POLYTECHNIC OF NAMIBIA SCHOOL OF MANAGEMENT SCIENCES BACHELOR OF ACCOUNTING. MANAGEMENT ACCOUNTING 301/310 (PMA 711 SiGMA 711 S) SECOND OPPORTUNITY

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1 POLYTECHNIC OF NAMIBIA SCHOOL OF MANAGEMENT SCIENCES DEPARTMENT: ACCOUNTING, ECONOMICS & FINANCE BACHELOR OF ACCOUNTING MANAGEMENT ACCOUNTING 301/310 (PMA 711 SiGMA 711 S) SECOND OPPORTUNITY EXAMINATION QUESTION PAPER Date: Duration: Total marks: 100 NOVEMBER HOURS INSTRUCTIONS I NOTES 1. This examination paper is made up of four ( 4) questions 2. Answer ALL the questions and in ink 3. Start each question on a new page in your answer booklet & show all your workings 4. Questions relating to this paper may be raised in the initial 30 minutes after the start of the paper. Thereafter, candidates must use their initiative to deal with any perceived error or ambiguities & any assumption made by the candidate should be clearly stated. 5. This paper consists of 6 pages excluding the cover page EXAMINERS: A. Makosa and Z. Stellmacher MODERATOR: Dr. U Paliwal

2 Question 1 (25 marks) Voltex (Ply.) Limited is manufacturer of electrical appliances based in Windhoek. The budgeting process of the company is set centrally and is then communicated to each of the managers who have responsibility for achieving their respective targets. The light bulbs division has produced the following information from which a cash budget for the first six month of next year is required. The division makes a single type of electrical bulbs which it sells for 50 and the variable cost of each unit is as follows: Material Labour (wages) Variable overhead Fixed overheads (excluding depreciation) are budgeted at per month payable on the 23'd of each month. Notes a) Sales units expected for the last two month of this year. November December b) Budgeted sales units for next year. January February March April May June c) Production quantities expected for the last two months of this year. November December d) Budgeted production units for next year. January February March April May June e) Wages are paid in the month when output is produced. f) Variable overhead is paid 50% in the month when the cost is incurred and 50% the following month. g) Supplier of materials are paid two months after the material is used in production. h) Customers are expected to pay at the end of the second month following the sale. i) A new machine is scheduled is scheduled to be purchased in January costing This is to be paid in February. j) An old machine is to be sold for cash in January for k) The company expects to have a cash balance of on 1 January. 1

3 Required a) Prepare a month by month cash budget for the first six months of next year. (15 marks) b) Explain the difference between an incremental budgeting system and a zero-based budgeting system. (3 marks) c) Explain why Voltex (Ply.) Limited and other similar organisations would find it difficult to introduce zero-based budgeting system. (3 marks) d) Explain the benefits of involving the managers of Voltex (Ply.) Limited in the budget setting process, rather than setting the budget centrally as is Voltex (Pty.) Limited current policy. ( 4 marks) Question 2 (25 marks) Data from October 2014 standard cost card of product Gel from Dupps pic. is as follows: Direct materials - 25 per kg 100 Direct labour per hour 180 Variable overhead per hour 120 Fixed overhead 200 Standard profit Selling price 600 Budgeted fixed overhead cost for October 2014 was The operating statement for October 2014, when raw material inventory levels remained unchanged was as follows: Budgeted profit Sales volume profit variance Selling price variance Cost variances: Direct material - price -usage Direct labour - rate - efficiency Variable overhead - expenditure - efficiency Fixed overhead -expenditure -volume Adverse (5 350) (3 750) (4 1 00) (12 000) (8 000) (33 200) Favourable (7 500) (5 000)

4 Note: All adverse variances have been presented as negatives and all favourable variances are positive. Required a) Calculate the following: i) ii) iii) iv) v) vi) vii) Actual sales units Actual production units Actual selling price per unit Actual material price per kg Actual labour hours Actual variable overhead cost Actual fixed overhead cost b) Prepare a brief report addressed to the operations manager which explains the meaning and possible causes of two most significant variances which occurred in October Clearly state your assumptions in picking the most significant variances. c) Explain the following terms: i) Ideal standard ii) Basic standard iii) Attainable standard (6 marks) (1 marks) Question 3 (20 marks) The standard direct labour cost of one batch of 100 units of a product is This assumes a standard time of 4.2 hours, costing 12 per hour. The standard time of 4.2 direct labour hours is the average time expected per batch based on a product life of units or 128 batches. The expected time for the first batch was 20 hours and an 80% learning curve is expected to apply throughout the product's life. The company has now completed the production of 32 batches of the product and the total actual direct labour cost was $ The following direct labour variances have also been ca\cu\ated: Direct labour rate Direct labour efficiency $85 Adverse $891 Adverse Further analysis has shown that the direct labour efficiency variance was caused solely by the actual rate of learning being different from that expected. However, the time taken for the first batch was 20 hours as expected. 3

5 Required: a) With the aid of a diagram, explain the learning curve theory in particular the concept of cumulative average time. (4 marks) b) Calculate the actual rate of learning that occurred. (6 marks) c) Assuming that the actual rate of learning and the actual labour rate continue throughout the life of the product, calculate the total direct labour cost that the company will incur during the life of the product. (4 marks) d) State the three conditions that should prevail for a learning curve effect to work. (3 marks) e) State any three difficulties a company may face in trying to put the learning curve into practice. (3 marks) Question 4 (30 marks) Ondangwa airport is modernising its facilities in anticipation of significant growth in the number of passengers using the airport. It is expected that the number of passengers will increase by i 0% per annum as a result of a "low cost" airline opening new routes to and from the airport. At present, the airport has only one food outlet selling sandwiches and other cold food and drinks. To improve the facilities available to customers, the management of the airport is considering opening a restaurant selling a range of hot food and drinks. The cost of fitting out the new restaurant, which will have to be fully refurbished after four years, is estimated to be These assets are expected to have a residual value of at the end of four years. A firm of consultants carried out an extensive study in relation to this project at a cost of NS The key findings from their report, regarding expected revenue and contribution from the restaurant, are as follows: Average revenue: 90 per customer Average variable cost: 50 per customer Demand in year i: 500 customers per day Future demand for the restaurant is expected to rise in line with passenger numbers. The airport operates for 360 days per year. Other relevant information from the consultants' report is listed below: i. Staffing of the new restaurant: Number of employees (Years i and 2): 4 Number of employees (Years 3 and 4): 5 Average salary per employee: per annum 4

6 ' 2. Overheads The annual budgeted fixed overhead of the airport which will be apportioned to the restaurant is The annual overheads apportioned to the cold food outlet will be The airport's overheads are expected to increase by the following annual amounts as a direct result of the opening of the restaurant: Electricity: Advertising: Audit: Cold food outlet The average contribution from the sale of cold food is $25 per customer. If the restaurant is not opened it is expected that the cold food outlet will sell to customers per day in the coming year and in subsequent years the customer numbers will rise in line with passenger numbers. If the restaurant is opened, the consultants expect sales from the existing cold food outlet to initially reduce by 40% in year 1 and then to increase in line with passenger numbers. The airport's Financial Director has provided the following taxation information: Tax depreciation: 25% reducing balance per annum. The first year's tax depreciation allowance is used against the first year's net cash inflows. Taxation rate: 30% of taxable profits. Half of the tax is payable in the year in which it arises, the balance is paid the following year. Any taxable losses resulting from this investment can be set against profits made by the airport company's other business activities since the airport company is profitable. The airport company uses a post-tax cost of capital of 8% per annum to evaluate projects of this type. Ignore inflation. Required: a) Calculate the net present value (NPV) of the restaurant project. (round off all your figure to the nearest 10) (20 marks) b) State one advantage and one disadvantage of using the NPV as an investment appraisal 5

7 '. c) The Managing Director of Telecom has been presented with the details of three potential investment projects. He has very little experience of project appraisal and has asked you for help. The project details are given below: Net Present Value Internal Rate of Return Project A % Project B Project C % 10% The three projects will require the same level of initial investment The projects are mutually exclusive and therefore the Managing Director can only choose one of them. Explain why the net present value and the internal rate of return may at times give conflicting results. (For example project B and C) ( 4 marks) d) List any four non-financial considerations that should be considered before a project is undertaken. (4 marks) END OF QUESTION PAPER 6

8 1-'resent value mterest tactor ot per penod at 1% torn periods, PVIF(i,n). Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

9 Present value interest factor of an (ordinary) annuity of $1 per period at i% for n periods, PVIFA(i,n). Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%