MAC4862/102/0/2015
Tutorial Letter 102/0/2015
APPLIED MANAGEMENT
ACCOUNTING
MAC4862
NMA4862
ZMA4862
Year module
Department of Financial Intelligence
This tutorial letter contains important
information about your module.
Bar code
2
MAC4862/102
MODULE PURPOSE
This module is intended for students who are interested in qualifying as registered chartered
accountants (SAICA) or management accountants (CIMA) to develop the necessary competencies.
The purpose of the module is to provide students with knowledge of management accounting and
financial management. Furthermore, the module will create an understanding of and develop skills
with regard to the management and use of costs, control, decision-making and planning approaches
and processes, risk management, sources and forms of finance, the cost of capital as well as
techniques to be applied with regard to managing and investing of funds in a financial environment.
These topics will be dealt with in two separate tutorial letters, of which this is the first. The syllabus will
then be revised in a further two tutorial letters.
- WEEK from 28 January to 3 February 2015
- WEEK from 25 March to 31 March 2015
Dear student, we suggest that you allocate your time spent on this tutorial letter, according to the
following approximate allocation.
Part 1
Cost accounting bases and allocation (30%)
Part 2
Planning and control (40%)
Part 3
Decision-making (20%)
Part 4
Integrated self-assessment test (10%)
Proposed time allocation
10%
30%
Part 1 - Bases and allocation
Part 2 - Planning and control
20%
40%
Part 3 Decision-making
Part 4 - Integrated self-assessment
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CONTENT – THIS MODULE
The diagram below contains a schematic presentation of the content of this module.
MAC4862
Applied Management Accounting
Planning and
general
Tutorial
letter 101
Management
decision making
and control
Strategy, Risk,
Management,
Financial
Management
Tutorial letter 102
(this tutorial letter)
Tutorial letter
103
Tutorial
letters in
the 3-series
(3**)
Prior exams,
questions and
revision
Tutorial
letter 104
Tutorial
letter 105
Topics
• Nature, classification and
allocation of cost (variable
and absorption costing,
ABC)
• Product costing systems
• Planning, budgeting and
control
• Cost-volume-profit
analysis
• Standard costing
• Performance management
• Transfer pricing
• Information for decisionmaking (relevant cost &
revenues; pricing
decisions & profitability
analysis; decision-making
under conditions of risk &
uncertainty)
Integrated selfassessment
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MAC4862
APPLIED MANAGEMENT ACCOUNTING
TUTORIAL LETTER 102 / 2015
Page
MODULE PURPOSE ......................................................................................................................... 2
PART 1 – COST ACCOUNTING BASES AND ALLOCATION ......................................................... 5
PART 1, TOPIC 1 – Nature, classification and allocation of cost ........................................................ 6
STUDY UNIT 1.1 – Nature and classification of cost ................................................................... 7
STUDY UNIT 1.2 – Variable and absorption costing.................................................................. 10
STUDY UNIT 1.3 – Activity-based costing (ABC) ...................................................................... 16
PART 1, TOPIC 2 – Product costing systems .................................................................................. 20
STUDY UNIT 2.1 – Job costing ................................................................................................. 21
STUDY UNIT 2.2 – Process costing... ....................................................................................... 22
STUDY UNIT 2.3 – Joint and by-product costing... .................................................................... 24
PART 2 – PLANNING AND CONTROL .......................................................................................... 26
PART 2, TOPIC 3 – Planning, budgeting and control ....................................................................... 27
STUDY UNIT 3.1 – Budgeting and management control systems ............................................. 28
STUDY UNIT 3.2 – Cost management techniques/principles .................................................... 30
STUDY UNIT 3.3 – Cost-volume-profit analysis ........................................................................ 32
PART 2, TOPIC 4 – Standard costing .............................................................................................. 38
STUDY UNIT 4.1 – Variance analysis ....................................................................................... 39
STUDY UNIT 4.2 – Reconciliation of budget to actual .............................................................. 41
STUDY UNIT 4.3 –Variance analysis reports ............................................................................ 42
STUDY UNIT 4.4 – Pro-rating of variances and compliance with the relevant
accounting standard .................................................................................................................. 43
PART 2, TOPIC 5 – Performance measurement ............................................................................. 44
STUDY UNIT 5.1 – Divisional financial performance measures ................................................ 45
STUDY UNIT 5.2 – Transfer pricing in divisional companies ..................................................... 50
PART 3 – DECISION-MAKING ....................................................................................................... 54
PART 3, TOPIC 6 – Information for decision-making ...................................................................... 55
STUDY UNIT 6.1 – Decision-making under conditions of risk and uncertainty .......................... 56
PART 3, TOPIC 7 – Information application to decisions ................................................................ 61
STUDY UNIT 7.1 - Relevant costs and revenues for decision-making .................................... 62
PART 4 - INTEGRATED SELF-ASSESSMENT ............................................................................. 66
2014 TEST 1 & 2 WITH SUGGESTED SOLUTIONS ..................................................................... 70
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PART 1 - COST ACCOUNTING BASES AND ALLOCATION
PART 1 - PURPOSE
The purpose of part 1 is to equip students with a critical and informed understanding of
•
•
Key terms and guidelines
Concepts and established principles
in order to classify, to record and to present costs for the valuation of inventories and to compile
Statements of Comprehensive Income on different bases.
DEEL 1 - DOEL
Die doel met deel 1 is om studente toe te rus met ‘n kritiese en ingeligte begrip van die
•
•
Sleutelterme en riglyne
Konsepte en gevestigde beginsels
ten einde koste te klassifiseer, te boek te stel en voor te lê vir die waardasie van voorraad en die
opstel van State van Omvattende Inkomste op verskillende grondslae.
TOPICS:
1.
Nature, classification and allocation of cost
2.
Product costing systems
Introduction
Management accounting deals with accounting information within the organisation, focussing on
critical information so that operational and strategic planning can be undertaken, decisions can be
made, control can be exercised and problems addressed. There is no formal framework which
regulates management accounting. A logical mind and approach is however required to deal with the
aforementioned focus areas.
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PART 1, TOPIC 1 – Nature, classification and allocation of cost
TOPIC 1 LEARNING OUTCOMES
After studying this topic, you should be able to:
●
●
●
●
●
●
●
Describe the definitions relevant to costing terms and systems.
Classify costs and apply cost concepts and cost estimation techniques in various scenarios.
Apply knowledge of variable and absorption costing systems in a case study scenario.
Advise on an applicable method when analysing a scenario.
Apply results of the over- and under-recovery of overheads calculation to a practical case
study and correctly account for it in the Statement of Comprehensive Income.
Apply an activity-based costing approach to costing information in a scenario.
Advise management on which type of costing system is appropriate and how the systems
differ.
ONDERWERP 1 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om:
•
•
•
●
•
•
•
Die definisies relevant tot kostestelsels te omskryf.
Koste te klassifiseer en koste konsepte en kosteberamingstegnieke toe te pas in verskeie
scenarios.
Advies oor ‘n gepaste werkswyse te gee wanneer ‘n scenario ontleed word.
Kennis van veranderlike- en absorpsiekostestelsels in ‘n gevallestudie/scenario toe te pas.
Gevolge van die berekening van die oor- en onderverhaling van bokoste op ‘n praktiese
gevallestudie toe te pas en dit korrek in die Staat van Omvattende Inkomste weer te gee.
Pas ‘n aktiwiteitsgebaseerde kostebenadering op koste inligting in ‘n scenario toe.
Adviseer bestuur aangaande die tipe kostestelsel wat toepaslik is en hoe die stelsels verskil.
STUDY UNIT
TITLE
STUDY UNIT 1.1
Nature and classification of cost
STUDY UNIT 1.2
Variable and absorption costing
STUDY UNIT 1.3
Activity-based costing
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STUDY UNIT 1.1 Nature and classification of cost
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for the nature, classification and allocation of
costs. If not, please refer to your undergraduate and advanced study material and revise the following
indicated pages of the textbook, namely Drury, using the page numbers below:
Prior learning
Drury 8th ed.
Before studying this topic, you Applicable references:
should be able to:
•
•
•
•
•
•
Define and illustrate a cost.
Understand the meaning of the
important cost definitions.
Distinguish between variable and
fixed costs.
Apply and describe the different
methods of estimating costs.
Calculate regression equations
using the least-squares methods
and evaluate the goodness of fit,
using
the
coefficient
of
correlation and coefficient of
determination.
Apply the high-low method.
Drury 9th ed.
Applicable references:
Drury Chapter 2: An
introduction to cost terms
and concepts. Pages 23-39
Drury Chapter 2: An
introduction to cost terms and
concepts. Pages 25-41
Drury Chapter 23: Cost
estimation and cost
behaviour. Pages 608-619
Drury Chapter 23: Cost
estimation and cost
behaviour. Pages 628-639
Drury Chapter 8:
Separation of semi-variable
costs. Page 184-185
Drury Chapter 8: Separation
of semi-variable costs. Page
188-189
Do crossword puzzle for
Chapter 2 & 23
Glossary and flashcards:
Chapter 2, 23 & 8
Do crossword puzzle for
Chapter 2 & 23
Glossary and flashcards:
Chapter 2, 23 & 8
Introduction
In this study unit you will revise the nature of costs and the methods used to classify them. You will
specifically revisit the application of the high-low method to distinguish between fixed and variable
costs.
Activity 1: Review
Study unit 1.1 in MAC4861/102, available on myUnisa under Additional Resources.
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Activity 2
Attempt question: (Drury textbook)
8th ed: Question 23.14 p626 (Solution p766)
9th ed: Question 23.14 p647 (Solution p801)
Feedback 2
The high-low method was used to determine the total cost for a specified quantity.
Activity 3
Attempt question: (Dury Student Manual)
8th ed: Question 2.2
9th ed: Question 2.2
Feedback 3
Specifically note the explanations of fundamental terms used throughout this tutorial letter.
Summary
In this study unit, we revisited cost classification, behaviour and estimation with emphasis on applying
the high-low method.
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Self-assessment activity
Before you move on to the next study unit, please ensure that you have grasped the following
concepts:
Yes/No
1. What is a cost object? Explain how sales commission will be treated when
(i)
(ii)
the product is the cost object
the customer is the cost object
2. Maintaining a cost database.
3. Cost estimation: Regression analysis and High-Low method. Explain under which
circumstances a particular method may be more applicable.
4. Provide an example of a fixed and a variable cost in a
•
•
•
Manufacturing environment
Retail environment
Service environment
without using the same example more than once.
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STUDY UNIT 1.2
Variable and absorption costing
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for variable and absorption costing. If not, please
refer to your undergraduate and advanced study material and revise the following indicated pages of
the textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you
should be able to:
Applicable references:
Applicable references:
•
Drury: Chapter 3: Cost
assignment. Pages 44 –
56.
•
Drury: Chapter 3: Cost
assignment. Pages 48 –
60.
Drury: Chapter 3:
Budgeted overhead rates
and Under- and overrecovery of overheads.
Pages 60 – 65.
•
Drury: Chapter 3:
Budgeted overhead rates
and Under- and overrecovery of overheads.
Pages 64 – 70.
Drury: Chapter 3: Interservice department reallocations. Pages 67 – 71.
● Drury: Chapter 3: Interservice department reallocations. Pages 72 – 76.
Drury: Chapter 7:
Income effects of
alternative cost
accumulation systems.
Pages 146 – 157.
•
Now study IAS2 again.
● Now study IAS2 again.
•
•
•
•
•
•
•
•
Describe
the
various
denominator levels that can be
used with an absorption
•
costing system;
Justify why budgeted overhead
rates should be used in
preference to actual overhead
rates;
Calculate and explain the ●
accounting treatment of the
under-/over-recovery
of
overheads;
Reallocate
service •
departments’ overheads where
service departments render
services to each other and to
production departments;
Explain
the
differences
between an absorption costing ●
and a variable costing system;
Prepare
profit
statements
based on an absorption and
variable costing system;
Reconcile and explain the
difference in profits between
absorption
and
variable
costing profit calculations;
Explain the arguments for and
against
variable
and
absorption costing.
Drury: Chapter 7:
Income effects of
alternative cost
accumulation systems.
Pages 151 – 162.
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Introduction
In the previous study unit, we used the nature of a cost to classify it as either fixed or variable,
although in practice many costs will have a dual nature or follow a step pattern. We will now use these
classifications to assign overhead cost to products.
In this study unit, we revisit types of cost accumulation systems, namely absorption costing and
variable / direct costing systems, specifically those using traditional volume-based measures. In the
next topic we will look at another absorption costing system, namely Activity-based-costing (ABC).
Under absorption costing ALL manufacturing costs, including fixed overhead, are included in the cost
of the product. Under variable costing only variable manufacturing costs (including variable
overheads) are included in the cost of the product.
International Accounting Statement (IAS2) makes absorption costing compulsory for external
reporting. For internal use, variable costing gives a clearer picture for the evaluation of the
performance of divisions and for certain short-term decision-making scenarios.
Critical topics:
Bases of assigning overheads to cost objects
•
Absorption vs variable costing
•
Traditional volume-based measures
•
Selecting an appropriate denominator level for the allocation of fixed production
overheads
•
Accounting treatment of over/under recovery of fixed production overheads and
expenditure variances
Refer to the two different Statement of Comprehensive Income (SCI) below for an illustration of how
the profits are determined under each basis and how the presentation differs.
Illustration of the difference between absorption and variable/direct costing
Absorption costing
Turnover
Less: Cost of sales (including fixed manufacturing overhead)
Opening inventory (fixed and variable manufacturing costs)
Production cost (fixed and variable manufacturing costs)
Less: Closing inventory (fixed and variable manufacturing costs)
Over- / (under-) recovery of fixed manufacturing overheads / labour
(if treated as a period cost)
Expenditure variance
Gross profit
Less: All non-manufacturing costs (fixed and variable) (period cost)
Profit
R
5 000
(3 600)
720
3 320
(440)
1 400
(120)
(10)
1 270
(500)
770
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Variable/Direct costing
Turnover
Less: Variable cost of sales (no fixed manufacturing overhead included)
Opening inventory (variable manufacturing costs)
Production cost (variable manufacturing costs)
Less: Closing inventory (variable manufacturing costs)
R
5 000
(3 000)
660
2 740
(400)
2 000
Less: Other variable costs (non-manufacturing)
Contribution
Less: Fixed costs (manufacturing and non-manufacturing) (total actual amount)
Profit
(250)
1 750
(860)
890
Additional information:
•
Contribution = Turnover – ALL variable costs
•
Under-recovered overhead means that actual production volume is less than the budgeted
allocation base used. Over-recovered: actual production volume is more than the budgeted
allocation base used.
•
Over/under recovery of overhead/labour should be included ABOVE the gross profit line, as part
of the production cost for the period under review (due to different teaching applications,
under/over recovery below the line will still earn marks when clearly shown).
•
The over/under recovery and expenditure variances are only calculated when doing a SCI on the
absorption costing method. The expenditure variance is covered in tandem with the over/under
recovery as they are often confused with one another.
How do we allocate manufacturing overheads to products?
Manufacturing overheads cannot be traced directly to products. They are assigned to products using
cost allocations. A cost allocation is the process of estimating the cost of resources consumed by
products that involves the use of surrogate rather than direct measures, as set out in study unit 2.
To calculate the budgeted overhead rate:
Overhead rate =
Budgeted overhead
Appropriate allocation base
Focus note:
Please study Drury (8th ed.) pages 155 – 157 and (Drury ed. 9th) pages 159 – 162 in depth. The most
appropriate allocation base (denominator) is the AVERAGE long-run (= life of the plant) capacity
utilisation. In the absence of information on this, you may use the next period’s budgeted activity.
Refer to IAS2 par 13 on the dangers of over- or under costing products when using next period’s
budgeted activity level.
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The following activities are popular for allocating overheads because they are simple to calculate:
•
•
Direct labour hours
Machine hours
Other traditional bases used may be:
•
•
Labour cost Rand
Units produced
Activity 1 – Traditional bases applied
The budgeted fixed production overhead for 20x2 are R900 000. The average long-run utilisation and
related costs for this plant are:
•
•
•
•
Direct labour hours
Machine hours
Units produced
Labour cost
– 36 000 hours
– 22 500 hours
– 45 000 units
– R540 000
REQUIRED
Calculate a budgeted fixed overhead rate for each of the traditional measures above.
Feedback 1
FOH rate based on direct labour hours
FOH rate based on machine hours
FOH rate based on units produced
FOH rate based on direct labour R cost
=
=
=
=
=
=
=
=
R900 000 ÷ 36 000 hours
R25 per DLH
R900 000 ÷ 22 500 hours
R40 per MH
R900 000 ÷ 45 000 units
R20 per unit
R900 000 ÷ R540 000
R1,667 per R1 direct labour
Or 166,67% of labour
Activity 2
Attempt question: (Drury Student Manual)
8th ed: Question 3.3
9th ed: Question 3.6
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Feedback 2
Compare your answer to the solution posted on myUnisa. Note that the requirement was to calculate
the costs for one unit.
Activity 3
Attempt questions: (Drury Student Manual)
8th ed: Question 7.5
Question 7.8
9th ed: Question 7.7
Question 7.10
Feedback 3
Note in question 7.5 (7.7 - 9th ed) the application of over- and under-absorption of overhead before the
high-low method is applied to split the production overheads. Question 7.8 (7.10 - 9th ed) covers the
impact of fixed overhead and its allocation on the valuation of inventory.
Where you have gone wrong, reflect upon why it has happened, as that will improve the learning
process.
Summary
In this study unit we covered the calculation of an appropriate fixed overhead rate and the preparation
of the SCI using the absorption and variable costing methods.
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Self-assessment activity
Before you move on to the next study unit please ensure that you understand and can apply the
following concepts:
Topic
1.
2.
3.
4.
5.
6.
7.
8.
9.
Difference between variable and absorption costing
Definition of manufacturing overheads
Treatment of fixed labour costs
Calculation of appropriate fixed production overhead allocation rate
Proper accounting treatment of over/under recoveries and expenditure variances
Present SCI on the variable and absorption costing basis
Reconcile profits derived from different costing bases
Calculation of under/over recovery of overheads/labour
Calculation of the expenditure variance.
Yes/No
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STUDY UNIT 1.3 Activity-based costing (ABC) and related concepts
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for activity-based costing (ABC). If not, please
refer to your undergraduate and advanced study material and revise the following indicated pages of
the textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Before studying this topic, you Applicable references:
should be able to:
• Drury: Chapter 11:
Activity-based costing.
• Describe the differences between
Pages 251 – 268.
activity-based and traditional
● Drury: Chapter 3:
costing systems;
Illustration of the two
• Explain why traditional costing
stage process for an ABC
systems can provide misleading
system. Pages 57 – 60.
information for decision-making;
• Identify and explain each of the • Drury: Chapter 15:
Activity-based budgeting.
four stages involved in designing
Pages 377 – 379.
ABC systems;
• Apply an activity-based costing
approach to costing information;
• Describe
activity-based
budgeting.
Drury 9th ed.
Applicable references:
• Drury: Chapter 11:
Activity-based costing.
Pages 257 – 274.
● Drury: Chapter 3:
Illustration of the two
stage process for an ABC
system. Pages 60 – 64.
• Drury: Chapter 15:
Activity-based budgeting.
Pages 388 – 390.
Critical topics:
•
Activity-based-costing and cost drivers
•
ABC in service organisations
•
ABC profitability analysis
•
Activity-based budgeting and Activity based management (resource consumption models)
Introduction
Even though activity-based costing (ABC) is presented as a separate topic in management
accounting, it is in reality an extension of the previous topic: ‘Absorption Costing’. The reason is that
ABC is quite simply a different absorption costing method for the allocation of fixed manufacturing
overheads to products. The only difference between ABC and the traditional methods is that ABC
makes use of different activities as its allocation base, whereas the traditional methods made use of
volume-related bases, such as machine or labour hours, for the allocation of overheads to products.
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Why do we use ABC?
ABC is used as it may lead to more accurate pricing of products, which will therefore influence all
decision-making with regard to those products, e.g. whether or not to withdraw a product or what price
to charge for it.
Traditionally, overhead costs were small in comparison to directly measurable and traceable costs,
such as material costs, and the method of allocation of those costs to products was therefore largely
unimportant. However, in the advanced manufacturing environment that companies are currently
trading in, fixed overhead costs have escalated dramatically, and now make up a substantial portion of
the cost of a product. It is therefore becoming increasingly important to allocate the cost of the
overheads correctly to the products involved, to ensure the continued success and competitiveness of
a firm.
ABC is also useful in the costing of cost objects separate from products. When ABC is applied to
support activity hierarchies, costs for diverse cost objects such as a whole product line a production
plant, a customer, customer groups (geographic area) etc. can be computed. This is important for
analyses of profitability of the diverse cost objects in support of management’s decisions regarding
allocation (or withdrawing) of resources. ABC and its related concepts are therefore a very handy
arrangement tool in optimising the fixed production and other support activity infrastructure of an
entity.
Activity-based-costing and cost drivers
Review the study material in MAC4861/102 on myUnisa under Additional Resources.
Study Drury 8th ed. p57 – 60 and Drury 9th ed. p60 – 64.
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 11.7
9th ed: Question 11.7
Feedback 1 (Question 11.7 in 8th ed. of Drury Student Manual)
The driver volume is the total per activity eg for deliveries: 100 + 80 + 70 = 250. This total is used to
calculate the driver rate (£2 400 000 ÷ 250) = £9 600, which is then applied to the product. For
Sunshine 100 deliveries x £9 600 = £960 000.
Although layouts may be different to the one presented, it is essential that calculations are shown
clearly and can be followed by an examiner. Look carefully at the approach where statements are
made: where possible the statement should be answered as being correct or incorrect with supporting
motivation and then the implications/consequences listed.
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ABC in service organisations
Study Drury 8th ed. p265 – 267 or Drury 9th ed. p272 – 274.
Activity 2
Go to www.saica.co.za, then SAICA examinations, then 3. Past Exam Papers, then
● Part II – Financial Management.
Attempt question 3 of 2005: Brown Bank Ltd.
Feedback 2
Compare your answer to the solution, reflect upon differences and use this process to improve your
knowledge level and skill. Consider whether the current ATM environment is different to that
presented in the question and reflect on the implications of such differences.
ABC profitability analysis
Study Drury 8th ed. p260-262 or Drury 9th ed. p267 – 269.
Activity-based management (ABM)
Study Drury 8th ed. P549 – 552 or Drury 9th ed. P567 – 571.
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Summary
In this study unit we focussed on the application of activity-based costing and related concepts in
terms of fixed overhead allocation, reduction and product pricing.
Self-assessment activity
Before you move on to the next study unit please ensure that you have grasped the following
concepts:
Topic
1.
2.
3.
4.
5.
6.
7.
An activity
Cost driver
Cost driver rate
Activity (resource) demand
Activity hierarchies
Profitability analyses using ABC
ABM and ABB
Yes/No
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PART 1, TOPIC 2 – Product costing systems
TOPIC 2 LEARNING OUTCOMES
After studying this topic, you should be able to do the following in a case study/scenario:
•
•
•
•
•
•
•
•
Record and account for material, labour and overhead costs in the general ledger.
Value purchased and manufactured inventory using the FIFO or weighted average cost
methods.
Cost specific jobs (manufacturing or service)
Value work-in-process in a process costing system involving more than one process
Determine whether separate products should be processed further after split-off point.
Apply backflush accounting in a JIT environment
Correctly account for the treatment of normal and abnormal losses.
Consider the allocation of joint costs and treatment of by-products and their proceeds.
ONDERWERP 2 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om die volgende in ‘n gevallestudie/scenario te doen:
•
•
•
•
•
•
•
Teboekstelling en verantwoording van grondstowwe, arbeid en bokoste in die grootboek toe te
pas.
Gekoopte- en vervaardigde voorraad te waardeer met die gebruik van die EIEU of die
geweegde gemiddelde metode.
Bepaal die koste vir spesifieke take (vervaardiging of dienste).
Bepaal of afsonderlike produkte na die skeidingspunt verder verwerk moet word.
Terugvoer rekeningkunde in ‘n net-betyds omgewing toe te pas.
Die hantering van normale en abnormale verliese korrek te verantwoord.
Die toedeling van gesamentlike koste en hantering van neweprodukte en hul opbrengste te
oorweeg.
STUDY UNIT
TITLE
STUDY UNIT 2.1
Job costing
STUDY UNIT 2.2
Process costing
STUDY UNIT 2.3
Joint and by-products
Introduction
This topic deals with the recording and allocation of costs using job, process and joint costing systems
to value products manufactured or services rendered. It will largely follow a revision route with closer
focus on areas where students’ past assessments indicated shortcomings in knowledge.
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STUDY UNIT 2.1
Job costing
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for job costing. If not, please refer to your
undergraduate and advanced study material and revise the following indicated pages of the textbook,
namely Drury using the page numbers below:
th
th
Prior learning
Drury 8 ed.
Drury 9 ed.
Before studying this topic, you should be able to:
Applicable references:
Applicable references:
• Describe the materials recording procedure;
• Distinguish between first-in-first-out (FIFO), and
average cost methods of stores pricing;
• Describe the accounting procedure for labour
costs;
• Describe the accounting procedure for
manufacturing and non-manufacturing overheads;
• Describe accounting procedures for jobs
completed and products sold.
•
•
Drury: Chapter 4:
Accounting entries
for a job costing
system.
Pages 80 – 93.
Drury: Chapter 4:
Accounting entries for a
job costing system.
Pages 85 – 98.
Summary
In this study unit we reviewed the recording process in general and how it would apply in a job costing
system.
Self-assessment activity
Before you move on to the next study unit, please ensure that you have grasped the following
concepts:
Topic
1.
How to record materials, labour and overheads
2.
The treatment of inventory for FIFO and weighted average cost methods.
3.
The accounting treatment for jobs completed and products sold.
Yes/No
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STUDY UNIT 2.2 Process Costing
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for process costing. If not, please refer to your
undergraduate and advanced study material and revise the following indicated pages of the textbook,
namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you should be
able to:
Applicable references:
Applicable references:
• Explain when process costing systems
are appropriate;
• Explain the accounting treatment of
normal and abnormal losses;
• Prepare process, normal loss, abnormal
loss and
abnormal gain accounts;
• Prepare a process costing statement; and
value inventories.
• Drury: Chapter 5:
Process Costing.
Pages 102 – 122.
• Drury: Chapter 5:
Process Costing.
Pages 107 – 127.
Introduction
In the previous study unit we looked at job costing which is a costing system used when the cost of
each unique unit produced needs to be calculated separately. On the other end of the scale are
entities that continuously produce large quantities of homogeneous or similar products or services,
making it unnecessary to assign costs to each unit produced. Process costing systems are therefore
used to calculate the average cost per unit by dividing the total costs for a specific process for a period
by the number of units passing through the process for that period, e.g. oil refineries, breweries and
paper manufacturers.
Measurement in a process costing system takes place by way of equivalent and completed units. To
do this work-in-progress must be converted to the ‘equivalent’ of fully completed units. The study unit
will be dealt with by way of revision.
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Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 5.10
9th ed: Question 5.13
Feedback 1
Note the following:
•
•
•
•
•
•
Difference in layout of Quantity Statement and Production Cost Statement
Output is dependent on the initial input
Output includes reworked units
Reworked units are not subject to the normal 10% loss, being reworked
Completed and equivalent units are required
Possible integration with standard costing system
Summary
In this study unit we revisited the determination of cost per completed and equivalent unit in a process
costing system.
Self-assessment activity
Before you move on to the next study unit, please ensure that you have grasped the following
concepts:
Topic
1.
2.
3.
4.
5.
6.
7.
8.
The difference between a job costing system and a process costing system
Equivalent units
Normal loss
Abnormal loss or gain
The FIFO and weighted average methods of inventory valuation
Allocation of normal loss – when to use “short” or absorption method and when to
use the “long” or allocation method.
Value output from the process.
Treatment of proceeds from the sale of normal and abnormal units scrapped or
“off-cuts” or by-products.
Yes/No
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STUDY UNIT 2.3 Joint- and by-products
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for joint- and by-products. If not, please refer to
your undergraduate and advanced study material and revise the following indicated pages of the
textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you
should be able to:
Applicable references:
Applicable references:
• Drury: Chapter 6:
Joint and by-product
costing.
Pages 129 – 138.
• Drury: Chapter 4:
Accounting entries for a
job costing system –
Backflush accounting
Pages 93 – 95.
• Drury: Chapter 6:
Joint and by-product
costing.
Pages 134 – 143.
• Drury: Chapter 4:
Accounting entries for a
job costing system –
Backflush accounting
Pages 98 – 100.
• Distinguish between joint- and byproducts;
• Explain the alternative methods of
allocating joint costs to products;
• Describe and apply the accounting
treatment of by-products;
• Describe backflush costing.
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 6.8
9th ed: Question 6.9
Feedback 1
Note the following:
•
•
•
The allocation of costs on weight and market values yield different profits.
All costs are joint and unavoidable, thus dropping a product will simply decrease revenue with no
impact on costs.
Further processing requires an incremental approach.
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Backflush accounting
Training costs to inventory
Large inventories

Elaborate costing systems tracing
Costs to products
JIT (no or very low inventories)

Backflush accounting
Study
•
•
•
Drury 8th ed. p93 – 95 or Drury 9th ed. p98 – 100.
Note the following from the studied information:
Backflush costing is used in a JIT manufacturing system
Accounting for completed units is triggered by:
○ the manufacture of finished goods – the most simple method
○ the purchase of raw materials and components
Summary
In this study unit we focussed on the determination of joint and by-products, the allocation of joint
costs and the accounting treatment of by-products. The circumstances for applying Backflush
Accounting were described.
Self-assessment activity
Before you move on to the next study unit, please ensure that you have grasped the following
concepts:
Topic
1.
Conversion costs
2.
Identifying joint products
3.
Allocating joint product costs
4.
Further processing costs
5.
Measures for allocating joint costs
6.
Treatment of by-product and their sales value and further processing costs
7.
Backflush accounting situations
Yes/No
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PART 2 – Planning and control
PART 2 PURPOSE
The purpose of part 2 is to enable students to have a critical and informed understanding of the
key terms, rules, concepts and established principles of planning and control techniques.
DEEL 2 DOEL
Die doel van deel 2 is om studente in staat te stel om ‘n kritiese en ingeligte begrip van die
sleutelterme, reëls, konsepte en gevestigde beginsels van beplannings- en beheertegnieke te
verkry.
TOPICS:
3.
Planning, budgeting and control
4.
Standard costing
5.
Performance measurement
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PART 2, TOPIC 3 – Planning, budgeting and control
TOPIC 3 LEARNING OUTCOMES
After studying this topic, you should be able to
•
•
•
Design and compile fixed and flexible budgets
Explain how costs are controlled using various management tools
Calculate and interpret the break-even point and margin of safety of a business under different
scenarios and advise management based on your calculations.
ONDERWERP 3 LEER UITKOMSTE
Na bestudering van hierdie onderwerp, behoort u in staat te wees om
•
•
•
Vaste- en veranderlike begrotings te ontwerp en op te stel
Te verduidelik hoe koste beheer word deur verskeie bestuurstegnieke te gebruik
Die gelykbreekpunt en veiligheidsmarge van ‘n besigheid in verskeie scenarios te bereken, en
die bestuur op grond van u berekeninge raad te gee.
STUDY UNIT
TITLE
STUDY UNIT 3.1
Budgeting and management control systems
STUDY UNIT 3.2
Other cost management techniques / principles
STUDY UNIT 3.3
Cost-volume-profit analysis
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STUDY UNIT 3.1
Budgeting and management control systems
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for budgeting and management control systems.
If not, please refer to your undergraduate and advanced study material and revise the following
indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you should
be able to deal with:
Applicable references:
Applicable references:
•
•
Drury: Chapter 15:
The budgeting process
Pages 358 - 387.
•
Drury: Chapter 15:
The budgeting process
Pages 368 - 398.
•
Drury: Chapter 16:
Pages 400 - 409.
•
Drury: Chapter 16:
Pages 411 - 420.
•
Drury: Chapter 15:
Criticisms of budgeting
Page 383
•
Drury: Chapter 15:
Criticisms of budgeting
Pages 393 - 395
Corporate strategy and long-term
planning
o
o
o
o
•
Competitive advantage
Porter’s models
Value chain
Supply chain
Budgeting
o
o
o
o
o
o
o
Master, capital, cash and
subsidiary budgets
Fixed and flexible budgeting
Zero-base budgeting
Activity-based budgeting
Stages in planning functions etc.
Responsibility centres
Behavioural aspects
●
Management control systems
●
Rolling forecasts
Introduction
In your prior learning you covered both the short-term and long-term aspects of the planning and
control process, with focus on:
•
•
•
•
•
Flexible budgeting
Control ability
Non-profit-making organisations
Zero-based budgeting and
Management control systems
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Study
Drury 8th ed. p377 – 379 or Drury 9th ed. p388 – 390: Activity-based budgeting
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 15.12
9th ed: Question 15.15
Feedback 1
The cost driver rates are determined using the budget information. The flexible budget is then set
using the actual activity, where after the variances are determined. This enables management to
narrow down responsibility.
Summary
In this study unit we focussed on further aspects related to budgeting other than those covered at the
undergraduate level. We studied the controllability principle, activity-based budgeting in non-profit
organisations, zero-based budgeting and criticisms of budgeting. Lastly we investigated other
management control systems and their influence on employee behaviour.
Self-assessment activity
Attempt questions: (Drury textbook)
8th ed: Question 16.21 p416 (Solution p737)
9th ed: Question 16.21 p427 (Solution p765)
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STUDY UNIT 3.2 – Cost management techniques / principles
Review Study unit 3.2 of MAC4861/102 on my Unisa under Additional Resources.
Benchmarking
External and internal benchmarking can be used to compare key activities or processes in order to
improve them.
Study
•
Drury (8th ed.) p553 or Drury (9th ed.) p571 – 572 (Benchmarking)
Note the following from the studied information:
•
The advantages and disadvantages of benchmarking.
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 21.6
9th ed: Question 21.3
Strategic management accounting (SMA)
CIMA defines strategic management accounting as “A form of management accounting in which
emphasis is placed on information which relates to factors external to the entity, as well as nonfinancial information and internally generated information.”
Study
•
Drury (8th ed.) p578 – 584 or Drury (9th ed.) p598 – 601
Also refer to the study unit in Finance tutorial letter 103 regarding Strategy.
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Summary
In this study unit we looked at changes in the business environment and developments in cost
management techniques and philosophies. The use of benchmarking was also explained.
Self-assessment activity
Ensure that you can describe the following concepts briefly in a paragraph:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Action or behavioural controls
Personnel, cultural and social controls
Results or output controls
Cybernetic control systems
Feedback and feed-forward controls
Life-cycle costing
Target costing
Kaizen costing
Activity-based management
Business process re-engineering
Cost of quality
Cost management and the value chain
Environmental cost management
Just-in-time systems
Strategic management accounting
Benchmarking
Enrichment Activity
Google the following concepts and read about a company that employs them:
•
Life-cycle costing
•
Kaizen costing
•
Just-in-time systems
•
Activity-based budgeting
You can also look it up in Wikipedia at http://www.wikipedia.org for more background on the history
and applications.
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STUDY UNIT 3.3 Cost-volume-profit analysis
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for cost-volume-profit analysis. If not, please refer
to your undergraduate and advanced study material and revise the following indicated pages of the
textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you
should be able to:
Applicable references:
Applicable references:
•
•
•
•
Calculate a break-even point
and margin of safety
Calculate sensitivities for
changes in any variables in
the CVP model.
Drury: Chapter 8:
Cost-Volume-Profit
analysis. Pages 168 –
185.
Drury: Chapter 8:
Cost-Volume-Profit
analysis. Pages 172 – 190.
Introduction
In previous study units, we have looked at cost accumulation for inventory valuation and profit
measurement using different bases. In this study unit, we will consider the use of the same basic
financial information for decision-making by means of cost-volume-profit (CVP) analysis. CVP is
especially valuable during planning and budgeting as it gives a broad indication of expected outcomes
at different levels for different variables in the CVP model. The breakeven analysis and margin of
safety are also very useful tools in measuring the riskiness of various plans or scenarios in the budget.
Focus notes
Why does a business have to calculate a break-even point?
•
When you start a business you want to determine what sales level is required for it to survive.
•
For a typical start-up business, it is critical to ensure that ongoing operating costs are covered by
sales revenue in the short-to medium-term.
•
In the long-term, the business can focus on making a profit. Once again the breakeven point
and margin of safety will indicate the riskiness or sensitivities of various plans or strategies.
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MAC4862/102
Application of CVP
•
Please note that ALL variable costs and ALL fixed costs (production AND non-production costs)
are included in the break-even calculation.
•
Contribution per unit equals the sales price per unit less ALL variable costs per unit. The
contribution margin ratio is the contribution expressed as a percentage of sales.
•
The net profit figure in a break-even calculation is ALWAYS BEFORE TAX. Therefore if you are
told in a question that you are trying to achieve a net profit AFTER tax of, for example R50 000,
you must first convert the R50 000 to a BEFORE tax amount before you use it in the break-even
calculation.
•
Remember that a break-even point (in units) should always be ROUNDED UP as one less unit
sold will lead to a small loss.
•
Unit information usually indicates a break-even in units and value/monetary information (eg
Rand or a ratio based on rand) a break-even in Rand.
•
The net profit is derived from the units sold in excess of the breakeven point, i.e. the contribution
from the margin of safety sales.
•
The margin of safety % indicates by how much sales volume can decline before the entity
makes NIL profit.
•
Sensitivity % for other variables in the model indicates how big a change can be absorbed
before the entity makes no profit.
- ∆ in selling price/unit
- ∆ in variable cost/unit
- ∆ in total fixed costs
Impact of factors
All other factors remaining the same:
•
•
•
An increase in selling price per unit will increase the contribution per unit and decrease the
break-even sales required.
An increase in variable cost per unit will decrease the contribution per unit and increase the
break-even sales required.
An increase in total fixed cost will increase the sales required to break-even.
Generally, you will first have to determine the nature of the costs before proceeding with the breakeven calculation.
Study the following in your textbook:
•
•
Drury (8th ed.): Chapter 8: Multi-product Cost-Volume-Profit analysis. Pages 178 – 180.
Drury (9th ed.): Chapter 8: Multi-product Cost-Volume-Profit analysis. Pages 182 – 184.
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Activity 1 – Basic principle
Bubbles Ltd sells two products, namely product X and product Y.
The budgeted sales are divided equally (C1) between these two products and the
budgeted contribution is R10 per unit of product X and R6 per unit of product Y.
The actual sales for the period consisted of 75% for product Y and 25% (C2) for
product X. The annual fixed costs are R560 000.
Actual costs and selling prices are identical to the budget.(C3)
C1:
Budgeted =
50:50
C2: Actual =
75:25
C3: No
change to
contribution
or FC
REQUIRED
(a) Calculate the unit break-even points for budgeted and actual sales.
(b) Analyse your results.
Feedback 1
(a)
Budgeted average contribution
C1: Average base
used, based on 50:50
split.
= (50% x R10) + (50% x R6)
= R5 + R3
= R8,00
Budgeted break-even point
= Fixed costs / Budgeted average unit contribution
= R560 000 / R8,00
= 70 000 units
Actual average unit contribution
= (25% x R10) + (75% x R6)
= R2,50+ R4,50
= R7,00
Actual break-even point
= Fixed costs / Actual average unit contribution
= R560 000 / R7,00
= 80 000 units
C2: New split lowers
average as more with low
contribution sold.
C3: BE now higher as
average down.
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MAC4862/102
(b)
The break-even point varies depending on the composition of
the sales mix.
The actual sales mix is different from the budgeted sales mix
(see note above) and therefore the actual average unit
contribution is different from that used in the budgeted breakeven calculation.
Activity 2
Work through example: (Drury textbook)
8th ed: Example 8.2 p179
9th ed: Example 8.2 p183
Attempt question: (Drury Student Manual)
8th ed: Question 8.7
9th ed: Question 8.9
Feedback 2
•
•
•
Specific and general fixed costs. Some questions may specify breakeven in terms of the
specific costs.
Current mix implies total basis – individual b/e’s not required.
Average contribution used.
Activity 3 – ‘What if’s’
Paramountain Ltd manufactures and sells video equipment. Every video recorder sells for R1 150,
and variable costs amount to R850 per unit. Total annual fixed costs amount to R150 000.
The following operating results for the previous year were given:
R
Sales
Less: Variable costs
Contribution margin
Less: Fixed costs
Net income
1 265 000
935 000
330 000
150 000
180 000
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REQUIRED
Mark
(a) Determine the break-even point in units;
(2)
(b) Calculate the margin of safety based on sales units, if Paramountain expects to sell
1 200 video recorders this year;
(1)
(c) Refer to the original data. Management would like to increase the net income from the
previous year. The marketing manager would like an additional amount of R25 000 set
aside for advertising purposes. The sales manager believes that a 12,5% reduction in
the selling price, combined with the additional advertising, should cause annual sales in
units to increase by 25%. Prepare a contribution income statement, showing the results
of operations if the changes are made. Advise management whether or not to adopt the
suggested changes.
(6)
(d) Refer to the original data. The financial manager does not want the selling price to
change, as it would lead to a lot of administrative work. Instead, he suggests that costs
should be cut and advertising increased. He suggests negotiating with the suppliers for
a price cut of R90 on a circuit used in the production of the video recorders, and
improving productivity in order to save R25 on labour costs per recorder. The manager
believes that additional advertising should also increase annual sales by 40%. By how
much can advertising increase for profits to remain unchanged.
(3)
(e) Refer to the original data. Assume that the company is only producing 850 video
recorders per year. An order has been received for 600 units on a special price basis.
What unit price would have to be quoted to the buyer if Paramountain Ltd wants to earn
an overall profit of R195 000 for the year? (You may assume that the present sales will
not be affected by the special price order).
(3)
Feedback 3
Scenario analysis is often required as part of the decision-making process.
(a) Break-even point
Break-even point
(b) Margin of safety
=
=
=
Fixed cost / Contribution
R150 000 / (R1 150 - R850)
500 units
(2)
=
=
=
(Expected sales - Break-even sales) / Expected sales
(1 200 - 500) / 1 200)
58,33%
(1)
(c) Proposal: Contribution income statement
Calculation
Sales
Variable costs
Contribution
Fixed costs
Net income
R
(1 100 x [R1 150 - 12,5%] x 1,25
(1 100 x R850 x 1,25)
(150 000 + 25 000)
1 383 594
1 168 750
214 844
175 000
39 844
(4)
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Working:
Calculate last year’s number of units sold:
R1 265 000 / R1 150 = 1 000 units sold
Management should not accept the changes, as it decreases net income.
(d) Net income
NI
R180 000
R180 000
R180 000
Advertising
(1)
(1)
= Sales - Variable costs - Fixed costs
= SP x - Varx - FC
= (1 100 x 1,4 x R1 150) - (1 100 x 1,4 x [850 - 90 - 25]) - R150 000 –
advertising
= R1 771 000 - R1 131 900 - 150 000 - advertising
= R489 100 - advertising
= R309 100
(3)
Advertising may increase with R309 100, representing the incremental contribution margin,
without affecting the net income.
(e) NI
R195 000
R195 000
600SP
SP
=
=
=
=
=
SP x - VarCx - FC
(R1 150 x 850) + (600 x SP) - (1450 x R850) - R150 000
R977 500 + 600SP - R1 232 500 - R150 000
R600 000
R1 000 per unit
(3)
Summary
In this study unit we focused on the calculation of the break-even point, the margin of safety and the
impact of changes in breakeven components on profit.
Self-assessment activity
Knowledge check:
Before proceeding to the next study unit, ensure that you are on par with the following concepts:
Yes/No
1.
2.
3.
4.
5.
6.
Classification of costs
Determination of fixed and variable costs
Definition and calculation of contribution
Calculation of the break-even point
Interpretation of margin of safety and other sensitivity percentages
Effect of change of a given factor on profit or other relevant issue.
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PART 2, TOPIC 4 – Standard costing
TOPIC 4 LEARNING OUTCOMES
After studying this topic, you should be able to
•
•
•
•
Calculate and analyse variances
Provide suitable explanations for variances found
Reconcile budgeted income and expenses to actual income and expenses
Decide on the appropriate accounting treatment of material variances
ONDERWERP 4 – LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om
•
•
•
•
Afwykings te bereken en te ontleed
Geskikte verduidelikings vir verkreë afwykings te verskaf
Begrote inkomste en uitgawes met werklike inkomste en uitgawes te rekonsilieer
Te besluit oor die toepaslike rekeningkundige hantering van wesenlike afwykings
STUDY UNIT
TITLE
Study unit 4.1
Variance analysis
Study unit 4.2
Reconciliation of budget to actual
Study unit 4.3
Variance analysis for controlling purposes
Study unit 4.4
Pro-rating of variances and compliance with the relevant accounting
standard
Introduction
Standard costing is a financial control system that analyses deviations from budget in detail in order to
control future costs and forms part of the process of management by exception. Standards are
predetermined target costs and selling prices which represent a benchmark that should be achieved
under normal conditions. Standard costs are the expected or budgeted costs for producing a single
unit of a product or a service. Quantity standards and cost (price) standards are set for the materials,
labour and overheads consumed in producing a unit of the product. In order to apply standard costing,
standardised tasks or repetitive operations must be involved for which a standard time or quantity and
cost can be determined.
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MAC4862/102
STUDY UNIT 4.1
Variance analysis
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for variance analysis. If not, please refer to your
undergraduate and advanced study material and revise the following indicated pages of the textbook,
namely Drury using the page numbers below:
Prior learning
Before studying this topic, you should
be able to deal with:
Drury 8th ed.
Drury 9th ed.
Applicable references:
Applicable references:
•
Design of standard costing systems
•
•
Drury: Chapter 17,
pages 423 – 450
Drury: Chapter 17,
pages 434 – 463
Variance analysis
Reporting on variance analysis
Drury: Chapter 18,
pages 458 – 469
Drury: Chapter 18,
pages 471 – 482
•
•
Reconciliation of budget to actual
Investigation of variances and
exception reporting
Pro-rating of variances and
compliance with the relevant
accounting standard
Cost estimation when the learning
curve effect is present
Drury: Chapter 18,
pages 470 – 472
Drury: Chapter 7,
pages 155 – 157
Drury: Chapter 18,
pages 483 – 485
Drury: Chapter 7,
pages 159 – 162
Drury: Chapter 23,
Pages 619 – 622
Drury: Chapter 23,
pages 640 – 643
•
•
Study
Recap by reviewing study unit 1.1 of MAC4861/103 on myUnisa under Additional Resources and then
studying:
• Ex post variance analysis/Distinguishing between planning and operating variances –
Drury (8th ed.) p469 – 470 or Drury (9th ed.) p482 – 483.
• ABC variance analysis – Drury (8th ed.) p472 – 474 or Drury (9th ed.) p485 – 487.
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 17.11
9th ed: Question 17.9
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MAC4862/102
Feedback 1
The correct variance needs to be used in calculating actual quantities and costs. As a marginal
costing system is used, fixed overhead is not relevant.
Activity 2
Attempt question: (Drury Student Manual)
8th ed: Question 17.12
9th ed: Question 17.10
Feedback 2
The variance ‘formula’ is used to determine the required. Note the layout followed.
Summary
In this study unit, we revisited the calculation and meaning of various standard cost variances for both
variable and absorption costing systems. Some issues in calculating mix variances were also
highlighted.
Self-assessment activity
Attempt question: (Drury Student Manual)
8th ed: Question 18.6
9th ed: Question 18.3
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STUDY UNIT 4.2 – Reconciliation of budget to actual
Review study unit 1.2 of MAC4861/103 on myUnisa under Additional Resources.
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 17.9
9th ed: Question 17.6
Feedback 1
Because a JIT system is in use, it implies that production equals sales. Note specifically the approach
from a sales volume angle.
Summary
In this study unit we studied the reconciliation of budgeted profit to actual profit by means of adding
the favourable to and deducting the adverse production and sales variances from the budgeted profit.
Self-assessment activity
Attempt questions: (Drury Student Manual)
8th ed: Question 17.8
9th ed: Question 17.7
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STUDY UNIT 4.3 – Variance analysis for controlling purposes
Introduction
In the prior study unit 4.1 we looked at the calculation of the various variances. In this study unit we
will study the factors that should be considered when deciding whether it is worthwhile to investigate
variances.
Study
• Drury (8th ed.) p469 – 470 or Drury (9th ed.) p482 – 483 (Ex post variance analysis)/(Distinguishing
between planning and operating variances)
• Drury (8th ed.) pages 470 – 472 or Drury (9th ed.) p483 – 485 (The investigation of variances)
• Drury (8th ed.) pages 472 – 474 or Drury (9th ed.) p485 – 487 (The role of standard costing
when ABC has been implemented)
Note the following from the studied information:
• The impact of controllability on variance reporting, i.e. flexing and planning variances.
• The causes of variances and the methods used to determine whether an investigation is justified.
• The types of costs for which an ABC system variance analysis is appropriate.
Activity 1
Attempt question: (Drury Student Manual)
8th ed: Question 18.8
9th ed: Question 18.8
Feedback 1
The ex-post plan drives planning (uncontrollable) and operational variances.
Summary
In this study unit we looked at the reasons for variances and the models used by organisations to
ensure that the benefits from investigating variances exceed the costs. The use of standard costing
when an ABC system is in use was also investigated.
Self-assessment activity
Attempt question: (Drury textbook)
8th ed: Question 18.16 p478 – 479 (Solution p746)
9th ed: Question 18.18 p492 (Solution p774 - 775)
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STUDY UNIT 4.4
Pro-rating of variances and compliance with the relevant accounting
standard
Review study unit 1.4 of MAC4861/103 on my Unisa under Additional Resources.
Summary
IAS 2 requires the use of absorption costing to value closing inventory for external reporting purposes.
Furthermore, the allocation of fixed production overheads should be based on normal capacity.
Standard costing is allowable for financial statements if the cost approximates actual cost. Usual
variances should be investigated and a decision taken on whether the variance becomes a period
cost, or whether the standard is adjusted and inventory is revalued.
Self-assessment activity
Before moving on to the next topic, make sure that you have grasped the following:
When a standard costing system can be used to value inventories
-
the accounting treatment of variances that arise between actual costs and standard (or allowed)
costs
the treatment of an unusually high fixed production volume capacity variance.
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PART 2, TOPIC 5 – Performance measurement
TOPIC 5 LEARNING OUTCOMES
After studying this topic, you should be able to:
•
•
•
•
Have a critical understanding of appropriate performance measures within an organisation.
Distinguish between the managerial and economic performance of the division.
Explain the meaning of return on investment (ROI), residual Income (RI) and Economic Value
Added (EVA).
Compute and apply the above performance measures.
ONDERWERP 5 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om
•
•
•
•
‘n Kritiese begrip van geskikte prestasiemaatstawwe binne ‘n organisasie te hê.
Te onderskei tussen die bestuurs- en ekonomiese prestasie van die afdeling.
Die betekenis van opbrengs op belegging (OOB/ROI) residuele inkomste (RI) en ekonomiese
waarde toegevoeg (EWT/EVA) te verduidelik.
Bogenoemde prestasiemaatstawwe te bereken en toe te pas.
STUDY UNIT
TITLE
Study unit 5.1
Divisional financial performance measures
Study unit 5.2
Transfer pricing in divisionalised companies
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STUDY UNIT 5.1
Divisional financial performance measures
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for divisional financial performance measures.
If not, please refer to your undergraduate and advanced study material and revise the following
indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you should be able to deal
with:
Applicable
references:
Chapter 19:
Drury page 485
Drury page 485
Drury page 486
Drury page 486
Drury page 486
Applicable
references:
Chapter 19:
Drury page 498
Drury page 498
Drury page 499
Drury page 499
Drury page 499
Drury page 488
Drury page 490
Drury page 491
Drury page 492
Drury page 492
Drury page 500
Drury page 502
Drury page 503
Drury page 504
Drury page 508
Drury page 494
Drury page 495
Drury page 509
Drury page 510
Drury page 497
Drury page 512
Chapter 21:
Drury page 553
Chapter 16:
Drury page 394
Drury page 400
- 402
Chapter 21:
Drury page 571
Chapter 16:
Drury page 405
Drury page 411
- 413
•
•
•
•
•
•
•
•
•
•
•
•
•
Divisionalised organizational structures
Profit centres and investment centres
Advantages and disadvantages of divisionalisation
Pre-requisites for successful divisionalisation
Distinguishing between the managerial and economic
performance of the division
Alternative divisional profit measures
Return on investment
Residual income
Economic value added (EVA™)
Determining which assets should be included in the
investment base
The impact of depreciation
The effect of performance measurement on capital
investment decisions
Addressing the dysfunctional consequences of shortterm financial performance measures
•
Benchmarking
•
•
Controls at different organizational levels
Responsibility centres
Introduction
In your prior learning the evaluation of divisional performance by employing appropriate
performance measures and distinguishing between managerial and economic performance were
covered. In this study unit we shall focus primarily on computing three financial performance
measures viz. ROI, RI and EVA and discuss the influence of these measures on capital investment
decisions. Finally, we shall discuss various approaches that can be employed to overcome the
short-term orientation associated with accounting profit-related measures.
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Study
• Residual income
• Economic value added (EVA™)
• Determining which assets should be included in the
investment base
• The impact of depreciation
• The effect of performance measurement on capital
investment decisions
• Addressing the dysfunctional consequences of short-term
financial performance measures
• Benchmarking
• Controls at different organizational levels
• Responsibility centres
8th ed.
Drury page 491
Drury page 492
9th ed.
Drury page 503
Drury page 504
Drury page 492
Drury page 494
Drury page 508
Drury page 509
Drury page 495
Drury page 510
Drury page 497
Drury page 553
Drury page 394
Drury page 400 402
Drury page 512
Drury page 571
Drury page 405
Drury page 411 413
Activity 1
Attempt question: (Drury textbook)
8th ed: Question 19.22 p505 (Solution p753)
9th ed: Question 19.23 p521 (Solution p782)
Feedback 1
The calculated values use annuity factors. Ensure that you understand the principles.
• Financial performance measures should include only the factors directly controllable by the
manager. Therefore, distinguish between managerial and economic performance.
• Non – financial factors (e.g. competitiveness, productivity, quality, etc) should be incorporated in
performance measures in order to mitigate the short – term orientation of managers.
• EVA adjusts for distortions introduced by generally accepted accounting principles into the
divisional performance measure to measure economic performance (the starting point though, is
the accounting profit based on historic costs and not future cash flows)
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Calculation of EVA:
1.
Adjust for IFRS distortions (starting point – obtaining WACC and accounting profit)
•
•
•
Add back expenses that will have value over a longer term than one year.
Amortise capitalised expenses over an appropriate lifespan.
Replace depreciation with economic holding gains/losses.
Note: You are required to calculate WACC.
2. Calculate the value of the controllable investment
• The term controllable investment refers to the net asset base that is controlled by
divisional managers. If the purpose is to evaluate the performance of a divisional
manager, then only those assets that can be directly attributed to the division and are
controllable by the manager should be included in the asset base. This means that only
assets that can be influenced by the divisional manager ought to be included in the
measure. For instance, if debtors and cash are administered by central headquarters,
they should be excluded because a divisional manager cannot influence these items.
• Use replacement values when available, else use as stipulated hereafter.
• Non-current assets at market value plus net working capital at realisable values plus
capitalised expenses at amortised values.
3. Calculate the capital charge by multiplying the controllable investment (2) with the
WACC (1).
4. Deduct the capital charge (3) from the adjusted profit or adjusted cash profit (1) to
calculate the economic value added.
• If the EVA > 0, economic value is created/added.
• If EVA < 0, capital is destroyed.
EVA = Adjusted Divisional – (Adjusted Capital Employed X Divisional WACC)
• The Capital Employed is adjusted as follows (figures imaginary and in R’000):
Owner’s Equity (NAV)
Add Goodwill amortisation
Add Deferred tax and other Provisions
Add total Debt
Adjusted capital Employed
4 333
253
14
467
5 067
• Adjust the Net Profit as follows:
Operating profit before Tax
Add Interest expense
Minus Tax
Minus extra-ordinary gains
NOPAT
Above will be illustrated by working through activity 2.
2 642
120
469
20
2 273
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Activity 2 – EVA
Attempt question: (Drury textbook)
8th ed: Question 19.20 p504 (Solution p751 – 752)
9th ed: Question 19.21 p520 (Solution p780 – 781)
Feedback 2
The discussions in part a regarding expenses that add value give good guidance on this issue.
Advantages of EVA:
• EVA achieves goal congruence (as the interests of the company as a whole are considered)
• Non-financial factors (e.g. competitiveness, productivity, quality, etc) should be incorporated in
performance measures in order to mitigate the short- term orientation of managers.
• EVA adjusts for distortions introduced by generally accepted accounting principles into the divisional
performance measure to measure economic performance (the starting point though, is the
accounting profit based on historic costs and not future cash flows).
• Managers are encouraged to ‘think” in the same way as shareholders: EVA actively encourages
increasing shareholders’ wealth
• Under-utilised assets are identified.
• Puts emphasis on the achievement of long-term goals and shows the benefits of research and
development expenditure, training and marketing costs.
Disadvantages of EVA:
• The EVA can only provide a rough approximation of economic profit as the starting point for
calculating EVA is the conventional accounting profits, based on historic costs and, not future cash
flows.
• The EVA calculation involves making a number of adjustments to the profitability measure in order
to convert the historic accounting data and thereby approximate economic profit and asset values.
• The use of estimates of economic profit in evaluating performance results in lack of precision and
objectivity.
Activity 3
Attempt questions:
8th ed: (Drury Student Manual) Question 19.10
8th ed: (Drury Student Manual) Question 19.13
9th ed: (Drury Student Manual) Question 19.11
9th ed: (Drury textbook) Question 19.17
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Feedback 3
In question 19.13 (or 9th ed. 19.11) the target structure and cash flows are relevant.
Share-based compensation
Refer to tutorial letter 103 of MAC4861, study unit 2.1.
Summary
In this study unit we focussed on further aspects related to performance measurement. We studied
both short- and long-term performance measures.
Assessment / self-assessment
Ensure that you can describe the following concepts briefly in a paragraph:
1.
2.
3.
4.
5.
6.
Economic performance
Economic value added
Managerial performance
Return on capital employed
Return on investment
Residual income
Enrichment activity
Google the term ‘Economic value added’ and read about a local company that employs it. You can
also look it up in Wikipedia at http:/www.wikipedia.org.
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STUDY UNIT 5.2
Transfer pricing in divisionalised companies
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for the topic of transfer pricing. If not, please refer
to your undergraduate and advanced study material and revise the following indicated pages of the
textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Drury 9th ed.
Before studying this topic, you should be
able to:
Applicable references:
Chapter 20:
Applicable references:
Chapter 20:
•
•
•
Drury pages 509 – 510
Drury pages 511 – 518
Drury pages 518 – 521
Drury pages 526 – 527
Drury pages 527 – 535
Drury pages 535 – 538
Drury pages 521 – 523
Drury pages 523 – 525
Drury pages 526 – 532
Drury pages 538 – 539
Drury pages 539 – 541
Drury pages 543 – 549
•
•
•
Discuss the purpose of transfer pricing
Apply alternative transfer pricing methods
Consider proposals for resolving transfer
pricing conflicts
Recommend domestic transfer pricing
Evaluate international transfer pricing
Discuss the economic theory of transfer
pricing
Introduction
In your prior learning various methods that can be employed in determining internal transfer pricing,
achieve organisational objectives and the general goals of transfer pricing were discussed. In this section
we shall focus primarily on resolving transfer pricing conflicts, setting international transfer pricing and
finally, setting transfer prices when there is no external market for the intermediate product.
Study
•
•
•
•
Proposals for resolving transfer pricing conflicts
Domestic transfer pricing recommendations
International transfer pricing
Appendix 20.1: Economic theory of transfer
pricing
8th ed.
Drury pages 518 – 521
Drury pages 521 – 523
Drury pages 523 – 525
Drury pages 526 – 532
9th ed.
Drury pages 535 – 538
Drury pages 538 – 539
Drury pages 539 – 541
Drury pages 543 – 549
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Focus notes
Goals of transfer pricing system:
• To motivate the divisional managers to make decisions to the advantage of the company or group as
a whole (goal congruence).
• To ensure that each division’s performance is reasonable, measurable and comparable (achieve
equity).
• The system should be simple to operate and administer.
• The managers should still have the ability to make autonomous decisions and enter into negotiations
with each other.
• If possible, healthy competition between divisions should be encouraged by the transfer pricing
system.
Rule of thumb:
The following ‘rules of thumb’ may be applied when a question asks for the calculation of a transfer price
that will lead to goal congruence within the company:
1.
Minimum transfer price (that the supplying division will accept).
o
o
2.
Maximum transfer price (that the receiving division would pay)
o
3.
If there is an external market to buy from, the transfer price should be the Market price less
savings on selling and transport expenses
The maximum negotiated profit
o
4.
The minimum transfer price should comprise the incremental cost (usually variable cost plus
any increase in fixed costs) and opportunity cost.
Opportunity cost exists only if there are sacrificed external sales due to the internal transfer
of goods (and is the contribution thus lost).
This refers to the incremental profit that would be made by the receiving division on the
ultimate sale of the goods.
The Negotiated transfer price (normally obtained through negotiation between selling and
buying divisions)
• It should lie between the minimum and maximum prices calculated.
• Range of Acceptable transfer prices:
The Upper limit (determined by the buying division)
Lower limit (determined by the selling division)
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MAC4862/102
Advantages of negotiated transfer prices:
• Negotiated transfer prices preserve the autonomy of the divisions, which is consistent
with the spirit of decentralization.
• The managers negotiating the transfer price are likely to have much better information
about the potential costs and benefits of the transfer than others in the company.
Behavioural implications of transfer pricing
The selling division may refuse to supply due to the following:
• The price offered not being able to cover marginal cost (where marginal cost pricing is
used).
• The price offered not being able to cover full costs (where full cost pricing is used).
• The price offered not being able to give the supplying division optimum profitability (where
market related prices are used and divisional performance is judged on profitability).
• Failure to agree a negotiated price.
The buying division may refuse to take supply due to the following:
• The price charged is considered excessive.
• In cost based approaches this may be due to disputes relating to the supplying division’s
cost structure or the size of the mark – up.
• In market based approaches there may be disputes as to the quantum of the discounts
for cost savings related to internal transfers.
Activity 1 - Transfer based on different cost bases
Attempt question:
8th ed: (Drury Student Manual) Question 20.1
9th ed: (Drury textbook) Question 20.19
Feedback 1: Question 20.1 (8th ed.)
The standard variable cost is core to the transfer price. The initial 3 methods all yield the same total
(organisation) profit.
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Activity 2 - Transfer price and bonus
Attempt question: (Drury Student Manual)
8th ed: Question 20.5
9th ed: Question 20.7
Feedback 2
Residual income used to measure performance. Consider the ‘what-if’ scenarios carefully.
Summary
In this study unit we looked at the purposes of a transfer pricing system, proposals to resolve conflict
and the recommendations in respect of domestic and international transfer pricing.
Assessment / self-assessment
Ensure that you can
1.
2.
3.
Motivate a recommended transfer price
Apply transfer price principles to different cost bases
Distinguish between domestic and international transfer prices
Enrichment activity
Visit the JSE Industrial Sector companies’ annual financial statements and read about their application
of transfer prices.
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PART 3 – Information for decision-making
PART 3 PURPOSE
The purpose of part 3 is to enable students to have a critical and informed understanding of the key
terms, rules, concepts and established principles of collecting and using information in making shortterm decisions.
DEEL 3 DOEL
Die doel van deel 3 is om studente in staat te stel om ‘n kritiese en ingeligde begrip van die
sleutelterme, reëls, konsepte en gevestigde beginsels van die insameling en gebruik van inligting in
die neem van korttermynbesluite te hê.
Topics
6.
Decision-making under conditions of risk and uncertainty
7.
Information application to decisions
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PART 3, TOPIC 6 – Decision-making under conditions of risk and
uncertainty
TOPIC 1 LEARNING OUTCOMES
After studying this topic, you should be able to:
•
•
•
•
•
•
Have a critical understanding of key concepts, rules and established principles of decisionmaking.
Explain the meaning of the terms of standard deviation and coefficient of variation as
measures of risk and outline their limitations
Describe and calculate the value of perfect and imperfect information.
Explain and apply the maximin, maximax and regret criteria
Explain the implications of pursuing a diversification strategy
Apply the principles of decision-making.
ONDERWERP 1 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om:
•
•
•
•
•
•
‘n Kritiese begrip van die sleutel konsepte, reëls en gevestigde beginsels van besluitneming
te hê.
Die betekenis van die terme standaard afwyking en koëffisiënt van variansie as maatstawwe
van risiko te verduidelik en hul beperkings te kan omlyn.
Die waarde van perfekte en nie-perfekte inligting te omskryf en bereken.
Die maximin, maximax en berou kriteria te verduidelik en toe te pas.
Die implikasies van die navolg van ‘n diversifikasie strategie te verduidelik.
Die beginsels van besluitneming toe te pas.
STUDY UNIT
Study unit 6.1 Decision-making under conditions of risk and uncertainty
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STUDY UNIT 6.1 – Decision-making under conditions of risk and uncertainty
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for decision-making under conditions of risk and
uncertainty. If not, please refer to your undergraduate and advanced study material and revise the
following indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Before studying this topic, you should be able Applicable
to:
references:
Chapter 12:
Drury page 279 - 280
Define risk and uncertainty.
Calculate probability distribution and expected
Drury page 281 - 282
value.
Drury page 282 - 283
Measure the amount of uncertainty/risk.
Drury page 283 - 284
Describe individuals’ attitudes to risk.
Establish the buying of perfect and imperfect
Drury page 286 - 287
information
Drury page 287 - 289
Calculate maximin, maximax and regret criteria.
Drury 9th ed.
Applicable
references:
Chapter 12:
Drury page 287 - 288
Drury page 289 - 290
Drury page 290 - 291
Drury page 291 - 293
Drury page 294 - 295
Drury page 296 - 297
Introduction
In prior learning the impact of risk and uncertainty in business-decision making was examined. It was
also mentioned that business decisions are influenced by managerial subjectivity as managers
normally draw from their expert knowledge, past experience and existing situations likely to impact on
future events due to the uncertain business environment. In this section we shall look at how the
principle of probability theory enables management to consider the degree of uncertainty associated
with each course of action when making business decisions. We shall also describe and calculate the
value of perfect information, and finally explain the diversification strategy.
Study
•
•
•
•
Measuring the amount of uncertainty
Buying perfect and imperfect information
Maximin, maximax and regret criteria
Risk reduction and diversification
Drury 8th ed.
Drury 9th ed.
Drury page 282 - 283
Drury page 286 - 287
Drury page 287 - 289
Drury page 289
Drury page 290 - 291
Drury page 294 - 295
Drury page 296 - 297
Drury page 297
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Focus notes
•
•
•
•
The concept of expected value considers a range of possible outcomes rather that a single
estimate. It involves multiplying each outcome (say projected sales level) by its associated
probability (likelihood that it will occur).
The standard deviation calculates the degree of variability in the possible outcomes.
Though expected value, standard deviation and coefficient of variation sum up the characteristics
of alternative courses of action, these measures do not provide the decision – maker with all the
relevant information as does the probability distribution.
When it is difficult to assign reasonable probability to possible outcomes, management may
employ the “maximin, maximax and regret” criteria to make decisions.
Activity 1
Calculating a portfolio return (expected value), standard deviation and coefficient of variation.
Consider the following:
State of
economy
Probability of
State of
Economy
Rate of
return
Share A
Rate of return
Share B
Rate of return
Share C
Boom
Good
Poor
Bust
0.15
0.25
0.55
0.05
0.30
0.12
0.01
-0.20
0.45
0.10
-0.15
-0.30
0.33
0.15
-0.05
-0.09
Your portfolio is invested 40 per cent in A and C, and 20 per cent in B.
REQUIRED
Calculate the expected return, standard deviation and the coefficient of variation of the portfolio.
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MAC4862/102
Feedback 1
1.
Calculate the expected return of the portfolio.
State
Prob
Share A
Return
Boom
Good
Poor
Bust
0.15
0.25
0.55
0.05
0.30
0.12
0.01
-0.20
Weighting
(40%)
Return*40%
0.12
0.048
0.004
-0.08
Share B
Return
Weighting (20%)
Return*20
%
Share
C
Return
0.09
0.02
-0.03
-0.06
0.33
0.15
-0.05
-0.09
0.45
0.10
-0.15
-0.30
Weighting
(40%)
Return*40%
0.132
0.06
-0.02
-0.036
Expected value
Portfolio
return
0.342
0.128
-0.046
-0.176
0.0513
0.032
-0.0253
-0.0088
0.0492
Weight*
Prob
4.92%
Calculate the standard deviation (σ) of the portfolio.
2.
State
Probability
Boom
Good
Poor
Bust
3.
Return
Sum
of
weight
returns
0.15
0.25
0.55
0.05
Return
(R)
0.342
0.128
-0.046
-0.176
Portfolio
variances
Squared variances
Weighted amount
R-EV
(R-E)2
(R-E)2 * Probability
0.2928
0.0788
-0.0952
-0.2252
0.085732
0.006209
0.009063
0.050715
0.0128598
0.0015524
0.0049847
0.0025358
0.0219326
14.81%
σ2
σ
Calculate the coefficient of variation (CV)
CV = σ/EV
= 0,1481/0,0492
= 3,01
= 301%
•
The SD measures the dispersion of returns around the expected value (mean). The
portfolio mean is low indicating low variance and thereby low risk.
•
The CV measures the relative amount of dispersion by expressing risk in relation to
the return. In this case for every 1 unit of risk there is more than 1 corresponding
unit of return which indicates low risk.
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Activity 2 - Calculating the value of perfect information
Zabalaza (Pty) Ltd has to choose between its two machines that produce product Z. Machine Zamalek has
low fixed costs and high variable cost/unit and is therefore suited to low volume production. Machine Zozo
on the other hand, has high fixed costs and low variable cost/unit rendering it suitable for high volume
production. The probability distribution for product Z is as follows:
State of production
Probability
Machine Zamalek
Profit
Machine Zozo
Profit
Low
High
0.5
0.5
R100 000
R160 000
R10 000
R200 000
REQUIRED
Zabalaza (Pty) Ltd could acquire perfect information regarding the state of nature by undertaking an
extensive market research. What is the maximum price that the company should pay for this information?
Feedback 2
1. Calculate the expected value of each machine without perfect information.
Machine Zamalek: R130 000 [(0.5*R100 000) + (0.5*R160 000)]
Machine Zozo: R105 000 [(0.5*R10 000) + (0.5*R200 000)]
Machine Zamalek has the highest expected value and will be chosen based on expected
value only (i.e. no perfect information available).
2. Calculate the expected value with perfect information.
R150 000 [(0.5*R100 000) + (0.5*R200 000)]
The calculation uses the highest profit if there is low demand and the highest profit if there
is high demand.
3. Calculate the value of perfect information.
The amount to be paid should be limited to the difference between the expected value with
and without perfect information: R20 000 [R150 000 – R130 000].
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Activity 3
Attempt question:
8th ed: (Drury Student Manual) Question 12.7
9th ed: (Drury textbook) Question 12.18
Feedback 3
Note the use of contribution and the application of capacity constraints.
Summary
In this study unit the calculation of risk indicators, the value of perfect information and risk
diversification was covered.
Self-assessment activity
Ensure that you can describe the following concepts briefly in a paragraph:
1.
2.
3.
4.
5.
Expected value
Co-efficient of variation
Perfect information
Risk diversification
Standard deviation
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PART 3, TOPIC 7 – Information application to decisions
TOPIC 2 LEARNNG OUTCOMES
After studying this topic, you should be able to:
•
•
•
•
Explain the meaning of relevance.
Distinguish between relevant and irrelevant costs and revenues.
Determine the product-mix that will maximize profit when capacity constraints apply.
Explain why the book value of equipment is irrelevant when making equipment replacement
decisions.
• Describe the opportunity cost concept.
• Explain the theory of constraints and throughput accounting.
ONDERWERP 1 LEER UITKOMSTE
Na bestudering van hierdie onderwerp behoort u in staat te wees om:
•
•
•
•
•
•
Die betekenis van relevantheid te verduidelik.
Tussen relevante en irrelevante koste en inkomste te onderskei.
Die produkmengsel wat wins sal maksimaliseer wanneer kapasiteitsbeperkings van toepassing
is, te bepaal.
Te verduidelik waarom die boekwaarde van toerusting irrelevant is wanneer besluite oor die
vervanging van toerusting gemaak word.
Die konsep van geleentheidskoste te verduidelik.
Die teorie van beperkings en deurvoer rekeningkunde te verduidelik.
STUDY UNIT
Study unit 7.1 - Relevant costs and revenues for decision-making
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STUDY UNIT 7.1 – Relevant costs and revenues for decision-making
Prior Learning
This course assumes that students have already mastered the work equivalent to that presented in
Unisa’s preceding postgraduate course, Advanced Management Accounting (‘Advanced’). Please
ensure that you are up to date with the prior learning for relevant costs and revenues for decisionmaking. If not, please refer to your undergraduate and advanced study material and revise the
following indicated pages of the textbook, namely Drury using the page numbers below:
Prior learning
Drury 8th ed.
Before studying this topic, you should be able Applicable
to:
references:
Chapter 9:
Drury page 195
• Describe the meaning of relevance.
Drury page 195 - 196
• Highlight the importance of qualitative factors.
Drury page 196 - 200
• Make special pricing decisions.
• Make product-mix decisions when capacity
Drury page 200 - 203
constraints exist.
• Consider outsourcing and make or buy
Drury page 204 - 207
decisions.
Drury page 207 - 209
• Make discontinuation decisions.
• Determine the relevant costs of direct materials
Drury page 209 - 210
and direct labour.
• Explain the relevant cost information that should
Chapter 10:
be presented in price setting firms for both shortDrury page 227 - 241
term and long-term decisions.
Drury 9th ed.
Applicable
references:
Chapter 9:
Drury page 199
Drury page 199 - 200
Drury page 200 - 204
Drury page 204 - 207
Drury page 208 - 211
Drury page 211 - 213
Drury page 213 - 214
Chapter 10:
Drury page 231 - 245
Introduction
In the previous module we dealt with the measuring of costs and benefits for non – routine decisions
such as, deciding on making a component within the company or buying from an outside supplier, or
introducing a new product and replacing existing equipment were dealt with. It was further mentioned
that in non-routine decisions, only those costs and benefits relevant to the specific alternative courses
of action should be considered. In this section we shall look at the key concept that should be applied
in making product-mix decisions when capacity constraints exist and also discuss equipment
decisions, explaining why equipment book values are irrelevant in such decisions. Finally, we shall
describe the process of maximising operating profit when confronted with bottleneck and nonbottleneck operations, the theory of constraints (TOC).
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Study
Drury 8th ed.
•
•
•
The key concept that should be applied for
presenting information for product-mix decisions
Drury page 200-203
when capacity constraints apply.
Replacement of equipment and the irrelevance of
Drury page 203-204
past costs.
Appendix 9.1: The theory of constraints and
Drury page 212-216
throughput accounting.
Drury 9th ed.
Drury page 204-207
Drury page 207-208
Drury page 216-220
Information explanation
• Relevant cost or benefit - is a future cash flow arising or changing as a direct consequence of the
decision under review.
• Costs and benefits that are independent of a decision are not relevant and need not be considered
when making the decision. Only differential or incremental cash flows should be taken into account.
• Cash flows that will be the same for all alternatives are irrelevant. Cash flows that have already been
incurred are sunk costs and irrelevant for decision-making.
• The total relevant cost of production is usually the variable cost per unit multiplied by the additional units
produced plus (or minus) any change in the total expenditure on fixed costs.
• Committed costs cannot be relevant to a decision that a manager is making now to improve or
maximise profits.
• Fixed Costs are irrelevant costs (Except for such costs as incremental and divisible fixed costs)
• Total Variable Costs: Variable costs are often considered as relevant costs. Committed variable costs
are nevertheless irrelevant to decision making.
Guidelines for determining material and labour relevancy
Material
Purchased in the past
Ordered or received, not yet paid
•
•
No other use at present
Could be sold directly
May be used on another job
Frequently used
Used as a substitute
•
•
•
•
•
Must otherwise be disposed of
•
Sunk cost
Sunk cost (already committed to pay), unless able to
return the goods to the supplier
No value (0)
Net realisable value
Lost contribution (opportunity cost)
Replacement cost
Cost saved by not having to purchase other
material
Opportunity saving
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Labour
Salaried labourers:
•
•
Already working at business = No cost
Work overtime = Overtime cost
Additional labourers / wage workers:
•
•
•
Employ additional labourers = Basic pay
New labourers work overtime = Basic pay plus overtime
Specialised labour (scarce) = Opportunity cost of projects sacrificed
Activity 1 - Revision
Attempt question:
8th ed: (Drury Student Manual) Question 9.13
9th ed: (Drury textbook) Question 9.22
Feedback activity 1
Note the initial requirement of the question 9.13 (8th ed.) for the evaluation of the three options from a
financial perspective. Note the subsequent requirement to evaluate the non-financial aspects.
Activity 2 – Throughput accounting
Attempt questions: (Drury Student Manual)
8th ed: Question 9.14
9th ed: Question 9.14
Feedback activity 2
A sequential approach of profit, profit based on constraints and throughput is followed. This approach
should also be followed in questions where such a detailed requirement was not presented.
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Activity 3 – Pricing
Attempt question: (Drury Student Manual)
8th ed: Question 10.4
9th ed: Question 10.4
Refer also to MAC4861 Tutorial letter 103 for the study material on pricing decisions which is a very
important topic.
Feedback activity 3
Note specifically the approach used based on marginal cost and contribution.
Summary
In this study unit we considered capacity constraints, irrelevance of past costs and throughput
accounting.
Assessment / self-assessment
Ensure that you can apply the following concepts in any given scenario:
•
•
•
•
•
•
•
•
•
•
•
•
Pricing of customized products
Pricing based on target costing
Cost-plus pricing
Customer profitability analysis
Pricing of special orders
Outsourcing
Make- or buy decisions
Discontinuation decisions
Relevance of material and labour
Constraints in business
Throughput accounting
Replacement of equipment
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PART 4 – Integrated self-assessments
As mentioned in the introduction you will now have the opportunity to assess whether you can apply
your technical knowledge of individual topics, in an integrated scenario. We will start with an easier
case study and then progress to a more advanced one.
General Guidelines
You should attempt the case studies under exam conditions. Time yourself.
In real tests, you receive the scenario first and have reading time before receiving the required section.
You should attempt the case studies in this tutorial letter in the same manner.
Read the information in the scenario at least twice
Ensure that you have read every line in the scenario. Remember that you have to use all the
information that is given to you. Read the scenario line by line and highlight important information,
relating this as far as possible to particular topics and principles even though you do not yet know the
content of the required section.
Read the ‘required’ very attentively. Note specifically what you should present in the answer, i.e.:
-
budget, actual or forecast amounts – what advice is required
for the year, month or week
standard or actual
costing basis (variable or absorption)
This is the methodology that you should use for every question that you attempt.
We will now take you through activities to illustrate the approach. You are also advised to work
through as many questions as possible in the Drury Student Manual. Use information encountered for
the first time to build up a data base of ‘info statements’ linked to ‘what to do’s’. This is what you need
to look for when reading a test or examination scenario.
Once you have read and understood the scenario and the ‘required’ you can start answering the
question.
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Activity 1
Attempt question (Drury Student Manual)
8th ed: Question 8.7
9th ed: Question 8.9
Feedback 1
Note the general approach to fixed costs and it’s consequent application. An approach based on
specific fixed costs will follow a different route.
Activity 2
Attempt question (Drury Student Manual)
8th ed: Question 8.8
9th ed: Question 8.10
Feedback 2
Relevancy, expectancy and constraints are the core of this question.
Activity 3
Attempt question: (Drury Student Manual)
8th ed: Question 9.8
9th ed: Question 9.8
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Feedback 3
Consider the layouts and combining with qualitative aspects.
Activity 4
Attempt question: (Drury Student Manual)
8th ed: Question 15.9
9th ed: Question 15.12
Feedback 4
A combination of absorption costing, variable costing and inventory required.
Activity 5
Attempt question: (Drury Student Manual)
8th ed: Question 6.10
9th ed: Question 6.11
Feedback 5
The summaries are based on supporting calculations and a flowchart, all of which should be done
before the final presentation is done.
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Activity 6
Attempt question 18 (South Ltd) in the Question Bank.
Activity 7
Attempt question 20 (Knysna Specialist Suppliers) in the Question Bank.
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TEST 1 (2014)
THIS PAPER CONSISTS OF TWO INDEPENDENT PARTS
QUESTION
40 marks
PART 1
15 marks
ALLROUND ENTERTAINERS (PTY) LTD (ARE)
ARE specializes in a number of entertainment fields, including organizing of rock concerts featuring
international artists. Other activities include hosting road shows for artists and performing normal
agent activities. ARE has grown to a household name and the public looks forward to the annual
concert called the “Big Show”. The venues for these concerts are leased as and when required. The
Operations Manager for ARE is currently planning the Big Show for the year to be held at Loftus
Versfeld stadium (home of the Blue Bulls) on the evening before the Currie Cup rugby final. The
concert is said to showcase some of South Africa’s best local talent and a world renowned Irish band.
Thanks to the latest technology and big screens all over the stadium, all tickets in the stands can be
sold at one price. In addition to the “Stand” tickets there will also be “VIP” tickets for those seated in
front of the stage and in VIP boxes.
Early indications are that the bands will require R22 000 000 appearance fees, which will include the
rights to sell official merchandise at the venue. Currently the venue hire is still under negotiation. As
the rugby teams who will be playing in the final are not yet decided, the venue hire is still not
contracted. Should the Blue Bulls reach the final, the Blue Bulls Rugby Union (BBRU) have agreed to
pay 10% of the venue hire as they will reap future benefits from the marketing of the concert. Should
the Blue Bulls not reach the final the BBRU are obligated to contribute 5% of the venue hire. Currently
betting sites have the Blue Bulls at a 40% probability to reach the final. The venue hire without any
discounts is R2 600 000. ARE has decided to use their own personnel to clean the venue after the
concert, even though BBRU offered to clean the venue for R50 000. ARE offered 30 members of their
staff, plus one friend or partner R200 each per hour to clean up the venue. BBRU indicated that the
venue must be cleaned within 4 hours. ARE decided to sell the rights for the sale of refreshments at
the venue to another local company for R250 000 as part of their community engagement initiative.
The operations manager has made the following estimates per person attending the concert:
Ticket price per person
Security services
Park and ride facilities
Drink and meal voucher
Stand
R
VIP
R
650,00
50,00
0,00
0,00
980,00
50,00
50,00
98,00
Other budgeted fixed overheads relating to the Big Show are R3 800 000.
Note that the security services for the concert will be outsourced at a cost of R50 per person. With the
VIP ticket customers get a drink and meal voucher worth 10% of the ticket price (costing ARE R98)
and a voucher for the VIP customers to park at designated places and use arranged transport to the
stadium (costing ARE R50). The contracted stadium vendors (per earlier note) will sell refreshments
during the concert and will accept the drink and meal voucher as payment. The venue has a capacity
of 52 500 stand tickets and 7 000 VIP tickets to be sold. Market research revealed the following:
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•
•
Indications are that 45 000 stand tickets and 5 000 VIP tickets will be sold at the stated
selling price.
The sales mix of stand tickets and VIP tickets will remain constant, regardless of the
eventual number of tickets sold.
PART 2
25 marks
You are the management accountant of Honey Limited, a company which produces a range of bottled
honey. The company has a large factory situated in the Gauteng area. The honey is purchased from
various beekeepers around Gauteng. Employees at Honey Limited fill three sizes of glass jars with
honey by hand and pack them into special packaging.
Information relevant to Honey Limited for the year ending 31 March 2015
Each of the three products produced in the factory passes through two stages: filling and packing.
Direct labour efficiency standards are set for each stage. The standards are based upon the number
of units expected to be manufactured per hour of direct labour.
Current standards are as follows:
Filling
Packing
Product 1
(units/hour)
Product 2
(units/hour)
Product 3
(units/hour)
32
23
75
25
62
23
Budgeted sales of the three products are:
Product 1
850 000 units
Product 2 1 500 000 units
Product 3
510 000 units
Production will be at the same level each month and will be sufficient to enable finished goods
inventory levels at the end of the year to be:
Product 1 200 000 units
Product 2 255 000 units
Product 3 70 000 units
Inventory at the beginning of the budget year is expected to be:
Product 1 100 000 units
Product 2 210 000 units
Product 3 105 000 units
After completion of the filling stage, 5% of the output of Products 1 and 3 is expected to be rejected
and thereafter destroyed. The cost of such rejects is treated as a normal loss.
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A single direct labour hour rate is established for the factory as a whole. The total payroll cost of direct
labour personnel is included in the direct labour rate. Time spent by direct labour personnel are
budgeted to be divided as follows:
% of total time
Direct work
Holidays (excluding public holidays)
Illness
Idle time
Cleaning
Training
80
7
3
4
3
3
100
All direct labour personnel involved in the filling and packing stages are employed on a full-time basis
to work a basic 35 hour, 5 day, week (due to the strenuous nature of the work). Overtime is to be
budgeted at an average of 3 hours per employee per week. Overtime is paid at a premium of 25%
more than the basic hourly rate of R40 per hour. There are 250 possible working days during the year
which excludes the paid public holidays. You are to assume that employees are paid for exactly 52
weeks in the year.
REQUIRED
PART 1
ALLROUND ENTERTAINERS (PTY) LTD (ARE)
REQUIRED
Marks
(a) Calculate the breakeven (in total only) in terms of number of people attending the
(13)
Big Show.
(b) Calculate the maximum revenue to be earned if the venue is sold out.
(2)
Total
15
PART 2
HONEY LTD
(c)
(d)
(e)
Total
Assist the new manager of Honey Ltd in the preparation of the labour budget by
calculating the following:
(i) The number of full-time direct employees required during the 2015 budget
year;
(ii) The direct labour rate per hour.
Honey Ltd is considering automating the filling process. Briefly discuss five risks
that management should consider.
Briefly discuss factors that are negatively influencing the agricultural industry
generally and the beekeeping industry specifically.
(12)
(4)
(5)
(4)
25
(Unisa adapted)
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MAC4862 – TEST 1 - SUGGESTED SOLUTION (2014)
PART 1
(a)
Calculate the breakeven (in total only) in terms of number of people attending the Big
Show
Fixed cost
Appearance fees
Venue hire*
Discount*
BBRU
(2 600 000 x 10% x 40%)
Other union
(2 600 000 x 5% x 60%)
(4 ^ x 60 ^ x 200 ^) OR (4 ^ x 31 ^ x 200 ^)
Cleaning
Head office
Fixed income
R
22 000 000
2 600 000
-182 000
-104 000
-78 000
48 000
3 800 000
-250 000
Total
28 016 000
(0.5)R/W
(0.5)R/W
(1)R/W
(1)R/W
(1.5) R/W
(1)R/W
(1)R/W
* Alternative for the Venue hire and Discount combined:
(2 600 000 x 90% x 40%) + (2 600 000 x 95% x 60%) = R2 418 000 (2,5 marks).
Marginal income (contribution) per ticket category
Marginal income
Stand
VIP
Sales
650 ^
980 ^
Security
Service
50 ^
50 ^
Parking
50 ^
Drinks
98 ^
Marginal
Income
600
782
(1)R/W
(2)R/W
Expected number of people
Stand
VIP
45 000
5 000
50 000
(0.5)R/W
Weighted average marginal income per person (must be on expected sales mix, not maximum capacity)
= (600 x 45 000)/50 000)  + (782 x 5 000)/50 000)  = R618,20
(2)C
Breakeven (must be correct principle – divide by weighted average)
Fixed cost
Divided by weighted average marginal income per
person
28 016 000
=
618,20
45 319 persons
(1)C
OR
28 016 000/30 910 000 X 50 000 = 45 318.7 ~ 45 319 persons
(1)C
(13)
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ALTERNATIVE
Stand
R
Sales
- 45 000 x 650 ^
VIP
R
29
250 000
Total
R
34 150 000
- 5 000 x 980 ^
4 900 000
Variable costs
Security services
2 500 000
- 45 000 x 50 ^
2 250 000
- 5 000 x 50 ^
250 000
Park and ride
250 000
- 5 000 x 50 ^
250 000
Drink and meal voucher
490 000
- 5 000 x 98 ^
490 000
Total variable costs
3 240 000
OR Summary of variable cost calculations:
Expected no. Variable
Variable
Security
of people
cost x
costs
Service
Parking Drinks Total
people
50 ^
Stand
50
45 000
2 250 000
5
000
990 000
50 ^
50 ^
98 ^
198
VIP
50 000
3 240 000
Total variable costs
Contribution
Contribution = sales – variable costs
= 34 150 000 – 3 240 000
= 30 910 000
Per person:
= 30 910 000/50 000
= 618,20 per person
(0.5)R/W
(0.5)R/W
(0.5)R/W
(0.5)R/W
(0.5)R/W
(0.5)R/W
(0.5)R/W
(1.5)R/W
(2)C (1 each)
(0.5)R/W
ALTERNATIVE
Contribution ratio =
R30 910 000
R34 150 000
Break-even (Rand) =
R28 016 000
0,90512
= R30 952 650
= 90,512%
Weighted average selling price = (R650 x 45 000/50 000) + (R980 x 5 000/50 000) = R585 +R98
= R683
OR
R34 150 000 / 50 000 ^ = R683
(0.5)R/W
Break-even (units) =
R30 952 650
R683 = 45 318,7 ≈ 45 319 persons
OR
(1)C
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ALTERNATIVE
Ratio of tickets per batch: 45 000 : 5 000
9:1
(0.5)R/W
Contribution per batch = (9 x R600) + (1 x R782) = R5 400 + R782 = R6 182 per batch
(2)C
Break-even =
R28 016 000
R6 182
=4 531,87 batches
Persons = (4 531,87 x 9) + (4 531,87 x 1) = 40 786,80 + 4531,87
= 45 318,7 ≈ 45 319 persons
(b)
(1)C
Calculate the maximum revenue to be earned if the venue is sold out
Maximum capacity
Tickets
Stand
VIP
Total
52 500
7 000
59 500
Sales mix (remaining constant as per market research)
Stand = 45 000/50 000 = 90%
VIP = 5 000/ 50 000 = 10%
Tickets
53 550
5 950
59 500
Stand: 59 500 x 45 000/50 000
VIP: 59 500 x 5 000/50 000
Total
(0.5)R/W
(0.5)R/W
Constraint
Stand capacity = 52 500
(0.5)R/W
Maximum revenue when venue is sold out
R
Stand: 52 500 x R650
VIP: ((52 500/0,9 ^) – 52 500) x R980 ^
Maximum revenue from ticket sales
Sale of refreshment rights
Total maximum revenue
34 125 000
5 716 340
39 841 340
250 000
40 091 340
(0.5)C
(1)R/W (0.5 each)
(0.5)R/W
Total (3.5)
Max (2)
If expected sales mix and constraint issue not picked up – MAX 1
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PART 2 – HONEY LTD
(c)
Preparation of the labour budget
(i)
The number of full-time direct employees required during the 2015 budget year
Calculate number of units to be produced
Product 1
Sales
850 000
Closing inventory
200 000
Opening inventory
(100 000)
950 000
Production units packed
Normal spillage (packed x
5/95)
50 000
Production units filled
1 000 000
(packed x 100/95)
Product 2
1 500 000
255 000
(210 000)
1 545 000
Product 3
510 000
70 000
(105 000)
475 000
1 545 000
25 000
500 000
(3) r/w (1 each)
(1) r/w (½ each)
Calculate direct labour hours needed for production
Product 1
Product 2
Product 3
(A)
(B)
(A/B)
1 000 000
32
31 250
1 545 000
75
20 600
500 000
62
8 065
(1½)c
Packing units
(A)
Number per hour (B) (B)
Hours
(A/B)
950 000
23
41 304
1 545 000
25
61 800
475 000
23
20 652
(1½)c
Filling units
Number per hour
Hours
Total direct labour hours = 31 250 + 20 600 + 8 065 + 41 304 + 61 800 + 20 652 = 183 671 hours
Calculate total labour hours needed
=
=
183 671 / 0,8
229 589 hours
(1)c
Calculate total labour hours per employee per year
Hours per week
Working weeks
=
=
35 + 3
38 hours
(½)r/w
=
=
250 days ÷ 5 days per week
50 working weeks
(½)r/w
Total labour hours per employee per year
=
=
38 x 50
1 900 hours
(1)r/w
Calculate number of employees
=
=
=
229 589 / 1 900
120,84
121
Maximum
(1)c
(12)
(1)c
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(c)(ii) Calculate total payroll costs
R
Basic:
(121 x 35 hours x 52 weeks x R40) 8 808 800
Overtime:
(121 x 3 hours x 50 weeks x R50)
907 500
Total payroll cost
9 716 300
(1)c
(2)c
For overtime we use 50 weeks as employees can only be paid overtime for working weeks
Calculate direct labour rate
= Total payroll costs ÷ total direct labour hours
= R9 716 300 ÷ 183 671
= R52,90
Total
(d)
•
•
•
•
•
•
•
•
(1)c
(4)
Risks relating to automating the filling process
Employees may have to be retrenched.
– This could lead to high retrenchment costs for the company.
– The negative social consequences and decreased employee morale could
also impact negatively on the company’s reputation.
The quality of the automated filling could be lower, resulting in an increase in
the rejection rate and consequential increase in cost.
The costs related to the new machinery are fixed and cannot be reduced if
demand were to drop whereas labour costs could possibly be reduced in the
medium to long term. The new machinery will result in higher depreciation.
There could be a large amount of unused capacity initially after the installation of
the new machinery resulting in higher cost per unit.
Unforeseen additional operating costs could arise as a result of the new
machinery e.g.
 additional staff to maintain the machinery or a maintenance contract
with a third party;
 exorbitant electricity price increases.
Debt/Equity and/or Gearing ratios and/or liquidity could be negatively impacted
by the financing of the new machinery.
Insufficient safety measures could be in place resulting in employee injuries
and/or loss of production and/or additional wastage
Any other valid point (max 1)
(1)
(1)
(1)
(1)
(1)c
(1)
Max (1)
operating
cost
Total
Maximum
(1)
(1)
(1)
9
(5)
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(e)
Briefly discuss factors that are negatively influencing the agricultural industry generally
and the beekeeping industry specifically.
General factors affecting agricultural industry
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Shortage of skilled labour / knowledge
Increase in costs – transport (diesel, petrol) and labour
Competition from cheap imports
Food safety / health standards and quality standards – additional costs to ensure
compliance. Risk of non-compliance.
Lack of financial support for emerging beekeepers / small farmer development /
BEE
Specific factors affecting beekeeping industry
Threats to food sources (forage sites): Global warming resulting in unusual
weather patterns. Droughts, fires and floods can deplete the food sources (forage
sites) for bees.
Threats to bee hives:
 Fires and floods can damage hives and kill the bees.
 Pests and diseases. Certain diseases require that the hive be destroyed.
Sustainability: Need a minimum number of beehives (at least 100) to be selfsufficient and sustainable.
Safety: Strict safety precautions have to be taken to prevent workers being stung by
the bees. Any serious injuries or deaths of workers or passers-by could have negative
financial and reputational consequences for the beekeeper.
Security measures e.g. guards, fences. Hives are damaged by wild animals
(badgers, ants) and human thieves and vandals.
Pesticides sprayed by farmers could kill the bees.
Invasion of hives by Cape honeybees.
Access to suitable forage sites to place the hives. Sites must be close to plenty of
water and crops or vegetation that are suitable for pollen and nectar collection.
Many invasive alien plants (eucalyptus trees) have been removed, reducing the
forage sites for beekeepers.
Total
Maximum
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
14
(4)
Note to markers: Students can only get one mark (not two) if the same or similar factor is
mentioned under both “General factors” and “Specific factors”.
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MARKERS’ COMMENTS
Part 1 (a): Break-even – number of people attending
Many students made a list of all expenses without distinguishing between fixed and variable
expenses. Please take note that no marks will be awarded in the exam if no distinction is made
between fixed and variable costs in break-even calculations.
Discount – students did not realise that they should’ve calculated the probabilities or they didn’t know
how to calculate it.
Fixed income with the nature of a by-product – was not deducted from fixed cost but added to it, or
was ignored.
Weighting – students used the maximum capacity of the venue instead of the expected sales mix to
calculate the weighted average marginal income per person. Many simply calculated the average
contribution, thus ignoring the weights.
Break-even – different approaches were used. Please see the solution for the allowed approaches.
Students tended to calculate the contribution ratio and break-even point in Rand, but then stopped
there and didn’t calculate per unit. Please read the required sections very carefully.
Part 1 (b): Maximum revenue if venue is sold out
The vast majority of students failed to identify that the maximum capacity was not in the expected
sales mix. Very few realised that they should apply the expected sales mix to the maximum capacity
and that there then was a constraint on the number of stand tickets available. Information in the
question needs to be read more thoroughly.
PART 2
Part (c) Number of full-time direct employees required
Many students do not know how to calculate production units (sales + closing inventory – opening
inventory). Most students do not know how to account for units rejected and destroyed (normal loss)
and they subtract 5% from units produced instead of multiplying by 100/95.
Some students incorrectly added together the filling and packing units per hour and calculated the
total hours required per product. Units rejected and destroyed will only affect filling and therefore the
filling and packing hours required should be calculated separately.
Many students did not take into account that workers are only 80% productive.
Part (d) Risks relating to automating the filling process
Students generally answered this part well.
Part (e) Negative factors in the agricultural and beekeeping industry
Students generally answered this part well.
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TEST 2 (2014)
This question consists of two independent parts.
PART A
Siamese Ltd is a manufacturing company that produces electronic chips and carries out its business
using two strategic divisions, Seal and Point. The process initiates in the Seal division, which produces
an incomplete product “Ying”. Product Ying is then transferred to division Point for further and final
processing to yield the product Yang. The intermediate product, Ying has a demand and market
outside the company, but this product is mainly used by division Point which has first option on division
Seal’s output. For each unit of Yang, two units of Ying are required in production.
The maximum processing capacity per annum for each division is:
Seal
Point
143 000 units of Ying
55 000 units of Yang
The budgeted activity for Seal of 110 000 units per annum is considered normal capacity, and each
division maintains a stable level of inventory throughout the year.
The company has projected the four different scenarios shown below:
Scenario
Number
1
2
3
4
Product Ying
Market price Total demand
(R per unit)
(’000 units)
66
55
77
77
Product Yang
Market price Total demand
(R per unit)
(’000 units)
110
77
143
143
220
198
198
253
44
33
33
33
Standard cost per unit of Yang:
Variable cost*
R 26,40 (excluding two units of Ying)
* Direct materials cost included above
Fixed overhead cost
Based on budgeted volume
(units per annum)
R 8,80
R 39,60
44 000
The production of one unit of product Ying requires the following:
Material – Elec
Material – Tronic
Labour hours per unit
Variable overhead costs are absorbed using labour
hours
Fixed overhead cost are absorbed using labour hours
10g
20g
9 minutes
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The average market price at time of purchase were R351,50 per kg for Elec and R484,50 per kg for
Tronic. The purchasing manager acquired 1 200kg of Elec at R426 000 and 2 400kg of Tronic at
R1 188 000 during the period. The output of 110 000 units was achieved by using 1 150 kg of Elec
and 2 195 kg of Tronic. During the period the division actually incurred variable costs of R3 256 000
that resulted in a rate of R185 per labour hour. The manager in charge was also concerned about the
overall fixed costs of R1 300 000 incurred during the period and a detailed analysis of the variances is
being investigated.
The report for the Seal division (Product Ying) was as follows:
Material mix
Material yield
Material purchasing planning - Elec
Material purchasing planning - Tronic
Material purchasing efficiency - Elec
Material purchasing efficiency - Tronic
Variable overhead costs
Fixed overhead cost – expenditure
Fixed overhead cost – capacity
Fixed overhead cost – efficiency
R4 725
R19 800
R1 800
R1 200
R4 200
R25 200
R206 800
R112 000
R79 200
R79 200
Favourable
Adverse
Adverse
Favourable
Adverse
Adverse
Adverse
Adverse
Favourable
Adverse
PART B
Bill Job is the production manager at Technical Industries Ltd (TIL). TIL is active in the technology
production market where it manufactures amongst others an upmarket range of alarms and security
camera units. The company has been active for the past 27 years and considers itself to be the leader
in its field.
During the current security boom the company experienced tremendous growth and realised excellent
profits. At present production is at 90% capacity. Inventory is sold in less than a month after it is
assembled.
Bill received an offer to tender from one of the big five contractors constructing the new convention
centre in Tshwane which, based on the infrastructure size and finishes will be the best in the whole of
Africa. In accordance with the unique design of the convention centre, a new style/model of security is
required. The convention centre management insists on the exclusivity of the product. This specific
camera must only be made for them and an undertaking must be given that no cameras of this
particular style/model will be sold by TIL in future.
Bill requested your assistance in preparing the tender for 3 000 new cameras. During your last
meeting with him the following notes were made:
1.
The company will have to work overtime in order to supply the cameras. The overtime rate is
50% more than the normal wage rate of R150 per hour. Additional space will be required for this
order although no such facilities are in place at present and the special cameras will also require
extra manual assembly time as well as a plastic film to protect the outside.
2.
It is estimated that the labour required for the production of one camera is 3,3 hours.
3.
The production process requires the cameras to be assembled within a magnetic free ‘box’,
purpose-built for this industry. These boxes are currently not in use. Depreciation for the boxes
amounts to R3 850 per month.
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4.
One camera will require 5 components. There are 7 700 components of material in inventory at
present. All cameras require these components in the manufacturing process. The current
inventory was imported when the Rand was stronger than it is now. The last batch was imported
at a total cost of R1 650 per 1 000 components. Currently the same product can be imported at
R1 815 per 1 000 components. These components are used regularly in production.
5.
Special assembly equipment will be needed for this project. It will have to be imported from
England and the estimated cost will be R76 230. The expected life of this equipment is three
years.
6.
Special connectors are required for the new cameras. They can only be bought in bulk but a
relatively small amount will be required in the assembly process. The cost of the connectors will
be R26 400. At the end of the project the remaining connectors will be sold for an estimated
R16 500.
7.
Bill has found suitable premises across the road from the current factory premise. The premises
require upgraded lighting at a cost of R18 150 and paint and cleaning at a cost of R1 650.
8.
In order to secure the premises, a rent deposit of R22 000 will have to be paid. The monthly
rental charge for the new premises will be R25 300 per month and the project will be running for
six months. A six-month contract is acceptable to the rental agent.
9.
The variable manufacturing overhead at present is absorbed at R99 per camera.
10.
The fixed manufacturing overheads at present are R38,50 per camera. Total fixed overheads will
not be influenced by the tender.
11.
Laz Mckintosh will be transferred from his current job to be in charge of the assembly process.
His salary is R16 500 per month, and he will return to his present position after the project has
ended. His current position will not be filled during the duration of the project.
12.
Five new quality controllers and packers will have to be appointed for the duration of the project
on a contract basis and will each be earning a salary of R9 350 per month.
13.
Half of the plastic film required for the tender is in inventory. The original cost price was R38 500
but it was written off during the last annual audit. The cost of additional plastic film required will
be a further R52 800.
14.
Bill is of the opinion that the new project will have to bear its portion of a management fee
charged to all product lines. He calculated that it should be in the region of R2 750 per month.
15.
It is the company’s policy to mark up its products by 50% to arrive at a selling price. VAT at 14%
is then added to the selling price for invoicing purposes. Management is concerned that the
tender may be awarded to foreign suppliers.
16.
The construction contractor’s representative has indicated that he will be able (on behalf of the
construction company) to give TIL accurate estimates of other companies submitted tender
prices. In return a number of all-inclusive packages to the soccer world cup in Brazil has been
suggested.
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REQUIRED
PART A
REQUIRED
(a) Assuming division Seal has adopted absorption costing; reconstruct the standard cost
card for product Ying.
(b) Assuming that division Point receives an overseas order for 22 000 units of Yang
that will in no way influence its other clientele, to recommend, with supporting
calculations, acceptance or refusal of the order under each of the following two
scenarios as set out on page 2:
Scenario 2 Price/unit - R121 (transfer price based on absorbed standard cost);
Scenario 3 Price/unit - R143 (transfer price based on market price);
(i)
(ii)
(c)
(5)
(3)
(3)
Assuming that no market price for product Ying existed:
(i)
(ii)
(d)
as manager of division Point;
as managing director of the company.
Marks
calculate a transfer price for product Ying (using scenario 1), explaining the
reasoning behind the calculation;
calculate what profits would result for each division from using that transfer price
under scenario 1 (using the figures in respect of product Yang only).
(3)
(3)
Explain the following to senior management, who are interested in finding a suitable
alternative performance measure:
•
•
Total
What is meant by the term Economic Value Added (‘EVA’)
How is EVA similar to the residual income performance measure?
(1)
(2)
20
PART B
REQUIRED
(e) Determine the price that should be included in the tender document by using relevant
Marks
costing. Indicate all costs that should not be considered as well as the reasons for this.
(f) Identify and discuss other relevant factors that should be considered by Bill Job in
deciding whether to tender or not, with specific reference to:
 The special camera
 Production environment and
 Working capital
(½ mark per relevant factor)
Communication skills – appropriate style
(g) Briefly discuss the cost and ethical implications of the construction company
representative’s proposal.
Communication skills – logical argument and structure
Total
(10)
(4)
(1)
(4)
(1)
20
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MAC4862 (2014)
TEST 2 - SUGGESTED SOLUTION
PART A
(a)
Standard cost card
Raw material – Elec
Purchase plan variance: R1 800 A = 1 200kg (SC – R351,50)
∴ SC = R350 per Kg
Raw material – Tronic
Purchase plan variance: R1 200 F = 2 400kg (SC – R484,50)
Other variable costing
∴ SC = R485 per Kg
R206 800A = R3 256 000 - SC ×
9min
×110
60min
∴ SC = R184,80 per labour hour
SC per unit =
R184,80
60min
000 units
× 9 min
= R27,72 per unit
Alternative:
(R3 256 000 – R206 800)/110 000
= R27,72 per unit
Budgeted labour hours =
9min
×110
60min
000 units
= 16 500 hours
Fixed cost expenditure variance
R112 000A = R1 300 000 – BFC
∴ BFC = R1 188 000
BF absorption rate per labour hour =
R1 188 000
16 500 hrs
= R72 per labour hour
Absorption rate per unit =
R72
×
60min
9min
= R10,80 per unit
Alternative:
R1 188 000 / 110 000
= R10,80 per unit
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The standard cost card of product Ying:
Material – elec 10g at R350/kg
Material – tronic 20g at R485/kg
Other variable costs
Fixed costs
Standard cost per unit
(b)(i)
3,50
9,70
27,72
10,80
51,72
(1)R/W
(1)R/W
(2)R/W
(2)R/W
__
Maximum 5
As manager of division Point
R
Absorbed standard cost of division Seal
Variable
Fixed
Transfer price of Ying
R
40,92
10,80
51,72
(1)C
121,00
103,44
26,40 129,84
(8,84)
(1)C
Scenario 2
Price per unit
Transfer cost: 2 x R 51,72
Variable cost in division Point
Loss per unit
Refusal of the order is recommended
Scenario 3
Price per unit
Transfer cost 2 x R77 market price
Variable cost in division Point
Loss per unit
Refusal of the order is recommended.
(ii)
(1)C
143,00
154,00
26,40 180,40
(37,40)
(1)R/W
(1)C
Maximum 3
As managing director of the company
The managing director will only be concerned with relevant costs, that is those costs which are
incremental for the company.
(1)
Scenario 2
Under this scenario division Seal has sufficient capacity to produce the 44 000 units of Ying
required for the order without displacing external sales.
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R
Price per unit
Relevant cost to the company
2 x R40,92 (incremental cost to the company)
Variable cost in division Point
Profit per unit
R
121,00
81,84
26,40
108,24
12,76
(1)C
Acceptance of the order is recommended.
(1)C
Scenario 3
Under this scenario, division Seal is already working at full capacity. The relevant cost of Ying
transferred to division Point for this order is therefore the sales value of external sales forgone (R77).
R
Price per unit
Relevant costs
2 x R77
Variable cost in division Point
Loss per unit
R
143,00
154,00
26,40
180,40
(37,40)
Refusal of the order is recommended.
(c)
(1)R/W
(1)C
Maximum 3
Bearing in mind the behavioural aspects of transfer prices, the optimum solution is one which
results in each division being credited with a fair proportion of the eventual profits earned on the
units transferred internally.
With the data available, the best method is to set the transfer price so that each division is
rewarded with profit in proportion to the costs incurred in the division. The variable cost
structure of each division appears to be similar, since the direct material costs for Seal and Point
are respectively 32% and 33% of total variable cost.
(i)
Using scenario 1, the profit earned on 44 000 units of Yang is as follows:
R
Sales revenue
Costs incurred
Division Seal
Variable
Fixed
Division Point
Variable
Fixed
Profit
R220 x 44 000
9 680 000
88 000 x R40,92
110 000 x R10,80
3 600 960
1 188 000 4 788 960
44 000 x R26,40
44 000 x R39,60
1 161 600
1 742 400 2 904 000
(1)R/W
(1)C
7 692 960
1 987 040
(1)R/W
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R
Division Seal share of profit, in proportion to costs incurred
4 788 960
7 692 960 x R1 987 040
Total costs of Ying transferred
Transfer value to be credited to division Seal
=
1 236 956
4 788 960
6 025 917
÷ 88 000 units
R68,48 per Ying
Say R68,50 per Ying
Maximum
(ii)
Division Seal
(2)C
(1)C
(1)R/W
(1)C
3
R
Transfer value of 88 000 units x R68,50
Less total costs (from b(i))
Profit
6 028 000
4 788 960
1 239 040
(1)C
(1)C
9 680 000
(1)R/W
8 932 000
748 000
(1)C
Division Point
Sales value 44 000 units x R220
Costs
Transfer charges from division Seal
Division Point costs (from b(i))
Profit
6 028 000
2 904 000
__
Maximum 3
(d)
Economic value added
•
•
•
•
The difference between what investors put into the company as capital and what they
could get out by selling at today’s market price.
(1)
The difference between the total market value of equity plus debt and total capital (MVA).
(1)
The amount by which the Net Operating Profit after taxes (cash profit) exceeds the capital
charge.
(1)
The market value of a company less its book value.
(1)
Maximum (1)
Similarities with RI
•
•
•
•
•
According to Vigario, EVA is ‘RI by another name’.
(1)
It is similar to RI in that it is a performance measurement tool.
(1)
It uses basically the same formula as RI, i.e. (Cash) Profit – (Capital x Cost of Capital%)
(1)
It uses the cost of capital of the company to calculate the capital charge.
(1)
The answers to both measures are in Rand-terms, making comparison between
companies and divisions difficult.
(1)
Maximum (2)
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PART B
(d)
Calculation of minimum price to be included in tender document
Per unit
R
Total cost
R
742,50
2 227 500
(1)R/W
1/2
Labour cost of assembling
(3 000 units x 3,3 x R150 x 1,5)
3.
Depreciation of boxes
According to IAS16 assets are depreciated although they are not used.
This is already included in the total costs of the company and therefore
not relevant.
-
-
(½)R/W
4.
Components
3 000 cameras required, 1 camera needs 5 components. Thus 15 000
components required. 7 700 components in inventory. We need to buy
7 300 components. However, used components must be replaced.
Original purchase price is a sunk cost. Use latest, replacement cost.
(15 000 x R1 815 / 1 000 components)
9,08
27 225
(1)R/W
5.
Assembly equipment
Written off over production units as product is unique.
(76 230 / 3 000)
25,41
76 230
(1)R/W
6.
Special components.
Net cost is ((R26 400 – R16 500)/3 000)
3,30
9 900
(1)R/W
New lighting (R18 150 / 3 000)
6,05
18 150
(½)R/W
Paint and cleaning (R1 650 / 3 000)
0,55
1 650
(½)R/W
7.
8.
Rental deposit will be returned.
Monthly rentals ([R25 300 x 6] /3 000)
50,60
151 800
(½)R/W
(½)R/W
9.
Variable manufacturing overheads (3 000 x 99)
99,00
297 000
(½)R/W
10.
Fixed manufacturing overheads – do not change, thus not relevant.
-
-
(½)R/W
11.
Salary Laz McKintosh – not replaced, not incremental
-
-
(½)R/W
12.
Salaries for new assemblers ([R9 350 x 5 x 6] / 3 000)
93,50
280 500
(1) R/W
13.
Plastic Film
Inventory = written off (and presumable no other use)
Plastic film required (cost of R52 800)
17,60
52 800
(1) R/W
(1) R/W
1 047,59
523,79
1 571.38
219,99
1 791,37
3 142 755
1 571 378
4 714 132
659 979
5 374 111
(½)R/W
Maximum
10
14. Management fee – allocated cost, not relevant
Total cost per camera
Profit of 50% of cost
Base selling price to be used for tender
Plus 14% VAT
Invoice price
(1)C
(1)C
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(f)
Other factors to be considered by Bill Job
The special camera
•
•
The policy of the company regarding selling unique and exclusive products.
What guarantees will have to be given on the cameras?
(½)
(½)
Production environment
•
•
•
•
Working overtime for long periods could adversely affect staff. This could also
have an effect on current production and standing orders.
Are there any time constraints in the offer to tender that could have an
influence on current production?
Availability of quality controllers.
Are there back-up alternatives for premises and at what cost?
(½)
(½)
(½)
(½)
Working capital
•
The uncertainty of selling the unused special connectors.
(½)
•
Cash flow implications of the tender. Technology Industries is a subcontractor.
(½)
•
Will the premises be available until the tender is awarded? If not, early cash
payment (deposit) may be lost if tender is not won. (liquidity)
(½)
•
Any other valid point.
(½)
Maximum (4)
Communication skills (Points raised are full sentences and relate to the headings)
(1)
5
(g)
Cost and ethical implications of the construction company representative proposal
Cost implications
•
•
•
The costs of the (all-inclusive) tickets to the World Cup in Brazil are relevant.
(1)
The cost is a relevant cost in terms of the decision-making process as there will be
cash expenditure.
(1)
The cost is ‘legal’ in terms of taxation as it will be incurred in the generation of income. (1)
Ethics implications
•
If this proposal is against the company’s Code of Conduct, it should be reported
(IA or Board or Chairperson).
(1)
•
King III states that behaviour towards internal and external stakeholders should
reflect the company’s ethical Standards (Chapters 1 and 7), whilst following the offer will in
all likelihood be construed as a bribe.
(1)
•
In terms of good governance communication, the company should consider
communicating the offer to the final client, as it may indicate lack of internal control in all
parties.
(1)
Max 4
Layout split into cost and ethics
1
5
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MAC4862 – TEST 2 (2014)
MARKERS’ COMMENTS:
General
Test 2 covered cost accounting topics. The concept of standard costing, transfer pricing, economic
value added, relevant costing and factors, as well as ethics was tested. Approximately 2 422 students
wrote the test with an average mark achieved of 38%. This indicates that students have not allocated
sufficient time to do examples for management accounting, as the theory as well as a practical
application of theory was required, which could only be achieved after much study and attempting
many questions and analysing the suggested solution.
As a level 2 CTA student, you should guard against compartmentalisation and you should really start
to focus on the integration between the various topics.
PART A (Marks 20)
(a)
Reconstruction of the standard cost card for product Ying
(5 Marks)
This was a simple calculation which most students were unable to perform as they were required to
work back to a standard cost given the variance and the actual price/cost using mathematical
principles as opposed to simply calculating the variance.
By having a better knowledge and understanding of standard costing this can easily be corrected.
(b)
Acceptance or refusal of product Yang order given Scenario 2 and 3 as either manager of
Division Point or managing director of the company
(6 Marks)
Most students only managed to obtain one or two marks here as not only were the basic concepts of
transfer pricing not known but the application was not even correctly attempted. Important to notice
was the different transfer prices required for each scenario, namely, absorbed standard cost for
scenario 2 and market price for scenario 3.
The following brief explanation should assist you.
Transfer prices refer to the prices set on goods or services transferred between two departments or
subsidiaries of a company. A transfer price is therefore the price which a receiving division will pay for
the internal transfer of inventory or products by a supplying division.
Goals of transfer pricing
Goals of transfer pricing include
• to motivate the divisional managers to make decisions to the advantage of the company or
group as a whole (goal congruence).
• to ensure equity: the internal transfer price should ensure that each division’s performance is
reasonable, measurable and comparable.
• the managers should still have the ability to make autonomous decisions and enter into
negotiations with each other.
• the system should be simple to operate and administer.
• if possible, healthy competition between divisions should be encouraged by the transfer
pricing system.
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Setting a transfer price
Different companies will use different methods for determining internal transfer prices. Such policies
may include basing the internal transfer price on
•
•
•
the variable cost of the product
the full cost of the product
the market price of the product.
The company has to decide which method will best achieve its objectives and the general goals of
transfer pricing.
Should a question be given in the exam where a specific method is prescribed for setting
transfer prices, you merely have to calculate the required price using the prescribed method.
However, transfer pricing questions are more likely to ask you to SUGGEST an appropriate
transfer price, in which case you should follow the rules set out below.
The following ‘rules of thumb’ may be applied when a question asks for the calculation of a transfer
price that will lead to goal congruence within the company:
•
Minimum transfer price (that the supplying division will accept)
Incremental cost (usually variable cost plus any increase in fixed costs) plus opportunity cost
→ Opportunity cost exists only if there are sacrificed external sales due to the internal transfer
of goods (and is the contribution thus lost).
•
Maximum transfer price (that the receiving division would pay)
If there is an external market to buy from
→
Market price less savings on selling and transport expenses
If no external market exists
→
Variable cost plus a negotiated profit
•
The maximum negotiated profit is the incremental profit that would be made by the
receiving division on the ultimate sale of the goods.
•
The final transfer price is normally obtained through negotiation. It should lie between the
minimum and maximum prices calculated.
(b)
Transfer price for product Ying
(6 Marks)
As a result of a lack of the application of basic principles, only a handful of students were able to
identify the proportionate split of profit in proportion to the costs. This necessitated the profit to be
calculated in total and not per unit which was what most students did. We did award a mark for any
calculation of a transfer price.
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(d)
Meaning of Economic Value Added (‘EVA’) and similarity to the residual income
performance measure
(3 Marks)
Most students were able to define ‘EVA’ and identify similarities to the residual income performance
measure.
PART B
(Marks 20)
(e)
(10 Marks)
Tender document price using relevant costing
Most students understood and answered this section well. `Always remember to explain why an item
is relevant or not. The deposit of R22 000 was erroneously included as relevant by some but
remember the principle is that a deposit is returned so it is a cash flow out but also a cash flow in so
has no effect on the relevant cost/decision.
(f)
Relevant factors in deciding to tender or not
(5 Marks)
The relevant factors listed should almost always have a direct bearing on the information in the given
question e.g. overtime, quality and capacity were hinted at. Cash flow and liquidity are always
considerations when production plans change.
Please note that each factor was only awarded ½ a mark and so at least eight valid points had to be
made.
The presentation mark was awarded here for discussion under the relevant headings provided in the
required as well as clearly stated relevant factors. Some students ignored the headings. This displays
poor exam technique and marks such as these must be scored.
(g)
Cost and ethical implications of construction company representative’ proposal (5 Marks)
Many incorrectly discussed other costs and not the cost of the bribe. Remember that KING III and
ethics go hand in hand.
The presentation mark was awarded here for identifying both the cost and ethical implications. Many
did not cover both which displays poor exam technique and marks such as these must also always
be scored.
General: Communication marks
Communication skills and competencies are very important to any professional – including CAs (SA).
In this regard, SAICA indicated that competency in this area will be specifically assessed in the Initial
Test of Competency (ITC). This competency has been assessed in this module in the past, but for this
test the format in which it was assessed was closely aligned to that used in the ITC; future tests and
exams will follow the same trend.
We recommend that you pay close attention to the formulation used in the suggested solution, and the
way in which communication marks were awarded.