UNIVERSITY EXAMINATIONS

Oct/Nov 2023

MAC3761
Management Accounting III
100 Marks
Duration: 3 Hours (writing time)
EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT

Use of a non-programmable pocket calculator is permissible.

Closed-book examination.

The examination question paper remains the property of the University of South Africa and may not be
distributed beyond its intended use for this examination.

THIS PAPER CONSISTS OF FIFTEEN (15) PAGES IN TOTAL (INCLUDING THE INSTRUCTIONS).
IMPORTANT INSTRUCTIONS:
1. This is a closed-book exam. You are not allowed to copy from or consult any sources,
including for example your textbook or tutorial letters. You are not allowed to consult any
third party for the duration of the exam session.
2. This paper consists of two (2) questions with subsections.
3. You are strongly advised to carefully read the required before attempting the questions concerned.
4. All questions and sub-sections must be answered.
5. Each sub-section must be commenced on a new (separate) page.
6. All workings, where applicable, must be shown.
7. Include (type/write) your student number in the document/answer file.

PROPOSED TIMETABLE FOR THIS EXAM: Marks Minutes

Question 1: Performance management and analysis; Standard costing; Direct and

absorption costing; Ethics; Budgets, planning and control; Other ancillary topics; 50 90
Relevant costing; Price-setting
Question 2: Risk management and governance; Capital structure and cost of capital;
Working capital management; Reporting and performance analysis; Business 50 90
valuations; Mergers and acquisitions; Sources and forms of finance
Converting your answers to a PDF file and successfully uploading your single PDF
file. You must successfully upload your PDF file on CAS.myExams before 11:30
South African time, 10 November 2023. The submission platform will automatically 30
close at 11:30 (10 November 2023, South African time) and no submission can be
made henceforth. No late scripts can be accepted.
100 210

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MAC3761 EXAMINATION
OCT/NOV 2023
Honesty Declaration:
By submitting my solution to the exam, I declare that:
I know what plagiarism is, that plagiarism is wrong and that disciplinary steps can be taken against me
if I am found guilty of plagiarism.
This solution, submitted by myself, is my own work.
I have not assisted any other student in any manner, and I have not had the assistance of any other
person, in completing this exam.
I will not assist any other student in any manner, and I will not obtain the assistance of any other
person, in completing this exam.
I know that if I am found to be in violation of this declaration, I will have to face a disciplinary hearing.
Please note: By submitting your solution, you automatically declare that you adhere to all the above
with regards to this specific assessment.

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MAC3761 EXAMINATION
OCT/NOV 2023
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MAC3761 EXAMINATION
OCT/NOV 2023
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MAC3761 EXAMINATION
OCT/NOV 2023
or so and most of the time the system then allows access. Ask immediately if you encounter a problem,
do not wait until it is too late!
ADDITIONAL INSTRUCTIONS:
We remind you of important information already shared with you.
• Students must upload their answer scripts in a single PDF file on the official CAS.myExams platform
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CAS.myExams platform.
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correct answer script file has been uploaded.
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a violation of academic integrity and students who plagiarise, copy from published work or use

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MAC3761 EXAMINATION
OCT/NOV 2023
Artificial Intelligence Software (e.g. ChatGPT) or online sources (e.g. course material) will be in
violation of the Policy on Academic Integrity and the Student Disciplinary Code and may be referred
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MAC3761 EXAMINATION
OCT/NOV 2023
QUESTION 1 (50 Marks; 90 minutes)
Appleday, a JSE-listed company, manufactures and sells a wide range of healthcare products
and is a leading supplier to both the private and public sectors of the market. The company
operates three manufacturing divisions, namely Consumer Division, Over-the-Counter Division
and Prescription Division. Each manufacturing division is headed up by an executive director who
reports directly to the Appleday Chief Executive Officer at the company’s head office in Midrand,
South Africa. The divisions are independently responsible for their own investment, buying,
manufacturing and selling decisions. The head office is responsible for all the financing decisions
of the company, as well as allocating relevant head office intangible assets and costs to different
divisions. The company’s most recent financial year ended on 30 September 2023. The company
uses absorption costing and accounts for inventory on a first-in-first-out (FIFO) basis.
1. SUMMARY OF APPLEDAY’S REMUNERATION POLICY
The divisions are required to abide by the company’s remuneration policy. The company’s
remuneration policy encompasses matters such as those relating to the structuring of
performance assessment criteria, performance bonuses, salaries (divisional executive directors,
supervisors and managers) and wages (permanent and casual direct labourers). Divisional
executive directors are each paid a guaranteed annual salary of R1,5 million plus 2,5% of total
divisional sales. Employees involved directly in the manufacturing processes are paid wages on
weekly intervals based on the number of hours worked, while supervisors and managers are paid
fixed monthly salaries. Wages and salaries are increased by strictly between 4% and 6% per
annum after negotiations with labour unions. A “13th cheque”, equivalent to a monthly salary, is
paid annually to each employee in the respective employee’s birthday month. Performance
bonuses equivalent to 10% of divisional profits are paid to all the employees of that division
(except Divisional executive directors), subject to all of the following criteria being met in a
financial year by the specific division:
 Minimum revenue growth of 6%
 Minimum return on investment of 22,5%
 Minimum residual income of R5 million
Divisional executive directors are awarded company shares equivalent to 5% of their division’s
sales if the above criteria are met. These shares vest within six months from the time the company
awards them.
2. CONSUMER DIVISION
The Consumer Division competes mainly in the fast-moving consumer goods (FMCG) space,
selling the energy drink BioMade and the popular Grannie, a syrup for pain and fever relief. Below
is the extract from this Division’s financial statements for the year ended 30 September 2023.
ASSETS AND LIABILITIES (R 000) 2023 Actual
Property, plant and equipment R64 112
Intangible assets R9 750
Other intangible assets (Head Office allocated) R1 546
Current assets R18 369
Head Office allocated interest-bearing liabilities R45 923
Provisions R6 872
Trade payables R13 405

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MAC3761 EXAMINATION
OCT/NOV 2023
BUDGET – BUDGET – ACTUAL
STAMENT OF PROFIT AND LOSS (R 000) Notes
BioMade Grannie (Total)
Sales 1 R49 980 R24 620 R81 343
Direct material costs (R13 960) (R7 095) (R22 814)
Direct labour costs 2 (R7 980) (R3 556) (R13 550)
Variable manufacturing overheads (R2 750) (R2 503) (R5 831)
Fixed manufacturing overheads 3 (R5 500) (R5 500) (R11 276)
Administration costs 4 (R2 014) (R1 410) (R3 684)
Variable selling costs (R1 012) (R607) (R1 978)
Allocated Head Office costs (R2 550)
Profit before interest and tax R19 660
Finance costs 5 (R4 347)
Profit before tax R15 313

Notes and additional information

1. The actual sales for the 2022 financial year amounted to R72 340 000. The actual average
selling price per BioMade unit for the 2023 financial year was R25,30 (budgeted: R24,99) and
R12,23 (budgeted: R12,31) per Grannie unit. Towards the end of the 2023 financial year, the
Division’s management team embarked on an extensive marketing roadshow, which led to
the Division selling 2,2 million BioMade units and 2,1 million Grannie units in total for the
financial year. During the marketing roadshow, the Consumer Division’s executive director
tried to convince some major customers to buy stock that they did not need at that moment
and that was more than they would normally buy, by selling it at below the division’s cost price.
He also suggested to the management team that the Consumer Division, which allows
customers to return goods already sold if they are not satisfied, should record the returns as
administration costs instead of reversing the revenue and also buy some products themselves
in 2023 to return for a refund in the new financial year (2024).
2. Direct labourers require a standard 8,55 minutes to manufacture one unit of BioMade and a
standard 3,81 minutes to manufacture one unit of Grannie. The actual direct labour hours for
the 2023 financial year were 350 000 for BioMade and 192 000 for Grannie. 70% of actual
direct labour costs for 2023 relates to BioMade. Unfortunately, the Consumer Division has
recently been confronted with skills and labour shortages as some of the labourers abscond
from work or are absent without leave. The management team has been proactive in dealing
with these matters swiftly. There is a contingent of casual workers, often sharp high school
learners, who are available on call should the need arise. These workers are paid the same
rate per hour as permanent labourers.
3. The fixed manufacturing overheads (FMO) allocation rate per machine hour was budgeted at
R27,50 for the 2023 financial year. The total actual machine hours for the 2023 financial year
were 412 000.
4. Administration costs include office equipment depreciation. Office equipment depreciation for
the 2023 financial year was budgeted at R436 000, but the actual costs incurred for the year
amounted to R450 000.

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MAC3761 EXAMINATION
OCT/NOV 2023
5. Appleday’s required rate of return is 9,8%.
6. There is no budgeted or actual opening and closing inventory for raw materials, work-in-
progress or finished goods.

3. PRESCRIPTION DIVISION
The Division manufactures and sells three types of medicine, Codyl, Diphdol and Enpayne in
targeted therapeutic areas for patients consulting healthcare professionals, where prescriptions
are generally required. Codyl is for the relief of mild to moderate pain of inflammatory origin with
or without fever. Codyl is also sold internally to the Over-the-Counter Division where it is mixed
with other medicines and ingredients to create a new type of medicine for short-term pain relief
that is easily accessible over the counter to many customers. Codyl is currently sold to the Over-
the-Counter Division at the same price as to external customers, but the divisions want to
negotiate the transfer price in the future. Diphdol is a capsule for the relief of moderately severe
pain and short-term anxiety. Enpayne is an injection used for pain during a certain medical
procedure (local anaesthesia).
The following information relates to the budgeted selling price and costs per unit for the year
ending 30 September 2024. Information on budgeted machine hours per unit and the expected
sales demand is also provided below.

Note Codyl (C) Diphdol (D) Enpayne (E)

Budgeted information per unit
Selling price R42,80 R45,00 R82,40
Direct material costs (codeine phosphate) 1 R7,20 R4,80 R12,00
Direct material costs (other) R7,63 R9,25 R15,34
Direct labour costs 2 see below see below see below
Total manufacturing overheads 3 R16,50 R19,00 R26,00
Variable selling costs R0,75 R0,75 R0,75
Budgeted machine hours per unit 0,25 0,3 0,4

Expected total sales demand 400 000 350 000 250 000

NOTES AND ADDITIONAL INFORMATION

1. One of the ingredients required in all three products is codeine phosphate which is currently
under short supply, and the suppliers have indicated their ability to make available a maximum
of 30 000 grams of the ingredient. 100 milligrams (mg) of codeine phosphate costs R24.
(There are 1 000 mg in one gram (g).)
2. Both Codyl and Diphdol require 13 minutes of labour time per unit to manufacture, while
Enpayne takes 15 minutes per unit. The Division’s budgeted direct labour rate per hour is
R45.
3. The budgeted fixed manufacturing overheads are allocated to products based on a fixed
manufacturing overhead rate of R50 per machine hour.

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MAC3761 EXAMINATION
OCT/NOV 2023
REQUIRED
For each subsection below, remember to:
• Where applicable, clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value); and
• Ignore all potential taxation and time value of money implications.

(a) Critically evaluate the remuneration policy of Appleday with reference to its (6)
manufacturing divisions. [No calculations are required.]

(b) Determine whether the Consumer Division qualifies for any performance bonuses for (8)
the year ended 30 September 2023.

(c) Calculate the following variances for the Consumer Division for the year ended
30 September 2023 assuming that a standard costing system is in place, and discuss
possible reasons for such variances:
i. Direct labour rate variance – BioMade only (3 marks for calculation; 1 mark for
comment).
ii. Fixed manufacturing overhead volume variance (3 marks for calculation; 1 mark
for comment).
iii. Sales mix variance – BioMade only, assuming a standard gross profit of
R9,10 per unit of BioMade (3 marks for calculation; 1 mark for comment). (12)

(d) Discuss two ethical concerns that the Appleday management team may have when it (4)
comes to the Consumer Division.

(e) Discuss three non-financial performance measures that can be used in managing and (3)
measuring customer satisfaction for the Consumer Division.

(f) Determine the Prescription Division’s budgeted optimal production mix for the financial (12)
year ending 30 September 2024.

(g) Discuss factors that the Prescription Division will have to consider in proposing an (5)
internal selling price of the Codyl product supplied to the Over-the-Counter Division in
future transfer price negotiations. [No calculations are required.]

Total question 1 [50]

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MAC3761 EXAMINATION
OCT/NOV 2023
QUESTION 2 (50 Marks; 90 minutes)
AKHA Traders is the retailer of building materials and associated products, selling directly to only
cash-paying customers through its 318 stores in South Africa, Namibia, Lesotho, Botswana,
Eswatini and Malawi. Rising food price inflation, and higher than usual interest rates coupled with
slow economic growth, has put pressure on consumers’ disposable income. Soaring
unemployment rates continue to have a devastating effect on families. The financial impact of
loadshedding on the national economy as well as on AKHA Traders’ business, has been
astronomical. However, despite all these challenges, the company continues to deliver strong
financial results at the back of sound acquisitions and store expansion programmes. This is
evidenced by the release of the latest financial results (see further below).
The company is optimistic about the 2024 financial year and the ongoing implementation of
acquisition programmes. In preparation for the upcoming Management Committee 2024 planning
meeting, the Chief Financial Officer (CFO), Dan Zulu, has been asked some questions relating to
true financial affairs of the company. As his executive assistant, you have been tasked with
providing a comprehensive report to address these questions. The following information has been
made available to you to assist with the report.

A. CAPITAL STRUCTURE, FINANCIAL STATEMENTS AND OTHER INDICATORS

The equity and liabilities section of the statement of financial position of AKHA Traders for the
year ended 30 September 2023 is provided below:
EQUITY AND LIABILITIES (Rm) Notes 2023 2022
Ordinary share capital (i) 824 688
Reserves 133 133
Retained income 2 055 2 240
Preference share capital (ii) 745 745
Provisions 380 425
Long-term loan (iii) 600 940
9,75% Debentures (iv) 592 720
Short-term borrowings (v) 400 400
Deferred tax 150 194
Trade payables (vi) 277 406
Total equity and liabilities 6 156 6 891

Notes to the Statement of financial position

(i) On 2 February 2023 AKHA Traders issued 2,5 million additional shares, which resulted in an
increase of 6,25% in the total number of issued shares. There were no other movements in
ordinary share capital during the year.
(ii) Four million preference shares were issued five years ago. These redeemable preference
shares (redeemable at nominal value) pay out a dividend of R85,2 million annually in arrears.
Similar preference shares currently carry an annual dividend rate of 12%.

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MAC3761 EXAMINATION
OCT/NOV 2023
(iii) The long-term loan relates to the loan received from Richard Nathan Bank (RNB) which will
be repaid in full on 30 September 2026. Its current market value as at
30 September 2023 was R618 million. Interest on this loan is paid annually in arrears at an
interest rate of 9%.
(iv) These 10-year debentures were issued four years ago. The going interest rate for similar
debentures is prime less 2%. The interest on debentures is paid annually in arrears.
(v) The short-term borrowings are made up of a R350 million bank overdraft with a market
interest rate of 15%, and a R50 million short-term loan of eight months taken four months
ago. The bank overdraft facility is often utilised to pay creditors and the short-term loan was
taken out to pay a court settlement after the company was found to have unfairly dismissed
its previous Chief Operating Officer.

(vi) Trade payables relate to amounts owed to creditors for inventory purchased and will be
settled within a year.

Below is the detailed Earnings Before Interest and Tax (EBIT) of AKHA Traders for the year ended
30 September 2023:

EARNINGS BEFORE INTEREST & TAX (Rm) 2023 2022

Revenue 11 145 12 615
Cost of sales 8 216 9 226
Opening inventory 1 546 1 623
Cash purchases 6 812 6 862
Credit purchases 1 578 2 287
Closing inventory (1 720) (1 546)
Gross profit 2 929 3 389
Operating expenses (875) (1 038)
Earnings before interest and tax 2 054 2 351

Additional information and other economic indicators for the 2023 financial year, and comparative
figures, are given below:

Additional information 2023 2022

Ordinary shares – closing share price (cents) 2 588 2 725
Risk-free rate (%) 5,7 6,25
Market risk premium (%) 7,5 8,0
AKHA Traders’ Beta 1,3 1,28
Prime lending rate (prime) (%) 11,0 9,25
Days in a year 365 365

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MAC3761 EXAMINATION
OCT/NOV 2023
B. BUSINESS MODEL (WORKING CAPITAL) [Also refer to information under A above]
In the light of rising inflation and reduced consumers’ buying power, the Board of directors recently
took a resolution to change its “cash-only sales” business model to now also sell on credit in the
new financial year. The Board will oversee the implementation of sound credit vetting and credit
management systems to ensure that credit is granted to creditworthy customers and that bad
debts are kept at a minimum, while increasing overall revenue and profits for the company. The
Board is, however, concerned that this change in business model may significantly increase the
business cycle, leading to reduced operating cashflows. Proforma analysis for the 2024 financial
year shows the following:
• Revenue will increase by R3,2 billion from 2023 revenue (R1,5 billion will be credit sales
and R1,7 billion will be an increase in cash sales).
• Closing trade receivable balance is expected to be R234,3 million.
• The gross profit margin is expected to remain the same as in 2023, while bad debts will
be around R240 million. Closing inventory is expected to increase by 20%.
• The creditors’ payment terms will not change as a result of the change in policy; therefore,
creditors’ payment days will remain the same as in 2023.

C. ACQUISITION: AMOS HARDWARE (PTY) LTD

As part of its growth strategy, AKHA Traders has approached the owners of Amos Hardware (Pty)
Ltd (“Amos Hardware”) with the intention of making an offer to buy a majority stake in Amos
Hardware. Seeking to retire and transition into a passive role in Amos Hardware, the owners of
this family business, which has been in operation for many decades, have expressed their
willingness to sell at least 51% of the company.
The owners of Amos Hardware founded the company in the 1970s with the opening of its first
store in Harding, KwaZulu-Natal. Today they have hardware stores in many small towns in
KwaZulu-Natal, as well as the Eastern Cape and Mpumalanga provinces. Despite the COVID-19
pandemic, the company has increased its revenue for each consecutive year. However, in this
global economic climate the company is battling to reduce and/or limit purchasing costs. Family
dynamics have also played a key part in the decision to dispose of some of the shares in the
company, with clashing views about the vision and the strategy of the company. The following
information relates to the financial performance of Amos Hardware for the past four financial
years.
2020 2021 2022 2023
STATEMENT OF PROFIT AND LOSS
Rm Rm Rm Rm
Revenue 204 354 372 407
Cost of sales (60) (100) (109) (128)
Operating and other expenses (68) (91) (107) (110)
Depreciation and impairments (10) (14) (15) (15)
Finance costs (21) (20) (31) (33)
Profit before taxation 45 129 110 121
Taxation (13) (37) (29) (32)
Net profit 32 92 81 89

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MAC3761 EXAMINATION
OCT/NOV 2023
Additional information
• During the 2020 financial year, the stores only operated 189 days out of the possible 253
days due to COVID-19 lockdown as the stores, classified as non-essential, had to be
closed for a number of days. There were no other trading anomalies in 2020. Assume all
income and expenses were earned or incurred (as applicable) evenly throughout the year.
• In 2021, an employee was badly injured on duty and sued the company for R50 million
citing gross negligence by the company. After much deliberation and lengthy negotiations,
the matter was settled out of court with Amos Hardware paying the employee a settlement
amount of R10 million. The company also had to pay all legal costs which amounted to
R1,2 million.
• Amos Hardware also applied for government tax-exempt COVID-19 relief funds in 2021
for trading disruptions which took place in that year due to the pandemic. The company
did not suffer any financial losses in 2021 but still met the requirements to receive the
funds. These funds amounted to R13 million and were received by the company in 2021.
• Amos Hardware lost some cargo carrying machine tools (trading stock) that were being
shipped from Russia during its 2023 financial year. Unfortunately, the cargo never made
it to South African shores and the suppliers cited ongoing Russia/Ukraine conflict as the
reason for the lost cargo. The company had already paid R42 million for this inventory and
after failed attempts to recover these funds, the company decided to write off this amount.
The company’s insurance contract excluded cover on goods shipped from countries at
war, under terrorist attack or with similar political instability.
• Net working capital was R32 million at the end of the 2023 financial year (2022: R27
million).
• Capital expenditure for the 2023 financial year was R14,5 million (2022: R10,5 million).
• Free cashflows for the 2023 financial year are expected to increase by an average of 5,0%
in 2024 and continue at that rate for the foreseeable future.
• Average earnings-yield for similar listed companies is 6,8%.
• The weighted average cost of capital of Amos Hardware is 16%.
• AKHA Traders is willing to offer up to 10% over and above the established value of the
business if it will end up with the majority shareholding in Amos Hardware.

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MAC3761 EXAMINATION
OCT/NOV 2023

REQUIRED
For each subsection below, remember to:
• Where applicable, clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
• Where necessary, assume amounts are before tax, unless where otherwise stated; and
• Where applicable, use South African corporate taxation rate of 27%.

You are required to prepare a report to the Chief Financial officer in which you
address the following questions:

(a) Identify five key business risks that AKHA Traders needs to prioritise for the 2024
financial year and explain how these risks can be mitigated. [Consider the local and
global economic environment in your answer.] (10)
(b) Determine the capital structure of AKHA Traders based on book values at
30 September 2023, and provide possible reasons for movement in the calculations
between 2022 and 2023 financial years. [Calculations 3 marks; discussion 2 marks] (5)
(c) Calculate the weighted average cost of capital of AKHA Traders based on market values
at 30 September 2023. (10)
(d) Determine how the business cycle (cash conversion cycle) will change in the 2024
financial year, considering the proposed business model and the projected sales
increase. [Only calculations are required, and use closing balances where applicable] (6)

(e) Perform a valuation of the 51% equity stake in Amos Hardware (Pty) Ltd. Use any two
appropriate valuation methods for reasonableness and a comparability test. (15)
(f) Discuss four factors that the Management Committee will have to consider when
choosing the appropriate funding facility for the acquisition of Amos Hardware (Pty) Ltd.
[Your answer should consider, as a minimum, economic data, AKHA Traders’
financial information and the available facilities] (4)

Total question 2 [50]

TOTAL questions 1 and 2 [100]
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