QUESTION 1 40 MARKS

The Frère Manufacturing Company operates the following three departments:

Total available time per Cost per hour

annum

Mounting 20 000 hours R75

Finishing 10 000 hours R50

Inspection 5 000 hours R40

Up to now the company produced two products, ‘Cutters’ and ‘Trimmers’. The marketing
department has suggested that a third product ’Blowers’ be considered.

The information relating to these three products are as follows:

Cutters Trimmers Blowers

Mounting 4 hours 3 hours 2 hours

Finishing 2 hours 1.5 hours 1,5 hours

Inspection 1 hour 0.5 hour 0,75 hour

Other variable costs R200 R150 R145

Fixed costs (see note below) R200 R150 R120

Selling price per unit R1 000 R800 R700

Budgeted annual market 3 000 units 2 000 units 2 000 units

sales

Fixed costs are allocated per total manufacturing hours.

REQUIRED: MARKS

Financial Management IIIA Examination Page 1

(a) Calculate the possibility of a limited resource situation existing with the 6
introduction of the third product ’Blowers’.

(b) Calculate the contribution per unit of limited resource. 22.5

(c) Establish whether or not this is a linear programming problem and 11.5
calculate the number of units of each of the three products that should
be produced in order to maximise profits

TOTAL 40 marks

Financial Management IIIA Examination Page 2

QUESTION 2 30 marks

Lunar Ltd manufactures a single product from one type of raw material and operates a standard
absorption costing system to control costs and evaluate performance. The organisation’s policy
is to value all inventory at standard cost per unit.

At the beginning of 2013, the management accountant proposed the following budget, which
was approved by the board of directors:

Budgeted Income Statement for the year ending June 2013

Notes R'000 R'000

Sales and production 1 3 000

Less: Cost of sales 2 400
Direct materials ( 120 000 kg) 900
Direct labour (50 000 hours) 500
Factory overhead 1 000
Gross profit 600
Fixed administration cost 100
500

Notes

1 This represents normal annual activity at a price of R 150 per unit.

The factory overheads above display the following cost-volume relationship:

Budgeted direct labour hours 50 000 62 500

Budgeted factory overheads R 1 000 000 R 1 050 000

Direct labour hours associated with normal activity are used as the basis for establishing
standard factory overhead absorption rates. Variable overhead rates vary with direct labour
hours.

Financial Management IIIA Examination Page 3

Soon after the 2013 financial year end the assistant accountant prepared the income statement
reflecting the actual results. The management accountant took one look at the statement
reflected below and immediate knew that something was wrong.

Looking through the finished goods inventory records, he noted the following quantities on
hand at the beginning and end of 2013:

Finished
goods
On hand at:
01 July 2012 3 000 units
30 June 2013 5 000 units

He confirmed his suspicion that there had been no change in the raw materials on hand at the
beginning and end of 2013. He also established that the standard costs at 30 June 2012 were
the same as those used during 2013.

Actual results for the year ending 30 June 2013

R'000 R'000

Sales ( 19 000 units at R 153) 2 907.0

Production costs incurred
(21 000 units were produced) 2 522.5
Direct material purchased (125 000 kg's) 925.0
Direct labour (57 000 hours) 570.0
Variable overheads 217.5
Fixed overheads 810.0
Gross profit 384.5
Fixed administration costs 95.0
Profit 289.5

Financial Management IIIA Examination Page 4

 REQUIRED MARKS
:
(a) Calculate the standard product cost per unit of output showing the 6
amount for each cost element.
(b) Recalculate the actual profit for the year taking into consideration the 2
change in inventory levels of finished goods.
(c) Prepare a reconciliation of budgeted profit and actual profit as 17
calculated in (b) above, showing all the variances.
(d) Answer the question below posed by the assistant accountant giving a 5
full explanation and providing supporting calculations:
‘Looking at your revised actual profit calculation, I see where I went
wrong. Would the actual profit and variances have been different if we
had been using a standard variable costing system’
TOTAL 30 marks

QUESTION 3 20 MARKS

You are the financial accountant at Steel and Aluminium Unlimited, a company that supplies
specialised steel and aluminium products to the building industry. You have received a request
to provide a quote for the manufacture of a specialised piece of equipment to Builders Galore
CC. This order would be a once- off order, in excess of normal budgeted production.

The following cost estimate has already been prepared:

Notes R
Direct materials
Steel (10m² at R5.00 per 1 50
square metre)
Handles 2 20
Direct labour
Skilled (25 hours at R8.00 3 200
per hour)
Unskilled (35 hours at R10.00 4 50
per hour)
Other
Overhead (35 hours at R10.00 5 350
per hour)

Financial Management IIIA Examination Page 5

 Estimated time 6 100
770
Admin overhead (20% of production 7 154
cost)
924
Profit (50% of total cost) 8 462
1 386

(Adapted from Drury - Management and Cost Accounting 7th Edition)

Notes:
1. The steel has a value of R5.00 per square metre and there are currently 100 square
metres in stock. The steel is used regularly in other processes within the business and is
available at a price of R5.50 per square metre.
2. The handles would have to be purchased specifically for this order; a supplier has
quoted the price of R20 for the handles required.
3. The skilled labour is currently fully employed by your company and paid at a rate of
R8.00 per hour. If this job was accepted it would be necessary either to work 25 hours
overtime which would be paid at time and a half (X1.5) or to reduce production of
another product which earns a contribution of R13.00 per hour.
4. The unskilled labour currently has sufficient paid idle time to be able to complete this
order.
5. The overhead absorption rate includes electricity costs which are directly related to
machine usage. If this order were accepted, it is estimated that the machine time
needed would be 10 hours. The machines incur electricity costs of R0.75 per hour. There
are no other overhead costs which can be specifically attributed to this order.
6. The cost of the estimating time is that attributed to the 4 hours taken by the engineers
to analyse the drawings and determine the cost estimate given above.
7. It is the company policy to add 20% on to the production cost as an allowance against
admin costs associated with orders accepted.
8. Your company has a standard policy where the minimum profit they expect to make is
50% on total cost.

REQUIRED MARKS
:
(a) Prepare, on a relevant costing basis, the lowest cost estimate that 13
could be used as the basis for a quotation. Explain briefly your reasons
for using each of the values in your estimate.
(b) Builders Galore CC have indicated that they would like to do business 4
with your company on an ongoing basis. What other factors should you

Financial Management IIIA Examination Page 6

 consider before entering into a business relationship with them on a
long term basis? Note: These orders would occupy part of your normal
production capacity.
(c) Your Chief Financial Officer (CFO) has proposed purchasing a new 3
machine to be able to fill these orders and has asked your opinion on
the treatment of the cost and related depreciation for this machine in
the context of relevant costing.
TOTAL 20 marks

QUESTION 4 20 MARKS

Mrs Dlamini wants to start a new business selling woolen socks that she manufactures herself.
She has been making woolen socks for friends and family for years and has always received
praise as to the quality. Mrs Dlamini has no financial background and has therefore come to
you for help.

She has supplied you with the following information regarding her new business venture:

Expected sales per month 4 500 pairs

Sales price R 20 / pair
Expenses R
Rent for manufacturing building per month 5 000
Electricity per month 2 650
Material for socks per pair 10
Staff costs (3 permanent staff) per month 18 000
Sewing machines (3 needed) Each 15 000
Other admin costs per month 1 450
Consumables per pair 3
Rental deposit 5 000

1) Material is sourced from a local supplier and she will have 30 days to pay them, but she
has to purchase a minimum amount that is the equivalent of 10 000 pairs of woolen
socks per order.
2) The sales will increase by 10% per month initially for 4 months.
3) The sewing machines will be purchased on credit and paid off over the first 3 months
with no finance costs.
4) All other expenses will remain constant each month.
5) Mrs Dlamini is of the opinion she will not need all the rental space and will sub-lease a
portion at a rental of R3 200 per month

Financial Management IIIA Examination Page 7

 6) She will have a 2/30 net 60 credit policy.
(Note that if customers pay in cash, they get 5% discount)
7) Mrs Damini is only willing to invest R90 000 initially to fund the business.
8) Mrs Dlamini wants to draw a R10 000 salary from the business (she won’t take a salary
for the first two months).

Other information she was able to get from her business advisor:
- The sewing machines will be written off over a period of three years on a straight-line
basis.
- Sales are expected to be paid as follows:
o 40% will pay cash immediately, taking opportunity of the 5% cash discount
o 35% will pay within 30 days (refer note 6 above)
o 22% will pay within 60 days
o 3% are expected to be bad debts.

REQUIRED MARKS
:
(a) Prepare the following monthly budgets for the first four months of
operations:
i) Budgeted income statement
ii) Cash flow budget 14
14
(b) Discuss whether Mrs Dlamini should start her business or not 2
TOTAL 30 marks

Financial Management IIIA Examination Page 8