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Tutorial letter 105/0/20 21APPLIED/ ADVANCED MANAGEMENTACCOUNTINGYear moduleDepartment of Financial IntelligenceIMPORTANT INFORMATION: This tutorial letter contains important information about your module.####### MAC/NMA/ZMA4861/105/####### MAC/NMA/ZMA4862 /105/MAC4861/NMA4861/ZMA4861/APPLIED / ADVA...

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MAC/NMA/ZMA4861/105/2021 MAC/NMA/ZMA4862 /105/2021

Tutorial letter 105/0/2021 APPLIED/ ADVANCED MANAGEMENT ACCOUNTING

MAC4861/2 NMA4861/2 ZMA4861/2 Year module Department of Financial Intelligence IMPORTANT INFORMATION: This tutorial letter contains important information about your module.

2 MAC4861/MAC4862/105

APPLIED / ADVANCED MANAGEMENT ACCOUNTING TUTORIAL LETTER 105 / 2021 INDEX MARKS 1.

2.

3.

4.

PAGE

UNISA EXAMS Question 1: HERO Question 2: WATER-COUNTS Question 3: THOLAKELE and KGANYAGO Question 4: ICE CASTLE Question 5: FAMOUS FISHING Question 6: NH- AGRI

100 100 100 100 100 63

3 9 14 20 26 31

UNISA TESTS Question 7: SUPERBEV Question 8: KWINI Question 9: FAB COMS Question 10: CITA and BOX Question 11: HONEYSMOOTH Question 12: BLEXSEM Question 13: LOVELY LIGHTS Question 14: POTTING

40 40 40 40 40 40 40 40

35 39 42 46 49 52 56 59

ITC EXAMS Question 15: SA SOLAR Question 16: DMG Question 17: IZINKUNI Question 18: ANGORA

35 54 53 46

62 69 75 80

SOLUTIONS Solution 1: HERO Solution 2: WATER-COUNTS Solution 3: THOLAKELE and KGANYAGO Solution 4: ICE CASTLE Solution 5: FAMOUS FISHING Solution 6: NH- AGRI Solution 7: SUPERBEV Solution 8: KWINI Solution 9: FAB COMS Solution 10: CITA and BOX Solution 11: HONEYSMOOTH Solution 12: BLEXSEM Solution 13: LOVELY LIGHTS Solution 14: POTTING Solution 15: SA SOLAR Solution 16: DMG Solution 17: IZINKUNI Solution 18: ANGORA

100 100 100 100 100 63 40 40 40 40 40 40 40 40 35 54 53 46

85 99 110 123 138 153 161 171 177 182 186 193 200 207 213 217 222 224

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MAC4861/MAC4862/105

UNISA EXAMS QUESTION 1: HERO (MAC4862, 2019)

100 MARKS

Ignore Value-Added Tax (VAT), Dividends Tax and any possible impact of Section 8 of the Income Tax Act. Background to the South African peanut industry Peanuts are a high value crop that are produced mainly in the north-western parts of South Africa. The highest peanut producing area is along the Vaal River. Peanuts are rich in protein, energy, fibre and essential nutrients and are produced for edible peanuts, peanut butter, peanut oil, oilcake, and seeds. The consumption of edible peanuts in South Africa has been decreasing significantly since 2011 due to consumer price sensitivity. The market for peanut butter has however been steady. Local farmers’ selling prices for peanuts started increasing from 2010 mainly due to international price movements driven by growing global demand. Increasing local production costs added to the price increases. The increased global demand stimulated international production and supply. South Africa is a very small producer and exporter of peanuts. South Africa exports mainly to the European Union, Japan and the SADC region. Production was recently negatively impacted by the drought. Hero (Pty) Ltd (‘Hero’) You have recently been appointed as the management accountant of Hero. It is a private company in Hartswater in the Northern Cape Province, with a December financial year end. Hero has two operating divisions namely peanut division and peanut butter division, as well as a shared support division. Peanut division The division’s budget is based on the purchase of 6 000 tons of peanuts (in their shells) per annum from local farmers. The division employs 10 permanent staff and approximately 130 seasonal workers. •

Process 1: Cleaning and sorting

Peanuts (in their shells) are taken from the storage area and cleaned by removing soil, stones and other debris. They are then classified into size categories whereafter quality testing and inspection takes place to enable grading. There is no significant weight loss during the cleaning and sorting of the peanuts. The division maintains high health, safety and food quality standards necessary for export. In compliance with fixed existing contracts, 35% of the best quality cleaned peanuts are exported to Japan. •

Process 2: De-shelling of peanuts

The remaining cleaned peanuts are “de-shelled” (i.e. the shells are removed). There is a normal weight loss of 20% due to the de-shelling process. 70% of the de-shelled peanuts are transferred to the peanut butter division and 30% are sold to various wholesalers and factories. The de-shelled peanuts are transferred to the peanut butter division at the same price as that charged to external local customers. Hero’s management made this decision in order not to penalise the peanut division management during the performance measurement process. The peanut division must first supply the peanut butter division’s demands before selling externally. External demand for de-shelled peanuts is 2 000 tons. Inventory is valued at standard cost. The division uses an absorption costing system and allocates fixed production overheads based on machine hours. Sales are done per whole ton and not for parts of tons. The peanut division does not keep any inventory at either the beginning or the end of the year.

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QUESTION 1 (continued) The following budgeted information (per ton), valued at standard cost, for the peanut division is available: Export Local R/ton R/ton Selling price Variable costs Fixed cost

17 000 (11 000) (1 200) 4 800

15 200 (10 200) (1 400) 3 600

The division is operating at full capacity. Variable costs include inter alia the cost of packaging and deshelling, as appropriate. Total budgeted common fixed overhead costs are allocated using the traditional costing method, whereby R2 520 000 is allocated to export products and R4 368 000 is allocated to local products. Peanut butter division The peanut butter division must purchase all its de-shelled peanuts from the peanut division. Hero currently only produces smooth peanut butter in a highly mechanised production process. The process comprises five steps: roasting, blanching, inspection, grinding and packaging. Blanching entails the removal of the outer skins of the roasted peanuts. During the grinding process sugar, salt and oil stabilizer are added to produce the smooth peanut butter. The peanut butter is then pumped into plastic jars, labelled and packed. Inventory of raw materials, packaging and finished goods are all valued at standard cost. The division does not keep any inventory at either the beginning or the end of the year. The following are the standard ingredients to produce one ton of smooth peanut butter:

Peanuts Dry ingredients Oil stabilizer

Notes 1 2, 3 3

Quantity 1 022 kg 80 kg 10 kg

Price R15 200 per ton R10,20 per kg R14,50 per kg

Notes 1. The de-shelled peanuts undergo a normal loss of input during the production process (conversion: 1 ton = 1 000 kg). 2. The dry ingredients (i.e. sugar and salt) are premixed in a standard proportion and therefore a weighted average price is used for the dry ingredients. 3. There is no significant loss on the dry ingredients or oil stabilizer. The division uses an absorption costing system and allocates fixed production overheads based on machine hours. Standard variable overheads amount to R4 050 per ton and standard fixed overheads amount to R9 500 per ton of peanut butter produced. The standard cost for a 400g plastic jar with a label is R6,50. The standard selling price is R22,50 per 400g jar of peanut butter. The actual results for the month of November 2018 show the following: •

Production was 160 tons of peanut butter. This was lower than the expected monthly production due to annual maintenance of the plant.

•

170 tons of peanuts were purchased for R2 652 000, of which 159 tons were issued to production.

•

13 000 kg of dry ingredients were purchased for R130 000 and 15 000 kg were issued to production.

•

1 500 kg of oil stabilizer were purchased at R14,60 per kg and 1 650 kg were issued to production.

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QUESTION 1 (continued) •

Expanding peanut exportation Management intends to increase peanut exports and possibly exporting to countries other than Japan, without increasing its purchases from farmers.

•

Expanding the peanut butter range

Hero’s management is planning on expanding the peanut butter range to include crunchy peanut butter and “No added sugar” (NAS) smooth peanut butter. The crunchy peanut butter production process is the same as that for the current smooth peanut butter except that some of the peanuts will be chopped and added at the end of the grinding process and mixed into the peanut butter. The NAS peanut butter follows the same process as the current smooth peanut butter but the sugar and salt are left out during the grinding process. The NAS peanut butter will therefore have a higher peanut content (i.e. approximately 99%) compared to the normal smooth peanut butter (i.e. approximately 91%). Hero is considering implementing an activity-based costing (ABC) system in the peanut butter division to correctly allocate fixed production overheads to the new range of peanut butter products. •

Free State Department of Education tender

The manager of the peanut butter division is aware of a tender advertised by the Free State Department of Education to supply 7 500 jars (800g each) of smooth peanut butter in May 2019 for school feeding schemes in the province. The maximum production output during May 2019 is expected to be 185 tons. The expected demand is 181 tons (excluding the tender). He visited Bloemfontein (at a cost of R5 000) for a few days and attended an information session at the provincial government offices and obtained the necessary information. The following information was obtained: •

Hero has 1 000 jars (800g each) on hand that were purchased in error during October 2018 at R8,80 per jar. Hero does not have any other use for the jars. The supplier has agreed that Hero may return the jars bought in error at R8,40 per jar. New 800g jars can be purchased at a cost of R10,50 per jar in batches of 1 000 jars or at R11,00 per jar in batches of 500 jars.

•

The settings on the packaging machinery will need to be adjusted, for this order only, to handle the 800g jars at a cost of R1 500 per setting change. The order will be produced in a single production run.

•

An administrative staff member who earns R8 000 per month will need to spend two weeks on the preparation of the tender. A temporary clerk will be hired for two weeks at a total cost of R6 000 to take-over the administrative staff member’s duties.

•

The peanut butter division requires an operating profit margin of at least 15% on the tender.

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QUESTION 1 (continued) Divisional performance measurement The operating divisions are investment centres while the support division is a cost centre. The support division’s costs are expensed as a period cost in the company financial statements. The divisional manager of each division is solely responsible for the division’s performance. Performance measurement of the operating divisions are based on the division’s gross profit percentage. Divisional managers receive their bonuses if their division achieves a 25% gross profit percentage (before provision for bonuses). Hero energy bars (‘HEB’) Senior management of Hero is planning to launch a new energy bar division that will use Hero peanut butter as a basic ingredient. It will operate as an investment centre. After in-depth market research, the following information was obtained for HEB: 1. The initial investment will be R1,8 million and will be depreciated on a straight-line basis over four years with a Rnil residual value at the end of the fourth year. Book value of the investment is anticipated to approximate its market value. 2. The net operating cash inflows are expected to be as follows: Year 1 R600 000

Net operating cash inflow

Year 2 R708 000

Year 3 R877 920

Year 4 R1 123 738

3. Cash fixed costs (not included above) are expected to be R80 000 in year 1. The year 2 to year 4 expected annual escalation percentage is based on the following probabilities:

Annual escalation % (year 2 to 4) 4% 5% 6%

Probability 35% 40% 25%

4. The net present value of the investment has been calculated as R151 900. The divisional manager of the peanut butter division, Mr Mbewu, will be appointed as divisional manager of the new division. He is not in favour of the new investment and his appointment. The financial director has proposed that performance measurement for bonus purposes for the new division should be based on residual income and return on investment. The target residual income will be R100 000 per year. Management performance will be based on a required return on investment of 15% per year (before tax), based on opening investment balances using market values. The corporate tax rate is 28% for all periods under consideration. Divisional managers do not have control over tax structures and tax will therefore be excluded from their performance measures.

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REQUIRED

(a) (b)

MARKS Sub- Total total

Calculate the annual budgeted number of tons to be sold by the peanut division to break-even. Distinguish between export tons and local tons.

10

Calculate the minimum transfer price per ton of peanuts transferred to the Peanut butter division.

5

Ignore any possible changes to the export strategy. (c)

Calculate the standard raw material cost (i.e. peanuts, dry ingredients, and oil stabilizer) for one ton of peanut butter.

(d)

Calculate the following standard costing variances for the peanut butter ingredients (peanuts, dry ingredients, and oil stabilizer) for the month of November 2018: • • •

(e)

5 6 5

Use standard Rand values per ton/kg to two decimal places (i.e. cents). Ignore plastic jars. Discuss possible reasons for the following variances calculated in part (d): (i) (ii) (iii)

(f)

Material price variances per input; Material mix variances per input; and Material yield variances per input.

3

Material price variance for peanuts only; Material mix variances; and Material yield variances.

16

3 1 2

6

Prepare a memo to the management of Hero advising them on the following: (i)

Discuss factors that the management of the peanut division will need to consider when planning their export expansion strategy. The discussion should include factors relating to: • • •

international markets; the South African market; and Hero (internal factors).

4 2 3

Exclude any discussion regarding the financing of the strategy. (ii)

Discuss the impact that an increased percentage of exports will have on the break-even of the division and why? No calculations are required.

Communication skills – layout and structure

3

1

13

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MAC4861/MAC4862/105

REQUIRED

(g)

Assuming the peanut butter product range is expanded, critically discuss the implementation of activity-based costing (ABC) in the peanut butter division and provide a recommendation regarding the implementation of ABC.

MARKS SubTotal Total 6

(h)

Communication skills – clarity of expression Calculate the minimum price per jar of peanut butter that Hero can bid for the Free State Department of Education tender.

(i)

Provide reasons for any values excluded from the calculation. Discuss five key non-financial factors that Hero should consider in its decision about the Free State Department of Education tender.

5

Communication skills – logical argument

1

(j)

(k)

1

14

List three key pieces of legislation that the Free State Department of Education must comply with during its procurement of supplies for its school feeding schemes. (i) Calculate the expected residual income and return on investment for year 1, year 2 and year 3 for HEB.

(ii) Critically discuss Mr Mbewu’s performance from his own perspective as well as from Hero’s perspective. Make three recommendations about how HEB’s proposed performance measures could be improved to achieve overall goal congruence for Hero. TOTAL

7

6

3 11

6

17 100

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MAC4861/MAC4862/105

QUESTION 2: WATER-COUNTS (MAC4861, 2019)

100 MARKS

Ignore Value-Added Tax (VAT), Dividends Tax and any possible impact of Section 8 of the Income Tax Act. Water-Counts (Pty) Ltd (WC) WC was incorporated in 2008 by two entrepreneurs who saw the importance of treating water as a scarce natural resource. WC has several divisions, specialising in different innovative water conservation products, mainly focussing on water storage, irrigation, and household use. Tough-tank division (Tank) Tank manufactures two types of rainwater storage tanks mainly for residential use. The underground (Under) tank can hold up to 6 000 litres and the upright (Upright) tank can hold up to 10 000 litres. Tank is subject to certain minimum production quantities due to fixed sales contracts with retailers during this period. The company is contractually bound to produce at least 2 000 Under, and 3 000 Upright tanks. (These quantities have been included in the budgeted production figures below.) Fixed manufacturing overheads are allocated to the tanks based on machine hours. Tank has a maximum capacity of 119 000 machine hours per annum, which renders Tank unable to meet total demand for its products. Expected demand for Under is the same as budgeted production, while Upright’s expected demand is 11 000 units. Expected demand includes contractual commitments. Under R The standard cost per tank produced is: Raw materials: • UPVC (specialised plastic) • Valves • Direct labour (temporary labourers) Fixed manufacturing cost (R100 per machine hour, based on maximum capacity) Standard cost of sales Standard selling price Standard profit

Budgeted annual production at 100% capacity Batch size (units) Note: ?: To be calculated

Upright R

(10 800) (2 400) (2 100) (1 500)

(3 800) (2 400) (2 100) (500)

(16 800) 22 000 5 200

(8 800) 11 000 2 200

Units

Units

5 800 4

? 8

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MAC4861/MAC4862/105

QUESTION 2 (continued) Tank’s production manager, Mr Nzinga, is of the opinion that the allocation of fixed manufacturing overhead cost is inappropriate. He feels that the use of machine hours as an allocation base for fixed overheads is not a fair reflection of the resources consumed by the products. He suggests that the activity-based costing (ABC) method should be applied to allocate the fixed manufacturing costs to Under and Upright tanks. Fixed manufacturing overhead cost consists of the following components: Fixed manufacturing overhead components Procurement of combined components Depreciation on production machinery Quality assurance Machine set-up cost Total

R’000 2 800 3 000 3 500 2 600 11 900

The following possible cost-drivers were identified: Cost-driver Labour hours Machine hours Combined component units per purchase order* Machine set-ups per batch Quality assurance inspections per batch

Under 42 ? 20 6 2

Upright 42 ? 50 1...