MAC4862/102/0/2017
Tutorial Letter 102/0/2017
APPLIED MANAGEMENT
ACCOUNTING
MAC4862
NMA4862
ZMA4862
Year module
Department of Financial Intelligence
This tutorial letter contains important
information about your module.
BARCODE
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MAC4862/102
MODULE PURPOSE
This module is intended for students who are studying towards a Certificate in the Theory of
Accounting (CTA), a prerequisite for the professional qualification of Chartered Accountant (SA)
(registered with SAICA). This module will help you to develop some of the prerequisite
competencies.
The purpose of the module is to provide students with knowledge of Management Decision
Making and Control (MDC); as well as Strategy, Risk Management (SRM), and Financial
Management (FM). The module will create an understanding of and develop skills with regard to
the following areas: Management and use of costs, control, decision-making and planning
approaches and processes; strategy; risk management; function of financial management; as
well as mergers and acquisitions, and business plans.
INTRODUCTION AND OVERVIEW
The purpose of this tutorial letter is to provide students with tutorial matter relating to Management
Decision Making and Control topics (often referred to as Costing). This tutorial letter will build upon
your prior knowledge and introduce a few new concepts relating to decision making and control.
PRE-REQUISITES
The parts and learning units in this tutorial letter build, to a large extent, upon prior knowledge
obtained in your undergraduate Management Accounting studies and in the post-graduate Advanced
Management Accounting module. It is therefore assumed that you have achieved the necessary prior
learning.
STRUCTURE OF THIS TUTORIAL LETTER
This tutorial letter is structured in three parts, each containing several learning units. A learning unit is
the main study area within a part, and each learning unit is further divided into sub learning units. You
will find the outcomes, which you are required to achieve for each learning unit in this tutorial letter at
the beginning of each learning unit. Self-assessment activities are provided at the end of each learning
unit so that you can assess whether you have mastered the learning outcomes.
These topics will be dealt with in two separate tutorial letters, of which this is the first. The syllabus will
then be revised in a further two tutorial letters.
- WEEK from 25 January to 31 January 2017 (Topics 1 – 3)
- WEEK from 22 March to 28 March 2017 (Topics 4 – 7)
Dear student, we suggest that you allocate your time spent on this tutorial letter, according to the
following approximate allocation.
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Part 1
Cost accounting bases and allocation (30%)
Part 2
Planning and control (40%)
Part 3
Decision-making (20%)
Part 4
Integrated self-assessment test (10%)
Proposed time allocation
10%
30%
Part 1 - Bases and allocation
Part 2 - Planning and control
20%
40%
Part 3 Decision-making
Part 4 - Integrated self-assessment
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CONTENT – THIS MODULE
The diagram below contains a schematic presentation of the content of this module.
MAC4862
Applied Management Accounting
Planning and
general
Tutorial
letter 101
Management
decision making
and control
Strategy, Risk,
Management,
Financial
Management
Tutorial letter 102
(this tutorial letter)
Tutorial letter
103
Prior exams,
questions and
revision
Tutorial
letter 104
Tutorial
letters in
the 3-series
(3**)
Tutorial
letter 105
Topics
Integrated selfassessment
TEST 1 – 14 March 2017
• Nature, classification and
allocation of cost (variable
and absorption costing,
ABC)
• Product costing systems
• Planning, budgeting and
control
• Cost-volume-profit analysis
TEST 1 – 14 March 2017
Topics 1 – 3, first four bullets.
TEST 2 – 25 April 2017
TEST 2 – 25 April 2017
•
•
•
•
Standard costing
Performance management
Transfer pricing
Information for decisionmaking (relevant cost &
revenues; pricing decisions
& profitability analysis;
decision-making under
conditions of risk &
uncertainty)
Topics 4 – 7, last four bullets.
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STUDY MATERIAL AND RESOURCES
Prescribed study material
The prescribed textbooks for this module are:
•
•
Management and Cost Accounting (including Student’s Manual), 9th edition (Drury, C)
Managerial Finance, 7th edition (Skae, FO.)
Important note:
This tutorial letter makes principle reference to the textbook Management and Cost Accounting
(including Student’s Manual), 9th edition (Drury, C.)
Note that the Management and Cost Accounting (Drury) textbook includes access to the online
CourseMate system which offers interactive learning tools in line with the textbook and an interactive
ebook. It is recommended that students register on CourseMate and use the tools available to assist
them as they proceed with each chapter in the textbook.
To register, please visit https://login.cengage.com and click on “New Student User?”. You will need the
unique personal access code included in the front of the textbook (scratch open).
myUnisa resources
Please make use of myUnisa (https://my.unisa.ac.za) as it contains further resources to help you
master this module. The following resources are available on myUnisa (made available at appropriate
times during the year):
•
•
•
•
your tutorial letters for this module
suggested solutions to the tests
postings under ‘Additional Resources’
e-learning initiatives (optional)
Supplementary literature/additional reading
Refer to the Management Accounting Glossary and Bibliography at the end of Tutorial letter 102
(MAC4861) available on myUnisa under Additional Resources. Also refer to the recommended
reading (including company websites) as indicated in the study material and myUnisa.
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General information and CTA news
For general information and CTA news please refer to the CTA Support Page.
The CTA support page can be accessed from our CAS website landing page.
The short URL for this page is: www.unisa.ac.za/cas/cta
STUDY SCHOOLS
Please refer to follow-up tutorial letters in the SASALL 300-series for more details. If these classes are
offered in your area, it is strongly recommended that you attend. These classes will support you with
your studies and help you gain a better understanding of the module.
TESTS
The learning units assessed by Test 1 will cover predominately (but not exclusively) the content of
Topics 1-3; and Test 2 the content of Topic 4 – 7.
It is important to realise that the examination papers of this module will integrate between the various
learning units and disciplines. In preparation for the exam, you can therefore also expect some level of
integration in the tests.
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STUDY PROGRAMME
A study programme has been published in Tutorial Letter SASALL301. Please utilise this to plan you
studies.
Note
If you struggle with any of the learning units we strongly recommend that you allocate additional time –
above and beyond the time indicated in the study programme.
CONCLUSION
We trust that the preceding sections will assist you in approaching your studies (linked to this tutorial
letter) in a methodical manner and with a greater level of understanding.
We hope you enjoy this part of your studies!
Regards,
Your Applied Management Accounting lecturers
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MAC4862
APPLIED MANAGEMENT ACCOUNTING
TUTORIAL LETTER 102 / 2017
Page
MODULE PURPOSE ......................................................................................................................... 2
PART 1 – COST ACCOUNTING BASES AND ALLOCATION ......................................................... 9
PART 1, TOPIC 1 – Nature, classification and allocation of cost ...................................................... 10
LEARNING UNIT 1.1 – Nature and classification of cost ........................................................... 11
LEARNING UNIT 1.2 – Variable and absorption costing ........................................................... 14
LEARNING UNIT 1.3 – Activity-based costing (ABC) ................................................................ 21
PART 1, TOPIC 2 – Product costing systems .................................................................................. 25
LEARNING UNIT 2.1 – Job costing ........................................................................................... 26
LEARNING UNIT 2.2 – Process costing... ................................................................................. 27
LEARNING UNIT 2.3 – Joint and by-product costing... .............................................................. 30
PART 2 – PLANNING AND CONTROL .......................................................................................... 32
PART 2, TOPIC 3 – Planning, budgeting and control ....................................................................... 33
LEARNING UNIT 3.1 – Budgeting and management control systems ....................................... 34
LEARNING UNIT 3.2 – Cost management techniques/principles .............................................. 36
LEARNING UNIT 3.3 – Cost-volume-profit analysis .................................................................. 38
PART 2, TOPIC 4 – Standard costing .............................................................................................. 44
LEARNING UNIT 4.1 – Variance analysis ................................................................................. 45
LEARNING UNIT 4.2 – Reconciliation of budget to actual ........................................................ 47
LEARNING UNIT 4.3 –Variance analysis reports ...................................................................... 48
LEARNING UNIT 4.4 – Pro-rating of variances and compliance with the relevant
accounting standard .................................................................................................................. 49
PART 2, TOPIC 5 – Performance measurement ............................................................................. 50
LEARNING UNIT 5.1 – Divisional financial performance measures .......................................... 51
LEARNING UNIT 5.2 – Transfer pricing in divisional companies ............................................... 64
PART 3 – DECISION-MAKING ....................................................................................................... 68
PART 3, TOPIC 6 – Information for decision-making ...................................................................... 69
LEARNING UNIT 6.1 – Decision-making under conditions of risk and uncertainty ................... 70
PART 3, TOPIC 7 – Information application to decisions ................................................................ 75
LEARNING UNIT 7.1 - Relevant costs and revenues for decision-making .............................. 76
INTEGRATED SELF-ASSESSMENT .............................................................................................. 80
2016 TEST 1 & 2 WITH SUGGESTED SOLUTIONS ..................................................................... 84
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PART 1 - COST ACCOUNTING BASES AND ALLOCATION
PART 1 - PURPOSE
The purpose of part 1 is to equip students with a critical and informed understanding of
•
•
Key terms and guidelines
Concepts and established principles
in order to classify, to record and to present costs for the valuation of inventories and to compile
Statements of Comprehensive Income on different bases.
DEEL 1 - DOEL
Die doel met deel 1 is om studente toe te rus met ‘n kritiese en ingeligte begrip van die
•
•
Sleutelterme en riglyne
Konsepte en gevestigde beginsels
ten einde koste te klassifiseer, te boek te stel en voor te lê vir die waardasie van voorraad en die
opstel van State van Omvattende Inkomste op verskillende grondslae.
TOPICS:
1.
Nature, classification and allocation of cost
2.
Product costing systems
Introduction
Management accounting deals with accounting information within the organisation, focussing on
critical information so that operational and strategic planning can be undertaken, decisions can be
made, control can be exercised and problems addressed. There is no formal framework which
regulates management accounting. A logical mind and approach is however required to deal with the
aforementioned focus areas.
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PART 1, TOPIC 1 – Nature, classification and allocation of cost
TOPIC 1 LEARNING OUTCOMES
After studying this topic, you should be able to:
●
●
●
●
●
●
●
Describe the definitions relevant to costing terms and systems.
Classify costs and apply cost concepts and cost estimation techniques in various scenarios.
Apply knowledge of variable and absorption costing systems in a case study scenario.
Advise on an applicable method when analysing a scenario.
Apply results of the over- and under-recovery of overheads calculation to a practical case
study and correctly account for it in the Statement of Comprehensive Income.
Apply an activity-based costing approach to costing information in a scenario.
Advise management on which type of costing system is appropriate and how the systems
differ.
ONDERWERP 1 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om:
•
•
•
●
•
•
•
Die definisies relevant tot kostestelsels te omskryf.
Koste te klassifiseer en koste konsepte en kosteberamingstegnieke toe te pas in verskeie
scenarios.
Advies oor ‘n gepaste werkswyse te gee wanneer ‘n scenario ontleed word.
Kennis van veranderlike- en absorpsiekostestelsels in ‘n gevallestudie/scenario toe te pas.
Gevolge van die berekening van die oor- en onderverhaling van bokoste op ‘n praktiese
gevallestudie toe te pas en dit korrek in die Staat van Omvattende Inkomste weer te gee.
Pas ‘n aktiwiteitsgebaseerde kostebenadering op koste inligting in ‘n scenario toe.
Adviseer bestuur aangaande die tipe kostestelsel wat toepaslik is en hoe die stelsels verskil.
LEARNING UNIT
TITLE
LEARNING UNIT 1.1
Nature and classification of cost
LEARNING UNIT 1.2
Variable and absorption costing
LEARNING UNIT 1.3
Activity-based costing
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LEARNING UNIT 1.1
Nature and classification of cost
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for the nature, classification and allocation of
costs. If not, please refer to your undergraduate and advanced study material and revise the following
indicated pages of the textbook, namely Drury, using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be Applicable references:
able to:
•
•
•
•
•
•
Define and illustrate a cost.
Understand the meaning of the important
cost definitions.
Distinguish between variable and fixed
costs.
Apply and describe the different methods of
estimating costs.
Calculate regression equations using the
least-squares methods and evaluate the
goodness of fit, using the coefficient of
correlation and coefficient of determination.
Apply the high-low method.
Drury Chapter 2: An introduction to cost terms
and concepts. Pages 25-41
Drury Chapter 23: Cost estimation and cost
behaviour. Pages 628-639
Drury Chapter 8: Separation of semi-variable
costs. Page 188-189
CourseMate:
Glossary and flashcards:
Chapter 2, 23 & 8
Introduction
In this LEARNING UNIT you will revise the nature of costs and the methods used to classify them.
You will specifically revisit the application of the high-low method to distinguish between fixed and
variable costs.
Activity 1: Review
LEARNING UNIT 1.1 in MAC4861/102, available on myUnisa under Additional Resources.
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Activity 2
Attempt question: (Drury textbook)
9th ed: Question 23.14 p647 (Solution p801)
Feedback 2
The high-low method was used to determine the total cost for a specified quantity.
Activity 3
Attempt question: (Dury Student Manual)
9th ed: Question 2.2
Feedback 3
Specifically note the explanations of fundamental terms used throughout this tutorial letter.
Summary
In this LEARNING UNIT, we revisited cost classification, behaviour and estimation with emphasis on
applying the high-low method.
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Self-assessment activity
Before you move on to the next LEARNING UNIT, please ensure that you have grasped the following
concepts:
Yes/No
1. What is a cost object? Explain how sales commission will be treated when
(i)
(ii)
the product is the cost object
the customer is the cost object
2. Maintaining a cost database.
3. Cost estimation: Regression analysis and High-Low method. Explain under which
circumstances a particular method may be more applicable.
4. Provide an example of a fixed and a variable cost in a
•
•
•
Manufacturing environment
Retail environment
Service environment
without using the same example more than once.
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LEARNING UNIT 1.2 Variable and absorption costing
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for variable and absorption costing. If not, please
refer to your undergraduate and advanced study material and revise the following indicated pages of
the textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be
able to:
Applicable references:
•
•
•
•
•
•
•
•
Describe the various denominator levels
that can be used with an absorption
costing system;
Justify why budgeted overhead rates
should be used in preference to actual
overhead rates;
Calculate and explain the accounting
treatment of the volume and
expenditure variances;
Reallocate service departments’
overheads where service departments
render services to each other and to
production departments;
Explain the differences between an
absorption costing and a variable
costing system;
Prepare profit statements based on an
absorption and variable costing system;
Reconcile and explain the difference in
profits between absorption and variable
costing profit calculations;
Explain the arguments for and against
variable and absorption costing.
•
Drury: Chapter 3: Cost assignment. Pages
48 – 60.
•
Drury: Chapter 3: Budgeted overhead rates
and Under- and over-recovery of overheads.
Pages 64 – 70.
● Drury: Chapter 3: Inter-service department
reallocations. Pages 72 – 76.
•
Drury: Chapter 7: Income effects of
alternative cost accumulation systems. Pages
151 – 162.
● Now study IAS2 again.
Introduction
In the previous LEARNING UNIT, we used the nature of a cost to classify it as either fixed or variable,
although in practice many costs will have a dual nature or follow a step pattern. We will now use these
classifications to assign overhead cost to products.
In this LEARNING UNIT, we revisit types of cost accumulation systems, namely absorption costing
and variable / direct costing systems, specifically those using traditional volume-based measures. In
the next topic we will look at another absorption costing system, namely Activity-based-costing (ABC).
Under absorption costing ALL manufacturing costs, including fixed overhead, are included in the cost
of the product. Under variable costing only variable manufacturing costs (including variable overheads)
are included in the cost of the product.
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International Accounting Statement (IAS2) makes absorption costing compulsory for external
reporting. For internal use, variable costing gives a clearer picture for the evaluation of the
performance of divisions and for certain short-term decision-making scenarios.
Critical topics:
Bases of assigning overheads to cost objects
• Absorption vs variable costing
• Traditional volume-based measures
• Selecting an appropriate denominator level for the allocation of fixed production
overheads
• Accounting treatment of volume variances and expenditure variances
Refer to the two different Statement of Comprehensive Income (SCI) below for an illustration of how
the profits are determined under each basis and how the presentation differs.
Illustration of the difference between absorption and variable/direct costing
Absorption costing
Turnover
Less: Cost of sales (including fixed manufacturing overhead)
Opening inventory (fixed and variable manufacturing costs)
Production cost (fixed and variable manufacturing costs)
Less: Closing inventory (fixed and variable manufacturing costs)
Volume variance (fixed manufacturing overheads / labour)
(if treated as a period cost)
Expenditure variance
Gross profit
Less: All non-manufacturing costs (fixed and variable) (period cost)
Profit
R
4 800
(3 840)
720
3 360
(240)
960
(60)
(12)
888
(375)
513
Variable/Direct costing
Turnover
Less: Variable cost of sales (no fixed manufacturing overhead included)
Opening inventory (variable manufacturing costs)
Production cost (variable manufacturing costs)
Less: Closing inventory (variable manufacturing costs)
4 800
(2 880)
540
2 520
(180)
1 920
Less: Other variable costs (non-manufacturing)
Contribution
Less: Fixed costs (manufacturing and non-manufacturing) (total actual amount)
Profit
(75)
1 845
(1 212)
633
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Additional information:
•
Contribution = Turnover – ALL variable costs
•
When absorption costing is applied: Under- or over-recovery of overheads = Volume variance +
Expenditure variance.
•
When variable costing is applied: Under- or over-recovery of overheads = Expenditure variance.
The volume variance is not applicable when variable costing is applied.
•
An adverse volume variance means that actual production volume is less than the budgeted
allocation base used. Favourable volume variance: actual production volume is more than the
budgeted allocation base used.
•
The volume variance for overhead/labour should be included ABOVE the gross profit line, as part
of the production cost for the period under review (due to different teaching applications, volume
variance below the line will still earn marks when clearly shown).
•
The over/under recovery and expenditure variances are only calculated when doing a SCI on the
absorption costing method. The expenditure variance is covered in tandem with the volume
variance as they are often confused with one another.
How do we allocate manufacturing overheads to products?
Manufacturing overheads cannot be traced directly to products. They are assigned to products using
cost allocations. A cost allocation is the process of estimating the cost of resources consumed by
products that involves the use of surrogate rather than direct measures, as set out in LEARNING UNIT
2.
To calculate the budgeted overhead rate:
Overhead rate =
Budgeted overhead
Appropriate allocation base
Focus note:
Please study Drury (9th ed.) pages 159 – 162 in depth. The most appropriate allocation base
(denominator) is the AVERAGE long-run (= life of the plant) capacity utilisation. In the absence of
information on this, you may use the next period’s budgeted activity.
Refer to IAS2 par 13 on the dangers of over- or under costing products when using next period’s
budgeted activity level.
The following activities are popular for allocating overheads because they are simple to calculate:
•
•
•
•
Direct labour hours
Machine hours
Other traditional bases used may be:
Labour cost Rand
Units produced
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Activity 1 – Traditional bases applied
The budgeted fixed production overhead for 20x2 are R900 000. The average long-run utilisation and
related costs for this plant are:
•
•
•
•
Direct labour hours
Machine hours
Units produced
Labour cost
– 36 000 hours
– 22 500 hours
– 45 000 units
– R540 000
REQUIRED
Calculate a budgeted fixed overhead rate for each of the traditional measures above.
Feedback 1
FOH rate based on direct labour hours
FOH rate based on machine hours
FOH rate based on units produced
FOH rate based on direct labour R cost
= R900 000 ÷ 36 000 hours
= R25 per DLH
= R900 000 ÷ 22 500 hours
= R40 per MH
= R900 000 ÷ 45 000 units
= R20 per unit
= R900 000 ÷ R540 000
= R1,667 per R1 direct labour
Or 166,67% of labour
Activity 2
Attempt question: (Drury Student Manual)
9th ed: Question 3.6
Feedback 2
Compare your answer to the solution posted on myUnisa. Note that the requirement was to calculate
the costs for one unit.
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Activity 3
Attempt questions: (Drury Student Manual)
9th ed: Question 7.7
Question 7.10
Feedback 3
Note in question 7.7 the application of the fixed overhead volume variance before the high-low method
is applied to split the production overheads. Question 7.10 covers the impact of fixed overhead and its
allocation on the valuation of inventory.
Where you have gone wrong, reflect upon why it has happened, as that will improve the learning
process.
Summary
In this LEARNING UNIT we covered the calculation of an appropriate fixed overhead rate and the
preparation of the SCI using the absorption and variable costing methods.
It is critical that the relevant sections of MAC4861/102 be worked through thoroughly.
Self-assessment activity
Before you move on to the next LEARNING UNIT please ensure that you understand and can apply
the following concepts:
Topic
1.
2.
3.
4.
5.
6.
7.
8.
9.
Difference between variable and absorption costing
Definition of manufacturing overheads
Treatment of fixed labour costs
Calculation of appropriate fixed production overhead allocation rate
Proper accounting treatment of volume and expenditure variances
Present SCI on the variable and absorption costing basis
Reconcile profits derived from different costing bases
Calculation of volume variance for overheads/labour
Calculation of the expenditure variance.
Yes/No
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MR PRICE GROUP LIMITED (2015)
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SHOPRITE HOLDINGS (2015)
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LEARNING UNIT 1.3
Activity-based costing (ABC) and related concepts
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for activity-based costing (ABC). If not, please
refer to your undergraduate and advanced study material and revise the following indicated pages of
the textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be Applicable references:
able to:
• Describe the differences between activity- • Drury: Chapter 11: Activity-based costing.
Pages 257 – 274.
based and traditional costing systems;
• Explain why traditional costing systems ● Drury: Chapter 3: Illustration of the two stage
process for an ABC system. Pages 60 – 64.
can provide misleading information for
• Drury: Chapter 15: Activity-based budgeting.
decision-making;
Pages 388 – 390.
• Identify and explain each of the four
stages
involved in designing ABC
systems;
• Apply an activity-based costing approach
to costing information;
• Describe activity-based budgeting.
Critical topics:
•
Activity-based-costing and cost drivers
•
ABC in service organisations
•
ABC profitability analysis
•
Activity-based budgeting and Activity based management (resource consumption models)
Introduction
Even though activity-based costing (ABC) is presented as a separate topic in management
accounting, it is in reality an extension of the previous topic: ‘Absorption Costing’. The reason is that
ABC is quite simply a different absorption costing method for the allocation of fixed manufacturing
overheads to products. The only difference between ABC and the traditional methods is that ABC
makes use of different activities as its allocation base, whereas the traditional methods made use of
volume-related bases, such as machine or labour hours, for the allocation of overheads to products.
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Why do we use ABC?
ABC is used as it may lead to more accurate pricing of products, which will therefore influence all
decision-making with regard to those products, e.g. whether or not to withdraw a product or what price
to charge for it.
Traditionally, overhead costs were small in comparison to directly measurable and traceable costs,
such as material costs, and the method of allocation of those costs to products was therefore largely
unimportant. However, in the advanced manufacturing environment that companies are currently
trading in, fixed overhead costs have escalated dramatically, and now make up a substantial portion of
the cost of a product. It is therefore becoming increasingly important to allocate the cost of the
overheads correctly to the products involved, to ensure the continued success and competitiveness of
a firm.
ABC is also useful in the costing of cost objects separate from products. When ABC is applied to
support activity hierarchies, costs for diverse cost objects such as a whole product line a production
plant, a customer, customer groups (geographic area) etc. can be computed. This is important for
analyses of profitability of the diverse cost objects in support of management’s decisions regarding
allocation (or withdrawing) of resources. ABC and its related concepts are therefore a very handy
arrangement tool in optimising the fixed production and other support activity infrastructure of an
entity.
Activity-based-costing and cost drivers
Review the study material in MAC4861/102 on myUnisa under Additional Resources.
Study Drury 9th ed. p60 – 64.
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 11.7
Feedback 1 (Question 11.7 in 9th ed. of Drury Student Manual)
The driver volume is the total per activity eg for planned maintenance visits:
1 200 + 4 800 + 6 000 = 12 000. (NOT: 4 + 6 + 12 = 22). This total is used to calculate the driver rate
($480 000 ÷ 12 000 = $40), which is then applied to the product.
Although layouts may be different to the one presented, it is essential that calculations are shown
clearly and can be followed by an examiner. Look carefully at the approach where statements are
made: where possible the statement should be answered as being correct or incorrect with supporting
motivation and then the implications/consequences listed.
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ABC in service organisations
Study Drury 9th ed. p272 – 274.
Activity 2
Go to www.saica.co.za, then SAICA examinations, then 3. Past Exam Papers, then
● Part II – Financial Management.
Attempt question 3 of 2005: Brown Bank Ltd.
Feedback 2
Compare your answer to the solution, reflect upon differences and use this process to improve your
knowledge level and skill. Consider whether the current ATM environment is different to that
presented in the question and reflect on the implications of such differences.
ABC profitability analysis
Study Drury 9th ed. p267 – 269.
Activity-based management (ABM)
Study Drury 9th ed. p567 – 571.
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Summary
In this LEARNING UNIT we focussed on the application of activity-based costing and related concepts
in terms of fixed overhead allocation, reduction and product pricing.
Self-assessment activity
Before you move on to the next LEARNING UNIT please ensure that you have grasped the following
concepts:
Topic
1.
2.
3.
4.
5.
6.
7.
An activity
Cost driver
Cost driver rate
Activity (resource) demand
Activity hierarchies
Profitability analyses using ABC
ABM and ABB
Yes/No
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PART 1, TOPIC 2 – Product costing systems
TOPIC 2 LEARNING OUTCOMES
After studying this topic, you should be able to do the following in a case study/scenario:
•
•
•
•
•
•
•
•
Record and account for material, labour and overhead costs in the general ledger.
Value purchased and manufactured inventory using the FIFO or weighted average cost
methods.
Cost specific jobs (manufacturing or service)
Value work-in-process in a process costing system involving more than one process
Determine whether separate products should be processed further after split-off point.
Apply backflush accounting in a JIT environment
Correctly account for the treatment of normal and abnormal losses.
Consider the allocation of joint costs and treatment of by-products and their proceeds.
ONDERWERP 2 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om die volgende in ‘n gevallestudie/scenario te doen:
•
•
•
•
•
•
•
Teboekstelling en verantwoording van grondstowwe, arbeid en bokoste in die grootboek toe te
pas.
Gekoopte- en vervaardigde voorraad te waardeer met die gebruik van die EIEU of die
geweegde gemiddelde metode.
Bepaal die koste vir spesifieke take (vervaardiging of dienste).
Bepaal of afsonderlike produkte na die skeidingspunt verder verwerk moet word.
Terugvoer rekeningkunde in ‘n net-betyds omgewing toe te pas.
Die hantering van normale en abnormale verliese korrek te verantwoord.
Die toedeling van gesamentlike koste en hantering van neweprodukte en hul opbrengste te
oorweeg.
LEARNING UNIT
TITLE
LEARNING UNIT 2.1
Job costing
LEARNING UNIT 2.2
Process costing
LEARNING UNIT 2.3
Joint and by-products
Introduction
This topic deals with the recording and allocation of costs using job, process and joint costing systems
to value products manufactured or services rendered. It will largely follow a revision route with closer
focus on areas where students’ past assessments indicated shortcomings in knowledge.
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LEARNING UNIT 2.1
Job costing
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for job costing. If not, please refer to your
undergraduate and advanced study material and revise the following indicated pages of the textbook,
namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to:
Applicable references:
• Describe the materials recording procedure;
• Distinguish between first-in-first-out (FIFO), and average
cost methods of stores pricing;
• Describe the accounting procedure for labour costs;
• Describe the accounting procedure for manufacturing and
non-manufacturing overheads;
• Describe accounting procedures for jobs completed and
products sold.
• Drury: Chapter 4:
Accounting entries for a job
costing system.
Pages 85 – 98.
Summary
In this LEARNING UNIT we reviewed the recording process in general and how it would apply in a job
costing system.
Self-assessment activity
Before you move on to the next LEARNING UNIT, please ensure that you have grasped the following
concepts:
Topic
1.
How to record materials, labour and overheads
2.
The treatment of inventory for FIFO and weighted average cost methods.
3.
The accounting treatment for jobs completed and products sold.
Yes/No
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LEARNING UNIT 2.2
Process Costing
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for process costing. If not, please refer to your
undergraduate and advanced study material and revise the following indicated pages of the textbook,
namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to:
Applicable references:
• Explain when process costing systems are appropriate;
• Explain the accounting treatment of normal and abnormal
losses;
• Prepare process, normal loss, abnormal loss and abnormal
gain accounts;
• Prepare a process costing statement; and value inventories.
• Drury: Chapter 5:
Process Costing.
Pages 107 – 127.
Introduction
In the previous LEARNING UNIT we looked at job costing which is a costing system used when the
cost of each unique unit produced needs to be calculated separately. On the other end of the scale
are entities that continuously produce large quantities of homogeneous or similar products or services,
making it unnecessary to assign costs to each unit produced. Process costing systems are therefore
used to calculate the average cost per unit by dividing the total costs for a specific process for a period
by the number of units passing through the process for that period, e.g. oil refineries, breweries and
paper manufacturers.
Measurement in a process costing system takes place by way of equivalent and completed units. To
do this work-in-progress must be converted to the ‘equivalent’ of fully completed units. The LEARNING
UNIT will be dealt with by way of revision.
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Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 5.13
Feedback 1
Note the following:
•
•
•
•
•
•
Difference in layout of Quantity Statement and Production Cost Statement
Output is dependent on the initial input
Output includes reworked units
Reworked units are not subject to the normal 10% loss, being reworked
Completed and equivalent units are required
Possible integration with standard costing system
Summary
In this LEARNING UNIT we revisited the determination of cost per completed and equivalent unit in a
process costing system.
Self-assessment activity
Before you move on to the next LEARNING UNIT, please ensure that you have grasped the following
concepts:
Topic
1.
2.
3.
4.
5.
6.
7.
8.
The difference between a job costing system and a process costing system
Equivalent units
Normal loss
Abnormal loss or gain
The FIFO and weighted average methods of inventory valuation
Allocation of normal loss – when to use “short” or absorption method and when to
use the “long” or allocation method.
Value output from the process.
Treatment of proceeds from the sale of normal and abnormal units scrapped or
“off-cuts” or by-products.
Yes/No
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Read the section below in conjunction with topic 3.1 and topic 4 to get a clear understanding of the
concepts applied by York Timbers Ltd.
YORK TIMBERS – PROCESSING DIVISION
COST OPTIMISING
A factor applied by York in determining the optimal volume which can be generated from logs, is called
a log paying capability factor. Log paying capability reflects the ability of a sawmill to pay for the raw
material (logs) based on the average value of the lumber produced. It is calculated as: Average Selling
Price (ASP) for lumber/Delivered log price adjusted for recovery. If the mill recovery, for example, is
49,5% and the delivered log cost is R678/m 3 , then the raw material cost would be R678/49,5% = R1
370/m 3 . If the average ASP per m 3 is R2 382, then the log paying capability factor would be R2 382
/ R1 370 = 1,74 times. Processing plants in York are evaluated by reference to the ability of the
technology employed to pay for the logs utilised in the process. The current financial year has seen a
slight improvement at most processing sites, but in York’s view optimal value will only be
demonstrated once the Sabie integrated site, which will include a large sawmill and automated log
merchandising yard, is in place. VOLUME RECOVERY Volume recovery is one of the most widely
used efficiency measures in primary log processing worldwide. It is simply the volume percentage of a
log that is turned into final product volume (excluding by-products like chips and sawdust). In South
Africa the final product is considered to be the seasoned timber which has not been planned. Volume
recovery is stated as follows: Volume recovery = (Product volume/Log volume) x 100 another variable
having a large effect on the profitability of a primary log processor, is the log volume throughput. The
main reason is that fixed costs stay fixed with an increase in log volume throughput. The income will
thus increase due to higher product outputs, but one of the cost components (fixed costs) will remain
constant. Variable costs (mainly log costs) will increase proportionately with volume throughput.
VALUE MARGIN Value margin represents the value added through the production process. The
calculation is based on the log costs as described above, together with the other variable costs per m
3. Log costs for example of R1 370 plus R48/m 3 would result in variable costs of R1 418/m 3. The
value margin is then R2 382 – R1 418 = R964/m 3. The value margin is used to determine the breakeven volume required to pay for fixed costs.
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LEARNING UNIT 2.3
Joint- and by-products
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for joint- and by-products. If not, please refer to
your undergraduate and advanced study material and revise the following indicated pages of the
textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able
to:
Applicable references:
• Distinguish between joint- and by-products;
• Explain the alternative methods of allocating
joint costs to products;
• Describe and apply the accounting treatment of
by-products;
• Describe backflush costing.
• Drury: Chapter 6:
Joint and by-product costing.
Pages 134 – 143.
• Drury: Chapter 4:
Accounting entries for a job costing system
– Backflush accounting
Pages 98 – 100.
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 6.9
Feedback 1
Note the following:
•
•
•
The allocation of costs on weight and market values yield different profits.
All costs are joint and unavoidable, thus dropping a product will simply decrease revenue with no
impact on costs.
Further processing requires an incremental approach.
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Backflush accounting
Training costs to inventory
Large inventories

Elaborate costing systems tracing
Costs to products
JIT (no or very low inventories)

Backflush accounting
Study
•
•
•
Drury 9th ed. p98 – 100.
Note the following from the studied information:
Backflush costing is used in a JIT manufacturing system
Accounting for completed units is triggered by:
○ the manufacture of finished goods – the most simple method
○ the purchase of raw materials and components
Summary
In this LEARNING UNIT we focussed on the determination of joint and by-products, the allocation of
joint costs and the accounting treatment of by-products. The circumstances for applying Backflush
Accounting were described.
Self-assessment activity
Before you move on to the next LEARNING UNIT, please ensure that you have grasped the following
concepts:
Topic
1.
Conversion costs
2.
Identifying joint products
3.
Allocating joint product costs
4.
Further processing costs
5.
Measures for allocating joint costs
6.
Treatment of by-product and their sales value and further processing costs
7.
Backflush accounting situations
Yes/No
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PART 2 – Planning and control
PART 2 PURPOSE
The purpose of part 2 is to enable students to have a critical and informed understanding of the
key terms, rules, concepts and established principles of planning and control techniques.
DEEL 2 DOEL
Die doel van deel 2 is om studente in staat te stel om ‘n kritiese en ingeligte begrip van die
sleutelterme, reëls, konsepte en gevestigde beginsels van beplannings- en beheertegnieke te
verkry.
TOPICS:
3.
Planning, budgeting and control
4.
Standard costing
5.
Performance measurement
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PART 2, TOPIC 3 – Planning, budgeting and control
TOPIC 3 LEARNING OUTCOMES
After studying this topic, you should be able to
•
•
•
Design and compile fixed and flexible budgets
Explain how costs are controlled using various management tools
Calculate and interpret the break-even point and margin of safety of a business under different
scenarios and advise management based on your calculations.
ONDERWERP 3 LEER UITKOMSTE
Na bestudering van hierdie onderwerp, behoort u in staat te wees om
•
•
•
Vaste- en veranderlike begrotings te ontwerp en op te stel
Te verduidelik hoe koste beheer word deur verskeie bestuurstegnieke te gebruik
Die gelykbreekpunt en veiligheidsmarge van ‘n besigheid in verskeie scenarios te bereken, en
die bestuur op grond van u berekeninge raad te gee.
LEARNING UNIT
TITLE
LEARNING UNIT 3.1
Budgeting and management control systems
LEARNING UNIT 3.2
Other cost management techniques / principles
LEARNING UNIT 3.3
Cost-volume-profit analysis
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LEARNING UNIT 3.1
Budgeting and management control systems
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for budgeting and management control systems.
If not, please refer to your undergraduate and advanced study material and revise the following
indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to
deal with:
Applicable references:
•
•
Drury: Chapter 15:
The budgeting process
Pages 368 - 398.
•
Drury: Chapter 16:
Pages 411 - 420.
•
Drury: Chapter 15:
Criticisms of budgeting
Pages 393 - 395
Corporate strategy and long-term planning
o
o
o
o
•
Competitive advantage
Porter’s models
Value chain
Supply chain
Budgeting
o
o
o
o
o
o
o
Master, capital, cash and subsidiary budgets
Fixed and flexible budgeting
Zero-base budgeting
Activity-based budgeting
Stages in planning functions etc.
Responsibility centres
Behavioural aspects
●
Management control systems
●
Rolling forecasts
Introduction
In your prior learning you covered both the short-term and long-term aspects of the planning and
control process, with focus on:
•
•
•
•
•
Flexible budgeting
Control ability
Non-profit-making organisations
Zero-based budgeting and
Management control systems
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Study
Drury 9th ed. p388 – 390: Activity-based budgeting
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 15.15
Feedback 1
The cost driver rates are determined using the budget information. The flexible budget is then set
using the actual activity, where after the variances are determined. This enables management to
narrow down responsibility.
Summary
In this LEARNING UNIT we focussed on further aspects related to budgeting other than those covered
at the undergraduate level. We studied the controllability principle, activity-based budgeting in nonprofit organisations, zero-based budgeting and criticisms of budgeting. Lastly we investigated other
management control systems and their influence on employee behaviour.
Self-assessment activity
Attempt questions: (Drury textbook)
9th ed: Question 16.21 p427 (Solution p765)
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LEARNING UNIT 3.2 – Cost management techniques / principles
Prior Learning
Review LEARNING UNIT 3.2 of MAC4861/102 on my Unisa under Additional Resources.
Benchmarking
External and internal benchmarking can be used to compare key activities or processes in order to
improve them.
Study
•
Drury (9th ed.) p571 – 572 (Benchmarking)
Note the following from the studied information:
•
The advantages and disadvantages of benchmarking.
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 21.3
Strategic management accounting (SMA)
CIMA defines strategic management accounting as “A form of management accounting in which
emphasis is placed on information which relates to factors external to the entity, as well as nonfinancial information and internally generated information.”
Study
•
Drury (9th ed.) p598 – 601
Also refer to the LEARNING UNIT in Finance tutorial letter 103 regarding Strategy.
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Summary
In this LEARNING UNIT we looked at changes in the business environment and developments in cost
management techniques and philosophies. The use of benchmarking was also explained.
Self-assessment activity
Ensure that you can describe the following concepts briefly in a paragraph:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Action or behavioural controls
Personnel, cultural and social controls
Results or output controls
Cybernetic control systems
Feedback and feed-forward controls
Life-cycle costing
Target costing
Kaizen costing
Activity-based management
Business process re-engineering
Cost of quality
Cost management and the value chain
Environmental cost management
Just-in-time systems
Strategic management accounting
Benchmarking
Enrichment Activity
Google the following concepts and read about a company that employs them:
•
Life-cycle costing
•
Kaizen costing
•
Just-in-time systems
•
Activity-based budgeting
You can also look it up in Wikipedia at http://www.wikipedia.org for more background on the history
and applications.
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LEARNING UNIT 3.3
Cost-volume-profit analysis
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for cost-volume-profit analysis. If not, please refer
to your undergraduate and advanced study material and revise the following indicated pages of the
textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to:
Applicable references:
•
•
•
Calculate a break-even point and margin of safety
Calculate sensitivities for changes in any variables
in the CVP model.
Drury: Chapter 8:
Cost-Volume-Profit analysis. Pages
172 – 190.
Introduction
In previous LEARNING UNITs, we have looked at cost accumulation for inventory valuation and profit
measurement using different bases. In this LEARNING UNIT, we will consider the use of the same
basic financial information for decision-making by means of cost-volume-profit (CVP) analysis. CVP is
especially valuable during planning and budgeting as it gives a broad indication of expected outcomes
at different levels for different variables in the CVP model. The breakeven analysis and margin of
safety are also very useful tools in measuring the riskiness of various plans or scenarios in the budget.
Focus notes
Why does a business have to calculate a break-even point?
•
When you start a business you want to determine what sales level is required for it to survive.
•
For a typical start-up business, it is critical to ensure that ongoing operating costs are covered by
sales revenue in the short-to medium-term.
•
In the long-term, the business can focus on making a profit. Once again the breakeven point
and margin of safety will indicate the riskiness or sensitivities of various plans or strategies.
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Application of CVP
•
Please note that ALL variable costs and ALL fixed costs (production AND non-production costs)
are included in the break-even calculation.
•
Contribution per unit equals the sales price per unit less ALL variable costs per unit. The
contribution margin ratio is the contribution expressed as a percentage of sales.
•
The net profit figure in a break-even calculation is ALWAYS BEFORE TAX. Therefore if you are
told in a question that you are trying to achieve a net profit AFTER tax of, for example R50 000,
you must first convert the R50 000 to a BEFORE tax amount before you use it in the break-even
calculation.
•
Remember that a break-even point (in units) should always be ROUNDED UP as one less unit
sold will lead to a small loss.
•
Unit information usually indicates a break-even in units and value/monetary information (eg
Rand or a ratio based on rand) a break-even in Rand.
•
The net profit is derived from the units sold in excess of the breakeven point, i.e. the contribution
from the margin of safety sales.
•
The margin of safety % indicates by how much sales volume can decline before the entity
makes NIL profit.
•
Sensitivity % for other variables in the model indicates how big a change can be absorbed
before the entity makes no profit.
- ∆ in selling price/unit
- ∆ in variable cost/unit
- ∆ in total fixed costs
Impact of factors
All other factors remaining the same:
•
•
•
An increase in selling price per unit will increase the contribution per unit and decrease the
break-even sales required.
An increase in variable cost per unit will decrease the contribution per unit and increase the
break-even sales required.
An increase in total fixed cost will increase the sales required to break-even.
Generally, you will first have to determine the nature of the costs before proceeding with the breakeven calculation.
Study the following in your textbook:
•
Drury (9th ed.): Chapter 8: Multi-product Cost-Volume-Profit analysis. Pages 182 – 184.
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Activity 1 – Basic principle
Bubbles Ltd sells two products, namely product X and product Y.
The budgeted sales are divided equally (C1) between these two products and the
budgeted contribution is R10 per unit of product X and R6 per unit of product Y.
The actual sales for the period consisted of 75% for product Y and 25% (C2) for
product X. The annual fixed costs are R560 000.
Actual costs and selling prices are identical to the budget.(C3)
C1:
Budgeted =
50:50
C2: Actual =
75:25
C3: No
change to
contribution
or FC
REQUIRED
(a) Calculate the unit break-even points for budgeted and actual sales.
(b) Analyse your results.
Feedback 1
(a)
Budgeted average contribution
C1: Average base
used, based on 50:50
split.
= (50% x R10) + (50% x R6)
= R5 + R3
= R8,00
Budgeted break-even point
= Fixed costs / Budgeted average unit contribution
= R560 000 / R8,00
= 70 000 units
Actual average unit contribution
= (25% x R10) + (75% x R6)
= R2,50+ R4,50
= R7,00
Actual break-even point
= Fixed costs / Actual average unit contribution
= R560 000 / R7,00
= 80 000 units
C2: New split lowers
average as more with low
contribution sold.
C3: BE now higher as
average down.
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(b)
The break-even point varies depending on the composition of
the sales mix.
The actual sales mix is different from the budgeted sales mix
(see note above) and therefore the actual average unit
contribution is different from that used in the budgeted breakeven calculation.
Activity 2
Work through example: (Drury textbook)
9th ed: Example 8.2 p183
Attempt question: (Drury Student Manual)
9th ed: Question 8.9
Feedback 2
•
•
•
Specific and general fixed costs. Some questions may specify breakeven in terms of the
specific costs.
Current mix implies total basis – individual b/e’s not required.
Average contribution used.
Activity 3 – ‘What if’s’
Paramountain Ltd manufactures and sells video equipment. Every video recorder sells for R1 150,
and variable costs amount to R850 per unit. Total annual fixed costs amount to R150 000.
The following operating results for the previous year were given:
R
Sales
Less: Variable costs
Contribution margin
Less: Fixed costs
Net income
1 265 000
935 000
330 000
150 000
180 000
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REQUIRED
Mark
(a) Determine the break-even point in units;
(2)
(b) Calculate the margin of safety based on sales units, if Paramountain expects to sell
1 200 video recorders this year;
(1)
(c) Refer to the original data. Management would like to increase the net income from the
previous year. The marketing manager would like an additional amount of R25 000 set
aside for advertising purposes. The sales manager believes that a 12,5% reduction in
the selling price, combined with the additional advertising, should cause annual sales in
units to increase by 25%. Prepare a contribution income statement, showing the results
of operations if the changes are made. Advise management whether or not to adopt the
suggested changes.
(6)
(d) Refer to the original data. The financial manager does not want the selling price to
change, as it would lead to a lot of administrative work. Instead, he suggests that costs
should be cut and advertising increased. He suggests negotiating with the suppliers for
a price cut of R90 on a circuit used in the production of the video recorders, and
improving productivity in order to save R25 on labour costs per recorder. The manager
believes that additional advertising should also increase annual sales by 40%. By how
much can advertising increase for profits to remain unchanged.
(3)
(e) Refer to the original data. Assume that the company is only producing 850 video
recorders per year. An order has been received for 600 units on a special price basis.
What unit price would have to be quoted to the buyer if Paramountain Ltd wants to earn
an overall profit of R195 000 for the year? (You may assume that the present sales will
not be affected by the special price order).
(3)
Feedback 3
Scenario analysis is often required as part of the decision-making process.
(a) Break-even point
Break-even point
(b) Margin of safety
=
=
=
Fixed cost / Contribution
R150 000 / (R1 150 - R850)
500 units
(2)
=
=
=
(Expected sales - Break-even sales) / Expected sales
(1 200 - 500) / 1 200)
58,33%
(1)
(c) Proposal: Contribution income statement
Calculation
Sales
Variable costs
Contribution
Fixed costs
Net income
R
(1 100 x [R1 150 - 12,5%] x 1,25
(1 100 x R850 x 1,25)
(150 000 + 25 000)
1 383 594
1 168 750
214 844
175 000
39 844
(4)
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Working:
Calculate last year’s number of units sold:
R1 265 000 / R1 150 = 1 100 units sold
Management should not accept the changes, as it decreases net income.
(d) Net income
NI
R180 000
R180 000
R180 000
Advertising
(1)
(1)
= Sales - Variable costs - Fixed costs
= SP x - Varx - FC
= (1 100 x 1,4 x R1 150) - (1 100 x 1,4 x [850 - 90 - 25]) - R150 000 –
advertising
= R1 771 000 - R1 131 900 - 150 000 - advertising
= R489 100 - advertising
= R309 100
(3)
Advertising may increase with R309 100, representing the incremental contribution margin,
without affecting the net income.
(e) NI
R195 000
R195 000
600SP
SP
=
=
=
=
=
SP x - VarCx - FC
(R1 150 x 850) + (600 x SP) - (1450 x R850) - R150 000
R977 500 + 600SP - R1 232 500 - R150 000
R600 000
R1 000 per unit
(3)
Summary
In this LEARNING UNIT we focused on the calculation of the break-even point, the margin of safety
and the impact of changes in breakeven components on profit.
Self-assessment activity
Knowledge check:
Before proceeding to the next LEARNING UNIT, ensure that you are on par with the following
concepts:
Yes/No
1.
2.
3.
4.
5.
6.
Classification of costs
Determination of fixed and variable costs
Definition and calculation of contribution
Calculation of the break-even point
Interpretation of margin of safety and other sensitivity percentages
Effect of change of a given factor on profit or other relevant issue.
END OF CONTENT FOR TEST 1
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PART 2, TOPIC 4 – Standard costing
TOPIC 4 LEARNING OUTCOMES
After studying this topic, you should be able to
•
•
•
•
Calculate and analyse variances
Provide suitable explanations for variances found
Reconcile budgeted income and expenses to actual income and expenses
Decide on the appropriate accounting treatment of material variances
ONDERWERP 4 – LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om
•
•
•
•
Afwykings te bereken en te ontleed
Geskikte verduidelikings vir verkreë afwykings te verskaf
Begrote inkomste en uitgawes met werklike inkomste en uitgawes te rekonsilieer
Te besluit oor die toepaslike rekeningkundige hantering van wesenlike afwykings
LEARNING UNIT
TITLE
LEARNING UNIT 4.1 Variance analysis
LEARNING UNIT 4.2 Reconciliation of budget to actual
LEARNING UNIT 4.3 Variance analysis for controlling purposes
LEARNING UNIT 4.4 Pro-rating of variances and compliance with the relevant accounting
standard
Introduction
Standard costing is a financial control system that analyses deviations from budget in detail in order to
control future costs and forms part of the process of management by exception. Standards are
predetermined target costs and selling prices which represent a benchmark that should be achieved
under normal conditions. Standard costs are the expected or budgeted costs for producing a single
unit of a product or a service. Quantity standards and cost (price) standards are set for the materials,
labour and overheads consumed in producing a unit of the product. In order to apply standard costing,
standardised tasks or repetitive operations must be involved for which a standard time or quantity and
cost can be determined.
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LEARNING UNIT 4.1
Variance analysis
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for variance analysis. If not, please refer to your
undergraduate and advanced study material and revise the following indicated pages of the textbook,
namely Drury using the page numbers below:
Prior learning
Before studying this topic, you should be able to deal
with:
Drury 9th ed.
•
•
•
•
•
•
Drury: Chapter 17, pages 434 – 463
•
Design of standard costing systems
Variance analysis
Reporting on variance analysis
Reconciliation of budget to actual
Investigation of variances and exception reporting
Pro-rating of variances and compliance with the
relevant accounting standard
Cost estimation when the learning curve effect is
present
Applicable references:
Drury: Chapter 18, pages 471 – 482
Drury: Chapter 18, pages 483 – 485
Drury: Chapter 7, pages 159 – 162
Drury: Chapter 23, pages 640 – 643
Study
Recap by reviewing LEARNING UNIT 1.1 of MAC4861/103 on myUnisa under Additional Resources
and then studying:
• Ex post variance analysis / Distinguishing between planning and operating variances –
Drury (9th ed.) p482 – 483.
• ABC variance analysis – Drury (9th ed.) p485 – 487.
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 17.9
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Feedback 1
The correct variance needs to be used in calculating actual quantities and costs. As a marginal
costing system is used, fixed overhead is not relevant.
Activity 2
Attempt question: (Drury Student Manual)
9th ed: Question 17.10
Feedback 2
The variance ‘formula’ is used to determine the required. Note the layout followed.
Summary
In this LEARNING UNIT, we revisited the calculation and meaning of various standard cost variances
for both variable and absorption costing systems. Some issues in calculating mix variances were also
highlighted.
Self-assessment activity
Attempt question: (Drury Student Manual)
9th ed: Question 18.3
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LEARNING UNIT 4.2 – Reconciliation of budget to actual
Prior Learning
Review LEARNING UNIT 1.2 of MAC4861/103 on myUnisa under Additional Resources.
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 17.6
Feedback 1
Because a JIT system is in use, it implies that production equals sales. Note specifically the approach
from a sales volume angle.
Summary
In this LEARNING UNIT we studied the reconciliation of budgeted profit to actual profit by means of
adding the favourable to and deducting the adverse production and sales variances from the budgeted
profit.
Self-assessment activity
Attempt questions: (Drury Student Manual)
9th ed: Question 17.7
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LEARNING UNIT 4.3 – Variance analysis for controlling purposes
Introduction
In the prior LEARNING UNIT 4.1 we looked at the calculation of the various variances. In this
LEARNING UNIT we will study the factors that should be considered when deciding whether it is
worthwhile to investigate variances.
Study
•
•
•
Drury (9th ed.) p482 – 483 (Ex post variance analysis) / (Distinguishing between planning and
operating variances)
Drury (9th ed.) p483 – 485 (The investigation of variances)
Drury (9th ed.) p485 – 487 (The role of standard costing when ABC has been implemented)
Note the following from the studied information:
•
•
•
The impact of controllability on variance reporting, i.e. flexing and planning variances.
The causes of variances and the methods used to determine whether an investigation is justified.
The types of costs for which an ABC system variance analysis is appropriate.
Activity 1
Attempt question: (Drury Student Manual)
9th ed: Question 18.8
Feedback 1
The ex-post plan drives planning (uncontrollable) and operational variances.
Summary
In this LEARNING UNIT we looked at the reasons for variances and the models used by organisations
to ensure that the benefits from investigating variances exceed the costs. The use of standard costing
when an ABC system is in use was also investigated.
Self-assessment activity
Attempt question: (Drury textbook)
9th ed: Question 18.18 p492 (Solution p774 - 775)
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LEARNING UNIT 4.4
Pro-rating of variances and compliance with the relevant accounting
standard
Prior Learning
Review LEARNING UNIT 1.4 of MAC4861/103 on my Unisa under Additional Resources.
Summary
IAS 2 requires the use of absorption costing to value closing inventory for external reporting purposes.
Furthermore, the allocation of fixed production overheads should be based on normal capacity.
Standard costing is allowable for financial statements if the cost approximates actual cost. Usual
variances should be investigated and a decision taken on whether the variance becomes a period
cost, or whether the standard is adjusted and inventory is revalued.
Self-assessment activity
Before moving on to the next topic, make sure that you have grasped the following:
When a standard costing system can be used to value inventories
-
the accounting treatment of variances that arise between actual costs and standard (or allowed)
costs
the treatment of an unusually high fixed production volume capacity variance.
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PART 2, TOPIC 5 – Performance measurement
TOPIC 5 LEARNING OUTCOMES
After studying this topic, you should be able to:
•
•
•
•
Have a critical understanding of appropriate performance measures within an organisation.
Distinguish between the managerial and economic performance of the division.
Explain the meaning of return on investment (ROI), residual Income (RI) and Economic Value
Added (EVA).
Compute and apply the above performance measures.
ONDERWERP 5 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om
•
•
•
•
‘n Kritiese begrip van geskikte prestasiemaatstawwe binne ‘n organisasie te hê.
Te onderskei tussen die bestuurs- en ekonomiese prestasie van die afdeling.
Die betekenis van opbrengs op belegging (OOB/ROI) residuele inkomste (RI) en ekonomiese
waarde toegevoeg (EWT/EVA) te verduidelik.
Bogenoemde prestasiemaatstawwe te bereken en toe te pas.
LEARNING UNIT
TITLE
LEARNING UNIT 5.1 Divisional financial performance measures
LEARNING UNIT 5.2 Transfer pricing in divisionalised companies
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LEARNING UNIT 5.1 Divisional financial performance measures
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented
in Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’).
Please ensure that you are up to date with the prior learning for divisional financial performance
measures. If not, please refer to your undergraduate and advanced study material and revise the
following indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to deal with:
Applicable references:
Chapter 19:
Drury page 498
Drury page 498
Drury page 499
Drury page 499
Drury page 499
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Divisionalised organizational structures
Profit centres and investment centres
Advantages and disadvantages of divisionalisation
Pre-requisites for successful divisionalisation
Distinguishing between the managerial and economic
performance of the division
Alternative divisional profit measures
Return on investment
Residual income
Economic value added (EVA™)
Determining which assets should be included in the investment
base
The impact of depreciation
The effect of performance measurement on capital investment
decisions
Addressing the dysfunctional consequences of short-term
financial performance measures
Benchmarking
Controls at different organizational levels
Responsibility centres
Drury page 500
Drury page 502
Drury page 503
Drury page 504
Drury page 508
Drury page 509
Drury page 510
Drury page 512
Drury page 571
Drury page 405
Drury page 411 - 413
Introduction
In your prior learning the evaluation of divisional performance by employing appropriate
performance measures and distinguishing between managerial and economic performance were
covered. In this LEARNING UNIT we shall focus primarily on computing three financial
performance measures viz. ROI, RI and EVA and discuss the influence of these measures on
capital investment decisions. Finally, we shall discuss various approaches that can be employed to
overcome the short-term orientation associated with accounting profit-related measures.
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Study
9th ed.
•
•
•
•
•
•
Residual income
Economic value added (EVA™)
Determining which assets should be included in the investment base
The impact of depreciation
The effect of performance measurement on capital investment decisions
Addressing the dysfunctional consequences of short-term financial
performance measures
• Benchmarking
• Controls at different organizational levels
• Responsibility centres
Drury page 503
Drury page 504
Drury page 508
Drury page 509
Drury page 510
Drury page 512
Drury page 571
Drury page 405
Drury page 411 - 413
Activity 1
Attempt question: (Drury textbook)
9th ed: Question 19.23 p521 (Solution p782)
Feedback 1
The calculated values use annuity factors. Ensure that you understand the principles.
• Financial performance measures should include only the factors directly controllable by the
manager. Therefore, distinguish between managerial and economic performance.
• Non – financial factors (e.g. competitiveness, productivity, quality, etc) should be incorporated in
performance measures in order to mitigate the short – term orientation of managers.
• EVA adjusts for distortions introduced by generally accepted accounting principles into the
divisional performance measure to measure economic performance (the starting point though, is
the accounting profit based on historic costs and not future cash flows).
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Calculation of EVA:
1.
Adjust for IFRS distortions (starting point – obtaining WACC and accounting profit)
•
•
•
Add back expenses that will have value over a longer term than one year.
Amortise capitalised expenses over an appropriate lifespan.
Replace depreciation with economic holding gains/losses.
Note: You are required to calculate WACC.
2. Calculate the value of the controllable investment
• The term controllable investment refers to the net asset base that is controlled by
divisional managers. If the purpose is to evaluate the performance of a divisional
manager, then only those assets that can be directly attributed to the division and are
controllable by the manager should be included in the asset base. This means that only
assets that can be influenced by the divisional manager ought to be included in the
measure. For instance, if debtors and cash are administered by central headquarters,
they should be excluded because a divisional manager cannot influence these items.
• Use replacement values when available, else use as stipulated hereafter.
• Non-current assets at market value plus net working capital at realisable values plus
capitalised expenses at amortised values.
3. Calculate the capital charge by multiplying the controllable investment (2) with the
WACC (1).
4. Deduct the capital charge (3) from the adjusted profit or adjusted cash profit (1) to
calculate the economic value added.
• If the EVA > 0, economic value is created/added.
• If EVA < 0, capital is destroyed.
EVA = Adjusted Divisional – (Adjusted Capital Employed X Divisional WACC)
• The Capital Employed is adjusted as follows (figures imaginary and in R’000):
Owner’s Equity (NAV)
Add Goodwill amortisation
Add Deferred tax and other Provisions
Add total Debt
Adjusted capital Employed
4 333
253
14
467
5 067
• Adjust the Net Profit as follows:
Operating profit before Tax
Add Interest expense
Minus Tax
Minus extra-ordinary gains
NOPAT
Above will be illustrated by working through activity 2.
2 642
120
469
20
2 273
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Activity 2 – EVA
Attempt question: (Drury textbook)
9th ed: Question 19.21 p520 (Solution p780 – 781)
Feedback 2
The discussions in part a regarding expenses that add value give good guidance on this issue.
Advantages of EVA:
• EVA achieves goal congruence (as the interests of the company as a whole are considered)
• Non-financial factors (e.g. competitiveness, productivity, quality, etc) should be incorporated in
performance measures in order to mitigate the short- term orientation of managers.
• EVA adjusts for distortions introduced by generally accepted accounting principles into the divisional
performance measure to measure economic performance (the starting point though, is the
accounting profit based on historic costs and not future cash flows).
• Managers are encouraged to ‘think” in the same way as shareholders: EVA actively encourages
increasing shareholders’ wealth
• Under-utilised assets are identified.
• Puts emphasis on the achievement of long-term goals and shows the benefits of research and
development expenditure, training and marketing costs.
Disadvantages of EVA:
• The EVA can only provide a rough approximation of economic profit as the starting point for
calculating EVA is the conventional accounting profits, based on historic costs and, not future cash
flows.
• The EVA calculation involves making a number of adjustments to the profitability measure in order
to convert the historic accounting data and thereby approximate economic profit and asset values.
• The use of estimates of economic profit in evaluating performance results in lack of precision and
objectivity.
Activity 3
Attempt questions:
9th ed: (Drury Student Manual) Question 19.11
9th ed: (Drury textbook) Question 19.17
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Feedback 3
In question 19.11 the target structure and cash flows are relevant.
Share-based compensation
Refer to tutorial letter 103 of MAC4861, LEARNING UNIT 2.1.
Summary
In this LEARNING UNIT we focussed on further aspects related to performance measurement. We
studied both short- and long-term performance measures.
Assessment / self-assessment
Ensure that you can describe the following concepts briefly in a paragraph:
1.
2.
3.
4.
5.
6.
Economic performance
Economic value added
Managerial performance
Return on capital employed
Return on investment
Residual income
Enrichment activity 1
Google the term ‘Economic value added’ and read about a local company that employs it. You can
also look it up in Wikipedia at http:/www.wikipedia.org.
Enrichment activity 2
Peruse and absorb the performance measures reported on in the following pages. Note the
commonalities and focus areas of the different companies.
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LEARNING UNIT 5.2 Transfer pricing in divisionalised companies
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for the topic of transfer pricing. If not, please
refer to your undergraduate and advanced study material and revise the following indicated pages of
the textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to:
Applicable references:
Chapter 20:
Drury pages 526 – 527
Drury pages 527 – 535
Drury pages 535 – 538
Drury pages 538 – 539
Drury pages 539 – 541
Drury pages 543 – 549
•
•
•
•
•
•
Discuss the purpose of transfer pricing
Apply alternative transfer pricing methods
Consider proposals for resolving transfer pricing conflicts
Recommend domestic transfer pricing
Evaluate international transfer pricing
Discuss the economic theory of transfer pricing
Introduction
In your prior learning various methods that can be employed in determining internal transfer
pricing, achieve organisational objectives and the general goals of transfer pricing were discussed.
In this section we shall focus primarily on resolving transfer pricing conflicts, setting international
transfer pricing and finally, setting transfer prices when there is no external market for the
intermediate product.
Study
9th ed.
•
•
•
•
Proposals for resolving transfer pricing conflicts
Domestic transfer pricing recommendations
International transfer pricing
Appendix 20.1: Economic theory of transfer pricing
Drury pages 535 – 538
Drury pages 538 – 539
Drury pages 539 – 541
Drury pages 543 – 549
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Focus notes
Goals of transfer pricing system:
• To motivate the divisional managers to make decisions to the advantage of the company or group as
a whole (goal congruence).
• To ensure that each division’s performance is reasonable, measurable and comparable (achieve
equity).
• The system should be simple to operate and administer.
• The managers should still have the ability to make autonomous decisions and enter into negotiations
with each other.
• If possible, healthy competition between divisions should be encouraged by the transfer pricing
system.
Rule of thumb:
The following ‘rules of thumb’ may be applied when a question asks for the calculation of a transfer price
that will lead to goal congruence within the company:
1.
Minimum transfer price (that the supplying division will accept).
o
o
2.
Maximum transfer price (that the receiving division would pay)
o
3.
If there is an external market to buy from, the transfer price should be the Market price less
savings on selling and transport expenses
The maximum negotiated profit
o
4.
The minimum transfer price should comprise the incremental cost (usually variable cost plus
any increase in fixed costs) and opportunity cost.
Opportunity cost exists only if there are sacrificed external sales due to the internal transfer of
goods (and is the contribution thus lost).
This refers to the incremental profit that would be made by the receiving division on the
ultimate sale of the goods.
The negotiated transfer price (normally obtained through negotiation between selling and
buying divisions)
•
•
It should lie between the minimum and maximum prices calculated.
Range of Acceptable transfer prices:
The Upper limit (determined by the buying division)
Lower limit (determined by the selling division)
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Advantages of negotiated transfer prices:
• Negotiated transfer prices preserve the autonomy of the divisions, which is consistent
with the spirit of decentralization.
• The managers negotiating the transfer price are likely to have much better information
about the potential costs and benefits of the transfer than others in the company.
Behavioural implications of transfer pricing
The selling division may refuse to supply due to the following:
• The price offered not being able to cover marginal cost (where marginal cost pricing is
used).
• The price offered not being able to cover full costs (where full cost pricing is used).
• The price offered not being able to give the supplying division optimum profitability (where
market related prices are used and divisional performance is judged on profitability).
• Failure to agree a negotiated price.
The buying division may refuse to take supply due to the following:
• The price charged is considered excessive.
• In cost based approaches this may be due to disputes relating to the supplying division’s
cost structure or the size of the mark – up.
• In market based approaches there may be disputes as to the quantum of the discounts
for cost savings related to internal transfers.
Activity 1 - Transfer based on different cost bases
Attempt question:
9th ed: (Drury textbook) Question 20.19
Feedback 1: Question 20.19 (9th ed.)
Note the effect of the transfer pricing system on the optimum output level and profits for the company
as a whole.
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Activity 2 - Transfer price and bonus
Attempt question: (Drury Student Manual)
9th ed: Question 20.7
Feedback 2
Residual income used to measure performance. Consider the ‘what-if’ scenarios carefully.
Summary
In this LEARNING UNIT we looked at the purposes of a transfer pricing system, proposals to resolve
conflict and the recommendations in respect of domestic and international transfer pricing.
Assessment / self-assessment
Ensure that you can
1.
2.
3.
Motivate a recommended transfer price
Apply transfer price principles to different cost bases
Distinguish between domestic and international transfer prices
Enrichment activity
Visit the JSE Industrial Sector companies’ annual financial statements and read about their
application of transfer prices.
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PART 3 – Information for decision-making
PART 3 PURPOSE
The purpose of part 3 is to enable students to have a critical and informed understanding of the key
terms, rules, concepts and established principles of collecting and using information in making shortterm decisions.
DEEL 3 DOEL
Die doel van deel 3 is om studente in staat te stel om ‘n kritiese en ingeligde begrip van die
sleutelterme, reëls, konsepte en gevestigde beginsels van die insameling en gebruik van inligting in
die neem van korttermynbesluite te hê.
Topics
6.
Decision-making under conditions of risk and uncertainty
7.
Information application to decisions
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PART 3, TOPIC 6 – Decision-making under conditions of risk and
uncertainty
TOPIC 1 LEARNING OUTCOMES
After studying this topic, you should be able to:
•
•
•
•
•
•
Have a critical understanding of key concepts, rules and established principles of decisionmaking.
Explain the meaning of the terms of standard deviation and coefficient of variation as
measures of risk and outline their limitations
Describe and calculate the value of perfect and imperfect information.
Explain and apply the maximin, maximax and regret criteria
Explain the implications of pursuing a diversification strategy
Apply the principles of decision-making.
ONDERWERP 1 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om:
•
•
•
•
•
•
‘n Kritiese begrip van die sleutel konsepte, reëls en gevestigde beginsels van besluitneming
te hê.
Die betekenis van die terme standaard afwyking en koëffisiënt van variansie as maatstawwe
van risiko te verduidelik en hul beperkings te kan omlyn.
Die waarde van perfekte en nie-perfekte inligting te omskryf en bereken.
Die maximin, maximax en berou kriteria te verduidelik en toe te pas.
Die implikasies van die navolg van ‘n diversifikasie strategie te verduidelik.
Die beginsels van besluitneming toe te pas.
LEARNING UNIT
LEARNING UNIT 6.1 Decision-making under conditions of risk and uncertainty
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LEARNING UNIT 6.1 – Decision-making under conditions of risk and uncertainty
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for decision-making under conditions of risk and
uncertainty. If not, please refer to your undergraduate and advanced study material and revise the
following indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Before studying this topic, you should be able to:
Define risk and uncertainty.
Calculate probability distribution and expected value.
Measure the amount of uncertainty/risk.
Describe individuals’ attitudes to risk.
Establish the buying of perfect and imperfect information
Calculate maximin, maximax and regret criteria.
Drury 9th ed.
Applicable references:
Chapter 12:
Drury page 287 - 288
Drury page 289 - 290
Drury page 290 - 291
Drury page 291 - 293
Drury page 294 - 295
Drury page 296 - 297
Introduction
In prior learning the impact of risk and uncertainty in business-decision making was examined. It was
also mentioned that business decisions are influenced by managerial subjectivity as managers
normally draw from their expert knowledge, past experience and existing situations likely to impact on
future events due to the uncertain business environment. In this section we shall look at how the
principle of probability theory enables management to consider the degree of uncertainty associated
with each course of action when making business decisions. We shall also describe and calculate
the value of perfect information, and finally explain the diversification strategy.
Study
Drury 9th ed.
•
•
•
•
Drury page 290 - 291
Drury page 294 - 295
Drury page 296 - 297
Drury page 297
Measuring the amount of uncertainty
Buying perfect and imperfect information
Maximin, maximax and regret criteria
Risk reduction and diversification
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Focus notes
•
•
•
•
The concept of expected value considers a range of possible outcomes rather that a single
estimate. It involves multiplying each outcome (say projected sales level) by its associated
probability (likelihood that it will occur).
The standard deviation calculates the degree of variability in the possible outcomes.
Though expected value, standard deviation and coefficient of variation sum up the characteristics
of alternative courses of action, these measures do not provide the decision – maker with all the
relevant information as does the probability distribution.
When it is difficult to assign reasonable probability to possible outcomes, management may
employ the “maximin, maximax and regret” criteria to make decisions.
Activity 1
Calculating a portfolio return (expected value), standard deviation and coefficient of variation.
Consider the following:
State of
economy
Probability of
State of
Economy
Rate of
return
Share A
Rate of return
Share B
Rate of return
Share C
Boom
Good
Poor
Bust
0.15
0.25
0.55
0.05
0.30
0.12
0.01
-0.20
0.45
0.10
-0.15
-0.30
0.33
0.15
-0.05
-0.09
Your portfolio is invested 40 per cent in A and C, and 20 per cent in B.
REQUIRED
Calculate the expected return, standard deviation and the coefficient of variation of the portfolio.
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Feedback 1
1.
Calculate the expected return of the portfolio.
State
Prob
Share A
Return
Boom
Good
Poor
Bust
0.15
0.25
0.55
0.05
0.30
0.12
0.01
-0.20
Weighting
(40%)
Return*40%
0.12
0.048
0.004
-0.08
Share B
Return
Weighting (20%)
Return*20
%
Share
C
Return
0.09
0.02
-0.03
-0.06
0.33
0.15
-0.05
-0.09
0.45
0.10
-0.15
-0.30
Weighting
(40%)
Return*40%
0.132
0.06
-0.02
-0.036
Expected value
Portfolio
return
0.342
0.128
-0.046
-0.176
0.0513
0.032
-0.0253
-0.0088
0.0492
Weight*
Prob
4.92%
Calculate the standard deviation (σ) of the portfolio.
2.
State
Probability
Boom
Good
Poor
Bust
3.
Return
Sum
of
weight
returns
0.15
0.25
0.55
0.05
Return
(R)
0.342
0.128
-0.046
-0.176
Portfolio
variances
Squared variances
Weighted amount
R-EV
(R-E)2
(R-E)2 * Probability
0.2928
0.0788
-0.0952
-0.2252
0.085732
0.006209
0.009063
0.050715
0.0128598
0.0015524
0.0049847
0.0025358
0.0219326
14.81%
σ2
σ
Calculate the coefficient of variation (CV)
CV = σ/EV
= 0,1481/0,0492
= 3,01
= 301%
•
The SD measures the dispersion of returns around the expected value (mean). The
portfolio mean is low indicating low variance and thereby low risk.
•
The CV measures the relative amount of dispersion by expressing risk in relation to
the return. In this case for every 1 unit of risk there is more than 1 corresponding
unit of return which indicates low risk.
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Activity 2 - Calculating the value of perfect information
Zabalaza (Pty) Ltd has to choose between its two machines that produce product Z. Machine Zamalek has
low fixed costs and high variable cost/unit and is therefore suited to low volume production. Machine Zozo
on the other hand, has high fixed costs and low variable cost/unit rendering it suitable for high volume
production. The probability distribution for product Z is as follows:
State of production
Probability
Machine Zamalek
Profit
Machine Zozo
Profit
Low
High
0.5
0.5
R100 000
R160 000
R10 000
R200 000
REQUIRED
Zabalaza (Pty) Ltd could acquire perfect information regarding the state of nature by undertaking an
extensive market research. What is the maximum price that the company should pay for this information?
Feedback 2
1. Calculate the expected value of each machine without perfect information.
Machine Zamalek: R130 000 [(0.5*R100 000) + (0.5*R160 000)]
Machine Zozo: R105 000 [(0.5*R10 000) + (0.5*R200 000)]
Machine Zamalek has the highest expected value and will be chosen based on expected
value only (i.e. no perfect information available).
2. Calculate the expected value with perfect information.
R150 000 [(0.5*R100 000) + (0.5*R200 000)]
The calculation uses the highest profit if there is low demand and the highest profit if there
is high demand.
3. Calculate the value of perfect information.
The amount to be paid should be limited to the difference between the expected value with
and without perfect information: R20 000 [R150 000 – R130 000].
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Activity 3
Attempt question:
9th ed: (Drury textbook) Question 12.18
Feedback 3
Note the use of contribution and the application of capacity constraints.
Summary
In this LEARNING UNIT the calculation of risk indicators, the value of perfect information and
risk diversification was covered.
Self-assessment activity
Ensure that you can describe the following concepts briefly in a paragraph:
1.
2.
3.
4.
5.
Expected value
Co-efficient of variation
Perfect information
Risk diversification
Standard deviation
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PART 3, TOPIC 7 – Information application to decisions
TOPIC 2 LEARNING OUTCOMES
After studying this topic, you should be able to:
•
•
•
•
Explain the meaning of relevance.
Distinguish between relevant and irrelevant costs and revenues.
Determine the product-mix that will maximize profit when capacity constraints apply.
Explain why the book value of equipment is irrelevant when making equipment replacement
decisions.
• Describe the opportunity cost concept.
• Explain the theory of constraints and throughput accounting.
ONDERWERP 1 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om:
•
•
•
•
•
•
Die betekenis van relevantheid te verduidelik.
Tussen relevante en irrelevante koste en inkomste te onderskei.
Die produkmengsel wat wins sal maksimaliseer wanneer kapasiteitsbeperkings van toepassing
is, te bepaal.
Te verduidelik waarom die boekwaarde van toerusting irrelevant is wanneer besluite oor die
vervanging van toerusting gemaak word.
Die konsep van geleentheidskoste te verduidelik.
Die teorie van beperkings en deurvoer rekeningkunde te verduidelik.
LEARNING UNIT
LEARNING UNIT 7.1 - Relevant costs and revenues for decision-making
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LEARNING UNIT 7.1 – Relevant costs and revenues for decision-making
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for relevant costs and revenues for decisionmaking. If not, please refer to your undergraduate and advanced study material and revise the
following indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 9th ed.
Before studying this topic, you should be able to:
Applicable references:
Chapter 9:
Drury page 199
Drury page 199 - 200
Drury page 200 - 204
Drury page 204 - 207
Drury page 208 - 211
Drury page 211 - 213
Drury page 213 - 214
Chapter 10:
Drury page 231 - 245
•
•
•
•
•
•
•
•
Describe the meaning of relevance.
Highlight the importance of qualitative factors.
Make special pricing decisions.
Make product-mix decisions when capacity constraints exist.
Consider outsourcing and make or buy decisions.
Make discontinuation decisions.
Determine the relevant costs of direct materials and direct labour.
Explain the relevant cost information that should be presented in
price setting firms for both short-term and long-term decisions.
Introduction
In the previous module we dealt with the measuring of costs and benefits for non – routine decisions
such as, deciding on making a component within the company or buying from an outside supplier, or
introducing a new product and replacing existing equipment were dealt with. It was further mentioned
that in non-routine decisions, only those costs and benefits relevant to the specific alternative courses
of action should be considered. In this section we shall look at the key concept that should be applied
in making product-mix decisions when capacity constraints exist and also discuss equipment
decisions, explaining why equipment book values are irrelevant in such decisions. Finally, we shall
describe the process of maximising operating profit when confronted with bottleneck and nonbottleneck operations, the theory of constraints (TOC).
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Study
Drury 9th ed.
•
•
•
The key concept that should be applied for presenting information
Drury page 204-207
for product-mix decisions when capacity constraints apply.
Drury page 207-208
Replacement of equipment and the irrelevance of past costs.
Appendix 9.1: The theory of constraints and throughput Drury page 216-220
accounting.
Information explanation
• Relevant cost or benefit - is a future cash flow arising or changing as a direct consequence of the
decision under review.
• Costs and benefits that are independent of a decision are not relevant and need not be considered
when making the decision. Only differential or incremental cash flows should be taken into account.
• Cash flows that will be the same for all alternatives are irrelevant. Cash flows that have already been
incurred are sunk costs and irrelevant for decision-making.
• The total relevant cost of production is usually the variable cost per unit multiplied by the additional units
produced plus (or minus) any change in the total expenditure on fixed costs.
• Committed costs cannot be relevant to a decision that a manager is making now to improve or
maximise profits.
• Fixed Costs are irrelevant costs (Except for such costs as incremental and divisible fixed costs)
• Total Variable Costs: Variable costs are often considered as relevant costs. Committed variable costs
are nevertheless irrelevant to decision making.
Guidelines for determining material and labour relevancy
Material
Purchased in the past
Ordered or received, not yet paid
•
•
No other use at present
Could be sold directly
May be used on another job
Frequently used
Used as a substitute
•
•
•
•
•
Must otherwise be disposed of
•
Sunk cost
Sunk cost (already committed to pay), unless able to
return the goods to the supplier
No value (0)
Net realisable value
Lost contribution (opportunity cost)
Replacement cost
Cost saved by not having to purchase other
material
Opportunity saving
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Labour
Salaried labourers:
•
•
Already working at business = No cost
Work overtime = Overtime cost
Additional labourers / wage workers:
•
•
•
Employ additional labourers = Basic pay
New labourers work overtime = Basic pay plus overtime
Specialised labour (scarce) = Opportunity cost of projects sacrificed
Activity 1 - Revision
Attempt question:
9th ed: (Drury textbook) Question 9.22
Feedback activity 1
Note the initial requirement of the question 9.22 (9th ed.) for the evaluation of the outsourcing decision
options from a financial perspective. Note the subsequent requirement to evaluate the non-financial
aspects.
Activity 2 – Throughput accounting
Attempt questions: (Drury Student Manual)
9th ed: Question 9.14
Feedback activity 2
A sequential approach of profit, profit based on constraints and throughput is followed. This approach
should also be followed in questions where such a detailed requirement was not presented.
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Activity 3 – Pricing
Attempt question: (Drury Student Manual)
9th ed: Question 10.4
Refer also to MAC4861 Tutorial letter 103 for the study material on pricing decisions which is a very
important topic.
Feedback activity 3
Note specifically the approach used based on marginal cost and contribution.
Summary
In this LEARNING UNIT we considered capacity constraints, irrelevance of past costs and throughput
accounting.
Assessment / self-assessment
Ensure that you can apply the following concepts in any given scenario:
•
•
•
•
•
•
•
•
•
•
•
•
Pricing of customized products
Pricing based on target costing
Cost-plus pricing
Customer profitability analysis
Pricing of special orders
Outsourcing
Make- or buy decisions
Discontinuation decisions
Relevance of material and labour
Constraints in business
Throughput accounting
Replacement of equipment
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Integrated self-assessments
As mentioned in the introduction you will now have the opportunity to assess whether you can apply
your technical knowledge of individual topics, in an integrated scenario. We will start with an easier
case study and then progress to a more advanced one.
General Guidelines
You should attempt the case studies under exam conditions. Time yourself.
In real tests, you receive the scenario first and have reading time before receiving the required
section. You should attempt the case studies in this tutorial letter in the same manner.
Read the information in the scenario at least twice
Ensure that you have read every line in the scenario. Remember that you have to use all the
information that is given to you. Read the scenario line by line and highlight important information,
relating this as far as possible to particular topics and principles even though you do not yet know the
content of the required section.
Read the ‘required’ very attentively. Note specifically what you should present in the answer, i.e.:
-
budget, actual or forecast amounts – what advice is required
for the year, month or week
standard or actual
costing basis (variable or absorption)
This is the methodology that you should use for every question that you attempt.
We will now take you through activities to illustrate the approach. You are also advised to work
through as many questions as possible in the Drury Student Manual. Use information encountered
for the first time to build up a data base of ‘info statements’ linked to ‘what to do’s’. This is what you
need to look for when reading a test or examination scenario.
Once you have read and understood the scenario and the ‘required’ you can start answering the
question.
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Activity 1
Attempt question (Drury Student Manual)
9th ed: Question 8.9
Feedback 1
Note the general approach to fixed costs and it’s consequent application. An approach based on
specific fixed costs will follow a different route.
Activity 2
Attempt question (Drury Student Manual)
9th ed: Question 8.10
Feedback 2
Relevancy, expectancy and constraints are the core of this question.
Activity 3
Attempt question: (Drury Student Manual)
9th ed: Question 9.8
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Feedback 3
Consider the layouts and combining with qualitative aspects.
Activity 4
Attempt question: (Drury Student Manual)
9th ed: Question 15.12
Feedback 4
A combination of absorption costing, variable costing and inventory required.
Activity 5
Attempt question: (Drury Student Manual)
9th ed: Question 6.11
Feedback 5
The summaries are based on supporting calculations and a flowchart, all of which should be done
before the final presentation is done.
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Activity 6
Attempt question 18 (South Ltd) in the Question Bank.
Activity 7
Attempt question 20 (Knysna Specialist Suppliers) in the Question Bank.
Activity 8
Attempt test 1 MAC4861 BEFORE attempting test 1 of MAC4862. Ensure that principles are
understood clearly.
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MAC4862 - TEST 1 (2016)
QUESTION 1
40 Marks
THIS TEST CONSISTS OF TWO DEPENDENT PARTS, PARTS A AND B, AND ONE INDEPENDENT PART, PART C. ALL PARTS MUST BE ATTEMPTED
Ignore Value-Added Taxation
PART A
Clothing World Limited is a wholesale clothing manufacturer with several factories located in the
Cape Town area. Its Salt River factory manufactures two types of garments. In the one production
line jeans are manufactured from denim fabric while in the other production line men’s trousers are
manufactured from ordinary cotton fabric.
The management of Clothing World are investigating the overhead production costs of the Salt River
factory, specifically the costs associated with the forklifts used in the Storage department and the
Shipping department. (A forklift is defined as a small industrial vehicle with a power-operated fork-like
pronged platform which can be raised and lowered for insertion under a load, often on pallets, to be
lifted and moved short distances.)
In the storage department, the forklifts are used to unload large rolls of fabric from trucks and move
them to the store during the receiving process. The forklifts are used again later to move the rolls of
fabric from the store to the cutting area of the factory.
In the shipping department the forklifts are used to load boxes of finished jeans or trousers from the
staging area onto trucks for transport to the company’s central warehouse. Since the factory only
ships products to the warehouse and not directly to customers, a box is packed with only one type of
garment i.e. only jeans or trousers, not both. This also facilitates stock control at the warehouse.
There is only one size of box which is used for both jeans and trousers.
The budgeted annual fixed overhead costs associated with operating the forklifts can be analysed as
follows for the most recent financial year, which just ended:
Operator salaries
Maintenance
Depreciation
Other
Total fixed forklift costs
R
1 120 000
112 000
105 000
35 000
1 372 000
The total budgeted annual fixed overhead for the factory is as follows:
Total fixed forklift costs
All other fixed factory overhead
Total fixed factory overhead
R
1 372 000
19 600 000
20 972 000
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The budgeted operational data are as follows:
Production units
Direct labour hours per unit (sewing machine operator time)
Units per roll of fabric
Units per box shipped
Jeans
420 000
0,16
240
8
Trousers
200 000
0,20
312,5
10
Denim is also made from cotton but is a heavier, thicker fabric than ordinary cotton fabric and
therefore fewer jeans are produced from a roll of denim fabric than trousers from a roll of ordinary
cotton fabric. This also results in fewer jeans being packed per box than cotton trousers per box.
Due to the greater automation on the jeans production line, jeans require less direct labour hours per
unit (i.e. sewing machine operator time).
A study by the production manager found that forklifts spend approximately 70% of their time in the
shipping department and only 30% of their time in the storage department.
Shortly after year-end, the financial manager sent an e-mail to the Chief Financial Officer (CFO)
which included the following facts regarding the fixed factory overheads of the Salt River factory:
•
•
•
•
•
The factory still applied the traditional absorption costing method for the current financial year;
The actual production volume of jeans was 8% higher than the budgeted volume;
The volume variance was R660 380 favourable for the financial year;
The expenditure variance was R548 000 unfavourable for the financial year;
The direct labour hours per unit for both jeans and trousers was lower than budget due to
efficiencies by sewing operators.
Unfortunately the financial manager was suddenly booked off due to illness and the CFO is urgently
trying to determine the actual production volume of trousers and the actual fixed overhead amount
spent for the financial year.
PART B
Clothing World has another factory in Maitland, Cape Town, that manufactures good quality pullovers
and socks. The following information is available for the past financial year:
1. The budgeted production plan for the year included the following:
Opening balance
Production
Sales
Closing balance
Pullovers
5 000
270 000
(265 000)
10 000
Pairs of socks
6 000
605 000
(600 000)
11 000
2. The actual production figures showed the following
Opening balance
Production
Sales
Closing balance
Pullovers
5 000
240 000
(225 000)
20 000
Pairs of socks
6 000
530 000
(524 000)
12 000
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3. The actual selling prices were R74,00 per pullover and R49,00 per pair of socks throughout the
year.
4. Actual costs paid during the year were as follows:
Material
Variable overhead
Per pullover
R
25,00
3,00
5. Labour was paid at R50 per hour during the year.
manufacture, while a sock requires 4,8 minutes.
Per sock
R
9,00
1,00
A pullover requires 16,8 minutes to
6. Fixed production overhead was calculated as R5,50 per pullover and R3,00 per sock for
absorption costing purposes at the start of the financial year. The actual expenses for the past
financial year were as follows:
Depreciation – Factory buildings and equipment
Other fixed production costs
R
2 715 000
2 500 000
7. The following actual expenses were also incurred for the financial year:
Depreciation – Administration buildings and equipment
Marketing expenses (fixed cost)
Other administrative expenses (fixed cost)
R
2 000 000
2 300 000
6 500 000
8. In addition to the above marketing expenses, commission of 2% of the selling price is paid to
sales staff.
9. The current South African income tax rate for companies is 28%.
The junior accountant at the Maitland factory, Frank Makoena, was tasked to prepare the actual
break-even calculation for the Maitland factory for the past financial year. Management wanted to
know the break-even level in terms of the quantity of pullovers and pairs of socks sold. He prepared
the following calculation and notes:
Fixed production costs:
R
Depreciation – Factory buildings and equipment
Other fixed production costs
TOTAL
2 500 000
2 500 000
Notes
Excluded (non-cash)
Fixed cost per product: Split according to production volume (240 000 : 530 000)
Fixed cost
Pullovers
R
779 221
Pairs of socks
R
1 720 779
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Contribution per product:
Selling price
Material
Variable overhead
Labour
Fixed overhead
Profit before tax
Less tax (28%)
Pullovers
R
74,00
(25,00)
(3,00)
(50,00)
(5,50)
9,50
(2,66)
6,84
Pairs of socks
R
49,00
(9,00)
(1,00)
(50,00)
(3,00)
14,00
(3,92)
10,08
Average contribution = (R6,84 + R10,08) ÷ 2 = R8,46
Break-even:
Pullovers = R779 221 ÷ R8,46 = 92 106,501
Pairs of socks = R1 720 779 ÷ R8,46 = 203 401,773
PART C
This part is covered under the REQUIRED section only.
REQUIRED
CLOTHING WORLD LTD – SALT RIVER FACTORY
PART A
REQUIRED
Marks
(a) Calculate the budgeted forklift cost per unit for jeans as well as for trousers based on
the traditional absorption costing approach and using direct labour hours as base.
Round Rand amounts to the nearest cent.
4
(b) Calculate the budgeted forklift cost per unit for jeans as well as for trousers based on
the activity-based costing (ABC) approach. Round Rand amounts to the nearest
8
cent.
(c) Compare the various forklift costs per unit calculated in parts (a) and (b), and briefly
discuss the reasons for the differences.
4
Communication skills – logical argument
1
(d) Assume you are the Assistant Financial Manager. Calculate the following for the
financial year to assist the CFO:
6
• Actual production volume of trousers and
1
• The actual fixed overhead amount spent.
Round Rand amounts to the nearest cent.
Total
24
(Caplan adapted)
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PART B
CLOTHING WORLD LTD – MAITLAND FACTORY
REQUIRED
Marks
(e) Again assume you are the Assistant Financial Manager. Prepare an e-mail to the
junior accountant, Frank Makoena, identifying errors in his break-even calculations
and explaining why they are errors. Give him guidance so that he can recalculate the
break-even figures correctly.
13
Communication skills – layout and structure; logical argument
1
Total
14
PART C
REQUIRED
Marks
(f) Truck manufacturers often have premises situated next to highways or main roads
where they park rows and rows of their trucks. Briefly give possible reasons for this
practice.
2
Total
2
TOTAL
40
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MAC4862 – TEST 1 (2016)
SUGGESTED SOLUTION
R/W – Right/Wrong mark
40 marks
C – Consequential mark
PART A
Part (a) Calculate the budgeted forklift cost per unit for jeans as well as for trousers based on the
traditional absorption costing approach and using direct labour hours as base.
Production units
Direct labour hours per unit
Direct labour hours (420 000 x 0,16; 200 000 x 0,20)
Jeans
420 000
0,16
67 200
Trousers
200 000
0,20
40 000 (1) r/w (½ each)
Budgeted forklift overhead rate
R 1 372 000
(67 200 hrs + 40 000 hrs)
=
R 1 372 000
107 200 hrs
= R12,80/hour
Budgeted forklift cost per unit
Jeans: R12,80/hr x 0,16 hr/unit
Trousers: R12,80/hr x 0,20 hr/unit
ALTERNATIVE:
Split total forklift costs per product:
Jeans: R1 372 000 x (67 200 / 107 200)
Trousers: R1 372 000 x (40 000 / 107 200)
Budgeted forklift cost per unit
Jeans: R860 060 / 420 000
Trousers: R511 940 / 200 000
(1) r/w
Jeans
R
2,05
Trousers
R
Jeans
R
Trousers
R
(1) r/w
2,56 (1) r/w
860 060
(½) r/w
511 940 (½) r/w
2,05
(1) r/w
2,56 (1) r/w
(Available:4)
Max 4
Markers’ comments:
Many students obtained full marks for part (a).
Part (b) Calculate the budgeted forklift cost per unit for jeans as well as for trousers based on the
activity-based costing (ABC) approach.
1st stage allocation to activities:
Storage: R1 372 000 x 30%
Shipping: R1 372 000 x 70%
Storage
R
411 600
Shipping
R
(½) r/w
960 400 (½) r/w
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2nd stage allocation:
Activity
No. of rolls moved:
Store: 420 000 units / 240 units per roll
Ship: 200 000 units / 312,5 units per roll
No. of boxes shipped:
Store: 420 000 units / 8 units per box
Ship: 200 000 units / 10 units per box
Jeans
Trousers
Total
2 390 rolls
1 750 rolls
(1) r/w
(1) r/w
640 rolls
72 500 boxes
52 500 boxes
(1) r/w
(1) r/w
20 000 boxes
Cost driver rates:
Storage:
R411 600 / 2 390 rolls = R172,22 per roll moved
Shipping:
R960 400 / 72 500 boxes = R13,25 per box moved
Activity
Storage:
J: 1 750 / 2 390 rolls x R411 600
T: 640 / 2 390 rolls x R411 600
Shipping:
J: 52 500 / 72 500 boxes x R960 400
T: 20 000 / 72 500 boxes x R960 400
Total
Units
Forklift cost per unit – Jeans
– Trousers
Jeans
R
Trousers
R
Total
R
411 600,00
301 380,75
(½) r/w
(½) r/w
110 219,25
960 400,00
695 462,07
996 842,82
420 000
R2,37
264 937,93
375 157,18
(½) r/w
(½) r/w
1 372 000,00
200 000
(½) c
(½) c
R1,88
Only if ABC
applied above
(Available: 8)
Max 8
Markers’ comments:
Many students struggled to apply ABC correctly, e.g. they left out the 1st stage allocation of costs to
activities or used only one of the drivers to allocate the costs instead of both. Several students
used the analysis of the forklift costs (operator salaries, maintenance etc.) to allocate each item
using different bases (e.g. labour hours, units etc.).
Part (c) Compare the various forklift costs per unit calculated in parts (a) and (b), and briefly discuss
the reasons for the differences.
Forklift cost per unit
Traditional absorption costing
ABC
Difference
Jeans
R per unit
2,05
2,37
0,32
Trousers
R per unit
2,56
1,88
(0,68)
Difference
R per unit
0,51
0,49
Note
1
2
3
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1. The traditional costing method allocates R0,51 more forklift costs per unit to
trousers than to jeans (R2,56 – R2,05).
(½)
This is because the traditional method uses direct labour hours (sewing operator
time) as base and trousers use more direct labour hours per unit than jeans.
2. The ABC method allocates R0,49 more forklift costs per unit to jeans than to
trousers (R2,37 – R1,88).
(½)
This is because the ABC method uses activities (number of rolls of fabric moved and
number of boxes moved) as allocation base and jeans require relatively more rolls to be
moved and boxes to be moved than trousers due to denim being a heavier and bulkier
fabric than cotton.
3. The forklift costs per unit increase with R0,32 per unit for jeans and decrease with
R0,68 per unit for trousers when ABC is applied instead of traditional costing.
(1)
(½)
(½)
This is because ABC uses activity cost drivers which are the actual cause of the cost
of the activities and therefore a more accurate reflection of the consumption by the
product of the specific overhead (activity) cost.
Max
Communication skills – logical argument (nil if not discussed) – Comparison of Costs per
unit done.
(Available: 6)
(1)
(1)
4
(1)
Max 5
Markers’ comments:
This section was not answered very well. Students did not compare the costs that they had
calculated and instead gave vague discussions of the benefits and disadvantages of ABC and
traditional absorption costing. Very few students could identify and explain the reasons for the
differences in costs accurately.
Part (d) Assume you are the assistant financial manager. Calculate the following for the financial
year to assist the CFO: actual production volume of trousers and the actual fixed overhead amount
spent.
(i)
Actual production volume of trousers
Budgeted total overhead rate
R 20 972 000
(67 200 hrs + 40 000 hrs)
=
R 20 972 000
107 200 hrs
= R195,63/hour
Budgeted overhead cost per unit
J: R195,63/hr x 0,16 hr/unit
T: R195,63/hr x 0,20 hr/unit
(1) r/w
Jeans
R
31,30
Trousers
R
(1) r/w
39,13 (1) r/w
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Actual volume of jeans produced:
= 420 000 + (420 000 x 8%)
= 453 600 units
(½) r/w
Therefore amount allocated to jeans:
= 453 600 units x R31,30
= R14 197 680
(½) c
Total amount allocated = budgeted overhead + favourable volume variance
= R20 972 000 + R660 380
= R21 632 380
(1) r/w
Therefore amount allocated to trousers = Total amount allocated – Amount allocated to jeans
= R21 632 380 – R14 197 680
= R7 434 700
(½) c
Therefore volume of trousers produced = Amount allocated to trousers ÷ Budgeted overhead cost per
trouser
= R7 434 700 ÷ R39,13 per unit
= 190 000 units
(½) c
(ii)
Actual fixed overhead:
Actual fixed overhead = Budgeted fixed overhead + Unfavourable expenditure variance:
= R20 972 000 + R548 000
= R21 520 000
(Available: 7)
(1) r/w
Max 7
Markers’ comments:
For learning purposes the proof for part (i) is as follows:
Allocated / Absorbed fixed overheads:
Jeans:
453 600 units x R31,30
Trousers: 190 000 units x R39,13
R
21 632 462
14 198 357
7 434 105
Less: Budgeted fixed overheads (given)
20 972 000
Volume variance (Favourable) (given)
660 462
Students generally did not perform well in part (d). Several students used only fixed forklift costs
instead of total fixed factory overheads.
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PART B
Part (e) Prepare an e-mail to the junior accountant, Frank Makoena, identifying errors in his
calculations and explaining why they are errors. Give him guidance so that he can recalculate the
break-even figures correctly.
From:
To:
Subject:
Assistant Financial Manager
Frank Makoena
Break-even calculations
Sent: Tue 15 March 2016 09:30am
Hi Frank
I’ve had a look at the break-even calculations for the Maitland factory that you sent me. I would like
to point out the following errors that I have identified and explain the correct approach that you should
follow:
1. Calculation of total fixed costs
•
•
•
•
You have incorrectly excluded Depreciation on factory buildings and equipment.
(R2 715 000)
You have also incorrectly excluded the non-production fixed costs (Depreciation
on admin buildings and equipment; marketing expenses and other admin expenses =
R2 000 000 + R2 300 000 + R6 500 000 = R10 800 000).
You should include all the above-mentioned fixed costs since the break-even
calculation should be based on all fixed costs, including all cash and non-cash fixed
expenses and production and non-production fixed expenses.
You have split the fixed costs between Pullovers and Pairs of socks. This is
incorrect.
(1)
(1)
(1)
(1)
2. Contribution per product
•
•
•
•
•
•
•
•
•
•
•
•
You have incorrectly deducted the cost of only one sock from the selling price of a
pair of socks (i.e. two socks).
You should multiply the costs by two (i.e. R9 x 2; R1 x 2; etc.).
You have incorrectly included labour cost at R50 per product. R50 is the rate per
hour.
You should’ve multiplied the R50 with the number of hours per product. Remember
that the minutes should be converted to hours by dividing by 60.
You have incorrectly included fixed overhead (R5,50 and R3,00) as expenses.
(OR: You should exclude fixed overhead (R5,50 and R3,00) from the contribution
calculation.)
You have omitted the commission of 2% of the selling price. Commission should
also be deducted since it is a variable cost that varies with sales volume.
You have shown a profit before tax for each product when in fact it is a loss for each
product.
You have incorrectly deducted tax.
Contribution is calculated as the selling price less all variable costs before tax.
You have calculated the average contribution which is incorrect for this break-even
calculation.
You should have calculated a weighted average contribution
based on actual sales volume (225 000 : 524 000).
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(½)
(½)
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3. Break-even calculation
•
You have incorrectly done two break-even calculations by dividing your two fixed
costs figures by the average contribution.
OR
• You should use only the one total fixed cost amount (as explained in note 1 above)
and divide it by the weighted average contribution per unit (as explained in note 2
above).
• The resultant break-even units calculated should then be split between the two
products (pullovers and pairs of socks) using the actual sales volume of each
product (225 000 : 524 000).
• The break-even volume (units) of each product must be rounded up to the next
whole number.
(1)
(1)
(1)
Please recalculate the break-even quantities taking the above points into consideration and e-mail the
revised calculations to me by tomorrow.
Regards
Assistant Financial Manager
Note to markers: Must explain what the error is with reasons. No marks for redoing the break-even
calculation.
(Available:18) Max 13
•
Communication skills – layout and structure; logical argument (E-mail format) (Bonus
if headings used)
(1)
Overall Max 14
Markers’ comments:
The question did not require that the correct break-even calculations should be shown but for
learning purposes the correct break-even calculation is supplied:
Fixed costs:
Depreciation – Factory buildings and equipment
Other fixed production costs
Depreciation – Administration buildings and equipment
Marketing expenses (fixed cost)
Other administrative expenses (fixed cost)
TOTAL
R
2 715 000
2 500 000
2 000 000
2 300 000
6 500 000
16 015 000
Contribution per unit:
Pullovers
Selling price
Material (R9 x 2 socks)
Variable overhead (R1 x 2 socks)
Labour (R50 x (16,8/60)); (R50 x (4,8/60)) x 2 socks
Commission (R74 x 2%); (R49 x 2%)
R
74,00
(25,00)
(3,00)
(14,00)
(1,48)
30,52
Pairs of
socks
R
49,00
(18,00)
(2,00)
(8,00)
(0,98)
20,02
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Weighted average contribution per unit:
= (R30,52 x 225 000 / 749 000) + (R20,02 x 524 000 / 749 000)
= R9,16 + R14,01
= R23,17 per unit
Must use actual sales volume
Alternative: Weighted average contribution per unit = Total contribution / total units
= [(R30,52 x 225 000) + (R20,02 x 524 000)] / 749 000
= (R6 867 000 + R10 490 480) / 749 000
= R17 357 480 / 749 000
= R23,17 per unit
Break-even = Fixed cost / Weighted average contribution per unit
= R16 015 000/ R23,17
= 691 070,075
= 691 071 units in total
Must divide by
weighted average
Break-even number of units per product:
Pullovers = 691 070,075 x 225 000 / 749 000
= 207 597,820
= 207 598 pullovers
Must use actual
sales volume to split
Pairs of socks = 691 070,075 x 524 000 / 749 000
= 483 472,255
= 483 473 pairs of socks
Must use actual
sales volume to split
Numerous students recalculated the break-even figures which did not earn them any marks. The
Required explicitly stated that Frank Makoena should recalculate the break-even figures (not the
Assistant Financial Manager). A surprisingly large number of students did not recognise that the
split of fixed costs and subsequent two break-even calculations are incorrect principles.
PART C
Part (f) Truck manufacturers often have premises situated next to highways or main roads where
they park rows and rows of their trucks. Briefly give possible reasons for this practice.
•
•
This serves as a marketing exercise to display their products and demonstrate that
(1)
they are a large manufacturer. (Advertising)
Trucks take some time to manufacture. By having some inventory of trucks on
(1)
hand, customers who purchase trucks can be supplied immediately / sooner.
Max 2
Markers’ comments:
Most students recognised that there are marketing / advertising advantages. Many students
however did not realise that the trucks are the inventory of the truck manufacturers and assumed
that the trucks were delivery trucks.
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TEST 2 (2016)
QUESTION 1
40 Marks
THIS TEST CONSISTS OF THREE INDEPENDENT PARTS.
Ignore Value-Added Taxation
PART A
[17]
Boundless Coffee (Pty) Ltd (BC) currently operates three spesialised coffee boutiques situated in
Gauteng, priding itself on serving only premium brand coffee. The company has been growing
steadily over the past few years. It has now decided to appoint a full time management accountant
as it wants to franchise the concept across the country. One of the first priorities of the management
accountant will be to implement proper controls, as well as to calculate and implement accurate
costing prices.
After some research, the management accountant recorded the following standard costs for a 350ml
‘Lanky’ (a basic cup of coffee served by BC), for the financial year ending 28 February 2017:
R
1,80
1,17
1,20
3,31
Coffee beans 9g at R200/kg
Milk 130ml
Standard cup
Total variable costs
Budgeted Sales price
R15,00
The actual results for ‘Lanky’ for the company for the month ended 31 March 2016 are as follows:
Description
Sales (Units)
Beans purchased
Milk purchased
Cups used (units)
Fixed Overhead (R)
Actual
14 400
130 kg
1 872 ℓ
14 500
62 211
Notes
1
2
3
4
5
Notes:
1.
There was a 4% negative variance based on budgeted sales quantity. Due to the intense
drought in Africa and consequent increase in coffee input costs the company had to increase
prices on all its coffee products by 5,5%. All units produced were sold.
2.
10% of beans purchased were not used. As mentioned in point 1, the drought has increased
the bean price per kilogram. There was a 6% negative variance on the price per kilogram.
3.
A new dairy farm has approached Boundless Coffee and offered to provide milk at a 10%
discount for the first year compared to what they are currently paying. Since their current
contract has expired, the Managing Director (MD) suggested that they sign a 6 month contract
on a test basis from 1 March 2016. All milk purchased was used except for one incident of a
fridge failure where milk equivalent to 7% of the month’s purchase was lost before being
delivered to the boutiques.
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4.
10 Batches of 1 500 cups each were bought to qualify for a 7% quantity discount.
5.
The fixed overhead amount reflects an average cost per boutique per quarter. Included in the
amount is depreciation amounting to R6 211. Fixed overhead excluding depreciation in March
was higher than other months by 5%. Fixed overhead are allocated to products based on
volume sold.
When finalising her calculations, the management accountant discovered that the ‘Lanky’
actually comprised 54% on average for all products sold within each boutique for the month
against a budgeted 60%. The ‘Lanky’ is the cheapest product in BC’s product range.
6.
PART B
[20]
The Coffee (Pty) Ltd (TC) is a well-established South African-based roaster. TC is known for the
production of roasted, ground and packaged single-origin coffee with a maximum capacity of 200 tons
per annum. The plant company was recently acquired by McCups Coffee (Pty) Ltd, with Mr Monate,
the general manager (GM) of McCups Coffee ensuring that the goals and objectives of the company
are met. Current customers include coffee boutiques, hotels, bars, cafés and households.
The primary raw material required for the plant is clean green coffee beans which are bought in 60kg
bags. Upon roasting, green coffee beans lose 20% of the initial weight mainly due to evaporation of
water content in the green beans.
Coffee farmers were hit very hard by the current drought and production has been severely affected.
Since demand remains strong amidst the lower supply, green coffee beans are in very high demand
both locally and internationally. Giant coffee roasters and other major players, have secured the
majority portion of what could be produced of high grade Arabica coffee beans directly from the
farmers. Luckily, a friend of an acquaintance, a coffee farmer from Ethiopia, has agreed to supply TC
but can only satisfy 50% of TC’s production requirements. No other supplies can currently be
sourced.
The market price for the clean green beans for the month of January 2016 is currently quoted at US
$3,20/kg.
Below is a snap shot of the 2016 year’s projections:
Green coffee beans (bags)
Paper bag, for 250g coffee
Cardboard box
Paper bag, for 1 000g (1 kg) coffee
Gumming paper tapes (units)
Quantity
?
200 000
?
100 000
100
Total amount
?
R330 000
?
R465 000
R35 000
The above, with exception of clean green beans and cardboard boxes are already committed.
The packing materials to be used by the production plant are paper bags, cardboard boxes, and
gumming paper tapes. All these auxiliary materials are sourced from local suppliers. The proposed
package sizes of printed paper bags for packing of roasted and ground coffee are 250g and 1 000g,
which are planned to constitute 40% and 60% of the total roasted and ground coffee, respectively.
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A cardboard box fits forty (40) units of 250g coffee bags or eight (8) units of 1 000g coffee bags.
The cardboard box supplier charges R20 per box and provides the following discount rates on
specific bulk purchases:
5 000 –
7 000 boxes
7 001 – 10 000 boxes
10 001 – more boxes
5%
7,5%
10%
The gummed paper tape (currently each unit contains 125m – now discontinued) is used to seal the
box and will be replaced during the year by a more advanced tape that will only use 50cm instead of
1m on each box. The existing market inventory of discontinued tape is priced at R312,50 a roll and
the normal price of the new advanced tape is R800 per roll of 75m each.
A pre-determined production overhead recovery rate (including variable and fixed overheads) of R36
per kilogram of roasted coffee is budgeted for the year and is based on 50% capacity being normal.
The fixed portion makes up 75% of the total overheads.
The current market price for high grade roasted Arabica coffee is R65,00 per 250g bag and R200,00
per 1000g bag, which has allowed an average 30% profit margin for distributors and retailers.
One of the roastery’s customers, Mr Dube, sent an email to Mr Monate, GM of TC in order to secure
his supply needs with the following proposal:
Dear Mr Monate
I fully understand the circumstances facing the coffee industry. Our management
has made a decision to mix the high-grade beans that you supply us, with an order
of low grade-beans. The blend/mixing will ensure that supply meets our coffee
beans quantity requirements for the year and this would be once-off arrangement or
until your high grade supply meets our requirements.
We have already engaged with coffee farmers and 50 tons of low grade green coffee
beans are on its way to our warehouse.
As your loyal customer we request that you roast the stock for us and propose a fee
of R2 100 000 for the service, which will only include roasting, packaging into 1 000g
packs and boxing the packs in a specially printed boxes to indicate quality.
We trust that you would favourably consider our proposal.
Yours sincerely,
Mr Dube
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The GM discussed the proposal with the directors, indicating that placing client branding on the boxes
would be R7,10 per box. The directors would only be interested if profit margin is of at least 65%
achieved.
The GM also suggested the incorporation of low quality coffee beans as a temporary solution for the
current shortage of high-grade coffee beans. The blend would be a company secret, the packaging
will retain the high grade statement and will not indicate that it contains a blend.
The estimated exchange rate for the month of January 2016 for South African rand (ZAR) to USD is:
ZAR15,50 : USD1.
PART C – This part will be dealt with in the REQUIRED section.
REQUIRED
PART A
Boundless Coffee (Pty) Ltd
REQUIRED
Marks
(a) Calculate the fixed overhead variances for the Gauteng boutiques for the month
ended 31 March 2016 in as much detail as possible.
3
(b) From a management information perspective, briefly motivate whether or not, mix and
yield variances will in this case add value to the understanding of the quantity cost
2
variances.
(c) Discuss the operational risks of opening a new coffee shop in South Africa
5
(d) This section relates to the notes 1 – 6 of Part A. Select and list the most likely
outcome for each of the questions posed. Read the note in Part A and then exercise
your choice, from the underlined options.
Questions on note listed
(i)
Note 1: The impact of note 1 will be that the company’s (BC) turnover for March
2016 decreased/increased.
(ii) Note 2: The holding of bean inventory will increase/decrease BC’s profit for the
month.
(iii) Note 2: The holding of the bean inventory will be favourable/unfavourable to
BC’s future operations.
(iv) Note 3: The milk loss experienced due to the fridge failure should be treated as
a normal/abnormal loss in the management accounts for March 2016.
(v) Note 4: From a finance perspective the discount obtained will be cheaper/more
expensive than an overdraft facility carrying interest at prime plus 3%.
(vi) Note 5: The given fixed overhead allocation base is in line/not in line with the
normal bases prescribed.
(vii) Note 6: The actual sales of ‘Lanky’ during March 2016 is favourable/
unfavourable to BC’s performance for the month.
1 each
Total for Part A
7
17
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PART B
The Coffee (Pty) Ltd
(a)
(b)
Calculate the budgeted quantity of cardboard boxes and green coffee bean bags
with the corresponding expenditure amounts to be included in the annual budget of
the company.
As a finance manager of the company, Mr Monate has requested you to write an
email to the members of the Board of Directors:
(i)
(ii)
(c)
evaluating and commenting on the proposal made by the customer, Mr Dube.
discussing all relevant issues to be considered by the management of The
Coffee (Pty) Ltd acceptance of the proposal.
Communication skills - layout and presentation
Briefly discuss the strategic and ethical implications of Mr Monate’s suggestion to
keep the high grade statement on company packages neglecting to mention the
blend of low and high quality beans.
5
6
2
1
2
PART B (continued)
(d)
The coffee boutiques owned by the company has been purchasing boxes containing
1 kg coffee bags from the plant at R200/kg. The directors are discussing increasing
the market share of their coffee boutiques next year and they consider transfer
pricing as one tool to effect this. Calculate the minimum transfer price of a box of
coffees, containing 1 kg coffee bags, assuming the current supply situation prevails,
and comment on how it would assist management in its next year’s objective.
Total for Part B
4
20
PART C
General
(a)
You and your life partner buy take-away cappuccinos every other day from different
suppliers. You wonder whether it will not be more cash efficient to buy your own
pod-based coffee machine to make your own cappuccinos. List all relevant detail
information you would require to make a formal decision in this regard.
½ each
Total for Part C
TOTAL
3
3
40
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TEST 2 - SUGGESTED SOLUTION (2016)
PART A
 Section (a) Fixed overhead variances
Depreciation is excluded
Expenditure: 62 211 – 6 211 = R56 000 x 5% = R2 800 A
Volume:
6%[60%- 54%] X 62 211 = 3,732.66 A
[1]
[1]
[1]
MAX [3]
 Section (b) Motivate w het her or not , mi x and yi eld vari ances w il l add
value…
Yes/No – with applicable motivation (no marks for no motivation)
Motivation
Yes: It will give us a better understanding on the causes of the usage variance
No: As customers receives the product in the correct proportions, all variances will be due
spillage
[1]
[1]
MAX [2]
 Section (c)Discuss the operational risks (1 MARK EACH)
•
•
•
•
•
•
•
•
•
•
Drought in Africa may cause a steep hike in prices / greater demand than supply
Less demand for coffee due to hard economic conditions
Coffee is imported and the high exchange rate further increase prices
Although coffee industry is growing, the market is getting saturated with the overseas
entrants into the market like StarBucks
Startup funding/capital is difficult to come by for new entrants
Choosing the incorrect location may be leathel
Poor controls leading to theft
Attracting qualified staff
Difficulty in registering a company for taxes / other statutory
One other valid point
MAX [5]
 Section (d) . Select and list the most likely outcome(1 MARK EACH)
(i)
Note 1:
The impact of note 1 will be that the company’s (BC) turnover for March
2016 increased [Budget: 14400 x 15 = R216 000; Actual: 14400 x96%
x(R15x1.055) = R218 765] (ii) Note 2: The holding of bean inventory will
increase BC’s profit for the month.
(iii)
Note 2:
The holding of the bean inventory will be favourable to BC’s future
operations.
(iv)
Note 3:
The milk loss experienced due to the fridge failure should be treated as
an abnormal loss in the management accounts for March 2016.
(v)
Note 4:
From a finance perspective the discount obtained will be cheaper than an
overdraft facility carrying interest at prime plus 3%.
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(vi)
Note 5:
(vii)
Note 6:
The given fixed overhead allocation base is in line with the normal
bases prescribed.
The actual sales of ‘Lanky’ during March 2016 is unfavourable to
BC’s performance for the month.
MAX [7]
PART B
Section (a) Calculate the budgeted quantity of cardboard boxes and green coffee bean bags
•
•
60% of the production capacity = 60 000 kg
The box packs 8 of the 1000g (1kg),
60
000kg
8kg
=
= 7500 boxes required for 1OOOg product.
[½]r/w
•
•
The other 40%, which is equivalent to 40 OOOkg (40% x 100 000kg).
=40 000kg
(40 x 250g)
= 4 000 boxes required for the 250g product.
The box packs 40 of the 250g, therefore
[½]r/w
•
Therefore the total boxes needed for the year
= 11500 boxes
•
The planned box expenditure for the year should be:
11500 x R20 x 90% = R207 000,00
•
= 7500 + 4000
The roasted coffee beans currently attainable =50% x 200 tons
= 100 tons of roasted coffee beans
•
•
Roasted bean weight = 80% green bean
Therefore green beans sourced from the
farmer
•
Expenditure = 125 000kg X 3.20 15.50
= R6 200 000
= 100 ton
80%
= 125 tons of green beans
[½]c
[1]c
[1]r/w
weight
[½]c
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 Section (b) write an email to the members of the Board of Directors
MAX [5]
(i)
evaluating and commenting on the proposal made by the customer, Mr Dube
TO:
FROM:
DATE:
[6]
Board members
Dear Members of the Board…….
Clean green beans - Provided for by customer, not relevant
Manufacturing overheads Total overheads= R36 x 100 000
= R3 600 000 per annum Fixed
portion of 75% x R3 600 000
= R2 700 000 irrelevant -the
required supply is within relevant range, hence no effect on the cost. The
variable portion of R900 000 translated to per kg = R9/kg Therefore total
variable costs = R9 x 40 000kg
1000g packs used- replacement value
50 tons x 80% = 40 tons = 40 OOOkg ..40 000 bags at
100000
R465 000 /
Rnil
Rnil
[½]
[1h]
R360 000
[1]
R186 000
[1]
Boxes - replacement value and incremental cost of printing
(R20+R7.1)
40 000 bags 40 000 / 8 = 5000 boxes at R27.10
5000 boxes at R27.10
R135 500
Tape in stock at cost price – sunk cost
Gumming tapes- opportunity cost
12500m - 11500m (from (a) ) = 1000m
1000m / 125m = 8 rolls at R312.50
Rnil
[1]
R2 500
[1]
Purchases of new rolls 5000 -1 000 = 4 000 x 0.5 = 2 000m
2000m / 75m = 26.666 = 27 rolls at R800
R21 600
[1]
Transport- not relevant, the customer will bear all other costs.
Total cost
Profit (65% profit margin)
Acceptable offer price
Rnil
R 705 600
R 1 310 400
R 2 016 000
[½]
[1]
[1]c
[1]
The offer made of R2 100 000 by the hotel manager can be accepted, it provides a profit margin
>65% and the owners would therefore be interested.
Possible 8.5 marks, Max 6 marks
[1]
Communication skills - layout and presentation – email format
[1]
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(ii)
discussing all relevant issues
1.
2.
3.
4.
5.
It may create an expectation and a practice in the future, for the customers,
where clients bring their own green beans and packaging materials, which would translate
[1]
into lost markup on cost items.
It may provide a platform for the customers to negotiate further discounts.
[1]
Other customers would follow suit.
[1]
The roasting times of low quality and high quality may not the same.
[1]
Reputational damage
[1]

Section (c) discuss the strategic and ethical implications (1 each) Max 2
1.
3.
4.
The act would constitute a deliberate misleading by the company and would imply lack of
integrity.
The company reputation, if found may be at risk and this would threaten the companies
existence.
The company could accrue legal action
Loss of customers due to low/poor/substandard quality

Section (d) Calculate the minimum transfer price
2.
Variable overheads costs (R9 x 8)
Coffee beans ($3.2x15.5) x 8kg
PackaQinQ - 1OOOg bags (R4.65 x 8)
Packaging - boxes (R20)
Gumming tape [(R800/75m)*0.5m]
Total variable costs
Total variable cost per kg (divided by Skg)
Opportunity cost (R200- R66.41- (30% x
R200))
Total minimum transfer price
And (R140 x Skg)
[2]
Max 4
R72.00
R396.80
R37.20
R20.00
R5.33
R531.33
R66.41/kg
R73.59
[1]
[1]
R140.00 per kg
R1 120.00 per box
[1]
Alternative:
Selling price
R200
[1]
Distributors and retailers margin
Minimum transfer price
(R 60)
R140 per kg
[1]
Therefore, R140 X 8
R1 120 per box
[1]
At the price of R1120 per box of 8 x 1000g coffees
Max 3 marks
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•
The coffee shop would now save R60 per kg and this could be used to drop
the coffee cup price in order to penetrate the market.
350ml cappuccino selling price could be reduced by up to R0.54 per cup and
coffee shops would still achieve the budgeted profit.
•
[1]
[1]
Max 1 mark

•
•
•
•
•
•
•
•
Section (e) cash efficient to buy your own pod-based coffee machine… (½ each) max [3]
Period Applicable
Number of purchases
Probability of buying at a supplier
Different prices of pods at suppliers
Cost of Nespresso machines
Own input costs
Discount rate
Loss of convenience at shop
PART C •
•
•
•
•
•
•
•
•
•
•
•
•
•
Period applicable
Number of purchases
Probability of buying at a supplier
Different prices of suppliers
Cost of Nespresso machine
Replacement value/time of machine
Own input costs (Milk, pods, electricity, water)
Discount rate
Loss of ‘café feeling’ (friendliness, cosiness etc)
Saving on traveling
Saving time
Quality for home vs shop
Time saved
Traveling cost saved
½ each, MAX [3]
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COMMENTARY
PART A
Most students did quite well in this Section.
Section (a) fixed overhead variances
Students generally did well with this section, and most student did the calculation to exclude
depreciation.
Most students however did not attempt, or did not get the volume variance correct.
Section (b) Motivate whether or not, mix and yield variances will add value …
Students generally did well with this section. Some students comments are still to generic and not
relevant to the case study
Section (c) Discuss the operational risks
Students did poorly here. As explained above, the answers were too generic and not made
relevant to the case study. Some student literally only listed the risks, eg. Business risk, exchange
rate risk. This will never score you marks. We want to know if you can identify valid risks and
comprehend the impact on the company.
Section (d) . Select and list the most likely outcome
Students did excellent in this section. The question was however very straight forward and the same
level should not be expected in the exam.
PART B
This section was not well executed by many students.
Section (a) – Budgets
This section was not approached in an appropriate manner. Budgets by its very nature takes into
account what is expected, and it is from that premise that budgets are prepared. Following the
narratives of the scenario to the question, green beans that are expected to be sourced from farmers
constitute only 50% of TC capacity, hence the resulting budget will be based on 50% capacity.
Students sadly missed the abovementioned fundamental.
Students also could not identify that there are two packages (250g and 1000g) that have different box
requirements.
The other important aspect that was not well executed, was the dealing with normal loss in production,
20% was the expected loss in terms of the scenario provided and students were finding it difficult
calculate the material input (green beans).
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Section (b) – proposal evaluation
This question exposed a lack of understanding of the required, which remains as one of significant
reasons students find our subject difficult. Students were required to evaluate the proposal made,
evaluation involves appraising and assessing the value of something, it involves number crunching to
figure(s) that informs the eventual commentary. The approach by many students was a discussion that
was not guided by any calculation and hence negative performance. The other worrying trend is the
discomfort shown by students when dealing with profit margin % and markup %, and it will not be
tolerated at this level of study.
NB: Do not use any name on all the reports that you may be required to draft, rather use the
position assumed to occupy in the question.
Section (c) – strategic and ethical implications
Whenever dealing with ethics question on this nature, identify the ethical principle that is in question
explaining why and interpret the effect thereof on the profits and company as a whole. Strategic
speaks long-term goals and game plan of achieving them. Students found it challenging to express
strategic implications because maybe the term is not well understood.
Section (d) – Transfer pricing
The section was not attempted by a noticeable number of students. The marks were easily
attainable once attempted. Just remember, where the product has a market it would have an
opportunity cost on those products sacrificed when calculating the minimum.
Section (e) – relevant costing principles
It was a sheer lack of proper reading and understating of the required by students who performed bad
in this section. The analysis was for household consumption and not for business as many have put in
their discussions.
General
Finally, ensure that you properly read and understand the required and prior to writing anything invest
in some planning to your solution. Remember what you write has to inform us in your absence, and
has to make sense to another person who is not you.