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
QUESTION 32 Marks (a) (a) Summary of mark allocation Reconciliation 4 Calculations 2.5 Presentation mark (cross referencing, clarity etc.).5.5 27 Reconciliation between budget and actual profit 4 Calc. R Budgeted gross profit 6486 ^ Sales volume variance 50766 Standard profit 464 050 Sales price variance 2 352500 86550 Production cost variances Favourable Adverse Calc. Material A Price variance 4686 3 Material B Price variance 20773 3 Material A Mix variance 20998 3 Material B Mix variance 00790 3 Material A Yield variance 56992 3 Material B Yield variance 68390 3 Labour: rate variance Labour: efficiency variance 3629 4 (info only) 4608 4 (info only) Variable overheads: expenditure variance 24 000 5 Fixed overheads Expenditure variance 7500 6 Calendar variance 48552 6 Volume variance 2852 6 Efficiency variance 35700 6 Actual gross profit 28 328 29 42 62 84 653 736 ^ 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 cost @ standard (240000 x R 8.77) 204800 plus all production variances (see above) 6284 Actual cost of production (as given) 226764 less Closing inventory @ standard cost (as given) [(240000235000)xR8.77] 43850 Cost of sales @ actual (as given) 2223764 Calculations (also refer to the alternative calculations) Marks Sales volume variance Sales volume variance = (Actual Budgeted sales units) x std GP per unit = (235000 259200) x (5 8.77) = 50766 Adverse ^ ^ 2 Budgeted sales units = Budgeted GP / Budgeted GP per unit = 6486 /(5 8.77) = 259200
2 Sales price variance Sales price variance = (6.50 5.00) x 235000 = 352500 Favourable ^ ^ ^.5 Actual sales price: 3877500 / 235000 = 6.50 3 Material 3. Material variances A B Actual cost of issues 59304 see 3.2 62973 see 3.2 Price variance 4686 Favourable 20773 Adv Actual issues @ std 605990 see 3.3 60200 see 3.3 Mix variance 20998 Adverse 00790 Fav Actual issues in std mix @ std 584992 see 3.4 70990 see 3.4 Yield variance 56992 Adverse 68390 Adv Output @ std cost 528000 633600 (240000 x R2.20) en (240000 x R2.64) ^ ^ 63304 627 3.2 Calculation of cost of actual input (issues)(fifo) A B Opening inventory 707 x R4.75 8258 ^ 4277 x R24 02648 Purchases 62500 ^ 650000 3 693758 752648 Closing inventory 20909x(62500/25000) 02454 5227x(650000/26000) 30675 Production (R) ^ ^ 59304 62973 (r/w) 3.3 Actual input (issues) @ std A B Std cost p.u. material 5.00 ^ R2.64 / 0. 24.00 ^ Material issues: 707+2500020909 = 2 98 ^ '4277+260005227 = 25 050 ^ 3 Thus 2 98 x R5 605 990 ^ 25 050 x R24 60 200 ^ 3.4 Total actual input (issues) in std mix @ std A B A: (298+25050) x (440/550) x R5 584992 2 ^ ^ B: (298+25050) x (0/550) x R24 70990 ^ ^ 4 0 Actual cost 65837 Rate variance 3629 Adverse Actual work hours @ std cost per work hour 62208 Efficiency variance 4608 Adverse Actual output @ std cost per unit 57600 (240000 x R0.24) 8237 5 Variable overheads Actual cost 624000 ^ Expenditure variance 24000 Adverse Actual output @ std cost per unit 600000 ^ (240000 x R2.50) 24000
6 Fixed overheads Actual cost (amount recovered "Z"+ 43200) 364500 (mt for Z) (r/w for +43200) 2 Expenditure variance 7500 Adverse Budget normal month (44000/ 2 x R29.75) 357000 see 6. ^ ^ (r/w) 2 Calendar variance 48552 Adverse Budget April (R357000 x 2 / 250 x 8) 308448 ^ ^ 2 Capacity variance 2852 Favourable Actual mach hrs @ std rate/mh "Z"(240000x0.045xR29.75) 32300 for 240'x0.045 ^.5 Efficiency variance 35700 Adverse Actual output @ std cost / unit (240000xR.9) 285600 ^ 78900 0.5 6. Recovery rate per machine hour R.9 / 0.04 = 29.75 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. 240 000 x 0.045 x R29.75 = R32 300. If the under recovery = R43 200, the actual fixed overhead cost is thus R32 300 + R43 200 = R364 500. The expenditure, calendar and capacity variances thus represent a further analysis of the under recovery: R43 200 = R7 500 + R48 552 R 2 852. 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
Alternative calculations (2 marks) Sales volume variance (a) Summary of mark allocation Sales volume variance = Standard gross profit(235 000 x (5 8.77)) 464050 less Budgeted gross profit 6486 = 50766 Adverse 2 2 Sales price variance Sales price variance = Actual sales 3877500 less actual sales units @ std selling price 3525000 (235000 x R5) = 352500 Favourable.5 3 Material 3. Material variances A B Price variance see 3(a) 4686 Favourable 20774 Adv Mix variance see 3(b) 20998 Adverse 00790 Fav Yield variance see 3(c) 56992 Adverse 68390 Adv 63304 626 3 (a) Price variance (material) (Actual material issued @ std cost p.u. material) actual cost of material issued A (2 98 x R5) R59 304 = 4 686 Favourable ^ 3.5 B (25 050 x R24) R62 973 = 20 774 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 R4.75 8258 ^ 4277 x R24 02648 Purchases 62500 ^ 650000 693758 752648 Closing inventory 20909x(62500/25000) 02454 5227x(650000/26000) 30675 Production (R) ^ ^ 59304 62973 (r/w) FIFO cost per unit (59304/298) 4.87883 (62973/ 25050) 24.8293 3.3 Actual input (issues)@ std A B Std cost p.u. material R2.20 / 0.44 5.00 ^ R2.64 / 0. 24.00 ^ Material issues: 707+2500020909 = 298 ^ '4277+260005227 = 25050 ^ Thus 298 x R5 605990 ^ 25050 x R24 60200 ^ 3 (b) Mix variance (material) (Actual total material issues in std mix actual issues) x std cost p.u. material A [((298+25050) x (440/550)) 2 98] x R5 20 998 Adverse ^ ^ = ( (46 248 x 0.8) 2 98) x R5 = 6 998.4 2 98) x R5 B [((298+25050) x (0/550) 25 050] x R24 00 790 Fav ^ ^ = ( (46 248 x 0.2) 25 050) x R24 = 29 249.6 25 050) 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 ((240 000 x 0.44) 6 998.4) x R5 56 992 Adverse ^ 0.5 = 05 600 6 998.4) x R5 B ((240 000 x 0.) 29 249.6) x R24 68 390 Adv ^ 0.5 = 26 400 29 249.6) x R24
Alternative calculations (continued) 5 Variable overheads: expenditure variance (Std cost p.u. output actual cost p.u. output) x output (R2.50 (624 000/240 000)) x 240 000 24 000 Adverse 6 Fixed overhead cost (as per original solution) Actual cost (amount recovered "Z"+ 43200) 364500 (mt for Z) (r/w for +43200) 2 Expenditure variance 7500 Adverse Budgeted normal month (44000/ 2 x R29.75) 357000 sien 6. ^ ^ (r/w) 2 Calendar variance 48552 Adverse Budgeted April (R357000 x 2 / 250 x 8) 308448 ^ ^ 2 Capacity variance 2852 Favourable Actual machine hours @ std rate/mh ("Z")(240000x0.045xR29.75) 32300 for 240'x0.045 ^mt.5 Efficency variance 35700 Adverse Actual input @ std cost / unit (240000xR.9) 285600 ^ 78900 0.5 6. Recovery rate per machine hour R.9 / 0.04 = 29.75 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
Fixed overhead cost (alternative calculations for amounts as per original solution) Actual cost (2 marks) Total actual cost of production (given) 226764 less actual cost raw material A 59304 less actual cost raw material B 62973 less actual cost variable overheads 624000 430337 less actual cost direct labour (240000 x R0.24) + 4608 + 3629 65837 Budgeted normal month (2 marks) 364 500 Machine hours for a normal month x rate per machine hour (as above) = (44 000 hours p.a. / 2) x R29.75 = 357 000 OR Units for a normal month x rate per unit = (44000 hours p.a. / 2 / 0.04 hours p.u.) x R.9 = 300000 units x R.9 = 357000 OR Units for a normal month x rate per unit = (259200 budgeted for April / 8 x (250/2)) x R.9 = 259200 / 8 x 20.833333 x R.9 = 357000 Budgeted April (2 marks) Fixed cost budgeted for a normal month x 2 / 250 x 8 (as above) = R357 000 x 2 / 250 x 8 = 308 448 OR Machine hours budgeted for April x rate per machine hour = 44000 hours p.a. X 8 / 250 x R29.75 = 0368 hours budgeted for April x R29.75 = 308448 OR Units budgeted for April x rate per unit = 259200 budgeted for April x R.9 = 308448 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 = ((44 000 hours p.a. / 2) x R29.75) R364 500 = 7 500 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 = 48552 Adverse 2 Capacity variance (Actual machine hours April Machine hours budgeted for April) x recovery rate p.h. = ((240000 units x 0.045 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. = ((240 000 units x 0.04 hours p.u.) 0 800 hours) x R29.75 ^ = ( 9 600 hours 0 800 hours) x R29.75 = 35 700 Adverse 0.5
QUESTION 2 20 Marks GIJIMA LIMITED a) Minimum transfer price R Mark Relevant cost of 2 000 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 2 000 (0.5) Total variable cost for 2 000 units. 356 000 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 3 000 (0.5) 468 000 Additional fixed cost 34 000 () Financing cost (200 000x2%/2) 2 000 ()bonus Total cost 860 000 Total units transferred 5 000 Per unit 24.00 () (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 4 500 000 Debtors 980 000 Long term loan ( 250 000) Net controllable assets 4 230 000 ()rw Current return Profit (59335) x 3 000 494 000 () Current ROI (4 230 000 494 000).68% (0.5)
Net controllable assets after transfer R Punt R Punt Net controllable assets 4 230 000 Additional debtors of Division D 200 000 (0.5) Net controllable assets after transfer 4 430 000 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 5 000 0 000 = = Contribution 80 000 430 000 Total contribution 60 000 Current fixed cost (65 000) (0.5) Additional fixed cost (34 000) (0.5) Additional financing cost (2 000) 509 000 Net controllable assets after transfer 4 430 000 = 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 (4 230 000 + 200 000) 4 430 000 (0.5) Return after transfer 494000+((2524) x 5 000) 509 000 (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.
d) Required transfer price in terms of ROI x /4 430 000 =.68% (0.5) x = 57 357 ( ) () (0.5) Thus, (57 357 509 000) / 5 000 = 0.56 Thus, R25.00+ R0.56 = R25.56 () Total marks for QUESTION 2 (20) (4)
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 6 60 3 840 Aquarium builders 8 60 5 20 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 3 840 0.5 7 680 A 3 000* Aquarium builders 5 20 0.75 6 827 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 3 840 2 000 840 0.5 0.5 3 680 0.5 Aquarium builders 5 20 3 500 620 0.5 0.75 2 60 0.5 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 6 000 terrariums Option 2: Continue with special project AND build 2 000 terrariums Total marks on this page: (8)
Relevant cash flows for the abovementioned two options: Option (R) Marks Option 2 (R) Marks Selling price R 750 x 6 000 4 4 500 000 500 000 0.5 Direct material R 240 000 x 6 4 ( 440 000) R6 000 x 60m 2 ( 360 000) Removal cost of project glass (R500R200) x 420 000 / 6 000 ( 2 000) Direct labour: builders Irrelevant Irrelevant 0.5 C Direct labour: glass cutters Irrelevant Irrelevant 0.5 C Direct labour: unskilled 6 000 4 x R24 ( 44 000) 200 x R24 ( 28 800) Variable overheads R 80 000 x 6 4 ( 080 000) ( 65 000) 0.5 (4 500 440 44 080 ) 2 batches terrariums / 6 4 x 2 5 62 000 2 Fixed costs: special factory ( 5 000) 0.5 R0 000x4 ( 40 000) 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: ( 800 000) 000 000 68 200 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 (R320 000) 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 R68 200 and will thus maximise NAB s profit in the next four months. () Total marks for (a) (25)
(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]