NKUHLU DEPARTMENT OF ACCOUNTING
Financial Management 2B
AFM221E
Test 1
30 August 2013
Time: 2.12 hrs Marks: 100
Assessors: O. Matarirano Moderator: D. Emslie
INSTRUCTIONS:
This paper consists of 7 pages.
Answer ALL questions.
Silent, non-programmable calculators may be used, unless otherwise instructed.
Show all calculations clearly.
Answers with Tippex and in pencil will not be remarked.
Scratch out open spaces and empty pages.
Questio Topic Marks Time
n
1 Introduction to management 06 07 minutes
accounting
2 41 49 minutes
Classification of costs
3 25 30 minutes
Assignment of costs
4 34 41 minutes
Material and labour
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106 127
Question 1 6 marks
Briefly discuss three functions of management accounting in an organisation. [6]
Question 2 41 marks
Part A 15 marks
Stread Manufacturers (Pty) Ltd (Stread) is a company that manufactures and sells a wide
range of durable products. The products are manufactured in various locations and sold to
numerous separate markets. The company’s operations are organised into five divisions
which may supply each other as well as selling on the open market. The following financial
information is available concerning the company for the year just ended:
R'000
Sales 8,600
Cost of sales 5,332
Gross profit 3,268
Other expenses 2,532
Net profit 736
Division 5 has been performing poorly and Stread has received an offer to purchase it. The
gross profit percentage of sales, earned by Division 5 in the year, was half that earned by
Stread as a whole and its sales were 10% of the total company sales. Of the production
expenses incurred by Division 5, fixed costs were R316 000. Other expenses incurred by the
division, other than production expenses, totalled R156 000, all of which can be regarded as
fixed. These include R38 000 apportionment of general company expenses which would not
be affected by the decision concerning the possible sale of Division 5.
In the year ahead, if Division 5 is not sold, fixed costs of the division would be expected to
increase by 5% and variable costs remain at the same percentage of sales. Sales would be
expected to increase by 10%. If the division is sold, it is expected that some sales of other
divisions would be lost. These would provide a contribution to profits of R20 000 in the year
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ahead. Also, if the division is sold, the capital sum received could be invested so as to yield
a return of R75 000 in the year ahead.
Required:
i Calculate whether it would be in the best interests of Stread Manufacturers, 9 marks
based on the expected situation in the year ahead, to sell Division 5.
ii Discuss other factors that you feel should influence the decision. 6 marks
Part B 26 marks
Stunning Cleaners (Pty) Ltd (Stunning) is a newly formed small company that intends to offer
washing services to its community. To start the business, Stunning requires 5 washing
machines and 2 dryers which cost R3 000 and R2 500 per unit respectively.
The building that the company had secured for the business needs some renovations that
are expected to cost R10 000. Rentals on the building will be R3 000 per month. Stunning is
the only occupant of the building and half of it will be used for administration purposes.
To effectively run the operations, the company would need 2 people to provide the washing
services. A salary of R9 000 per month will be paid to each employee. The owner of the
company will assist with the laundry but expects to spend 80% of his time attending to
administration issues. He will pay himself a monthly salary of R10 000 per month.
Each washing load is expected to use 250g of washing powder and each kilogram of
washing powder costs R30.
It also requires a fabric softener which costs R28 per 2 litres. Each 2 litre bottle is used to
wash 15 washing loads.
Apart from the washing powder and fabric softener, each washing load requires 42 litres of
water and water usage is paid at a flat rate of R0.05 per litre for any use below 50 000 litres
per month. If consumption goes above 50 000 litres, the extra consumption will be charged
at R0.08 per litre.
Electricity is expected to cost R6 000 per month of which 10% will be for lighting and
heating. Of that 10% lighting and heating cost, 50% is for the administration offices.
The building will be insured at R500 per month.
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Maintenance of the machines is expected to cost 2% per month of the total cost price of the
washing machines and dryers.
Stunning expects to have 525 washing loads per week.
Assume a 4 week month.
Required:
i Prepare a cost statement for Stunning Cleaners (Pty) Ltd for the year 22 marks
clearly distinguishing between prime costs, overhead costs and period
costs.
ii If a profit of 20% on cost (excluding period costs) is expected, determine 4 marks
the price to be charged per load.
Question 3 25 marks
Auto Viz Manufacturers (Pty) Ltd is a manufacturer of remote controlled toys. Company-wide
consultation has led to the following budgeted manufacturing overhead costs for its
production and service cost centres for the coming year:
Cost centre Budgeted Overhead
Machining R 220,000
Assembly R 190,000
Paint shop R 150,000
Engineering shop R 98,000
Stores R 67,000
Canteen R 100,000
The product passes through the machining, assembly and paint shop cost centres and the
following data relates to the cost centres:
Machining Assembly Paint Shop Engineering Stores
Shop
Number of employees 81 51 39 30 24
Engineering shop R18 000 R12 000 R10 000 - -
service
Stores (orders) 180 135 90 45 -
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The following budgeted data relates to the production cost centres:
Machining Assembly Paint Shop
Machine hours 9 200 8 100 6 600
Direct labour hours 8 300 11 250 9 000
Direct labour cost R40 000 R88 000 R45 000
Actual results for the production cost centres were:
Machining Assembly Paint Shop
Machine hours 10 000 8 200 6 600
Direct labour hours 4 500 7 800 6 900
Direct labour cost R25 000 R42 000 R35 000
Actual overheads R355 000 R195 000 R170 000
Required:
i Apportion the production overhead costs related to the service cost centres 9 marks
to the production cost centres.
ii Determine the predetermined overhead absorption rates for the 3 production 3 marks
cost centres on the following basis:
- machine hours for machining;
- labour hours for assembly; and
- labour costs for paint shop.
iii Prepare accounts showing the under/over absorption of production 9 marks
overheads per cost centre for the period under review.
Iv Explain why overheads need to be absorbed upon pre-determined bases 4 marks
such as the ones above calculated in (b).
Question 4 34 marks
Part A 15 marks
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Probsolve (Pty) Ltd (Probsolve) is a small company that buys plastic products from
manufacturers and sells them to supermarkets throughout the country. The following
information relates to plastic bin bags, one of the products that Probsolve supplies to
supermarkets, for the month of August.
Date Transaction
1-Aug 50 000 bags were on hand. These were valued at R0.70 each
3-Aug 120 000 bags were purchased at R0.75 each
4-Aug 100 000 bags were purchased at R0.80 each
7-Aug 200 000 bags were supplied to P "n" P at R0.90 each
9-Aug 200 000 bags were purchased at R0.82 each
12-Aug 250 000 bags were supplied to OK Bazaars at R0.88
13-Aug 500 000 bags were purchased at R0.78
20-Aug 300 000 bags were supplied to McInn at R0.90 each
29-Aug 180 000 bags were supplied to P "n" P at R0.90 each
No other transaction took place after the 29th of August.
Required:
i Determine the value of the closing inventories (bin bags) at the end of 13 marks
August if Probsolve uses the weighted average method to value its bin
bags.
ii Determine the cost of sales for August using the weighted average method. 2 marks
Part B 8 marks
Teddy Metru is the football coach for Suntowns Football Club, a soccer team that plays in
the Premier Soccer League. Teddy does not really understand how his net salary for July
was determined and has approached you to recalculate his salary from Suntowns for July.
You established that his remuneration is made on the following basis:
Basic Salary R50 000
Deductions:
PAYE 28% of taxable income
Pension contributions
Employee 7.5% of basic salary
Employer 10% of basic salary
Medical deductions R2 500 per month
UIF 1% of basic
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Teddy is paid a bonus based on the following criterion:
R5 000 per every match won
An additional R1 000 for every match won by a margin of more than 3 goals
(difference between opponent’s score and Suntowns score which is more than 3).
The matches and score lines for matches played by Suntowns FC are given below:
Opponent Result
Suntowns Opponent
Anazool FC 3 0
Khaya Chefs FC 5 1
Kappa FC 2 1
Panthers FC 1 2
Required:
Determine Teddy Metro’s net pay for the month of July [8]
Part C 11 marks
Tahitmos Ltd manufactures a single product and has 15 employees who work a 40 hour
week, excluding tea and lunch breaks. Each product requires one hour and thirty minutes
but the current efficiency ratio being achieved is 75%. The labourers are paid R60 per
attendance hour.
Because of agreements with the labourers about work procedures, there is some
unavoidable idle time due to bottlenecks in production and about 4 hours per week per
person are lost in this way.
The company can sell all the output it manufactures and makes a profit of R300 per unit
sold, after deducting currently achievable cost of production but before deducting labour
costs.
An incentive scheme is proposed whereby the labourers would be paid 40% above the
current rate per hour in exchange for agreeing to new work procedures that would reduce
idle time per employee per week to one hour and also raise efficiency to 84.62%.
Required:
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Determine the total profits under both payment schemes and advise management on the
better payment scheme for the company. [11]
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