FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES DEPARTMENT FINANCIAL MANAGEMENT

Transcription

1 FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES DEPARTMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT 300 YEAR TEST Suggested solution 20 March 202 INTERNAL J E Klopper F Blom L Klopper EXTERNAL G J Plant 80 marks 20 minutes

2 QUESTION 32 Marks (a) (a) Summary of mark allocation Reconciliation 4 Calculations 2.5 Presentation mark (cross referencing, clarity etc.) Reconciliation between budget and actual profit 4 Calc. R Budgeted gross profit 6486 ^ Sales volume variance Standard profit Sales price variance Production cost variances Favourable Adverse Calc. Material A Price variance Material B Price variance Material A Mix variance Material B Mix variance Material A Yield variance Material B Yield variance Labour: rate variance Labour: efficiency variance (info only) (info only) Variable overheads: expenditure variance Fixed overheads Expenditure variance Calendar variance Volume variance Efficiency variance Actual gross profit ^ Mark allocation for reconciliation (total of 4 marks): 2 marks (r/w) if it is clear that a reconciliation was done (not only calculations) AND 9 or more (out of the 3) variances were transferred to the reconciliation. ½ mark each as indicated for budgeted and actual gross profit shown in the reconciliation. mark (r/w) if it is clear that "adverse" variances decrease budgeted GP and "favourable" variances increase budgeted GP. Further explanation regarding the relationship between "standard" and "actual" cost Production standard ( x R 8.77) plus all production variances (see above) 6284 Actual cost of production (as given) less Closing standard cost (as given) [( )xR8.77] Cost of actual (as given) Calculations (also refer to the alternative calculations) Marks Sales volume variance Sales volume variance = (Actual Budgeted sales units) x std GP per unit = ( ) x (5 8.77) = Adverse ^ ^ 2 Budgeted sales units = Budgeted GP / Budgeted GP per unit = 6486 /(5 8.77) =

3 2 Sales price variance Sales price variance = ( ) x = Favourable ^ ^ ^.5 Actual sales price: / = Material 3. Material variances A B Actual cost of issues see see 3.2 Price variance 4686 Favourable Adv Actual std see see 3.3 Mix variance Adverse Fav Actual issues in std std see see 3.4 Yield variance Adverse Adv std cost ( x R2.20) en ( x R2.64) ^ ^ Calculation of cost of actual input (issues)(fifo) A B Opening inventory 707 x R ^ 4277 x R Purchases ^ Closing inventory 20909x(62500/25000) x(650000/26000) Production (R) ^ ^ (r/w) 3.3 Actual input std A B Std cost p.u. material 5.00 ^ R2.64 / ^ Material issues: = 2 98 ^ ' = ^ 3 Thus 2 98 x R ^ x R ^ 3.4 Total actual input (issues) in std std A B A: ( ) x (440/550) x R ^ ^ B: ( ) x (0/550) x R ^ ^ 4 0 Actual cost Rate variance 3629 Adverse Actual work std cost per work hour Efficiency variance 4608 Adverse Actual std cost per unit ( x R0.24) Variable overheads Actual cost ^ Expenditure variance Adverse Actual std cost per unit ^ ( x R2.50) 24000

4 6 Fixed overheads Actual cost (amount recovered "Z" ) (mt for Z) (r/w for ) 2 Expenditure variance 7500 Adverse Budget normal month (44000/ 2 x R29.75) see 6. ^ ^ (r/w) 2 Calendar variance Adverse Budget April (R x 2 / 250 x 8) ^ ^ 2 Capacity variance 2852 Favourable Actual mach std rate/mh "Z"(240000x0.045xR29.75) for 240'x0.045 ^.5 Efficiency variance Adverse Actual std cost / unit (240000xR.9) ^ Recovery rate per machine hour R.9 / 0.04 = Explanation regarding the under recovery of fixed overheads An over or under recovery is the difference between the actual fixed overhead cost amount and the amount of fixed overheads recovered. In Aloc's case the fixed overheads are recovered based on machine hours, i.e x x R29.75 = R If the under recovery = R43 200, the actual fixed overhead cost is thus R R = R The expenditure, calendar and capacity variances thus represent a further analysis of the under recovery: R = R R R Mark allocation for calculations (total of 2.5 marks): for every variable/adverse incorrectly indicated, taking into account student's own calculated figures? for every variance name not indicated of incorrectly indicated? 2.5 (b) Comments on production manager's remark (i): Although the net difference between the budgeted and actual gross profit is relatively small, the various variances that cause the net difference, may be material in size. The analysis of a net difference into a number of variances can provide management with valuable information (explanations) regarding the reasons that the budgeted profit was not achieved. In the case of Department of Aloc, a substantial adverse production variance and sales volume variance were completely obliterated by a large, favourable sales price variance. Management can use the information gained from the analysis of variances to implement remedial actions that address the problem areas and/or adjust the standards for the future if existing standards (after thorough investigation) are regarded as inappropriate. Standard cost may be of especially great value in highly competitive businesses (like Aloc) where cost control is sometimes the only way to gain market share by keeping prices lower than that of competitors. Aloc may have deliberately sacrificed sales volume (this is a competitive market) in order to obtain the greater advantage from the higher selling price. This net benefit is almost completely obliterated by the adverse production variances. This fact could possibly have gone unnoticed if variances were not analysed in detail. 2 max 3 Comments on production manager's remarks (ii): The usefulness (cost/benefit) of the calculation of a idle time variance needs to be considered. Aloc is a capital intensive business (more machines, less labour) as can be inferred from the relatively small % that labour constitutes of total production cost (0.24/8.77 = 2.74%). Management may thus be of the view that the benefit of calculating an idle time variance is not worth the cost of obtaining the information to do so. The production manager might be attempting (with his remarks) to divert attention from the material manufacturing variances. Total marks for QUESTION 32 max 2

5 Alternative calculations (2 marks) Sales volume variance (a) Summary of mark allocation Sales volume variance = Standard gross profit( x (5 8.77)) less Budgeted gross profit 6486 = Adverse 2 2 Sales price variance Sales price variance = Actual sales less actual sales std selling price ( x R5) = Favourable.5 3 Material 3. Material variances A B Price variance see 3(a) 4686 Favourable Adv Mix variance see 3(b) Adverse Fav Yield variance see 3(c) Adverse Adv (a) Price variance (material) (Actual material std cost p.u. material) actual cost of material issued A (2 98 x R5) R = Favourable ^ 3.5 B ( x R24) R = Adv ^ 2.5 (refer to 3.2 and 3.3 below for details regarding mark allocation) 3.2 Calculation of cost of actual input (issues)(fifo) A B Opening inventory 707 x R ^ 4277 x R Purchases ^ Closing inventory 20909x(62500/25000) x(650000/26000) Production (R) ^ ^ (r/w) FIFO cost per unit (59304/298) (62973/ 25050) Actual input (issues)@ std A B Std cost p.u. material R2.20 / ^ R2.64 / ^ Material issues: = 298 ^ ' = ^ Thus 298 x R ^ x R ^ 3 (b) Mix variance (material) (Actual total material issues in std mix actual issues) x std cost p.u. material A [(( ) x (440/550)) 2 98] x R Adverse ^ ^ = ( ( x 0.8) 2 98) x R5 = ) x R5 B [(( ) x (0/550) ] x R Fav ^ ^ = ( ( x 0.2) ) x R24 = ) x R24 3 (c) Yield variance (material) (Std material needed for output actual material issued in std mix) x std cost p.u. material A (( x 0.44) ) x R Adverse ^ 0.5 = ) x R5 B (( x 0.) ) x R Adv ^ 0.5 = ) x R24

6 Alternative calculations (continued) 5 Variable overheads: expenditure variance (Std cost p.u. output actual cost p.u. output) x output (R2.50 ( / )) x Adverse 6 Fixed overhead cost (as per original solution) Actual cost (amount recovered "Z" ) (mt for Z) (r/w for ) 2 Expenditure variance 7500 Adverse Budgeted normal month (44000/ 2 x R29.75) sien 6. ^ ^ (r/w) 2 Calendar variance Adverse Budgeted April (R x 2 / 250 x 8) ^ ^ 2 Capacity variance 2852 Favourable Actual machine std rate/mh ("Z")(240000x0.045xR29.75) for 240'x0.045 ^mt.5 Efficency variance Adverse Actual std cost / unit (240000xR.9) ^ Recovery rate per machine hour R.9 / 0.04 = Mark allocation for calculations (total of 2.5 marks): for every variable/adverse incorrectly indicated, taking into account student's own calculated figures? for every variance name not indicated of incorrectly indicated? 2.5

7 Fixed overhead cost (alternative calculations for amounts as per original solution) Actual cost (2 marks) Total actual cost of production (given) less actual cost raw material A less actual cost raw material B less actual cost variable overheads less actual cost direct labour ( x R0.24) Budgeted normal month (2 marks) Machine hours for a normal month x rate per machine hour (as above) = ( hours p.a. / 2) x R29.75 = OR Units for a normal month x rate per unit = (44000 hours p.a. / 2 / 0.04 hours p.u.) x R.9 = units x R.9 = OR Units for a normal month x rate per unit = ( budgeted for April / 8 x (250/2)) x R.9 = / 8 x x R.9 = Budgeted April (2 marks) Fixed cost budgeted for a normal month x 2 / 250 x 8 (as above) = R x 2 / 250 x 8 = OR Machine hours budgeted for April x rate per machine hour = hours p.a. X 8 / 250 x R29.75 = 0368 hours budgeted for April x R29.75 = OR Units budgeted for April x rate per unit = budgeted for April x R.9 = Fixed overhead cost (if variations were calculated directly) Marks: 8 Expenditure variance Fixed overhead cost budgeted for a normal month less actual fixed overhead cost = (( hours p.a. / 2) x R29.75) R = Adverse 4 Calendar variance (Machine hours budgeted for April Machine hours budgeted for normal month) x recovery rate p.h. = ((44000 hours p.a. x 8/250) 2000 hours) x R29.75 ^ ^ = ( 0368 hours 2000 hours) x R29.75 = Adverse 2 Capacity variance (Actual machine hours April Machine hours budgeted for April) x recovery rate p.h. = (( units x hours p.u.) 0368 hours) x R29.75 ^ = ( 0800 hours 0368 hours) x R29.75 = 2852 Favourable.5 Efficiency variance (Std machine hours for actual output Actual machine hours April) x recovery rate p.h. = (( units x 0.04 hours p.u.) hours) x R29.75 ^ = ( hours hours) x R29.75 = Adverse 0.5

8 QUESTION 2 20 Marks GIJIMA LIMITED a) Minimum transfer price R Mark Relevant cost of units out of spare capacity Labour p.u. R 60 (0.5) Component B p.u. R 4 (0.5) Variable overhead p.u. R 2 (0.5) Saving on selling cost R () (0.5) Total variable cost R3 Units (0.5) Total variable cost for units Opportunity cost of 3000 units sold in the external market. Lost selling price R59 (0.5) Saving on selling cost (R 3) (0.5) Lost contribution R56 Units (0.5) Additional fixed cost () Financing cost ( x2%/2) ()bonus Total cost Total units transferred Per unit () (6) Commentary: ) It is easier to calculate the total cost of the transfer and to divide it by the number of units to get the price per unit than it is to calculate a price per unit from the beginning. A few students did the latter and only a very few managed to do it correctly. 2) Students should learn to work more professionally! A few papers were a mess. Remember that you have to make it as easy as possible for the marker! b) Maximum transfer price Maximum transfer price: R59.00 the market price, because if the manager has to pay more than market price, he will rather buy the Logic board in the external market. Mark () () (2) c) Return on investment Net controllable assets before transfer R Mark Equipment Debtors Long term loan ( ) Net controllable assets ()rw Current return Profit (59335) x () Current ROI ( ).68% (0.5)

9 Net controllable assets after transfer R Punt R Punt Net controllable assets Additional debtors of Division D (0.5) Net controllable assets after transfer Controllable return after transfer Internal External Selling price 25 (0.5) 59 (0.5) Labour (60) (60) Component B (4) (0.5) (4) (0.5) Variable overheads (2) (2) Selling cost per unit () (3) (0.5) Contribution per unit 2 43 x x Number of units = = Contribution Total contribution Current fixed cost (65 000) (0.5) Additional fixed cost (34 000) (0.5) Additional financing cost (2 000) Net controllable assets after transfer = ROI.49% (0.5) Conclusion: The manager will not be happy since his division s ROI decreases. () (8) or Alternative for after transfer calculation Net assets after transfer ( ) (0.5) Return after transfer ((2524) x 5 000) (3.5) ROI after transfer.49% (0.5) (4.5) Plus conclusion (.0) Plus before transfer calculation as above (2.5) (8) Commentary: ) The question led you to do an ROI calculation and counted eight marks. The number of marks should give you an indication of the amount of calculations required. 2) The required asks you to determine whether the manager of Division C is going to be happy about the transfer or not. Thus, something should be compared with something. It is mentioned that you have to use the ROI measure and thus you should compare two ROI percentages. Division C s ROI should not be compared to the ROI of Division D, since the question asked specifically how Division C s manager will feel about the transfer. 3) The mark for you conclusion is an easy mark which a lot of students lost because of no conclusion.

10 d) Required transfer price in terms of ROI x / =.68% (0.5) x = ( ) () (0.5) Thus, ( ) / = 0.56 Thus, R R0.56 = R25.56 () Total marks for QUESTION 2 (20) (4)

11 QUESTION 3 28 Marks NATIONAL AQUATICS (PTY) LTD (a) Advice regarding the most profitable option for the next four months Available capacity (hours) Type of labour Number of labourers Hours available per labourer per month Total hours available for four months Marks Unskilled labour No limitation Glass cutters Aquarium builders Number of batches terrariums that can be produced from the available capacity Total hours available for four months Hours per unit Maximum production based on available Hours required: 6 batches Type of labour hours Marks Unskilled labour No limitation 6 000* Glass cutters A 3 000* Aquarium builders A 4 500* A = The maximum is therefore 6 batches of 000 units each * = Not required: provided for completeness only Capacity required if special project goes ahead Type of labour Unskilled labour Total hours available for four months No Required for project Surplus hours available Marks No limitation Hours per unit B Maximum production B from surplus time Marks limitation Glass cutters Aquarium builders Maximum 2 batches of 000 units eachwith surplus hours B= production of terrariums Options available for the next four months (mutually exclusive) Option : Cancel special project and build terrariums Option 2: Continue with special project AND build terrariums Total marks on this page: (8)

12 Relevant cash flows for the abovementioned two options: Option (R) Marks Option 2 (R) Marks Selling price R 750 x Direct material R x 6 4 ( ) R6 000 x 60m 2 ( ) Removal cost of project glass (R500R200) x / ( 2 000) Direct labour: builders Irrelevant Irrelevant 0.5 C Direct labour: glass cutters Irrelevant Irrelevant 0.5 C Direct labour: unskilled x R24 ( ) 200 x R24 ( ) Variable overheads R x 6 4 ( ) ( ) 0.5 ( ) 2 batches terrariums / 6 4 x Fixed costs: special factory ( 5 000) 0.5 R0 000x4 ( ) 0.5 Fixed costs: Not avoidable Cape Town store Not avoidable D Fixed costs: Not avoidable Management fee Not avoidable E Fixed costs: Not avoidable Existing factory Not avoidable 0.5 F Fixed costs: Not avoidable Factory manager Not avoidable 0.5 F Cancellation clause: ( ) Total marks in table: (6) C = Labour costs do not change regardless of the option chosen and is thus irrelevant. It must be left out altogether OR the same amount should be included under both options. D = The rent for the Cape Town store is not avoidable over the next 4 months and is thus irrelevant. It must be left out altogether OR the same amount should be included under both options. E = The allocated management fee is just an allocation of a cost that doesn t change regardless of what option is chosen and is thus irrelevant. It must be left out altogether OR the same amount should be included under both options. F = The fixed cost (R ) that relates to the existing facilities (factory and factory manager) is unavoidable and is thus irrelevant. It must be left out altogether OR the same amount should be included under both options. Conclusion Option 2 has a higher net relevant inflow of R and will thus maximise NAB s profit in the next four months. () Total marks for (a) (25)

13 (b) Qualitative factors to consider with regards to cancelling the aquarium contract a. If the company cancels the contract it could lead to a damaged reputation. This might lead to a loss of future business. b. The company will most probably never be contracted by the supplier again and thus future opportunities might be lost. c. As the only limiting factor is labour, the company might be able to become giant aquarium specialists (by training more workers). But if the contract is cancelled it may appear as though the company has no experience in the production of giant aquariums and all gained knowledge will be lost. d. The impact on the environment. Even though the glass can be recycled, the production and transport of it will still pollute the environment. Once again this could lead to a damaged reputation. e. If the company completed the project they would have received free exposure to everyone that visits the amusement park. This could lead to new business in the future. f. Any other valid point. One mark each, maximum for (b) (3) Total marks for QUESTION 3 (28) TOTAL MARKS FOR PAPER [80]