2021 FBS200 YRT1 Question Final (Full) PDF

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2021 Year test 1 Questions...

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DEPARTMENT OF FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT 200 (FBS 200) YEAR TEST 1: 29 APRIL 2021

QUESTION PAPER

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QUESTION 1 MULTIPLE CHOICE QUESTION

(10 MARKS)

1. Mashishi is tired of his friend Elless always complaining about how tough her working hours at KW Yette are, where she is currently completing her audit articles. After receiving the text below, Mashishi decided to calculate how long Elless spends at her client to decide whether it is really that bad, or whether she is exaggerating and being dramatic as per usual. “Mash, I’m telling you, it’s the absolute worst! We’re working ALL THE TIME, the second years are working on my nerves and BZ, our manager, says we’re chilling too much. Audit work takes time, man – it’s not like I’m sitting scrolling through the ‘gram! BZ’s just upset because we’re charging overtime at 1.5 times our normal rate. And I can’t help that there are only 7.5 normal work hours a day. The worst is, we get paid like R103 per hour of effective work in normal working hours which translates to a useless amount of R84.46 per clock hour. Basically, I’m letting the firm buy my entire life for R1 450.75 per day.” The number of clock hours that Elless spends at the client is closest to: A. B. C. D. E.

10.85 hours 11.89 hours 14.09 hours 14.5 hours 17.18 hours

(3)

2. Santa’s Helpers manufactures reindeer ornaments to hang on Christmas trees. The raw material inventory on 31 October 2020 was 25 000 kilograms. There was no raw material inventory on 30 November 2020. The following cost detail relates to the cost of one reindeer ornament: Materials (R25 per kilogram) Labour (R22 per hour) Overheads

R18.75 R33.00 R23.50

Santa’s Helpers received an order for 50 000 reindeer ornaments to be supplied on 30 November 2020 to one of the leading chain stores. No other orders were received during the month. Assuming labour is paid in the same month as the labour expense was incurred, the cash amount paid for labour on 30 November 2020 is: A. B. C. D.

R550 000 R1 100 000 R1 650 000 R36 300 000

(2)

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3. Jersey (Pty) Ltd is a newly incorporated company that produces cheese and butter from milk in a single manufacturing process. A by-product, whey, arises incidentally from the process. Whey is always sold to a company that produces sport supplements. During the financial year ended 28 February 2021, the following applied:

Products Cheese Butter Whey

Quantity produced 50 000 kilog rams 23 000 kilog rams 50 000 kilog rams

Selling price per kilogram R500 R455 R100

Further processing costs per kilogram R75 R102 R12

Sales value at split off point per kilogram R400 R350 R0

The total joint production costs which were incurred during the year to produce the above quantities of the three products amounted to R23 000 000. The total joint production cost per kilogram of cheese, calculated using the physical measures method, is closest to: A. B. C. D.

R186.99 R254.79 R315.07 R375.34

(2)

4. Retro (Pty) Ltd manufactures denim jackets and denim pants from a joint process. 6 000 units of denim jackets and 2 000 units of denim pants were produced and sold during the joint process. Joint costs are allocated to products, using the net realisable value method. Denim jackets were correctly allocated a joint cost of R30 000. Further processing costs amount to 20% of the net realisable value of all denim jackets and 10% of the market value of all denim pants. The total market value of denim jackets is R60 000 and R50 000 for denim pants. The total joint cost incurred to produce denim jackets and denim pants is: A. R57 000 B. R58 125 C. R95 000

(2)

5. A fruit juice manufacturer produces 300ml juice bottles. Each bottle consists of 30ml fruit concentrate, 250ml water and 20ml fruit pulp. The product cost for a 300ml bottle is R5.74. Water is purchased at R1 per litre and fruit pulp is bought at R82 per litre. Each 300ml bottle is made from plastic which has a cost of R0.60 per bottle and conversion costs amount to R0.10 per bottle. The purchase price per litre fruit concentrate is: A. B. C. D.

R3.15 R10.50 R54.67 R105.00

(1)

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QUESTION 2

(20 MARKS)

GLUG-GLUG (PTY) LTD GLUG-GLUG (PTY) LTD (“Glug-Glug”) is an oil refining company with a refinery located in Richards Bay. Crude oil is refined and distilled by Glug-Glug in a joint process into the following products – methane, gasoline, bitumen and slop oil. Bitumen is a low value residual product incidentally arising from crude oil refinery and distillation. Slop oil is a waste mixture formed from the crude oil refining process. During March 2021, the following costs were incurred before split-off point:  

  

4 000 barrels of crude oil were placed into production at an average cost of R810 per crude oil barrel. The total transport costs incurred during the month amounted to R380 000, of which R180 000 was incurred specifically to transport the crude oil barrels from the oil rig to the oil refinery. The remainder of the transportation costs were incurred to transport the products from the oil refinery to the oil production plant. Other production overheads required for the processing of crude oil amounted to R1 200 000 for the month. Other direct raw materials and labour costs amounted to R2 610 000 for the month. Head office administration costs amounted to R800 000 for the month.

During March 2021, the following products formed at the split-off point:    

298 600 kilograms of methane 265 000 litres of gasoline 106 000 litres of bitumen 53 000 litres of slop oil

The following additional information was provided regarding the products formed at split-off point during March 2021: The methane formed at split-off point is further processed at a cost of R1 per kilogram of methane, to form liquefied petroleum gas (LPG). LPG is also referred to as “bottled gas” and used for cooking, heating and refrigeration. 1 kilogram of the methane formed at split-off point produces 0.5 kilograms of LPG, due to density differences between methane gas and LPG. One kilogram of LPG is sold at R22 per kilogram. All LPG kilograms produced were sold during March 2021. The financial manager correctly calculated the total net realisable value of gasoline as R3 560 000 for March 2021. 80% of the gasoline litres produced were sold at R15 per litre during March 2021. Bitumen is used as road or airfield paving material. Nearly all the surfaced roads in South Africa have bituminous surface. The bitumen produced at split-off point is further processed at a cost of R2 per litre and then regularly sold to the road construction industry at R5 per litre. Only half of the bitumen litres produced, were sold during March 2021. Slop oil is not environmentally friendly or biodegradable and thus the disposal thereof is strictly governed by environmental laws. The disposal of slop oil is outsourced to ClearSky (Pty) Ltd, a company that specialises in the safe disposal of hazardous waste by complying with all applicable environmental laws. Glug-Glug entered into a 2-year contract with ClearSky (Pty) Ltd to collect and dispose of their slop oil on a weekly basis at a cost of R150 000 per month.

Page 1 of 2

During the third week of March 2021, ClearSky (Pty) Ltd could not collect the slop oil of the previous week because of the public holiday falling on Glug-Glug’s collection day. Glug-Glug had no space to store the uncollected slop oil and dumped 14 000 litres of slop oil into the sea. As a result of this illegal disposal, Glug-Glug has been fined by uMhlathuze Local Municipality with R1 000 000, payable immediately. There was no opening inventory of any products on 1 March 2021. Glug-Glug has the option to sell 100 000 kilograms of the methane produced at split-off point directly to Afrox Ltd, a well-known gas supply company, for R25 per kilogram. If this route were taken, additional shipping costs of R5 per kilogram of methane will need to be incurred to transport the methane from the refinery to Afrox Ltd. REQUIRED a) Discuss the treatment of both of the following costs in the statement of profit or loss and comprehensive income of Glug-Glug for the month ended 31 March 2021:  the monthly collection and disposal cost of slop oil payable to ClearSky (Pty) Ltd and,  the fine payable to uMhlathuze Local Municipality for illegal disposal of slop oil. b) Prepare the accounting general journal entries to account for the costs incurred and revenue made from the bitumen incidentally arising from crude oil refinery and distillation. Journal narrations are required. c) Calculate the total joint costs allocated to gasoline and methane gas, assuming that Glug-Glug allocates joint costs based on the net realisable value method. d) Calculate the value of closing inventory on hand, per litre of gasoline, on 31 March 2021. e) Determine whether Glug-Glug should sell 100 000 kilograms of methane to Afrox Ltd at split-off point or whether they should process the methane further to form LPG. Clearly motivate your answer with appropriate calculations. TOTAL

MARKS

Round off all calculations and final answers to two decimals, unless otherwise stated.

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4

6 6 2

2 20

QUESTION 3

(30 MARKS)

This question consists of two related, but independent parts. LUMINOUS (PTY) LTD (“Luminous”) is a small company that specialises in manufacturing and selling makeup brushes. Luminous gained popularity because they sell high quality products at an affordable price. As a result, the company has grown significantly over the past few years and after an expansion project, their product range now also includes handheld mirrors. Luminous’ year-end is 31 March. Luminous has a factory located in Kempton Park, Gauteng where all manufacturing takes place. The manufacturing process of their products includes physical labour and some automated processes. They pride themselves on their commitment to corporate social responsibility and environmentally friendly business practices – Luminous therefore only makes use of local suppliers of raw materials and employs only South African residents. Due to their growth and expansion, the company has undergone numerous changes in recent years. The previous financial manager left the employ of Luminous, and you have been appointed in this role by the chief financial officer (CFO). The CFO needs your help regarding the 2021 financial year (ended 31 March 2021) and requires assistance with the planning of the current (2022) financial year (ending 31 March 2022). Furthermore, the CFO implemented an activity-based costing approach for allocating fixed manufacturing overheads to products from 1 April 2021. For this implementation, he hired the consulting firm Maine & Binsey. The total cost of implementing this method was R13 200 000 (inclusive of VAT). General overview of Luminous’ manufacturing process Luminous obtains plastic from a supplier in Germiston, Gauteng for use in the makeup brushes and handheld mirrors. This plastic is melted in batches, dyed with a special powder dye and poured into moulds to form either makeup brush handles or handheld mirrors. Thereafter, all items are branded with Luminous’ modern logo by industrial lasers. After branding, labourers assemble the products by fitting the makeup brush handles with bristles that have been bundled to fit each makeup brush and by gluing the mirror glass to the handheld mirrors. Each item (both makeup brushes and handheld mirrors) is individually packed into a special Luminous container. Finally, all containers are packed together in boxes for shipping. The process of manufacturing the makeup brushes and handheld mirrors is labour intensive due to the assembly time spent by the direct labourers. Consequently, before moving to an activity-based costing approach on 1 April 2021, at the beginning of the current financial year, Luminous allocated overheads based on work hours spent by the labourers.

Page 1 of 4

PART 1

(10.5 MARKS)

The following information relates to the 2021 financial year and is relevant for PART 1 only. The previous financial manager was inexperienced and as a result, he misplaced financial information relating to the manufacturing overheads. You obtained the following actual data: 2019 financial year Production units Makeup brushes (in units) Handheld mirrors (in units) Total manufacturing overheads

2020 financial year

502 500 275 000 R8 510 000

581 250 310 000 R9 556 270

The total manufacturing overheads provided, consist of a fixed and a variable portion. Actual fixed manufacturing overheads increased by 8% each year since the 2018 financial year, whilst there was no change in the variable cost of overheads per work hour from the 2019 financial year to the 2020 financial year. A labourer takes 8 work minutes to assemble and pack a makeup brush and 6 work minutes to assemble and pack a handheld mirror. All labourers are trained well and have always taken the same amount of work minutes to produce units. In a recent meeting, the CFO provided you with the following information regarding production units, overhead cost increases and actual expenditures incurred during the 2021 financial year:

Budgeted production (units) Actual production (units)

Makeup brushes 600 000 615 000

Handheld mirrors 350 000 365 000



The total budgeted fixed overheads of the 2021 financial year increased with 10% from the actual total fixed overheads of the 2020 financial year.



The budgeted variable overheads per work hour of the 2021 financial year increased with 8% from the actual variable overheads per work hour of the 2020 financial year. Salary – factory supervisors Salary – financial manager Water and electricity (65% of the total amount is attributable to the factory) Rent (8 250m2 of 11 000m2 is attributable to the production process) Maintenance of industrial cutting machines Indirect materials and indirect labour related to the factory cleaners Selling expenses – fixed Selling expenses – variable Administration expenses Depreciation of industrial cutting machines Depreciation of office furniture and fittings Total actual expenses incurred by Luminous during the 2021 financial year

Page 2 of 4

R1 120 000 R1 350 000 R5 500 000 R3 200 000 R1 152 000 R655 000 R728 150 R672 250 R956 300 R2 398 000 R95 300 R17 827 000

REQUIRED – PART 1 a) Prepare the fixed manufacturing overheads general ledger T-account of Luminous for the financial year ended 31 March 2021.  Clearly show the under-/over-recovery of fixed manufacturing overheads.  Round off your calculations and final answer to the nearest Rand.

MARKS 9.5

1 10.5

Communication skills – Presentation TOTAL – PART 1

PART 2

(19.5 MARKS)

The following information relates to the 2022 financial year and is relevant for PART 2 only. Raw materials The following table includes the raw material requirements for the production of makeup brushes and handheld mirrors: Raw material Plastic Powder dye Glue Bristles Mirror glass

Note 1

2

Makeup brushes (per unit) 80g R5.70 R0.30 R8.75 Nil

Handheld mirrors (per unit) 125g R9.40 R1.20 Nil 40cm2

Notes on raw materials: 1. The same plastic is used for makeup brushes and handheld mirrors. Plastic will be purchased at R125 000 per ton in the 2022 financial year. In the melting process, there is a normal loss of 5% of the plastic input. After the normal loss, a makeup brush and handheld mirror consists of 76g and 114g of plastic, respectively. 2. Luminous uses high quality mirror glass which they buy in sheets of 1m2. Luminous pays their supplier R2 750 per sheet in the 2022 financial year. A machine cuts the glass into the shapes and requires a blade change after cutting 1 000 40cm2 mirrors. No glass is wasted in the production process, as the shapes can be accurately cut from the mirror sheets. Labour Labourers are involved in all areas of the production process. There are two factory supervisors who oversee the production process. Luminous pays all their employees per hour for a standard 8 hour working day. During the 2022 financial year, labourers are paid R80 per hour.

Page 3 of 4

Manufacturing overheads Maine & Binsey, the consulting firm hired for the implementation of ABC, determined that the following activities take place during Luminous’ manufacturing process: Activity

Cost driver

Number of batches Melting and mouldin g of plastic Cuttin g of mirror glass Number of blade changes Laser branding of products Number of units A ssembling and packing of products Labour work hours TOTAL

Note 1 2 3

Total budgeted overheads R4 160 750 R3 040 000 R1 515 000 R3 549 250 R12 265 000

Notes on manufacturing overheads: 1. The melting and moulding of plastic process can only accommodate 100 kilograms of plastic per batch. 2. The laser branding of products takes 12 seconds per item and the laser is only operated for this purpose. 3. A labourer takes 8 work minutes to assemble and pack a makeup brush and 6 work minutes to assemble and pack a handheld mirror. Additional information   

Luminous’ budgeted to produce 630 000 makeup brushes and 380 000 handheld mirrors during the 2022 financial year. During the 2022 financial year, makeup brushes and handheld mirrors are sold for R60 and R80 respectively. It may be assumed that the predetermined manufacturing overhead rate per unit, for the 2021 financial year, was R12.50 and R14.70 for makeup brushes and handheld mirrors respectively.

REQUIRED – PART 2 a) For the year ending 31 March 2022, calculate the following: i) Prime cost per unit of makeup brush and handheld mirror, and ii) Manufacturing overheads per unit of makeup brush and handheld mirror, using an activity-based costing allocation approach. b) Evaluate the CFO’s decision to start using an activity-based costing approach in the 2022 financial year, by clearly motivating your answer with appropriate calculations. Communication skills – Logical argument TOTAL – PART 2 TOTAL - QUESTION

Page 4 of 4

MARKS 5 8.5 5 1 19.5 30...