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take home test 2

Management Accounting 2A (Eduvos)

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Take-Home Test Memorandum

Faculty Name: Commerce and Law
Module Code: COMAB2-B33
Module Name: Management Accounting 2B (Block 3)
Examiner: Tafadzwa Hunde
Second Examiner: Laura Gregory
Copy Editor: Mr David Oldert
Total Marks: 100
Duration: 24 Hours
Date and Time Released: 02/09/2021, 09:00
Submission Date and Time: 03/09/2021, 09:00
Section A: Cost Volume Profit Analysis 25 Marks
Section B: Learning Curves 25 Marks
Section C: Budgets 25 Marks
Section D: Regression Analysis 25 Marks

Instructions to Marker
1. An assessment criteria matrix is available from the developer upon request.
2. Award marks according to the mark allocation suggested in the answers.
3. Consult the information on mark allocation in the ‘Note to Marker’ boxes, where relevant.
4. The answers provided in this memorandum are sample answers and do not cater for all
possible solutions. Markers, being content experts, must use their own judgement when
marking the students’ answers.
5. The ✓ symbol indicates that a mark must be awarded; each tick represents 1 mark.

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Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private
higher education institution under the Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008

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Section A
Cost Volume Profit Analysis 25 Marks

Question 1
Study the scenario and complete the questions that follow:

Mrs Khoza and her daughter saw the need amongst young people for a dance academy in
Johannesburg. They found a facility where they could conduct rehearsals and host performances. The
facility consists of 5 studios that could be used for rehearsals and 2 larger halls that could be converted
into areas to host performances.

Mrs Khoza and her daughter decided that they are going to convert one of the larger halls into a gym
and the other one into an auditorium. The 5 smaller studios will be fixed and receive mirrored-up walls
and the necessary dance equipment.

This facility cost R500 000 and the construction to convert all the rooms cost another R500 000. The
total of R1 000 000 was financed by means of a loan. Interest of 8% p.a. is payable on the capital
amount.

The academy will be open 6 days per week from 10:00 to 21:00 daily, with the exception of the days on
which they host performances. The academy will be open the whole year, and they already have 5
performances during the course of the year.

The following are budgeted costs and income for the academy for the coming year:
Variable costs R
Meals per day 500
Wages per day 600

Fixed costs R
Administration 10 000
Utilities 40 000

Income R
Per performance 100 000
Per day from studios 800
Monthly gym income 5 000
Source: Hunde, T. (2021)

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Required:
1.1 Calculate the revenue received for the year excluding the performances (income generated
by the studios). (3 Marks)
1.2 Determine the net income for the year based on the direct costing method. (10 Marks)
1.3 The academy is open 6 days per week between 10:00 and 21:00; this is at 80% capacity.
Discuss, with definitions, what effect a change from 80% capacity utilization to 90%
capacity utilization would have on fixed costs and variable costs, separately. (6 Marks)
1.4 Calculate and interpret the break-even point in sales value. (3 Marks)
1.5 Calculate and interpret the margin of safety ratio. (3 Marks)
[25 Marks]

Answer
Note to Marker
Allocate marks as indicated.

1.1
R800 × (6 days × 52 weeks) ✓
= R800 × 312 days = R249 600

Income generated by gym

= 12 months × R5 000 p.m. ✓
= R60 000

Total = R249 600 + R60 000

= R309 600 ✓

1.2
R
Revenue (309 600 + (5 × 100)) 809 600 ✓
Variable cost (343 200)
Meals 156 000 ✓
(R500 × 312 days)
Wages 187 200 ✓
(R600 × 312 days)

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Marginal Income 466 400

Fixed Costs (130 000) ✓
Utilities 40 000 ✓
Administration 10 000 ✓
Interest (8% × R1 000 000) 80 000 ✓
Net income 336 400 P

1.3
Fixed costs:
• Total fixed costs won’t change when there is a change in capacity utilization. ✓ Total fixed cost
remains constant. ✓
• Fixed cost per unit changes in opposite direction to a change in capacity utilization. Therefore,
if capacity utilization increases, fixed cost per unit will decrease. ✓

Variable costs:
• Total variable costs will change in direct relationship with a change in capacity, ✓ therefore an
increase in capacity will result in an increase in total variable costs. ✓
• Variable cost per unit remains constant and therefore a change in capacity won’t influence
variable cost per unit. ✓

1.4
Break-even point (sales value) =
Fixed costs
Marginal Income Ratio
= R130 000 ✓
0.576 ✓
= R225 694.4

Marginal Income Ratio =

Marginal Income = 466 400 = 57.6%
Sales 809 600

The break-even point is when a company makes neither a profit nor a loss. In other words, the
company has to make total sales of R225 694.40 to cover all the costs of production. ✓

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1.5
Margin of safety ratio =
Actual sales value – Break-even sales value
Actual sales value

= R809 600 – R225 694.4 = 0.72 = 72%

R809 600 ✓✓

The margin of safety ratio indicates the extent by which sales can drop before a loss will be
suffered. ✓ Therefore, the safety net of the company is 72%.

End of Section A

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Section B
Learning Curves 25 Marks

Question 2
Study the scenario and complete the questions that follow:

Green Leaves
Green Leaves (Pty) Ltd recently made a breakthrough in the invention of a machine that can be more
effectively used in garden service companies to ensure better lawn mowers are used. On the strength
of references from one company which bought the first two machines produced, a garden service
operating in Johannesburg has made an order for 14 machines.
The following information relates to the manufacture of the first two machines:
• Direct material R34 500
(Direct material costs have since increased by 6%)

• Direct labour R9 500

(Direct labour hours required to manufacture each machine are expected to decrease as the
cumulative output increases, until 16 units have been manufactured)

• Variable overheads R2 450

o Variable to material costs 35%
o Variable to direct labour costs 65%

• Fixed overheads R7 000

• First machine 70 hours
• Second machine 45 hours
Note: Fixed overheads are allocated to production on the basis of direct labour cost.
Source: Hunde, T. (2021)

Required:
2.1 Calculate the learning rate. (2 Marks)
2.2 Calculate the total direct hours required for the order. (3 Marks)
2.3 Calculate the selling price for each machine for the order to obtain a gross profit of 55% on
sales. (20 Marks)

Note: Round all your figures to the nearest whole number.

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Answer
Note to Marker
Allocate marks as indicated.

2.1
Cumulative average time
Learning rate =
Previous cumulative average time
[70 + 45] / 2
= 
70
= 0.82 % or 82% 

2.2
Total units Cumulative average time per unit Total time
Hours Hours
1 70 70
2 (70 × 82%) = 57 (57 × 2) = 114
4 (57 × 82%) = 47 (47 × 4) = 188
8 (47 × 82%) = 39 (39 × 8) = 312
16 (39 × 82%) = 32 (32 × 16) = 512

Time required for 16 units 512.00 

Time taken for two units 115.00 
Time required for additional 14 units 397.00 

2.3
R
Direct material (R34 500 ÷ 2 × 1.06) × 14  255 990
Direct labour (R9 500 ÷ 115 × 397)  32 796
Variable overheads variable to:
Material (R2 450 ÷ 2 × 35% × 14 × 1.06)   6 363
Labour (2 450 ÷ 115 × 60% × 397)  5 075
Fixed overheads (32 796 × 74%)  24 269
Total manufacturing costs 324 493
Gross profit (55/45 × 324 493)  396 603
Sales 721 096 

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Calculations:
 Fixed overheads
R7 000 × 100 = 74%
R9 500

Selling price per machine:

721 096 / 14 =R51 506 

End of Section B

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Section C
Budgets 25 Marks

Question 3
Study the scenario and complete the questions that follow:

Colcom (Pty) Ltd

The following information relates to Colcom (Pty) Ltd:
Sales before any discounts have been taken into account:

Actual Total Credit Cash

January 2021 R550 000 R350 000 R200 000
February 2021 R680 000 R300 000 R380 000
March 2021 R800 000 R420 000 R380 000
Budgeted Total Credit Cash
April 2021 R880 000 R550 000 R330 000
May 2021 R1 000 000 R600 000 R400 000
June 2021 R1 240 000 R740 000 R500 000

Accounts receivable are normally settled as follows:

• 50% within the same month as the sale occurred
• 25% in the month after the month of sale
• 17% within 2 months after the month of sale
• 8% is irrecoverable.
Budgeted indirect expenses:
• April: R160 000
• May: R220 000
• June: R260 000

Indirect expenses include depreciation of R25 000 per month.

The following balance is available at the end of March 2021:
Bank (credit balance) R80 000
All purchases are concluded on a cash basis.
The following purchases information was given before discounts were taken into account:

Actual Total
January 2021 R400 000
February 2021 R450 000
March 2021 R520 000

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Budgeted Total
April 2021 R540 000
May 2021 R560 000
June 2021 R600 000

Discount of 10% is given if purchases are paid in cash.

Interest at 15% per annum on a long-term loan of R100 000 is payable at the end of March, the end of
June, the end of September, and the end of December.
Source: Hunde, T. (2021)

Required:
The company has the option of purchasing a new property for R800 000, in cash, before the end
of June 2021. Calculate and determine whether Colcom (Pty) Ltd will have enough cash
available to purchase this property. (25 Marks)

Note: Answer should be in columnar form.

Answer
Note to Marker
Allocate marks as indicated.

2021
Cash budget for Colcom (Pty) Ltd for: April May June
R R R
Opening Bank balance (80 000)  60 000  269 900 

Receipts: 761 000 908 900 1 113 500

Cash Sales 330 000  400 000  500 000 
Debtors' collections (calc. 1) 431 000 508 900 613 500
Total cash available 681 000 968 900 1 383 400
Payments: (621 000) (699 000) (778 750)
Cash purchases 486 000 504 000 540 000 
Indirect Expenses (calc. 2) 135 000  195 000  235 000 
Interest (calc. 3) - - 3 750 
Ending Bank balance 60 000  269 900  604 650 

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Calculations:

1. Debtor’s collection
April May June
R R R
Same month = 550 000 × 50% =600 000 × 50% = 740 000 × 50%
= 275 000  = 300 000  = 370 000 
1 month after sale = 420 000 × 25% = 550 000 × 25% = 600 000 × 25%
= 105 000  = 137 500  = 150 000 
2 months after sale = 300 000 × 17% = 420 000 × 17% = 550 000 × 17%
= 51 000  = 71 400  = 93 500 
Total = 431 000 = 508 900 = 613 500

2. Indirect Expenses R
April = 160 000 – 25 000 = 135 000
May = 220 000 – 25 000 = 195 000
June = 260 000 – 25 000 = 235 000

3. Interest
= R100 000 × 15% × 3/12 = R3 750

4. Purchases R
Discount = 100% – 10% = 90%
April = 540 000 × 90% = 486 000
May = 560 000 × 90% = 504 000
June = 600 000 × 90% = 540 000

Conclusion:
Colcom (Pty) Ltd will not have enough money available to exercise the option to purchase the
property,  because the ending cash balance in June is smaller than the cost of the property. 

End of Section C

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Section D
Regression Analysis 25 Marks

Question 4
Study the scenario and complete the questions that follow:

You are the newly appointed cost management accountant of Meikles Limited, a company that
specialises in the manufacturing of high-quality blankets which are exported to countries in Southern
Africa.
Due to the impact of Covid-19, the company is currently experiencing financial problems because of a
downturn in African economies generally and is reviewing its product and pricing policies.
The following costs were incurred during the last 6 months of the year.

Hours R
July 297 5 000
Aug 220 4 220
Sept 310 5 800
Oct 330 6 200
Nov 285 4 850
Dec 250 4 500
Source: Hunde, T (2021).

Required
You have perused the cost records for the company, but you do not agree with the variable cost
and fixed cost per unit which were captured and you strongly believe that the cost elements are
the major factors in the pricing policy. You opt to use the least squared method to determine the
variable cost per unit and fixed cost per unit per month in order to calculate Y if x is 350 hours.
(25 Marks)

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Answer
Note to Marker
Allocate marks as indicated.

x y x2 y2 xy
July 297 5 000 88 209 25 000 000 1 485 000
Aug 220 4 220 48 400 17 808 400 928 400
Sep 310 5 800 96 100 33 640 000 1 798 000
Oct 330 6 200 108 900 38 440 000 2 046 000
Nov 285 4 850 81 225 23 522 500 1 382 250
Dec 250 4 500 62 500 20 250 000 1 125 000
Total ∑x ∑y ∑x2 ∑y2 ∑xy
n=6 1 692  30 570  485 334  158 660 900  8 764 650 

 y = na + b x

 xy = a x + b x 2

1. 30 570 = 6a + 1 692b 

2. 8 764 650 = 1 692a + 485 334b 
Convert: 1 692/6 = 282
3. (30 570 × 282) = (6 × 282)a + (1 692 × 282)b
8 620 740 = 1 692a + 477 144b

Subtract two equations: 2 – 3

(8 764 650 – 8 620 740) = (1 692 – 1 692)a + (485 334 – 477 144)b 
143 910 = 8 190b
b = 143 910/ 8190
= 17.57 (variable cost per unit)

Substitute b = 17.57 into equation 1

1. 30 570 = 6a + 1 692 (17.57) 
30 570 = 6a + 29 728.44

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841.56 = 6a
a = 140.26 (fixed cost per month)

Solve y = a + bx
If x = 350 hours
Y = 140.26 + (17.57) (350) 
= 6 289.76

End of Section D

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