MAC2601 Assignment 2 Semester 2

2020

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MAC2601
ASSIGNMENT 2 SEMESTER 2 2020
UNIQUE NUMBER: 787833
DISCLAIMER: Extreme care has been used to create this document, however the contents are provided “as is” without any
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PREVIEW OF QUESTION 1
PART A – DIRECT AND ABSORPTION
Actual Statement of Comprehensive Income for the year ended 30 June 2020 with
separate columns for Loft and Platinum using direct costing method.

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QUESTION 1

PART A – DIRECT AND ABSORPTION

Actual Statement of Comprehensive Income for the year ended 30 June 2020 with
separate columns for Loft and Platinum using direct costing method.

CALCULATIONS

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Discuss why a company would prefer a direct costing system as opposed to an absorption costing
system from a management accounting perspective.
A company would prefer the direct costing method because only variable manufacturing costs (direct material +
direct labour + variable manufacturing overheads) are included in inventory valuation, which is of particular
importance to management (we use variable information for decision making purposes)
Variable selling and distribution costs are added to arrive at marginal income. Variable non-manufacturing costs,
as well as ALL fixed costs, will be treated as period costs. This helps to overcome the problem of allocating fixed
costs.

Calculate the under/ over recovered overhead for the 2020 financial year and prepare a journal entry to
show how the under/over recovered overhead would normally be dealt with in the company's books at
the end of the 2020 financial year.

Based only on the information presented in additional information point 1 above, provide a reason why
the opening inventory in the extract from the actual results has been valued in terms of the absorption
costing system.
The opening inventory is valued on the absorption costing system as it contains the applied fixed overheads at
the recovery rate of R130 per unit, whereas the direct method would only include the variable costs (materials,
labour and overheads).

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PART B – DIRECT AND ABSORPTION

Prepare an actual Statement of Comprehensive Income for Millennials (Pty) Ltd for the year ended 30
June 2020, according to the absorption costing method.

OAR = 600 000/60 000

OAR= 10

Absorbed OH = 56000*10 = 560 000

Actual OH = 590 000
Under/over absorption - 30 000

Three (3) advantages and two (2) disadvantages of the absorption costing method. (Write the body of the
report in point form).
Advantages
Inexpensive and simple to operate. Absorption costing is simple to operate which makes it less expensive to
operate. This is good for the company as it allows them to reduce their costs and understand what they are doing.
Disadvantages
Less accurate. It's good that the system is simple, but this makes it less accurate when charging costs to cost
objects because of the intensive useof arbitrary allocation. Arbitrary allocation is when an allocation base usedis
not a considerable determinant of its cost. Not knowing all the exact causes of certain costs will make it di9cult
during planning and budgeting. Absorption costing emphasises on variable and fixed costs. This makes it di9cult
for the company to use information from this system for decision making; it's not detailed enough to help the
business make predictions or budgets

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In terms of Direct and Absorption costing, assuming no opening inventory existed: When sales units are
equal to production units, profits for the absorption costing method and the direct costing method will be
the same.
TRUE. All production cost will be charged to the income statement

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QUESTION 2

PART A – ACTIVITY-BASED COSTING (ABC)

Fixed manufacturing overhead cost allocated to one unit of model T and to one unit of Model Z
respectively if the activity-based costing is used.

CALCULATION
C2a

Cost Driver Cost amount ÷ Driver capacity (2b) = Rate

Machine costs Machine hours 1 400 000,00 500 2 800

Setup costs No. of setups 2 400 004,00 190 12 632
Quality inspections Inspections per run 1 403 520,00 17 200 82
Stores receiving No. of deliveries 696 000,00 2 784 250
Stores issues No. of issues 1 100 000,00 22 000 50

C2b

Driver capacity Model T (C2c) Model Z (C2c) Total

Machine hours 200 300 500
No. of setups 110 80 190
Inspections per run 4 400 12 800 17 200
No. of deliveries 984 1 800 2 784
No. of issues 8 000 14 000 22 000

C2c

Setups Model T Model Z

Production 2 200 3 200
Units per run ÷20 ÷40
No. of runs 110 80

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Quality inspections Model T Model Z

No of runs 110 80
Inspections per run x 40 x 160
Total inspections 4 400 12 800

State two differences between activity-based costing and traditional absorption costing.

 Traditional costing uses a single driver to determine the allocation rate while ABC uses multiple drivers
 Traditional costing does not make any distinction between production when allocating overheads while
ABC will allocate overheads on the basis of the demand that is placed on the specific resource.

PART B – PROCESS COSTING

Prepare a quantity statement for Somahhase for August 2020

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Calculate the equivalent cost per unit for August 2020.

Differentiate normal loss to abnormal loss by providing two (2) characteristics of each of the two
concepts
Normal losses Abnormal losses

Unavoidable losses inherent in the manufacturing Controllable losses avoidable in the manufacturing
process. Do not indicate that a process is ineffective. process. Indicate that a part/parts of the process
is/are ineffective.

Normal loss is not valued in the process costing and Abnormal loss is valued and separately charged
value of normal loss is adjusted in output i.e. normal unlike normal loss it is not adjusted against output
loss is born by the output. rather a spate account of abnormal loss is opened to
account for abnormal loss

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QUESTION 3

PART A – STANDARD COSTING

Calculate the following variances for July 2020
Selling Price Variance
= (AQ x AP) – (AQ x SP)
= (2 100 x 73 500/2 100) – (2 100 x 33)
= (2 100 x 35) – (2 100 x 33)
= R73 500 – R69 300
= R4 200 (F)

Variable Manufacturing Overhead Variance

= (AH x AR) – (AH x SR)
= (16 002 x 1,4) – (16 002 x 1,5)
= R22 402,80 – R24 003
= R1 600,20 (F)
Calculations and notes:
1,5 = 22 500 / 15 000

Variable Manufacturing Overhead Efficiency Variance

= (AH x SR) – (SH allowed for actual production x SR).
= (16 002 x 1,5) – (6,25 x 2 100 x 1,5)
= R24 003 – R19 687,50
= R4 315,50 (U)
Calculations and notes:
NB 1,5 = 22 500 / 15 000; 6,25 x 2 100 = 13 125; 2 100 x 1,5 = 3 150; 6,25 x 1,5 = 9,375
or 9,4.

Variable Manufacturing Overhead Total Variance

= R1 600,20 (F) – R4 315,50 (U)
= R2 715,30 (U)
Alternative: AH x AR – SH allowed for actual production x SR
= 22 402,80 – 19 687,50 = 2 715,30 (U)

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List one advantage/characteristic of an efficient standard costing system

 The standards that are set are realistic and attainable.

 There is room for normal variances.
 Employees are thoroughly informed about the purpose and application of the system and feel motivated
to achieve and maintain the standards.
 The standard is based on realistic future costs, results and operating conditions.
 The information (standard or variances) that is made available is useful for setting the budget and other
planning exercises.
 The standards that are made available are useful for valuing material and production inventories.
 The standards serve as a point of measurement against which actual costs can be measured.
 It may lead to cost reduction policies, since more control is exercised
 The standards can be used in performance management.
 The standards are ideals (or ideal costs) that the company can work towards.

List two possible reasons for an unfavourable material price variance.

 Poor planning leading to last minute purchases.
 (Higher than expected) inflation.
 (Higher than expected) exchange rate (if rand weakens).
 (Higher than expected) fuel prices.
 Material shortages due to fire damage, floods or strikes leading to orders to be processed more quickly
at a higher price (note: wastage as such should not be given a mark if it is not justified how it could lead
to an increase prices).
 Faulty standards.
 Market conditions: higher than expected increase in prices from suppliers.
 Limited availability of material available only at a premium price.
 Better quality material purchased at a higher price.

State two possible reasons for favourable or unfavourable selling price variance
Reasons for favorable sales price variance may include:

 Decrease in the number of competitors in the market.

 Improved product differentiation and market segmentation.
 Better promotion and aggressive sales campaign.
Causes for adverse sales price variance may include:
 Increase in competition in the market
 Decrease in demand for the products.
 Reduction in price enforced by regulatory authorities.

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State if the statement below is True or False:

“Integrity means as an accounting professional you should not be associated with any information that
you believe contains a false or misleading statement.”
True

Calculate the production mix of Lephefo and Senamela that will maximize the profit for the year ended 31
May 2020
Identify the limiting factor

Calculate the contribution per unit

Lephefo Senamela
Selling price 1 000,00 1 400,00
Less: Variable costs
(500,00) (800,00)
(400 + 100); (500 + 300)

Contribution per unit 500,00 600,00

Calculate the contribution per limiting factor

Lephefo Senamela

Contribution per unit 500 600

Divided by: Hours per

0,16 0,2
unit

Contribution per
finishing hour or per 3 125 3 000
limiting factor

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Rank the products from the highest to the lowest contribution per limiting factor
1. Lephefo
2. Senamela
Allocate the finishing hours until nothing is left thereof
Available 30 000
Lephepo (150 000 x 0,16 or 150 000 / 6,25) (24 000)
Remaining 6 000
Senamela (6 000 / 0,2 x 0,2 or all that is left) (6 000)
Remaining 0
In the 6 000 hours that are left, the company can finish
6 000/0,2 = 30 000 units

Therefore, manufacture 150 000 units of Lephefo and 30 000 units of Senamela.

PART B – COST-VOLUME PROFIT ANALYSIS AND ETHICS

Total actual fixed costs for the month of March 2020

Calculate the point where the total contribution will be equal to total fixed costs (Break-even) for the
month of March 2020
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑝𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟

1 942 856
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑝𝑜𝑖𝑛𝑡 = = 2 297 𝑝𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟𝑠
(70% ∗ 1 950) − 519.09(𝐶3𝑎)

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Calculations
C3a

Calculate the margin of safety percentage.

Margin of safety = sales – Breakeven = 3 102 – 2 297 = 805 passengers

Ha- Ha’s SA profit for the month of March 2020.

Sales (3 102 x 1 950 x 70%) 4 234 230,00

Total varibale costs - 1 610 206,00
Contribution 2 624 024,00
Total fixed costs - 1 942 856,00
Profit 681 168,00

Calculate the sales amount if Ha-Ha SA were to increase its profit by 10% for the month of April 2020.
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑇𝑎𝑟𝑔𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 =
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑝𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟
1 942 856 + 681 168 ∗ 1.1
𝑇𝑎𝑟𝑔𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 = = 3 183 𝑝𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟𝑠
(70% ∗ 1 950) − 519.09
𝑇𝑎𝑟𝑔𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 = 3 183 ∗ 1 950 ∗ 70% = 𝑅4 344 795

Write a report stating your ethical concerns to the chairperson of AASA board about the Ha- Ha SA
conduct
Include and explain the highlighted issues
 Decision not to involve the risk management division on their fuel hedging or insurance decisions
 Resolution to procure goods and services from one service provider that is connected to one of the
directors of the company
 The director in question did not declare the conflict of interest
 board concluded unanimously to resist the attempts to restructure the pilots’ unprecedented evergreen
service contracts that are significant drain on the cash flow

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PART C – LIMITING FACTORS

Determine the optimal sales and production mix of Chocolate, Vanilla Bean, Lemon-lime and Custard
Slice snacks.

Calculate the minimum price that the company should ask per almond bar.

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