competitors.
 The fact that Aqua’s landfill site is the largest amongst its competitors suggests that the company
is disposing-off more waste than all its competitors and thus contributing more to damaging the
environment.
 Any over utilisation of land for the burying of waste, so produced from the plant, has the propensity
to damage Aqua’s reputation, especially considering that access to and ownership of land is
currently a contentious issue in South Africa.
4. Inadequate bottle-recycling strategy.
 Aqua is expected to be fully cognisant of the impact of its glass manufacturing operation on the
environment and thus must develop an adequate bottling-recycling strategy to amongst others:
curb its carbon footprint; lowering greenhouse gas emissions; reducing the need for raw materials;
and reducing landfills.
 Aqua’s failure to develop and adopt an adequate bottle-recycling strategy can be misconceived by
many environmentalists as well as its customers as a lack of commitment to reduce its operation’s
negative impact on the environment.
5. One of the ingredients in Aqua’s flavoured sparkling mineral water is flavouring sugars.
 Increased intake of sugar has been linked to health problems such as obesity, diabetes and tooth
decay.
 Aqua is therefore expected to consider the impact of its flavoured sparkling mineral water, which
contain flavouring sugars, on the health of its customers.
 It therefore goes without saying that, beyond profiteering from the sale of its flavoured sparkling
mineral water, Aqua should also raise awareness about the negative impact of sugary drinks on
the health of its customers.
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4.23 ZAMBANI-CHIPS (PTY) LTD
(a) Critically analyse the structure of Zambaa’s management incentive scheme. Limit your
analysis to qualitative factors only.
(i) A management incentive scheme should consist of a pool of performance measurement tools.
Zambaa’s scheme is not suitably designed, as it is based on a single measurement tool only, which
is return on investment (ROI).
(ii) A management incentive scheme should consider both financial and non-financial factors.
Zambaa’s scheme does not consider non-financial factors.
(iii) A management incentive scheme should encourage long-term planning. Return on investment can
encourage executive directors to focus on the short term by not investing in property, plant and
equipment to earn their bonuses, to the detriment of the company in the long term.
(iv) Return on investment is open to manipulation. The executive directors can manipulate the valuation
of the item, Intangible assets – Trademarks, that is included in the calculation of controllable
investment, as there is no active market for these assets.
(v) Return on investment is a relative measure that makes comparison easier. Zambaa can measure
its performance with relative ease and can compare its performance with that of similar-size
companies with ease, using return on investment.
(b) By reference to the 31 March 2018 actual results, determine whether or not the executive
directors of Zambaa are entitled to receive bonuses.
Achieved return on investment (ROI) = Controllable profit / Controllable investments

= R128 860 000  / R434 000 000 
= 29,69%
Conclusion:
Zambaa achieved ROI of 29,69%, this translated into an A “performance rating”. The executive directors
of Zambaa are therefore each entitled to receive a bonus of 80% of their annual remuneration of the
2018 financial year.
 Controllable profit calculation

Item Calculations R
Sales Given 345 000 000
Less: Controllable costs 216 140 000
Raw potatoes purchases Given 100 000 000
Direct labour Given 50 000 000
Spices, salt and other ingredients Given 19 500 000
Packaging costs Given 2 500 000
Variable manufacturing overheads Given 5 000 000
Fixed manufacturing overheads Given 20 000 000
Variable distribution costs Given 4 500 000
Director's remuneration* ((R6 000K / 50%) x 1,095) 13 140 000*
Allocated head office expenses Not controllable 0
Finance costs Given 1 500 000
Controllable profit R128 860 000
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*Director’s remuneration
The 2017 performance rating of the executive directors is given as “B”, which attracted a performance
bonus equivalent to 50% of the executive director’s remuneration. Therefore, the 2017 actual executive
director’s remuneration was R12 000 000, that is R6 000 000 / 50%. The 2018 actual executive director’s
remuneration is thus R12 000 000 + 9,50% = R13 140 000.
 Controllable investment calculation

Item Reasons R’000
Controllable investments 434 000
Property, plant and equipment Controlled by Zambaa 500 000
Intangible assets –Trademarks Brand name registered in Zambaa’s name at CIPC 39 000
Trade receivables Centralised treasury responsibility 0
Less Long-term borrowings Controlled by Zambaa –105 000
Less Trade payables Centralised treasury responsibility 0
(c) From a performance measurement perspective, briefly discuss one reason supporting the
inclusion of Intangible assets – Trademarks in the calculation of the bonuses and also
discuss one reason supporting its exclusion.
(i) The item, Intangible assets – Trademarks, forms part of the non-current assets which Zambaa uses
in the manufacturing process of its potato chips and therefore, it should be included in the calculation
of controllable investments (bonus).
(ii) The item, Intangible assets – Trademarks, should be excluded from the calculation of controllable
investments, as the measurement thereof is highly subjective due to the lack of an active market.
Because of this subjectivity, it is extremely challenging to determine the appropriate value of this
intangible asset.
(d) Based on the actual results and the current cost allocation system, calculate what the
winning bidder’s price per kg of BBQ was for the Steinhopp bid.
The winning bidder’s price

Zambaa’s actual number of packets (units) manufactured in total (125 g each) 20 000 000
Actual packets manufactured in kg ((20 000 000 / (1 000 kg / 125 g)) 2 500 000
Total related manufacturing costs per kg (R159 314 000 / 2 500 000) R63,73
Plus: Profit according to the pricing policy (R63,73 x 6%) R3,82
Total bid price submitted per kg (R63,73 + R3,82) R67,55
The winning bidder's price (R67,55 – R0,12) R67,43
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 Total related manufacturing costs
Item Reason R
Raw potatoes purchases Manufacturing costs 80 000 000
Direct labour Manufacturing costs 40 000 000
Spices, salt and other ingredients Manufacturing costs 16 000 000
Packaging costs Manufacturing costs 2 000 000
Variable manufacturing overheads Manufacturing costs 4 000 000
Fixed manufacturing overheads Manufacturing costs 16 000 000
Variable distribution costs Not manufacturing costs 0
Production director’s remuneration Manufacturing costs 1 314 000
Administrative director's remuneration Not manufacturing costs 0
Allocated head office expenses Not manufacturing costs 0
Finance costs Not manufacturing costs 0
Total manufacturing costs R159 314 000
 R13 140k / 8 directors x 1 director (Production director) = R1 642,5k* x 20mil/25mil = R1 314 000
*Take note that only the production director’s remuneration forms part of the manufacturing costs.
(e) Identity and briefly discus seven (7) qualitative factors that Zambaa would have considered
before submitting the bid to Steinhopp.
No Identifying Factors Discussion
1. Availability of Whether the current maximum manufacturing capacity of 22 million

manufacturing capacity packets is sufficient to meet the required number of packets or if
additional/new capacity would have been required.
2. Impact on the existing The possible impact of the bid on Zambaa’s existing customer’s
customer goodwill loyalty and goodwill to the company should it be required to sacrifice
some packets from its regular market.
3. Possibility of future The possibility of Steinhopp becoming a regular customer, which

business may require capacity expansion.
4. Impact on the existing The possible increase in demand in the regular market, which may
market lead to lost orders/customers.
5. Steinhopp credit profile Zambaa should assess and the Steinhopp’s credit profile and
establish their ability to pay for the supplied packets.
6. Steinhopp’s corporate A proper consideration of these two factors will ensure that Zambaa
reputation and ethical does not associate itself with companies or organisations with
standing compromised business reputation and questionable/doubtful
ethical standing. This is to avoid possible negative publicity and/or
consumer backlash.
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No Identifying Factors Discussion
7. Steinhopp historical Zambaa should consider contacting some of Steinhopp’s historical

business relations and/or existing customers (mainly those with similar bids) to
establish Steinhopp’s business demeanor, ethics, reliability and
trustworthiness,
8. Possibility of cross-sell Establishing business relations with Steinhopp could present
Zambaa with an opportunity to expand its customer base with
Steinhopp’s clients.
(f) Assuming that the proposed cost allocation system is adopted, allocate the total indirect
manufacturing overheads to BBQ and WLS for the financial year ended 31 March 2018.
Activity driver BBQ WLS

R’000 R’000
Ordering costs ((5/8) x R5 000K)) and ((3/8) x R5 000K)) 3 125 1 875
Quality ((20 000K/25 000K) x R7 000K)) and ((5 000K/25 000K) x R7 000K)) 5 600 1 400
Peeling and slicing ((2 500/3 125) x R8 000K)) and ((625/3 125) x 6 400 1 600
R8 000K))
Total indirect manufacturing overheads allocated R15 125 R4 875
Cross-check balance
With every ABC question, after you have allocated the given costs/overheads to the products, it is
important to cross check that the allocated amounts still add back to the given total costs/overheads. In
this instance, R15 125k allocated to BBQ plus R4 875k allocated to WLS must cross balance to R20
000k.
 Peeling and slicing calculation

Details BBQ WLS
Total annual manufactured packets in gram 20 000 000 5 000 000
Total annual manufactured in kilogram 2 500 000 625 000
Number of kilograms per run (given) 1 000 1 000
Number of production runs 2 500 625
Total production runs (2 500 + 625) 3 125
 20 000 000 x 125 g/1 000 gram = 2 500 000 kg

 5 000 000 x 125 g/1 000 gram = 625 000 kg
 2 500 000 / 1 000 (given) = 2 500 production runs
 625 000 / 1 000 (given) = 625 production runs
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(g) Calculate the target price of V-L.
Target price = Total cost of manufacture + Target mark-up (amount)
= R8,49 (given) + R8,05

= R16,54 per packet
 Target mark-up amount
= Invested capital x Target rate of return

Annual volume
= (R0 + R13 200 000)  x 9,15%

12 500 x 12
= R1 207 800
150 000
= R8,05
 Invested capital
Billboards marketing campaign – not capital investment 0
Capital invested in a new plant 13 200 000
Total capital invested R13 200 000
 Target rate of return

10% probability (10% x 11,50%) 1,15%
30% probability (30% x 9%) 2,70%
25% probability (25% x 10%) 2,50%
35% probability (35% x 8%) 2,80%
Target rate of return (1,15% + 2,70% + 2,50% + 2,80%) 9,15%
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4.24 S’KHOTHANE (PTY) LTD
(a) (i) Budgeted contribution per unit per sales channels, and briefly advise if any,
a channel that S’khothane consider closing down? [11]
Details Retail channel Online channel

R R
Sales price per unit 15 175 16 175
Less: Variable manufacturing costs per unit 6 070 6 070
Less: Variable selling costs per unit (given) 0 400
Contribution per unit R9 105 R9 705
Advice:
At R9 105, the budgeted contribution per unit from the retail channel is lower that the R9 705 budgeted
contribution per unit from the online channel. Therefore, based on the calculated budgeted
contributions per unit, S’khothane should consider closing down the retail channel.
 Variable manufacturing cost per unit

Cost item Cost per unit
Leather 4 500
Direct labour 300
Shoe laces 70
Specialised glue 75
Rubber sole 100
Innersole 315
Inspection and polish 10
Packaging box 200
VMO* 500
Total R6 070
VMO* = Variable manufacturing overheads
 R5 000(given) / 1 000m x 450 mm x 2 = R4 500
 R10 x 15 hours (12 hours / 0,8) x 2 = R300
 Standard idle time/standard clock hours: 2,2 hours(given) /11 hours (given) = 20%
 R35(given) x 2 = R70
 R37,50(given) x 2 = R75
 R50(given) x 2 = R100
 R450/1 000m x 350 mm x 2 = R315
 R5(given) x 2 = R10
 N40 000(given) x R0,005(given) = R200
 (R135k – R50k)/(220 – 50) = R500
 Retail channel: (R6 070/ 40%) x 60% = R9 105
 Online channel: [(R6 470 + 400)]/40% x 60% = R9 705
 (R6 070 x 100)/40 = R15 175; [(R6 070 + R400(given)] x 100/40 = R16 175
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(a) (ii) Assuming that S’khothane uses the retail store sales channel only, calculate
[5]
the budgeted margin of safety percentage for the 2018 financial year
(Budgeted) margin of safety percentage formula =
Budgeted sales less budgeted break-even units

Budgeted sales
= 2 018 – 583
2 018
= 71,1%
 given
 Break-even units
Contribution per unit option Contribution margin ratio option
= Fixed costs/contribution per unit = Fixed costs/contribution margin ratio
= R5 299 500/R9 105 = R5 299 500/60% (given)
= 582,04 = R8 832 500
≈ 583 (rounded up) = R8 832 500/R15 175
= 582,04
≈ 583 (rounded up)
 Fixed costs
Retail cost items Yearly
R
Property rental expenses 600 000
Fixed distribution costs (only incurred for online) 0
Retail space rental expenses 3 480 000
Retail store staff costs 900 000
Manufacturing overheads 319 500
Total annual fixed costs R5 299 500
 Refer to question (a)(i) above

 2 000 m2 x R25 per m2 = R50 000 x 12 = R600 000
 R105 000 + R100 000 + R85 000 = R290 000 x 12 = R3 480 000
 R25 000 X 3 = R75 000 x 12 = R900 000
 R135k – (220 X 500) X 1.065 = R26 625 x 12 = R319 500
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(a) (iii) Briefly discuss 4 (four) qualitative factors that S’khothane would need to
[4]
consider if they were to decide to sell via the online sales channel only.
1. Loss of potential new customers via the retail store walk-ins – By closing down the retail
stores, S’khothane will immediately loose the possibility of “new customers” and/or “repeat
customers” pull-in-factor offered by window-shopping and overall human curiosity from the
people passing-by the stores.
2. Online fraud – Online transactions always present an opportunity for online fraud (hacking,
phishing, identity fraud, fraudulent payments, etc.). These could increase the propensity for
possible reputational damage and/or litigation resulting from defraud and aggrieved customers.
3. Information technology (IT) infrastructure and human capital – The company will need to
consider its ability to attract and maintain highly knowledgeable and mostly specialised IT skills
to ensure business continuity and limited downtime. Furthermore, it must ensure that adequate
back-up and recovery plans are maintained.
4. Staff and cash safety at the retail stores – The continued selling via the retail channel present
safety risk to the retail staff considering the luxurious, high-value and the popular nature of the
Krocvellars.
5. The need to minimise and/or eliminate inventory misappropriation – S’khothane has

already suffered the misappropriation of inventory both in the 2017 and the 2018 financial years.
Although it is not clear how the inventory was misappropriated, this risk potentially emanates
from both internally (staff) and externally (external 3rd parties).
6. Increased returns of shoes – Online shopping eliminates the opportunity of in-store fitting by
the customers. Although the expectation is for the customers to always select the right shoe size,
colour etc., there is always a risk of human error. This could happen at various points of the
transaction. Therefore, the risk of shoe returns is increased with the online channel.
7. Loss of customers and/or negative impact on customer loyalty – Some customers prefer
the old-fashioned/conventional human intervention and the interaction with sales person via the
retail store. With going online only, there is a risk of losing these “old-fashioned” customers.
8. In-transit inventory safety – With the online selling, the risk of in-transit stock theft or
misappropriation (between the manufacturing factory and the retail stores) is reduced and/or
eliminated.
9. Consideration of the distribution/delivery of shoes – Due to increased online sales volumes,

the current distributors (VCC) could be overwhelmed. S’khothane will need to consider if VCC is
willing and able (capacity consideration) to continue with the distribution of the shoes to
customers.
10. Social and moral consideration relating to staff retrenchments – As a corporate citizen,
S’khothane has both social and moral obligation to consider the human factor relating to the
possible retrenchments of its retail store staff. The company can also consider the possibility of
retaining, retraining and redeploying these staff members to perform other functions within the
company.
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(a) (iii) Briefly discuss 4 (four) qualitative factors that S’khothane would need to
[4]
consider if they were to decide to sell via the online sales channel only.
11. Consider the reaction of the trade union – South African labour market is highly unionised,
especially within industries perceived to be exploitive of labour. The possible retrenchment of the
retail store staff could solicit negative reaction from labour unions with possible business
interruptions and/or break of the social trust and contract.
12. Exposure to the international market – With one of the retail store located at the OR Tambo
International Airport, there always exist an opportunity for S’khothane to inadvertently access an
international market(s) via tourists and visitors buying the shoes. If the retail store channel is
closed, this potentially lucrative market could be lost.
13. Opportunity for predatory marketing by S’khothane’s close competitors – The closing down
of the retail stores could give the company’s close competitors an opportunity to immediately lease
those retail spaces and immediately have access to S’khothane’s long-standing clientele, by
design or by chance.
(b) Variances for the 2018 financial year [9]
iv. Direct raw material purchase price variance for specialised glue only.
Alternative Details Actual price Standard/ Actual Variance
Budgeted quantity R
price
1 Specialised glue R0,45 R0,30 506 000 R75 900 A
2 Specialised glue R227 700 R151 800 n/a R75 900 A
3 Specialised glue R56,25 R37,50 4 048 R75 900 A
 R227 700/506 000 = R0,45

 R37,50(given)/125ml(given) = R0,30
 506 000/125mi = 4 048 lots of 125ml
 R227 700/4 048 = R56,25
v. Direct raw material mix variance for leather and innersole only.
Direct raw Actual usage Actual usage Diff Standard Variance
material in actual in standard price R
proportions proportions
Leather 1 820 1 825 5 R5 000 R25 000 F
Innersole 1 425 1 420 -5 R450 R2 250 A
Total 3 245 3 245 R22 750 F
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(b) Variances for the 2018 financial year [9]
 Given
 2 000 (purchases given) – 180 (closing inventory given) = 1 820
 1 600 (purchases given) – 175 (closing inventory given) = 1 425
 3 245 X 450/800 = 1 825,31 ≈ 1 825
 3 245 X 350/800 = 1 419,69 ≈ 1 420
 1 820 + 1 425 = 3 245
vi. Direct labour idle time variance

Item Actual idle Standard Difference Standard Variance
hours allowed work R
idle hours hour rate
Direct labour 8 250 13 200 -4 950 R12,50 R61 875 F
 Given
 25 workers X 1,50 hours X 220 days = 8 250
 66 000hrs x 20% (see (a)(i) above) = 13 200
 R10 / (100% - 20% ) = R12,50
(c) Discuss four (4) ethical, social and legislative considerations that could
[4]
possibly disrupt and/or threaten the continued operations of S’khothane.
1. Child labour – Some of the company’s factory staff are as young as 13 years. This practice is
a direct contravention of the South African Basic Conditions of Employment.
2. S’khothane pays its factory staff R10 per hour, a rate even lower that the current proposed
national minimum wage rate – The South African Parliament tabled the “national minimum
wage bill” proposing a national minimum wage of R20 per hour. With the majority of the South
African labour unions strongly opposing the R20 p/h as a “slave wage”, S’khothane’s R10 p/h
offer is bound to attract negative attention from the labour unions.
3. Women discrimination in the labour force – The company only employs men in its factory.
This can be viewed by many as unfair discrimination and unfair labour practice.
4. Exploitation of the vulnerable community – With the factory situated at a poverty-stricken

environment with unemployment ranging between 60% and 85%. S’khothane could socially be
perceived as being insensitive to the plight of the people it employs. The unreasonably long
working hours and “slavery wages” can be seen as exploitative and/or taking advantage of the
harsh economic hardship and desperate situation experienced by the surrounding community.
5. Possible clashes with the trade unions – At face value, it appears that the location of the
factory site was only for S’khothane to benefit economically. This can lead to continuous clashes
with trade unions for various reasons (some of which have already been discussed above).
6. The use of the leather from an endangered species – The company might find itself at odds
with environmentalist and/or animal sensitive organisations/citizens for using leather from an
endangered crocodile.
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(c) Discuss four (4) ethical, social and legislative considerations that could
[4]
possibly disrupt and/or threaten the continued operations of S’khothane.
7. Possible political influence on contracts – The country is continuously debating corruption

allegations at the hands of what many see as “politically-connected people”. Unfortunately, more
often than not, the majority of “tenderpreneurs” tend to be politically connected and this could put
S’khothane under ethical and moral scrutiny. For example, an intervention by the “political heavy-
weights” on the DEaT special order.
8. Suspicious social and ethical standing – At face value, S’khothane’s entire business model
appears to be grounded on political alignment and close proximity to key decision makers within
various layers of the state. This view, whether true or not, can cast serious doubt on the company’s
social and ethical standing, and therefore doubt on their company’s continued existence through
support from the public.
9. Cross border trading legislations – The shoeboxes are currently bought from a foreign supplier
(Dibemba Plc, a shoebox supplier from Nigeria). S’khothane ability to continue selling the shoes
uninterrupted in the short term, is therefore partially dependent on Dibemba’s ability and willing to
meet S’khothane’s shoebox requirements. Furthermore, any cross border trading is subjected to
various trading legislations and regulations, both from the country of the seller and the country of
the buyer.
(d) Calculate the minimum transfer price.

[6]
Minimum transfer price = Total incremental costs + total lost contribution

units to transfer
= R222 090 + R57 150 = R138,31
2 019 (given)
 Total incremental costs
Cost items Per unit Units to Total
Costs (A) Transfer (B) Ax B
Direct raw material (given) R50 2 019 R100 950
Direct labour (given) R25 2 019 R50 475
Variable manufacturing overheads (given) R35 2 019 R70 665
Total variable manufacturing costs (vmc) R110 R222 090
 Total lost contribution: contribution per unit from external x sacrificed units
= (R150 – R110 (vmc) – R2,50 (external selling costs)] X 1 524 = R57 150
 Calculation of spare capacity
“Gross” available capacity given 2 500
“Net” available capacity 2 500 X 99/100 2 475
Current “gross” operating capacity given 2 000
Current “net” operating capacity 2 000 X 99/100 1 980
Spare capacity 2 475 – 1 980 495
 Calculation of lost/sacrificed units: 2 019(given) less 495 = 1 524
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(e) Special order from the Department of Economic Affairs and Trade (DEaT) [11]
(i) Calculate the special order price based on S’khothane’s special pricing policy
Cost item Calculations R
Direct manufacturing costs R7 300(given) x 1 400(given) 10 220 000
Variable manufacturing overheads R500 x 1 400(given) 700 000
Fixed manufacturing overheads Irrelevant 0
Online variable selling & distribution cost R400 x 1 400(given) 560 000
Fixed selling & distribution costs Irrelevant 0
Property rental expenses Irrelevant 0
Specialised cotton-like cloth cover R5(given) x 1 400(given) x 2 14 000
National coat of arms R15(given) x 1 400(given) 21 000
Delegate name printing R7,50(given) x 50(given) x 2 750
Lost contribution R8 700(given) x 419 3 645 300
Total special order costs 15 161 050
Profit 15 161 050 x 45% 6 822 472,50
Special order price R15 161 150 x 1.45 R21 983 522,50
Comparison: At R21,9m, the special order price is notably lower than the R30m offered by the DEaT.
 From question a(i)

 Lost/sacrificed units
Maximum capacity in units 3 000
External sales 2 019
Spare capacity 3 000 less 2 019 981
Special order units given 1 400
from spare capacity 981
from external sales sacrifice 1 400 less 981 419
(ii) Comment:
At face value, it appears that there might be merits to the allegations because it is strange that the
DEaT offered S’khothane R30 million for goods valued at R21,9 million, an overpayment of over
R8 million. Coincidentally, the special order only came through after S’khothane failed to acquire
PlatBox. Furthermore, it appears that the Centralised Treasury Department was reluctant and/or had
reservations about this special order and was only “convinced” otherwise after a special intervention
by the “political heavy-weights”. Lastly, the fact that the full payment for the special order was
effected immediately and probably without proper supply chain procedures, might also raise
questions. However, having said that, allegations will always remain just that, allegations, until proper,
valid and legally enforceable evidence is presented and acceptable in a court of law.
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4.25 TZANEEN TRAMPOLINES (PTY) LTD
[15]
financial year.
Statement of profit or loss (income statement) HT DT

(R) (R)
Sales  48 000 000 54 000 000
Less: Cost of Sales 33 950 000 38 730 000
Opening inventory - -
Plus: Variable manufacturing costs*:
(R5 325 x 6 000; R1 985 x 18 000 OR per below 31 950 000 35 730 000
Tubing
(R3 600 x 6 000; R900 x 18 000) 21 600 000 16 200 000
Steel springs
(R550 x 6 000; R400 x 18 000) 3 300 000 7 200 000
Jumping mat fabric
(R200 x 6 000; R150 x 18 000) 1 200 000 2 700 000
Safety pads
(R110 x 6 000; R80 x 18 000) 660 000 1 440 000
Direct labour
(R800 x 6 000; R400 x 18 000) 4 800 000 7 200 000
Variable manufacturing overheads
(R65 x 6 000; R55 x 18 000) 390 000 990 000
Plus: Fixed manufacturing cost: 2 000 000 3 000 000
Less: Closing inventory - -
Gross profit 14 050 000 15 270 000
Less: Non-manufacturing cost 330 000 990 000
Variable selling and administrative costs 300 000 900 000
Fixed selling and administrative costs 30 000 90 000
Less: Other operating costs 700 000 1 436 000
Variable insurance cost 150 000 486 000
Fixed insurance cost 150 000 150 000
Administrative staff costs 400 000 800 000
Budgeted profit R13 020 000 R12 844 000
*Take note: For this question, an excellent examination technique would be to combine all the
variable manufacturing costs into one line instead of reflecting each line separately.
 Sales
HT: 24 000 X ¼ = 6 000 units X R8 000 (given) = R48 000 000
DT: 24 000 X ¾ = 18 000 units X R3 000 (given) = R54 000 000
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[15]
financial year.
 Variable manufacturing costs
Cost element Calculations
HT DT
HT DT
Tubing R150 x 24 R150 x 24 R3 600 R900
Steel rings R5 x 110 R5 x 80 R550 R400
Jumping mat fabric R50 x 4 R50 x 3 R200 R150
Safety pads R1 x 110 R1 x 80 R110 R80
Direct labour R100 x 8 R100 x 4 R800 R400
Variable manufacturing overheads R10 x 6,5 R10 x 5,5 R65 R55
Total variable manufacturing costs R5 325 R1 985
 Fixed manufacturing overheads

HT: R800/R100 (given) = 8 work hours per unit X 6 000 units = 48 000 work hours
DT: R400/R100 (given) = 4 work hours per unit X 18 000 units = 72 000 work hours
Total work hours = 48 000 + 72 000 = 120 000 work hours
HT: 48 000/120 000 X R5 000 000 (given) = R2 000 000
DT: 72 000/120 000 X R5 000 000 (given) = R3 000 000
 Variable selling and administrative costs
HT: 6 000 X R50 = R300 000
DT: 18 000 X R50 = R900 000
 Fixed selling and administrative costs
HT: R120 000 X 6 000/24 000 = R30 000
DT: R120 000 X 18 000/24 000 = R90 000
 Variable insurance costs
Cost element Calculations
HT DT
HT DT
Probability 1 R30 x 10% R20 x 15% R3,00 R3,00
Expected variable insurance cost per unit R25,00 R27,00
Budgeted sales units 6 000 18 000
Expected total variable insurance cost per product R150 000 R486 000
 HT: R3 + R3 + R10 + R9 = R25,00; DT: R3 + R10 + R12 + R2 = R27,00
 HT: R25 X 6 000 = R150 000; DT: R27 X 18 000 = R486 000
 HT: R25 000 X 12 X ½ = R150 000; DT: R25 000 X 12 X ½ = R150 000
 HT: R1 200 000 X 1/3 = R400 000; DT: R1 200 000 X 2/3 = R800 000
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(b) Calculate the variances for the 2018 financial year. [16]
(i) Sales mix variance for HT, DT and in Total (5)

Product Actual Actual sales Difference Standard Sales margin
sales volume in budgeted in volume gross profit mix variance
volume proportions units R R
units units
HT 5,000.00 6,250.00 -1 250 2 341,67 2 927 087,50 A
DT 20,000.00 8,750.00 1 250 848,33 1 060 412,50 F
Total 25,000.00 25,000.00 R1 866 675 A
 HT: 25 000 x 6 000/24 000 = 6 250; DT: 25 000 x 18 000/24 000 = 18 750
 Refer to question (a) calculation 
 Standard gross profit HT: R14 050 000/6 000 units = R2 341,67
 Standard gross profit DT: R15 270 000/18 000 units = R848,33
 Refer to question (a), gross profit amount (TT uses absorption costing system)
(ii) Tubing purchase price variance for HT only (2)

Product Actual Standard Actual Purchase
Difference
purchase price purchase price volume price
per meter per meter purchased variance
HT R152,50 R150,00 -R2,50 121 000 R302 500 A
 given
 Actual volume purchased: R18 452 500/R152,5 = 121 000
(iii) Jumping mat fabric usage variance for HT only (2)

Product Actual Standard quantity Difference Standard Usage
quantity allowed of actual m2 price variance
m2 production R/m 2 R
m2
HT 20 500 20 000 -500 50 R25 000 A
 Actual quantity issued: R1 025 000/50m2 = 20 500m2
Standard quantity allowed for actual production: 4m2 per unit x 5 000 units = 20 000m2
 Given
(iv) Direct labour rate variance for DT (3)

Product Actual rate per Standard Difference in Actual clock Direct labour
clock hour rate per rate hours rate variance
clock hour
DT R80 R90 R10 100 000 R1 000 000 F
 Actual rate per clock hour = given

 Standard clock rate per hour = R100 per work hour x 90% = R90 per clock hour
 Actual clock hours = R8 000 000/R80 = 100 000
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(b) Calculate the variances for the 2018 financial year. [16]
(v) Direct labour idle time variance for DT (4)

Product Allowed Actual Difference Standard Idle time
idle idle work hour variance
hours hours rate
DT 10 000 20 000 -10 000 R100 R1 000 000 A
Direct labour idle time variance for DT (Alternative calculation)

Product Allowed Actual Difference Standard Idle time
productive productive work hour variance
hours hours rate
DT 90 000 80 000 -10 000 R100 R1 000 000 A
 Allowed idle hours: Actual clock hours x allowed idle time %

 R8 000 000/R80 = 100 000 actual clock hours x 10% = 10 000 allowed idle hours.
 Actual idle hours: Actual clock hours x actual idle time %
100 000 actual clock hours x (2 x 10%) = 20 000 actual idle hours.
 given
 100 000 x 90% = 90 000
 100 000 x 80 % = 80 000
(c) Draft a report to the CFO and explain the following four costing questions: [11]
REPORT TO THE CHIEF FINANCIAL OFFICER
RE: Costing terms and concepts
From: MAC3701 Student
Date: Day-Month-Year
Allow me to explain my understanding of the following cost terms and classifications thereof.
COMMON FIXED COST

Fixed costs can be classified into direct/traceable fixed costs (which relates directly to a certain
product) or common fixed costs, that is, those that are not directly traceable to a product.
Not directly traceable: Common fixed cost does not relate to a certain product and can only be
avoided if none of the products in the product mix are produced.
Shared between products: Common fixed costs can therefore be regarded as fixed costs that are
shared between different products or fixed costs that supports more than one product.
DIFFERENCE BETWEEN A SEMI-VARIABLE

COST AND A SEMI-FIXED COST
Semi-variable cost
This cost is also referred to as mixed costs. Semi-variable
or mixed cost contains both fixed and variable
cost. The mixture of cost includes a fixed amount within
a relevant range of output and an amount that varies
proportionately with output changes.
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(c) Draft a report to the CFO and explain the following four costing questions: [11]
Semi-fixed cost
This cost is also referred to as stepped-fixed costs.
It has costs that remain fixed within specified
activity levels for a given amount of time but
which eventually increase or decrease by a constant
amount at critical activity levels; also known as
semi-fixed costs.
REASONABILITY OF CLASSIFYING LABOUR COST AS A VARIABLE COST IN SA

Labour cost should only be classified as variable if there is a direct/measurable relationship between
output and cost. It is therefore unlikely that the given indirect cost (labour) can be variable as
employees are sometimes paid while they are not working, for example if a protected strike action
takes place, the employees will still be paid. The current labour legal environment makes it unlikely
that any permanent employees can be classified as variable. As such cost classification has a direct
impact on B/E and margin of safety, it should be reconsidered.
LEARNING CURVE - Learning curve can be applied to direct labour expense line-item
I trust you found my insights helpful for accurate decision-making.
Kind Regards,
MAC3701 student.
[8]
manufacture and sell to achieve a monthly target profit of R750 000 during the 2018.
Budgeted break-even sales quantity = Fixed costs + Target profit .
Weighted contribution
= R15 620 000 

R5 414
= 2 885,11
≈ 2 886 batches (ALWAYS ROUND UP)
Number of units for HT: 2 886 x 1 = 2 886 trampolines

Number of units for DT: 2 886 x 3 = 8 658 trampolines
 Fixed costs + target cost
Fixed manufacturing overheads given R5 000 000
Fixed insurance costs R25 000 x 12 months R300 000
Fixed selling costs given R120 000
Fixed administrative staff costs given R1 200 000
Target profit R750 000 x 12 months R9 000 000
Total R15 620 000
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manufacture and sell to achieve a monthly target profit of R750 000 during the 2018 [8]
financial year.
 Calculation of weighted contribution according to standard sales mix:
Details Calculations HT DT
Sales given R8 000 R3 000
Less: Variable manufacturing costs see question (a) R5 325 R1 985
Less: Variable selling costs given R50 R50
Less: Variable insurance costs see question (a) R25 R27
Contribution R2 600 R 938
Standard sales mix (SSM) given 1 3
Contribution x SSM R2 600 x 1; R938 x 3 R2 600 R2 814
Weighted contribution R2 600 + R2 814 R5 414
(e) Briefly explain the characteristics that TT’s CFO would have considered in the decision
to implement the most optimal costing system when comparing the ABC system to the [3]
traditional costing system.
1. Levels of competition: If the competition in the market is intense, then acquiring a sophisticated
ABC system might be necessary. As trampolining is becoming a popular sport, this argument is in
favour of acquiring an ABC system to give TT the “edge”.
2. Non-volume-related indirect costs: If the company has non-volume-related indirect costs that
are a high proportion of total indirect costs – an ABC system might be necessary. In the case of
TT, bending and shaping of the tubes, which accounts for the biggest portion of the fixed
manufacturing overheads, is still volume related (driven by machine hours)
3. Product diversity: TT’s products do not consist of a diverse range of products. They sell two
types of trampolines. The two trampolines however do consume the fixed manufacturing
overheads in different proportions.
4. Specialisation: TT is not a highly specialised company.
5. Cost vs benefit: The cost of acquiring the ABC system should be outweighed by the benefit
acquired from implementing the ABC system. If the accuracy of cost allocations does not lead to
much improved decision making as a result, then TT may decide not to implement the ABC
system.
Source: (Drury, 2015, 9th edition: 272)
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(f) Calculate the total budgeted fixed manufacturing overheads per unit for the 2018
financial year allocated to each product type, if TT decides to implement an activity- [10]
based costing (ABC) system.
Overheads item HT DT
Bending and shaping of the 39 000 x R16,09 = 99 000 x R16,09 =
tubes R627 510 R1 592 910
Cutting of the jumping mat fabric 25 662 x R3,08 = 38 493 x R3,08

R79 038,96 = R118 558,44
Quality inspection costs 3 000 x R281,25 = 1 800 x R281,25

R843 750 = R506 250
Machine set-up costs 12 x R25 625 = 36 x R25 625 =

R307 500 R922 500
Total (A) R1 857 798,96 R3 140 218,44

Number of units (B) 6 000 18 000
Cost per unit (A/B) R309,63 R174,46
 Calculation of activity rates:
Cost driver HT DT Total Activity Rate

Machine hours 39 000 99 000 138 000 R16,09
Cutting time hours 25 662 38 493 64 155 R3,08
Number of inspections 3 000 1 800 4 800 R281,50
Number of set-ups 12 36 48 R25 625
 HT: R65(given)/R10(given) = 6,5 hours per unit X 6 000 units = 39 000 machine hours
 DT: R55(given)/R10(given) = 5,5 hours per unit X 18 000 units = 99 000 machine hours
 R2 220 000 / 138 000 (39 000 + 99 000) = R16,09
 HT: 65 000 hours less (0,80% + 0,50%) = 64 155 X 40% = 25 662
 DT: 50 000 hours less (0,80% + 0,50%) = 64 155 X 60% = 38 493
 (R200 000 x 98,70%) / (25 662 + 38 493) = R3,08
 HT: 6 000/2 = 3 000
 DT: 18 000/10 = 1 800
 R1 350 000 / (3 000 + 1 800) = R281,50
 HT: 6 000/500 = 12
 DT: 18 000/500 = 36
 R1 230 000/ (12 + 36) = R25 625
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(g) Assume that both the jumping mat fabrics and the direct labour hours were not readily
available and were limited to 60 000 m2 and 80 000 work hours, respectively, for the 2018
[13]
financial year budget.
1. Establishing the sufficiency of the available resources
Details Jumping mat fabrics Direct labour
HT DT Total HT DT Total
Required/needed 24 000 54 000 78 000 48 000 72 000 120 000
Available (given) 60 000 80 000
Shortage 60 000 – 78 000 -18 000 120 000 – 80 000 -40 000
Both the jumping mats fabrics and the direct labour hours are insufficient and thus limiting factors
 HT: 6 000 x 4m2 = 24 000; DT: 18 000 x 3m2 = 54 000
 24 000 + 54 000 = 78 000
 HT: 6 000 x 8 = 48 000; DT: 18 000 x 4 = 72 000
 48 000 + 72 000 = 120 000
Comment: Both the jumping mat fabrics and the direct labours are not sufficiently available to meet
the 2018 financial year-end manufacturing requirement. Both this two resources are limiting factors
2. TT should use linear programming to calculate optimum mix (Drury, 2015: 674).
3. Objective function and other relevant equations:
3.1. Objective function:

Maximise 2 600 HT + 938 DT
3.2. Non-negativity constraints:

HT >= 0; DT >= 0;
3.3. Sales demand constraints:

HT <= 6 000; or 0 <= HT <= 6 000
DT <= 18 000; or 0 <= DT <= 18 000
3.4. Direct labour work hours constraint:

8HT + 4DT <= 80 000
3.5. Jumping mat fabric constraint:

4HT + 3DT <= 60 000
 Refer to question (d) calculation 

 Refer to question (d) calculation 
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(h) Determine the minimum transfer price per unit that the Springs Division will be willing to
[8]
transfer one spring to the Trampoline Division.
Minimum transfer price of transferring division =
[Total incremental cost (all units to be transferred) + total opportunity costs (from external sales
forfeited)] ÷ total number of units to be transferred.
How many units of sales will be forfeited/loss?
Available capacity in units 3 000

External market units 1 350
Spare capacity in units (3 000 less 1 350) 1 650
Less: Transfer requirements 2 500
Lost/forfeited units (2 500 less 1 650) 850
Incremental costs
Direct material R2
Direct labour R1
Variable manufacturing 0,5
External variable selling cost* R0
Variable cost per unit R3,5
Total incremental cost (R3,5 x 2 500 units) R8 750
(* irrelevant – only incurred if sold to external customers)
Total opportunity costs from 850 units sales

forfeited
Selling price R5
Less: Variable cost R3,5
Less: External variable selling 0,3
Opportunity cost per unit R 1,20 R1,2
Total opportunity cost R1,20 x 850 R1 020
Total incremental cost (as per above) R8 750

Total opportunity cost (as per above) R1 020
Total cost to transfer (R8 750 + R1 020) R9 770
Total number of units to be transferred 2 500
Minimum transfer price per unit
(R9 770 / 2 500) R3,91
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(i) List three (3) qualitative factors that TT should have considered before the acquisition of
[3]
Springs Galore CC.
1. The mission, vision and strategy of Springs Galore CC compared to that of the new group.
2. The impact that the brand value of Springs Galore CC will have on the new group.
3. The quality of the springs that Springs Galore CC manufacture.
4. The impact on the business relations with TT’s current springs suppliers.
5. Work morale of the employees since they now have to operate within a divisionalised structure.
6. Possible work culture clashes and the possible inability to integrate the employees from the two
companies into one group.
7. Possible implications of undue pressure and expectation on Ms. Lerato Ndlovu to replicate her
impeccable performance that earned her the “TopNotch Quality Manager” award.
8. Possible reluctance and pushback by the other managers on the “imposition” of Ms. Lerato Ndlovu’s
good leadership qualities.
9. The performance of Springs Galore CC used to be measure using ROI. How will the employees and
managers regard the new performance measurement system.
10. Similar leadership styles results in a strategic fit and an environment which is more conducive for
merging.
(j) Calculate, compare and briefly discuss the actual residual income of the two divisions [13]
Residual income = Controllable profit – (cost of capital of controllable investment)
Residual income Springs Division = R2 080 650,68 – (R4 429 600 x 12% x 1/12)
= R2 080 650,68 – R44 296
= R2 036 354,68
Residual income Trampoline Division = R6 712 141,10 – (R23 512 850 x 10% x 1/12)
= R6 712 141,10 – R195 940,42
= R6 516 200,68
The comparison of the divisions based on TT’s current performance measure would seem unfair and
biased. This is because the figures used to calculate residual income are in absolute terms and not
expressed as percentages. Based on the residual income approach, the Trampoline Division appears
to be quantitatively performing better than the Springs Division. However, the total investment (R4,4m
million in the Springs Division and R23,5m in the Trampoline Division) made in each division cannot be
underplayed and should also be considered when assessing the performance of a manager and/or
division. Hence, it would rather be sensible to also consider and/or implement performance measures
such as return on investment (ROI) which also considers the extent of the investment made in the
division.
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(j) Calculate, compare and briefly discuss the actual residual income of the two divisions [13]
 Controllable profit:
Springs Trampoline
Division Division
R R
Operating profit (given) 2 475 000 7 240 000
Less: Operating expenses 394 349,32 527 858,90
Head office expenses 0 0
Staff costs – administrative staff 0 0
Staff costs – factory staff 206 250 306 000
Rates and taxes -administrative building 0 0
Rates and taxes - factory building 8 250 6 500
Finance costs on bond – administrative building 0 0
Finance costs on bond – factory building 124 849,32 150 158,90
Legal expenses 55 000 65 200
Controllable profit R2 080 650,68 R6 712 141,10
 Springs: R275 000 x 75% = R206 250

 Trampoline: R408 000 x 75% = R306 000
 Springs: R14 700 000 x 10% x 31/365 = R124 849,32
 Trampoline: R17 680 000 x 10% x 31/365 = R150 158,90
 June 2018 factory building interest: (R123 287,67/R15 000 000) x (365/30) = 10% p/a OR
 July 2018 factory building interest (R126 123,29/R14 850 000) x (365/31) = 10% p/a
 June 2018 factory building interest: (R147 945,21/R18 000 000) x (365/30) = 10% p/a OR
 July 2018 factory building interest (R151 517,81/R17 840 000) x (365/31) = 10% p/a
 Controllable investment
Springs Trampoline
Division Division
R R
Total assets (given) 43 180 000 45 500 500
Less: Administrative buildings 3 345 000 0
Controllable assets 39 835 000 45 500 500
Less: controllable liabilities 35 405 400 21 987 650
non-current liabilities (given) 35 175 000 18 500 000
less: Administrative property bonds 3 345 000 0
plus: current liabilities 3 575 400 3 487 650
Controllable investments R4 429 600 R23 512 850
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4.26 UGOGO BAKKER (PTY) LTD
a. Assist Ms Poppy Smith by

iii. Calculating whether EB will be able to manufacture the required budgeted number of CC
and CM biscuits for the month of November 2018.
Hours (minutes) available – Hours (minutes ) required = shortage/surplus

1 778① hours – 1 890 hours = 112 hours shortage
106 680 minutes – 113 400 minutes = 6 720 minutes shortage
① Hours (minutes) available Alternative 1 Alternative 2
Total ovens 10 12
Days 22 22
Hours 7 7
Maximum available hours 1 540 1 848
(10 x 22 x 7); (12 x 22 x 7) 92 400 mins 110 880 mins
Plus(Less): broken time (2 x 17 x 7 ); (2 x 7 x 5) 238 (70)
Total available hours 1 778 1 778
106 680 mins 106 680 mins
 22 days less 5 days = 17 days
 Hours (minutes) required CC CM Total hours

Budgeted number of units 3 000 2 800
Baking hours per unit 0,35 0,30
(R4,20/R12 per hour; R3,60/R12 per hour)
Baking minutes per unit 21 18
Total number of hours 1 050 840 1 890
Total number of minutes 63 000 50 400 113 400
iv. Budgeted monthly optimum manufacturing mix for EB for the month of November 2018.
Details CC CM
R R
Sales price 40,00. 35,00.
Prime costs (21,75) (17,90)
Variable manufacturing overheads (4,00) (4,00)
Variable selling costs (2,00) (2,00)
Contribution per unit R 12,25 R 11,10
Limiting factor: Baking hours per unit (from a(i)) 0,35 0,30
Limiting factor: Baking minutes per unit 21 18
Contribution per limiting factor (CPLF) (hours) R 35 R 37
(R12,25/0,35; R11,10/0,30)
Contribution per limiting factor (minutes) R0,58 R0,62
(R12,25/21; R11,10/18)
Ranking based on CPLF 2 1
Optimum manufacturing mix 2 680 2 800
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 Given
 938/0,35 hrs of 56 280/21 mins = 2 680 units
 1 778 hrs(from (a(i) above) – 840 hrs(a(i) above) = 938 hrs
 106 680 mins(from (a(i) above) – 50 400 mins(a(i) above) = 56 280 mins
b. Prepare MB’s actual quantity statement for October 2018.
Alternative 1: using kilograms

Physical units Equivalent units
Direct
Input Output Conversion
Details raw materials
kg kg kg % kg %
200 Opening WIP
1 300 Put into production
Completed from:
Opening work-in-progress 188 0 0 75 40
Current production 912 912 100 912 100
Completed and transferred 1 100 912 987
Normal loss 90  
Abnormal loss 40 40 32 80
Closing WIP 270 270 100 243 90
1 500 1 500 1 222 1 262
 Given
 1,3 tonne x 1 000 kg = 1 300 kg
 200 kg x 94% (100% less 6% normal loss) = 188 kg
 188kg x 40% = 75 kg (rounded to nearest unit of measure (kg))
 200 units x (500 g / 1 000 g) = 1 100 kg
 1 100 kg completed and transferred – 188 kg = 912 kg
 (200 kg + 1 300 kg) input x 6% = 90 kg
 Balancing amount: [1 500 kg (200 + 1 300) – 1 100kg – 90kg – 270kg] = 40kg
 40 kg x 80% = 32 kg
 270 kg x 90%= 243 kg
 Take note: The given scenario allowed for the short-cut method to be used. In this instance and any
other similar instances, the short-cut method must be used.
Alternative 2: using units
Take note:
The required quantity statement for this question could also be prepared in terms of units as a unit of
measure, that is, biscuit packets of 500 grams each. Although the Alternative 2 option is not reflected,
the same principles as applied in Alternative 1 are equally applicable to Alternative 2.
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c. Based on your answer in (b) calculate MB’s equivalent cost per unit for October 2018.
Alternative 1: using kilograms
Unit cost statement Total Direct raw Conversion
material costs costs
(kg) R
R R
Opening WIP 10 000 0 0
Current production costs
Direct raw material 25 100 25 100 0
Direct labour & manufacturing overheads 75 300 0 75 300
Normal loss scrap value (900) (900)
Total R 109 500 R 24 200 R 75 300
Equivalent cost per kg R79,47 R19,80 R59,67
 Given
 90kg (from question (b) calculation  above) x R10 = R900
 R24 200/1 222 (from question (b) above) = R19,80
 R75 300/1 262 (from question (b) above) = R59,67
 R19,80 + R59,67 = R79,47
d. Prepare MB’s statement of profit or loss and comprehensive income (income statement)
for the month of October 2018.
Details Amount
Revenue 176 000
Cost of sales (86 952)

Opening work-in-progress (10 000)
Direct raw material (23 404)
Direct labour & manufacturing overheads (73 394)
Less: Closing work-in-progress 19 846
Abnormal loss (2 301)

Gross profit R86 747
Distribution cost (9 600)
Fixed distribution cost (5 000)
Variable distribution cost  (4 600)
Depreciation (2 000)
Net profit R 75 147

 Given
 2 200 units x R80 = R176 000
 R4 000 + R6 000 = R10 000
 (912kg x R19,80 = R18 058) + (270kg x R19,80 = R5 346) = R23 404
 (987kg x R59,67 = R58 894) + (243kg x R59,67 = R14 500) = R73 394
 (270kg x R19,80 = R5 346) + (243kg x R59,67 = R14 500) = R19 846
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 Abnormal loss R
Direct raw material (40kg x R19,80) 792
Direct labour & manufacturing overheads (32kg x R59,67) 1 909
Total cost R2 701
Scrap value (40kg x R10) (400)
Abnormal loss R2 301
 2 200 units/48 units per pallet = 45,8333. Rounded up to 46 x R100 per pallet = R4 600
 (R130 000 – R10 000)/(5 year x 12 months) = R 2 000 per month
e. With the imminent retirement of Ms Ugogo Bakker briefly explain to her two daughters, five
(5) benefits of divisionalising the two bakeries, with each daughter independently
managing one bakery.
1) Divisionalisation can improve the quality of decisions made because the two daughters (divisional
managers) know the savoury and sweet biscuit market (local conditions) and are able to make
business decision and judgments that are more informed.
2) Decisions are made more quickly because information does not have to pass along the chain of
command to and from Ugogo Bakker (top management).
3) The delegation of responsibility to the two daughters and the freedom to make decisions should
motivate the two daughters to execute their responsibilities well.
4) Ms Ugogo Bakker (top management) is freed and allowed to focus on strategic functions and/or
decisions for the bakeries.
5) Divisionilisation provides the two daughters with greater freedom, thus making their activities more
challenging and providing the opportunity to achieve self-fulfilment.
6) It provides valuable training ground for the two daughters by giving them experience of managerial
skills in a less complex environment than that faced by managing the entire UB.
7) Unprofitable activities will be identified quickly by the daughters and will either be eliminated or
turned around.
8) Divisionalisation can create healthy competition between the two sisters to the benefit of the entire
company.
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f. Recommend to UB whether or not the special offer from New Mill should be accepted.
Support your recommendation with the appropriate and relevant calculations.
Comprehensive approach Current supplier New supplier

(Golden Mills) (New Mill)
R R
Purchase price 192 000,00  168 000,00
Ordering cost 9 600,00  28 800,00 
Holding cost 9 535,20 5 365,80
Normal 8 220,00  4 065,00 
Safety stock 1 315,20  1 300,80 
Total R 211 135,20 R 202 165,80
Net saving: R202 165,80 less R211 135,20 = R8 969,40
Incremental approach Movement

Saving in purchase price 192 000,00 - 168 000,00 24 000,00.
Increase in ordering cost 9 600,00 - 28 800,00  (19 200,00)
Saving in holding cost 4 169,40
Saving in Normal 8 220,00 - 4 065,00 4 155,00
Saving in Safety stock 1 315,20 - 1 300,80 14,40
Net saving R 8 969,40
 24 tonnes (given) x 1 000 = 24 000 kg x R8 = R192 000

 24 000 kg x R7 = R168 000
 24 000 kg/ 3 000 kg per order = 8 orders x R1 200 = R 9 600
 24 000 kg/ 1 500 kg per order = 16 orders x R1 800 (R1 200 x 1,50) = R 28 800
 R5 + (R8 x 6%) = R5,48 x (3 000 kg/2) = R8 220
 R5 + (R7 x 6%) = R5,42 x (1 500 kg/2) = R4 065
 R5 + (R8 x 6%) = R5,48 x (24 000 kg/300 days x 3 days) = R1 315,20
 R5 + (R7 x 6%) = R5,42 x (24 000 kg/300 days x 3 days)= R1 300,80
Recommendation:
UB should accept the offer from New Mills as it will result in a saving of R8 969,40 (R211 135,20 –
R 202 165,80)
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4.27 AFRiKAN-ROCK CEMENTS FIRST (PTY) LTD
(a) Briefly comment on Dr. Myburgh’s response regarding her brewing legal woes. [3]
 Dr. Myburgh is a registered CA (SA). Therefore the requirements of the “Code of Professional
Conduct of the South African Institute of Chartered Accountants” (“the Code”) are applicable to
her.
 The issues about her brewing legal woes appears to be centered around her integrity and ethical
behaviour.
 In accordance with the Code, a professional accountant shall comply with “integrity” as one of the
five fundamental principles. That is, “to be straightforward and honest in all professional and
business relationships”.
 With reference to the given information, it would appear that Dr. Myburgh’s integrity and honesty
in dealing with African Roots Cements Plc could be questioned. This is primarily because:
- After 40 years of service at a company, it is expected for one to have amassed a great deal
of knowledge, experience and/or competitive advantage information about the company and
the industry they have served, more so when one was a CEO.
- Protecting a competitive advantage is pivotal to any company, especially from previous
employees who might possess critical and strategic information about the continued existence
of their previous employer.
- With the need to protect their market share, customer base and competitive advantage, it
would therefore seem unlikely that the intention of African Roots Cements Plc was to enter
into a three-months long restraint-of-trade agreement instead of a three-year long agreement.
Without any information suggesting the contrary, it would seem unusual for a company in a
specialised industry to arrange for a three months only restraint-of-trade agreement worth R30
million.
- The fact that Dr. Myburgh states that R10 million a year is “peanuts”, seems to suggest that
she is aware that the true restraint-of-trade agreement term is three years and not three
months. That is, R10 million x 3 years is equivalent to the R30 million she received for
restraint-of-trade.
- Withholding the truth (keeping quite when she realised that there was a mistake in the
contract) would also amount to dishonesty.
- Furthermore, the name chosen by Dr. Myburgh for her cement company (AfrikanRock
Cements (Pty) Ltd) closely resembles the name of her prior employer. If her intention was
honest, it would seem rational to choose a name that would not cause any confusion in the
market and/or industry.
(b) Prepare ARC’s cement manufacturing/production budget in units for the financial
[8]
year ending 28 February 2019.
HdC MfC LdC FtC Total

Sales  148 800 52 500 142 500 238 300 582 100
Plus: Closing inventory 8 700 0 15 000 13 700 37 400
Available for sale 157 500 52 500 157 500 252 000 619 500
Less: Opening inventory 0 0 0 0 0
Units to manufacture 157 500 52 500 157 500 252 000 619 500
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(b) Prepare ARC’s cement manufacturing/production budget in units for the financial
[8]
year ending 28 February 2019. (continued)
 Given
 HdC:R14 136k/R95 = 148,8k; MfC:R1 050k/R20 = 52,5k; LdC:R9 690k/R68 = 142,5k;
FtC:R23 234 250/R97,50 = 238,3k
 Balancing figures
 No opening inventory was budgeted for.
 HdC: 11 812,5k/75kg = 157,5k; MfC: 262,5k/5kg = 52,5k; LdC: 7 875k/50kg = 157,5k;
FtC: 6 300k/25kg = 252k
 Kilograms needed for manufacturing:
Details Kilograms
Maximum normal capacity (given) 35 000 000
Current operating capacity (35 000 000kg x 75% (given)) 26 250 000
Kilograms needed to manufacture at current capacity
HdC: 26 250 000 kg x 45% (given) 11 812 500
MfC: 26 250 000 kg x 1% (given) 262 500
LdC: 26 250 000 kg x 30% (given) 7 875 000
FtC: 26 250 000 kg x 24% (given) 6 300 000
(c) Calculate the budgeted total contribution amount that ARC must generate for the
[4]
2019 financial year so as to break-even.
Take note: This question stated that “break-even units calculations are not required”. It was
therefore important for students to illustrate an understanding that, AT BREAK-EVEN POINT,
TOTAL FIXED COSTS = TOTAL CONTRIBUTION AMOUNT.
Budgeted annual fixed manufacturing overheads R5 670 000 

Budgeted annual fixed selling & distribution costs R158 880 
Total budgeted annual fixed costs (R5 670k + R158,88k) R5 828 880
Therefore, total contribution amount at break-even is R5 828 880
 Budgeted annual fixed manufacturing overhead:

Products Workings Budgeted allocation to
products
HdC 157 500 x R10 R1 575 000
MfC R0
LdC 157 500 x R10 R1 575 000
FtC 252 000 x R10 R2 520 000
Total R5 670 000
 Manufacturing units as per (b) above

 Given, fixed manufacturing overheads only allocated to joint products
 HdC:R44 640 + MfC:0 + LdC:R42 750 + FtC:R71 490 = R158 880
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(d)(i) Calculate the correct total annual budgeted joint costs to be allocated to the joint
[6]
product(s) during the 2019 financial year.
Details Amount
Budgeted direct raw material purchases 16 485 000
Budgeted crushing and mixing costs 4 515 000
Joint costs before by-product net revenue ( + ) 21 000 000
Less: Net revenue/proceeds from the by-product (MfC) (997 500)
Sales (given) 1 050 000
Less: Packaging costs (PC) 26 250
Less: Variable selling costs (VSC) 26 250
Joint costs to be allocated to joint products (+  + ) R20 002 500
 Total budgeted direct raw material purchases = R7 875k + R8 610k = R16 485 000
 Limestone purchases: (26 250 000 x 0,6) x R0,50 = R7 875 000
 Silica purchases: (26 250 000 x 0,4) x R0,82 = R8 610 000
 Given
 R1 050 000 (By-product sales) less (R0(JC) + R26 250(PC) + R26 250(VSC)) = R997 500
 Current operating capacity in kilograms as per (b) calculation  above
(d)(ii) Allocate the correctly calculated total annual budgeted joint costs in (d)(i) above to
[3]
the joint product(s).
Products Allocation workings Allocated

joint costs
HdC 20 002 500 x 11 812 500/25 987 500 R9 092 045,45
MfC MfC is a by-product and not allocated joint costs R0
LdC 20 002 500 x 7 875 000/25 987 500 R6 061 363,64
FtC 20 002 500 x 6 300 000/25 987 500 R4 849 090,91
Total R20 002 500
 Refer to d(i) above

 157 500 x 75kg = 11 812 500 OR as per question (b) calculation  above
 157 500 x 50kg = 7 875 000 OR as per question (b) calculation  above
 252 000 x 25kg = 6 300 000 OR as per question (b) calculation  above
 Refer to the manufacturing budget as per question (b) above.
 11 812 500 + 7 875 000 + 6 300 000 = 25 987 500
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(e) Draft a report to Dr. Myburgh and briefly explain the other alternative method(s), if
[5]
any, of allocating joint costs to the joint products.
Report: Report on the alternative methods of allocating joint costs to the joint products
From: Student/Senior audit clerk
To: Dr. Christian Myburgh at AfrikanRock Cements (Pty) Ltd (ARC)
Date: 27 March 2019
I have the honour to present the following in response to your dissatisfaction about ARC’s current
method of allocating the company’s joint costs to the joint products (the physical measures
method). Instead of the physical measures method, ARC can consider using any one (1) of the
following three (3) additional alternative methods:
1. Sales value at split-off point method: When this method is used, “joint costs are allocated
joint products in proportion to the estimated sales value of production. A product with higher
sales value will be allocated a higher proportion of the joint costs”. (Drury, 2015:138)
2. Net realisable value (NRV) method: When this method is used, joint costs are allocated to
the joint products in proportion to the NRV of each joint product. The NRV is calculated as:
estimated sales value of the final product less (i) cost to sell the product and, (ii) product’s
further processing costs (if applicable).
3. Gross (constant) profit percentage method: This method “assumes that there is a uniform
relationship between cost and sales value of each individual product” (Drury, 2015:140). When
this method is adopted, the joint costs are allocated to the joint products as follows:
(i) Establish the company’s gross profit and gross profit percentage
(ii) Determine each product’s gross profit amount by applying the company’s gross profit
percentage.
(iii) Establish each product’s allocated joint cost gross as a balancing figure after
eliminating from the determined gross profit amount per 3(ii) above the product’s: (i)
sales value; and (ii) further processing cost.
I am confident that the above information will help you make an informed decision about the
allocation of ARC’s joint costs to the joint products.
Should you need further clarity on any item we have addressed above, you are more than
welcome to contact us.
Kind regards,
Student/Senior audit clerk
xyzauditfirm@auditfirm.org
012 345 678
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(f) Calculate the following variances for the period-ended 31 August 2018: [17]
(i) Sales prices variances for product HdC and FtC only (per product and in total for both)
Product Actual Standard Difference Actual Sales price

selling selling R sales variance
price price volume R
R R
HdC 98,00 95,00 3,00 73 500 220 500 F
FtC 95,50 97,50 (2,00) 121 242 000 A
000
Total R21 500 A
 R 7 203 000/73 500 = R98,00

 R14 136 000/148 800 (from question (b) above) = R95,00 (or given)
 R11 555 500/121 000 = R95,50
 R23 234 250/238 300 (from question (b) above) = R97,50 (or given)
 given
(ii) Direct labour efficiency variance for product LdC only
Product Standard Actual Difference Standard Labour

direct labour direct labour direct efficiency
time time labour rate variance
LdC 44 062,50 52 875,00 8 812,50 R24,00 R211 500 A

OR in minutes as per below
LdC 2 643 750 3 172 500 528 750 R0,40 R211 500 A
 Given
 88 125 x 30mins / 60mins = 44 062,50hrs
 88 125 x 0,6hours = 52 875,00hrs
 [(R1 890k/157 500 (from question (b) above)]/30mins x 60mins = R24,00 p/h
 44 062,50hrs x 60mins = 2 643 750mins
 52 875hrs x 60mins = 3 172 500mins
 R24/60mins = R0,40 p/minute
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(f) Calculate the following variances for the period-ended 31 August 2018
[17]
(continued):
(iii) Direct raw material purchase price variances (per material type and in total)
Direct Actual Standard Actual Direct raw material

Material purchase purchase quantity purchase price
name price price purchased variances
R R R
Limestone 0,60  0,50 9 517 000 951 700 A

Silica 0,80  0,82 5 833 000 116 660 F
Total 15 350 000 R835 040 A
 R5 710 200/9 517 000 kg = R0,60 p/kg

 R4 666 400/5 833 000 kg = R0,80 p/kg
 given
(iv) Direct raw material mix variances (per material type and in total)
Direct Actual usage Actual usage Standard Direct raw

Material in standard in actual Price material mix
name mix proportion variances
R
R
Limestone 9 210 000 9 517 000 0,50 153 500 A
Silica 6 140 000 5 833 000 0,82 251 740 F
Total 15 350 000 R98 240 F
 15 350 000 x 0,6 = 9 210 000

 15 350 000 x 0,4 = 6 140 000
 given
 9 517 000 + 5 833 000 = 15 350 000
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(g) Prepare the actual statement of profit or loss (income statement) for the period-
[12]
ended 31 August 2018 for product LdC only.
Income statement items Workings/ R

Reference
Sales 4 653 000
Less: Cost of sales 4 864 500
Opening inventory 0
Plus: Manufacturing cost 6 080 625
Joint costs allocated 3 172 500
Direct labour 88 125 x R18 1 586 250
Packaging costs 88 125 x R5 440 625
Applied fixed manufacturing overheads (FMO) 88 125 x R10 881 250
Less: Closing inventory 17 625 x R69 1 216 125
Plus: FMO over-recovery 881 250 – 875 750 5 500
Gross profit/(loss) (206 000)
Less: Selling and distribution costs R21 375 + R84 600 105 975
Fixed 42 750/12 x 6 21 375
Variable 70 500 x R1,20 84 600
Net profit/(loss) before tax (R311 975)
 Given
 0 + R6 080 625 – R1 216 125 = R4 864 500
 R3 172 500 + R1 586 250 + R440 625 + R881 250 = R6 080 625
 R30 x 0,60 hours = R18 p/u
 R787 500/157 500(see question (b) above) = R5 p/u
 Fixed manufacturing overhead absorption rate = given
 Joint cost per unit = R3 172 500/88 125 = R36 p/u
 0 + 88 125 – 70 500 = 17 625 units
 R18 + R5 + R10 + R36 = R69 p/u OR R6 080 625/88 125 = R69 p/u
 R171 000/142 500 (transferred from question (b) above = R1,20 p/u
 17 625 x R69 = R1 216 125
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(h) As part of the organisational structure investigation, you are requested to: [13]
(i) Calculate CMD’s projected residual income for the 2020 financial year
Details R
Profit before taxation (given) 17 442 000
Adjustments:
consultation fee – controllable: no adjustment 0
Add: Audit fees – not controllable and adjusted 600 000
Add: Allocated head office expenses – not controllable and adjusted 210 0000
depreciation – related asset controllable: no adjustment 0
Controllable profit R18 252 000
Less: Cost of capital charge (R77 520k x 9,50%) (7 364 400)
Residual income R10 887 600
(ii) Calculate CMD’s projected return on investment for the 2020 financial year
Controllable profit (as per (h)(i) above) R18 252 000

Controllable investment (given) R77 520 000
Return on investment (R18 252k/R77 520k) 23,54%
(iii) List four non-financial measures that can be used to evaluate CMD’s performance in terms of
the quality and efficiency of the cement manufacturing process
1. The actual kilograms (quantity) of cement manufactured compared to the budgeted kilograms
(quantity) to be manufactured.
2. The nature of the feedback from the customers about the quality of the cement.
3. The number and the nature of the complaints lodged with the NHRBC (or other applicable
regulatory bodies) about the quality of the cement.
4. The nature, extent and frequency of planned downtime in the cement manufacturing plant.
5. The extent of unplanned downtime in the cement manufacturing plant.
6. Kilograms, units and/or percentage of cement returned due to poor quality.
7. Kilograms, units and/or percentage of defective cements.
8. The extent and nature of direct labour idle time and direct labour efficiencies/productivity.
9. Vertical comparison to similar other cement manufacturing plants.
10. The morale and the attitude of the cement manufacturing staff.
11. Nature and extent of the feedback from the cement manufacturing staff.
12. Adherence and compliance to regulations and/or standards, for example those of the SABS.
13. Abnormal wastage.
14. Cement rejection rate at inspection points (if applicable).
(iv) Briefly explain benchmarking in the context of CMD’s cement manufacturing process
Within the context of CMD’s cement manufacturing process, benchmarking refers to the
investigation and the identification of the best cement manufacturing practices by comparing CMD’s
process with that of similar but top performing cement manufacturers across the industry (locally,
internationally or both). From CMD’s perspective, the intention of investigating and identifying these
best practices is to replicate them for the purpose of improving their current cement manufacturing
process. To a large extent, it (benchmarking) will involve CMD researching information about the
latest trends (technologically and otherwise) within the cement manufacturing process.
Furthermore, it could involve comparing CMD’s performance in terms of cement manufacturing
practice to the best in the field.
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(i) Assuming that the BMD’s annual requirements of the HdC for the 2020 will be 150
[9]
000 units:
(i) Calculate (if any) the envisaged total contribution that CMD will lose during the 2020 financial
year as a result of transferring 150 000 units of HdC to BMD.
 Determining possible sacrifice of external sales units:

Maximum annual manufacturing capacity of HdC units (given) 210 000
Annual external demand/sales of HdC units (given) 185 000
Expected spare manufacturing capacity in units (210k less 185k) 25 000
Required annual HdC units by BMD (given) 150 000
Shortage supplied from sacrificing external sales units (150k – 25k) 125 000
Take note: For the CMD to fully supply the required 150 000 units to the BMD, CMD will have to
sacrifice the selling of 125 000 units to their current external customers. As a result, CMD will thus
lose contribution relating to these sacrificed units.
 Calculating total envisaged lost contribution:
Details R R
Per unit Total
Sales (A) 102,60 12 825 000
Less: Total variable costs (B) (67,50) (8 437 500)
Direct labour cost 22,50 2 812 500
Other variable manufacturing costs 43,50 5 437 500
Variable selling & distribution cost 1,50 187 500
Lost contribution (A) less (B) R35,10 R4 387 500
Total envisaged lost contribution is therefore: 125 000 x R35,10 = R4 387 500
 R95 (given) x 1,08 = R102,60

 R22,50 (given) + R43,50 (given) + R1,50 (given) = R67,50
(ii) Calculate the minimum transfer price that CMD will be willing to accept for the transfer of each
unit of HdC required by BMD during the 2020 financial year.
The given scenario results in sacrificed external sales units, therefore, the minimum transfer price is
calculated as follows:
[Total incremental cost (all units to be transferred) + total opportunity costs (from external sales
forfeited)] ÷ total number of units to be transferred.
Incremental costs R
Direct labour costs per unit 22,50
Other variable manufacturing costs per unit 43,50
Variable selling & distribution costs per unit* 0
Variable costs per unit 66,00
Total incremental cost (R66,00 x 150 000 units) R9 900 000
242
MAC3701/301/3/2020
(i) Assuming that the BMD’s annual requirements of the HdC for the 2020 will be 150
[9]
000 units (continued).
Details Alternative 1 Alternative 2

per unit (R) Total (R)
Other variable manufacturing costs 43,50 6 525 000
Direct labour costs 22,50 3 375 000
Variable selling & distribution costs* 0 0
Total incremental costs 66,00 9 900 000
Lost contribution (R4 387 500/150 000) 29,25 4 387 500
Total incremental costs + lost contribution R95,25 14 287 500
Minimum transfer price R95,25 R95,25
 Given
 R4 387 500 ÷ 150 000 = R29,25
 R43,50 x 150 000 = R6 525 000
 R22,50 x 150 000 = R3 375 000
 R14 287 500 ÷ 150 000 = R95,25
 R43,50 +R22,50 + R0 + R29,25 = R95,25
* Variable selling & distribution costs are only incurred on external sales (given information)
(j) (i) Advise whether BMD will be able to fully meet its 2020 financial year annual [10]
demand.
Details Hours Minutes

Available maximum brick-making time 122 325 7 339 500
Less: Total brick-making time needed 141 250 8 475 000
MB (750 000 x 6 minutes/60 minutes) 75 000 4 500 000
FB (1 125 000 x 3 minutes/60 minutes) 56 250 3 375 000
PB (400 000 x 1,5 minutes/60minutes) 10 000 600 000
Shortage (122 325 – 141 250) (18 925) (1 135 500)
 Available production days calculations

Details Days
Total days in a financial year for all brick-makers 27 375
Less: Compulsory leave days 1 500
Less: Discretionary leave days 600
Less: Weekend days – not operational during weekends 7 800
Total productive days 17 475
 365 days x 75 brick-makers = 27 375 days

 20 days x 75 brick-makers = 1 500 days
 (15 days x 40% x 75 x ⅓ = 150) + (15 days x 60% x 75 x ⅔ = 450) = 600 days
 52 weekends x 2 days per weekend x 75 brick-makers = 7 800 days
 17 475 x 7 hours (given) = 122 325 hours x 60mins = 7 339 500 minutes
Advice:
Based on the above calculations, a maximum of 122 325 brick-making hours are available for the
2020 financial year against the required 141 250 hours. BMD will, therefore, not be able to fully
meet the 2020 financial year demand for all the three (3) types of bricks.
243
MAC3701/301/3/2020
(j) (ii) Calculate the optimum mix of bricks to maximize BMD’s projected contribution for [10]
the 2020 financial year.
MB FB PB
Sales R6,50 R10,50 R5,00
Less: Total variable costs per unit (R4,40) (R5,85) (R3,05)
Direct raw material costs R2,05 R4,25 R2,10
Brick-making labour costs R2,00 R1,00 R0,50
Variable manufacturing overheads R0,25 R0,50 R0,35
Variable selling costs R0,10 R0,10 R0,10
Brick-making time in minutes
6 3 1,5
Brick-making time in hours 6/60 = 0,1 3/60 = 0,05 1,5/60 =0,025
CPLF* in minutes R0,35 R1,55 R1,30
OR CPLF* in hours R21,00 R93,00 R78,00
Ranking in terms of CPLF* 3 1 2
All FB units manufactured first 1 125 000
Brick-making time used for FB 56 250
Available brick-making time after FB 66 075
All PB units manufactured 2nd 400 000
Brick-making time used for PB 10 000
Available brick-making time after FB and 56 075
PB
MB units manufactured 3rd 560 750
CPLF* = Contribution per limiting factor
BMD optimum manufacturing mix of bricks is therefore 1 125 000 FBs, 400 000 PBs and 560 750
MBs.
 MB:R20/60 x 6 = R2,00; FB:R20/60 x 3 = R1,00; PB:R20/60 x 1,5 = R0,50

 Minutes: MB:R2,10/6 = R0,35; FB:R4,65/3 = R1,55; PB:R1,95/1,5 = R1,30
 Hours: MB:R2,10/0,1 = R21,00; FB:R4,65/0,05 = R93,00; PB:R1,95/0,025 = R78,00
 Given
 1 125 000 (given) x 3mins/60mins = 56 250hrs
 122 325hrs (see (j)(i) above) – 56 250hrs = 66 075hrs
 400 000 (given) x 1,5mins/60mins = 10 000hrs
 66 075hrs – 10 000 = 56 075hrs
 56 075/6mins x 60mins = 560 750 units
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UNISA 2020
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MAC3701/301/3/2020

Tutorial Letter 301/3/2020

Department of Management Accounting

These questions must be used to improve examination technique

Cellphone no: 076 892 0520

FACE-TO-FACE APPOINTMENTS THE WEEK BEFORE THE EXAMINATION

3.1 DELICIOUS CEREALS (PTY) LTD 50 Marks

1. The primary ingredient for CC is corn and for WC is wheat.

FIXED MANUFACTURING OVERHEADS

Activity area Notes Total cost

3.2 KILO LTD 50 Marks

Selling price per unit 500 700

3. Inventory on hand at 31 March 2017 is 12 000 kg of material A and 6 000 kg of material B.

For each question below please remember to:

(e) With regards to the divisionalisation:

The standard cost per unit of product Gym-indoor:

Total budgeted fixed production overheads R725 000

Material Material purchased and issued to Cost

Actual production and sales (units) 10 200

XTreme ball AveJoe ball Intro ball

TREE PLANTATION DIVISION (TPD)

The production and sales of the logs is as follows:

Selling price to external customers per log R270

Financial year-ending 30 April 2016 30 April 2017

1. Information relating to WWD’s 2016 financial year-end actual results:

BLACK INDUSTRIALIST DEVELOPMENT PROGRAMME (BIDP)

In respect of the Tree Plantation Division (TPD)

CAPPUCCINO DIVISION - BUDGET INFORMATION

Product RCAP UCAP FCAP Total

Costs 13 955 700 12 044 000 10 272 800 36 272 500

Profit/(loss) R 1 994 300 R 2 206 000 (R 80 800) R 4 119 500

1. The budget assumes that:

COFFEE DIVISION - BUDGET INFORMATION

BEANCINO (PTY) LTD - CURRENT YEAR INFORMATION

Coffee division Cappuccino division

For each question below please remember to:

THIS QUESTION CONSISTS OF THREE (3) INDEPENDENT PARTS

Raw material per product

Raw material cost

3.8 HIGH RISE LTD 50 Marks

FINE PINE LTD

One wooden table requires:

In respect of Fine Pine Ltd:

ACTIVITY-BASED COSTING SYSTEM

ACTUAL DATA FOR JUNE 2016

JULY 2016 BUDGET

COMPANY’S GENERAL INFORMATION

Name Designation Qualification(s)

THE MILLING SITE

For each question below please remember to:

3.12 CHEMICAL EXPERIMENTS COMPANY (PTY) LTD 50 Marks

CHEMICAL EXPERIMENTS COMPANY (PTY) LTD

NORMAL DIVISION: MAY 2017

1. EXTRAORDINARY DIVISION MAY 2017 INFORMATION

Variable further Market selling price

2. EXTRAORDINARY DIVISION JUNE 2017 BUDGETED INFORMATION

The following information relates to the month of June 2017:

SUGGESTED TRANSFER PRICING PRICE CHANGE IMPOSED BY HEAD OFFICE

For each question below please remember to:

Question (a) relates to Normal Division

SOLAR PANEL DIVISION

Product REGULAR SUPER HYPER TOTAL

R’ 000 R’ 000 R’000 R’000