Tutorial Letter 102/0/2016: Applied Management Accounting MAC4862 NMA4862 ZMA4862

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MAC4862/102
MAC4862/102/0/2016
Tutorial Letter 102/0/2016
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 27 January to 2 February 2016 (Topics 1 – 3)

- WEEK from 23 March to 291 March 2016 (Topics 4 – 7)
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

Part 1 - Bases and allocation
10% 30%
Part 2 - Planning and control
20%
Part 3 Decision-making
40%
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
Management Strategy, Risk,

Planning and Prior exams,
decision making Management,
general questions and
Financial
and control revision
Management
Tutorial Tutorial letter 102 Tutorial letter Tutorial

letter 101 (this tutorial letter) 103 letter 104
Tutorial Tutorial
letters in letter 105
the 3-series
(3**)
Topics Integrated self-

• Nature, classification and assessment
allocation of cost (variable
and absorption costing,
ABC)
• Product costing systems
• Planning, budgeting and
control TEST 1 – 15 March
• Cost-volume-profit
analysis Topics 1 – 3, first four bullets.
• Standard costing
• Performance management TEST 2 – 26 April
• Transfer pricing
• Information for decision- Topics 4 – 7, last four bullets.
making (relevant cost &
revenues; pricing
decisions & profitability
analysis; decision-making
under conditions of risk &
uncertainty)
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MAC4862
APPLIED MANAGEMENT ACCOUNTING
TUTORIAL LETTER 102 / 2016
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) ...................................................................... 18
PART 1, TOPIC 2 – Product costing systems .................................................................................. 22

STUDY UNIT 2.1 – Job costing ................................................................................................. 23
STUDY UNIT 2.2 – Process costing... ....................................................................................... 24
STUDY UNIT 2.3 – Joint and by-product costing... .................................................................... 27
PART 2 – PLANNING AND CONTROL .......................................................................................... 29
PART 2, TOPIC 3 – Planning, budgeting and control ....................................................................... 30

STUDY UNIT 3.1 – Budgeting and management control systems ............................................. 31
STUDY UNIT 3.2 – Cost management techniques/principles .................................................... 33
STUDY UNIT 3.3 – Cost-volume-profit analysis ........................................................................ 35
PART 2, TOPIC 4 – Standard costing .............................................................................................. 41

STUDY UNIT 4.1 – Variance analysis ....................................................................................... 42
STUDY UNIT 4.2 – Reconciliation of budget to actual .............................................................. 44
STUDY UNIT 4.3 –Variance analysis reports ............................................................................ 45
STUDY UNIT 4.4 – Pro-rating of variances and compliance with the relevant
accounting standard .................................................................................................................. 46
PART 2, TOPIC 5 – Performance measurement ............................................................................. 47

STUDY UNIT 5.1 – Divisional financial performance measures ................................................ 48
STUDY UNIT 5.2 – Transfer pricing in divisional companies ..................................................... 61
PART 3 – DECISION-MAKING ....................................................................................................... 65
PART 3, TOPIC 6 – Information for decision-making ...................................................................... 66

STUDY UNIT 6.1 – Decision-making under conditions of risk and uncertainty .......................... 67
PART 3, TOPIC 7 – Information application to decisions ................................................................ 72

STUDY UNIT 7.1 - Relevant costs and revenues for decision-making .................................... 73
PART 4 - INTEGRATED SELF-ASSESSMENT ............................................................................. 77

2014 TEST 1 & 2 WITH SUGGESTED SOLUTIONS ..................................................................... 81
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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. Drury 9th ed.
Before studying this topic, you Applicable references: Applicable references:

should be able to:
• Define and illustrate a cost. Drury Chapter 2: An Drury Chapter 2: An

• Understand the meaning of the introduction to cost terms introduction to cost terms and
important cost definitions. and concepts. Pages 23-39 concepts. Pages 25-41
• Distinguish between variable and Drury Chapter 23: Cost Drury Chapter 23: Cost
fixed costs. estimation and cost estimation and cost
• Apply and describe the different behaviour. Pages 608-619 behaviour. Pages 628-639
methods of estimating costs.
• Calculate regression equations Drury Chapter 8: Drury Chapter 8: Separation
using the least-squares methods Separation of semi-variable of semi-variable costs. Page
and evaluate the goodness of fit, costs. Page 184-185 188-189
using the coefficient of
correlation and coefficient of Do crossword puzzle for Do crossword puzzle for
determination. Chapter 2 & 23 Chapter 2 & 23
• Apply the high-low method. Glossary and flashcards: Glossary and flashcards:
Chapter 2, 23 & 8 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)

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

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) the product is the cost object

(ii) 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
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:

should be able to:
• Drury: Chapter 3: Cost • Drury: Chapter 3: Cost
• Describe the various assignment. Pages 44 – assignment. Pages 48 –
denominator levels that can be 56. 60.
used with an absorption
• Drury: Chapter 3: • Drury: Chapter 3:
costing system;
Budgeted overhead rates Budgeted overhead rates
• Justify why budgeted overhead and Under- and over- and Under- and over-
rates should be used in recovery of overheads. recovery of overheads.
preference to actual overhead Pages 60 – 65. Pages 64 – 70.
rates;
• Calculate and explain the ● Drury: Chapter 3: Inter- ● Drury: Chapter 3: Inter-
accounting treatment of the service department reallo- service department reallo-
volume and expenditure cations. Pages 67 – 71. cations. Pages 72 – 76.
variances;
• Reallocate service • Drury: Chapter 7: • Drury: Chapter 7:
departments’ overheads where Income effects of Income effects of
service departments render alternative cost alternative cost
services to each other and to accumulation systems. accumulation systems.
production departments; Pages 146 – 157. Pages 151 – 162.
• Explain the differences
between an absorption costing ● Now study IAS2 again. ● Now study IAS2 again.
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.
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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 volume variances 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 R
Turnover 5 000
Less: Cost of sales (including fixed manufacturing overhead) (3 600)
Opening inventory (fixed and variable manufacturing costs) 720
Production cost (fixed and variable manufacturing costs) 3 320
Less: Closing inventory (fixed and variable manufacturing costs) (440)
1 400
Volume variance (fixed manufacturing overheads / labour) (120)
(if treated as a period cost)
Expenditure variance (10)
Gross profit 1 270

Less: All non-manufacturing costs (fixed and variable) (period cost) (500)
Profit 770
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Variable/Direct costing R
Turnover 5 000
Less: Variable cost of sales (no fixed manufacturing overhead included) (3 000)
Opening inventory (variable manufacturing costs) 660
Production cost (variable manufacturing costs) 2 740
Less: Closing inventory (variable manufacturing costs) (400)
2 000
Less: Other variable costs (non-manufacturing) (250)

Contribution 1 750
Less: Fixed costs (manufacturing and non-manufacturing) (total actual amount) (860)
Profit 890
Additional information:
• Contribution = Turnover – ALL variable costs
• When absorption costing is applied: Under- or over-recovery of overheads = Volume variance +

Expenditure variance.
• When variable costing is applied: Under- or over-recovery of overheads = Expenditure variance.

The volume variance is not applicable when variable costing is applied.
• An adverse volume variance means that actual production volume is less than the budgeted
allocation base used. Favourable volume variance: actual production volume is more than the
budgeted allocation base used.
• The volume variance for 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, volume
variance 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 volume
variance 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:
Budgeted overhead
Overhead rate = Appropriate allocation base
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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.
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 – 36 000 hours
• Machine hours – 22 500 hours
• Units produced – 45 000 units
• Labour cost – 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 = R900 000 ÷ 36 000 hours
= R25 per DLH
FOH rate based on machine hours = R900 000 ÷ 22 500 hours
= R40 per MH
FOH rate based on units produced = R900 000 ÷ 45 000 units
= R20 per unit
FOH rate based on direct labour R cost = R900 000 ÷ R540 000
= R1,667 per R1 direct labour
Or 166,67% of labour
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Activity 2
Attempt question: (Drury Student Manual)
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)
Question 7.8
Question 7.10
Feedback 3
Note in question 7.5 (7.7 - 9th ed) the application of the fixed overhead volume variance 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.
It is critical that the relevant sections of MAC4861/102 be worked through thoroughly.

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Before you move on to the next study unit please ensure that you understand and can apply the
following concepts:
Topic Yes/No
1. Difference between variable and absorption costing

2. Definition of manufacturing overheads
3. Treatment of fixed labour costs
4. Calculation of appropriate fixed production overhead allocation rate
5. Proper accounting treatment of volume and expenditure variances
6. Present SCI on the variable and absorption costing basis
7. Reconcile profits derived from different costing bases
8. Calculation of volume variance for overheads/labour
9. Calculation of the expenditure variance.
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MR PRICE GROUP LIMITED (2015)

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SHOPRITE HOLDINGS (2015)

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STUDY UNIT 1.3 Activity-based costing (ABC) and related concepts
Prior Learning
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:

should be able to:
• Describe the differences between Activity-based costing. Activity-based costing.
activity-based and traditional Pages 251 – 268. Pages 257 – 274.
costing systems; ● Drury: Chapter 3: ● Drury: Chapter 3:
• Explain why traditional costing Illustration of the two Illustration of the two
systems can provide misleading stage process for an ABC stage process for an ABC
information for decision-making; system. Pages 57 – 60. system. Pages 60 – 64.
• Identify and explain each of the • Drury: Chapter 15: • Drury: Chapter 15:
four stages involved in designing Activity-based budgeting. Activity-based budgeting.
ABC systems; Pages 377 – 379. Pages 388 – 390.
• Apply an activity-based costing
approach to costing information;
• Describe activity-based
budgeting.
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

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.
Before you move on to the next study unit please ensure that you have grasped the following
concepts:
Topic Yes/No
1. An activity
2. Cost driver
3. Cost driver rate
4. Activity (resource) demand
5. Activity hierarchies
6. Profitability analyses using ABC
7. ABM and ABB
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PART 1, TOPIC 2 – Product costing systems
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.
Na bestudering van hierdie onderwerp behoort u in staat te wees om die volgende in ‘n gevalle-
studie/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
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; • Drury: Chapter 4: • Drury: Chapter 4:

• Distinguish between first-in-first-out (FIFO), and Accounting entries Accounting entries for a
average cost methods of stores pricing; for a job costing job costing system.
• Describe the accounting procedure for labour system. Pages 85 – 98.
costs; Pages 80 – 93.
• Describe the accounting procedure for
manufacturing and non-manufacturing overheads;
• Describe accounting procedures for jobs
completed and products sold.
Summary
In this study unit we reviewed the recording process in general and how it would apply in a job costing
system.
concepts:
Topic Yes/No
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.
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STUDY UNIT 2.2 Process Costing
Prior Learning
ensure that you are up to date with the prior learning for process costing. If not, please refer to your
Before studying this topic, you should be Applicable references: Applicable references:
able to:
• Explain when process costing systems • Drury: Chapter 5: • Drury: Chapter 5:

are appropriate; Process Costing. Process Costing.
• Explain the accounting treatment of Pages 102 – 122. Pages 107 – 127.
normal and abnormal losses;
• Prepare process, normal loss, abnormal
loss and abnormal gain accounts;
• Prepare a process costing statement; and
value inventories.
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

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.
concepts:
Topic Yes/No
1. The difference between a job costing system and a process costing system
2. Equivalent units
3. Normal loss
4. Abnormal loss or gain
5. The FIFO and weighted average methods of inventory valuation
6. Allocation of normal loss – when to use “short” or absorption method and when to
use the “long” or allocation method.
7. Value output from the process.
8. Treatment of proceeds from the sale of normal and abnormal units scrapped or
“off-cuts” or by-products.
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Read the section below in conjunction with topic 3.1 and topic 4 to get a clear understanding
of the concepts applied by York Timbers Ltd.
YORK TIMBERS – PROCESSING DIVISION
COST OPTIMISING
A factor applied by York in determining the optimal volume which can be generated from logs,
is called a log paying capability factor. Log paying capability reflects the ability of a sawmill to
pay for the raw material (logs) based on the average value of the lumber produced. It is
calculated as: Average Selling Price (ASP) for lumber/Delivered log price adjusted for
recovery. If the mill recovery, for example, is 49,5% and the delivered log cost is R678/m 3 ,
then the raw material cost would be R678/49,5% = R1 370/m 3 . If the average ASP per m 3
is R2 382, then the log paying capability factor would be R2 382/ R1 370 = 1,74 times.
Processing plants in York are evaluated by reference to the ability of the technology
employed to pay for the logs utilised in the process. The current financial year has seen a
slight improvement at most processing sites, but in York’s view optimal value will only be
demonstrated once the Sabie integrated site, which will include a large sawmill and
automated log merchandising yard, is in place. VOLUME RECOVERY Volume recovery is
one of the most widely used efficiency measures in primary log processing worldwide. It is
simply the volume percentage of a log that is turned into final product volume (excluding by-
products like chips and sawdust). In South Africa the final product is considered to be the
seasoned timber which has not been planed. Volume recovery is stated as follows: Volume
recovery = (Product volume/Log volume) x 100 Another variable having a large effect on the
profitability of a primary log processor, is the log volume throughput. The main reason is that
fixed costs stay fixed with an increase in log volume throughput. The income will thus
increase due to higher product outputs, but one of the cost components (fixed costs) will
remain constant. Variable costs (mainly log costs) will increase proportionately with volume
throughput. VALUE MARGIN Value margin represents the value added through the
production process. The calculation is based on the log costs as described above, together
with the other variable costs per m 3. Log costs for example of R1 370 plus R48/m 3 would
result in variable costs of R1 418/m 3. The value margin is then R2 382 – R1 418 = R964/m 3.
The value margin is used to determine the break-even volume required to pay for fixed costs.
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STUDY UNIT 2.3 Joint- and by-products
Prior Learning
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:

should be able to:
• Distinguish between joint- and by- Joint and by-product Joint and by-product
products; costing. costing.
• Explain the alternative methods of Pages 129 – 138. Pages 134 – 143.
allocating joint costs to products; • Drury: Chapter 4: • Drury: Chapter 4:
• Describe and apply the accounting Accounting entries for a Accounting entries for a
treatment of by-products; job costing system – job costing system –
• Describe backflush costing. Backflush accounting Backflush accounting
Pages 93 – 95. Pages 98 – 100.
Activity 1

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 JIT (no or very low inventories)

 
Elaborate costing systems tracing Backflush accounting
Costs to products
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.
concepts:
Topic Yes/No
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
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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
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.
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
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:
Before studying this topic, you should Applicable references: Applicable references:
be able to deal with:
• Corporate strategy and long-term • Drury: Chapter 15: • Drury: Chapter 15:
planning The budgeting process The budgeting process
Pages 358 - 387. Pages 368 - 398.
o Competitive advantage
o Porter’s models • Drury: Chapter 16: • Drury: Chapter 16:
o Value chain Pages 400 - 409. Pages 411 - 420.
o Supply chain
• Budgeting Criticisms of budgeting Criticisms of budgeting
Page 383 Pages 393 - 395
o Master, capital, cash and
subsidiary budgets
o Fixed and flexible budgeting
o Zero-base budgeting
o Activity-based budgeting
o Stages in planning functions etc.
o Responsibility centres
o 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
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• Zero-based budgeting and

• Management control systems
Study
Drury 8th ed. p377 – 379 or Drury 9th ed. p388 – 390: Activity-based budgeting
Activity 1

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.
Attempt questions: (Drury textbook)

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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)

• The advantages and disadvantages of benchmarking.
Activity 1

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 non-
financial 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.
Ensure that you can describe the following concepts briefly in a paragraph:
1 Action or behavioural controls

2 Personnel, cultural and social controls
3 Results or output controls
4 Cybernetic control systems
5 Feedback and feed-forward controls
6 Life-cycle costing
7 Target costing
8 Kaizen costing
9 Activity-based management
10 Business process re-engineering
11 Cost of quality
12 Cost management and the value chain
13 Environmental cost management
14 Just-in-time systems
15 Strategic management accounting
16 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
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

should be able to:
• Calculate a break-even point • Drury: Chapter 8: • Drury: Chapter 8:

and margin of safety Cost-Volume-Profit Cost-Volume-Profit
• Calculate sensitivities for analysis. Pages 168 – analysis. Pages 172 – 190.
changes in any variables in 185.
the CVP model.
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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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 break-
even 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.

C1:
Budgeted =
The budgeted sales are divided equally (C1) between these two products and the 50:50
budgeted contribution is R10 per unit of product X and R6 per unit of product Y.
C2: Actual =
The actual sales for the period consisted of 75% for product Y and 25% (C2) for 75:25
product X. The annual fixed costs are R560 000.
Actual costs and selling prices are identical to the budget.(C3)
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
C1: Average base
(a) Budgeted average contribution 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) C2: New split lowers

= R2,50+ R4,50 average as more with low
contribution sold.
= R7,00
Actual break-even point

C3: BE now higher as
average down.
= Fixed costs / Actual average unit contribution
= R560 000 / R7,00
= 80 000 units
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(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 break-
even calculation.
Activity 2
Work through example: (Drury textbook)

8th ed: Example 8.2 p179
9th ed: Example 8.2 p183

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:
Sales 1 265 000

Less: Variable costs 935 000
Contribution margin 330 000
Less: Fixed costs 150 000
Net income 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 = Fixed cost / Contribution

= R150 000 / (R1 150 - R850)
= 500 units (2)
(b) Margin of safety = (Expected sales - Break-even sales) / Expected sales

= (1 200 - 500) / 1 200)
= 58,33% (1)
(c) Proposal: Contribution income statement
Calculation R
Sales (1 100 x [R1 150 - 12,5%] x 1,25 1 383 594

Variable costs (1 100 x R850 x 1,25) 1 168 750
Contribution 214 844
Fixed costs (150 000 + 25 000) 175 000
Net income 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 (1)
Management should not accept the changes, as it decreases net income. (1)
(d) Net income = Sales - Variable costs - Fixed costs

NI = SP x - Varx - FC
R180 000 = (1 100 x 1,4 x R1 150) - (1 100 x 1,4 x [850 - 90 - 25]) - R150 000 –
advertising
R180 000 = R1 771 000 - R1 131 900 - 150 000 - advertising
R180 000 = R489 100 - advertising
Advertising = R309 100 (3)
Advertising may increase with R309 100, representing the incremental contribution margin,
without affecting the net income.
(e) NI = SP x - VarCx - FC
R195 000 = (R1 150 x 850) + (600 x SP) - (1450 x R850) - R150 000
R195 000 = R977 500 + 600SP - R1 232 500 - R150 000
600SP = R600 000
SP = 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.
Knowledge check:
Before proceeding to the next study unit, ensure that you are on par with the following concepts:
Yes/No
1. Classification of costs
2. Determination of fixed and variable costs
3. Definition and calculation of contribution
4. Calculation of the break-even point
5. Interpretation of margin of safety and other sensitivity percentages
6. Effect of change of a given factor on profit or other relevant issue.
END OF CONTENT FOR TEST 1

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PART 2, TOPIC 4 – Standard costing
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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STUDY UNIT 4.1 Variance analysis
Prior Learning
ensure that you are up to date with the prior learning for variance analysis. If not, please refer to your

Before studying this topic, you should
be able to deal with: Applicable references: Applicable references:
• Design of standard costing systems Drury: Chapter 17, Drury: Chapter 17,
pages 423 – 450 pages 434 – 463
• Variance analysis
• Reporting on variance analysis Drury: Chapter 18, Drury: Chapter 18,
pages 458 – 469 pages 471 – 482
• Reconciliation of budget to actual
• Investigation of variances and Drury: Chapter 18, Drury: Chapter 18,
exception reporting pages 470 – 472 pages 483 – 485
• Pro-rating of variances and Drury: Chapter 7, Drury: Chapter 7,
compliance with the relevant pages 155 – 157 pages 159 – 162
accounting standard
• Cost estimation when the learning Drury: Chapter 23, Drury: Chapter 23,
curve effect is present Pages 619 – 622 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

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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

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.

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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

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.

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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)

• 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
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.
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.
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
• 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.
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
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:
Before studying this topic, you should be able to deal Applicable Applicable
with: references: references:
Chapter 19: Chapter 19:
• Divisionalised organizational structures Drury page 485 Drury page 498
• Profit centres and investment centres Drury page 485 Drury page 498
• Advantages and disadvantages of divisionalisation Drury page 486 Drury page 499
• Pre-requisites for successful divisionalisation Drury page 486 Drury page 499
• Distinguishing between the managerial and economic Drury page 486 Drury page 499
performance of the division
• Alternative divisional profit measures Drury page 488 Drury page 500
• Return on investment Drury page 490 Drury page 502
• Residual income Drury page 491 Drury page 503
• Economic value added (EVA™) Drury page 492 Drury page 504
• Determining which assets should be included in the Drury page 492 Drury page 508
investment base
• The impact of depreciation Drury page 494 Drury page 509
• The effect of performance measurement on capital Drury page 495 Drury page 510
investment decisions
• Addressing the dysfunctional consequences of short- Drury page 497 Drury page 512
term financial performance measures
• Benchmarking Drury page 553 Drury page 571
• Controls at different organizational levels Drury page 394 Drury page 405
• Responsibility centres Drury page 400 Drury page 411
- 402 - 413
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
8th ed. 9th ed.
• Residual income Drury page 491 Drury page 503
• Economic value added (EVA™) Drury page 492 Drury page 504
• Determining which assets should be included in the
investment base Drury page 492 Drury page 508
• The impact of depreciation Drury page 494 Drury page 509
• The effect of performance measurement on capital
investment decisions Drury page 495 Drury page 510
• Addressing the dysfunctional consequences of short-term
financial performance measures Drury page 497 Drury page 512
• Benchmarking Drury page 553 Drury page 571
• Controls at different organizational levels Drury page 394 Drury page 405
• Responsibility centres Drury page 400 - Drury page 411 -
402 413
Activity 1

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) 4 333

Add Goodwill amortisation 253
Add Deferred tax and other Provisions 14
Add total Debt 467
Adjusted capital Employed 5 067
• Adjust the Net Profit as follows:
Operating profit before Tax 2 642

Add Interest expense 120
Minus Tax 469
Minus extra-ordinary gains 20
NOPAT 2 273
Above will be illustrated by working through activity 2.

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Activity 2 – EVA

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

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
1. Economic performance
2. Economic value added
3. Managerial performance
4. Return on capital employed
5. Return on investment
6. Residual income
Enrichment activity 1
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.
Enrichment activity 2
Peruse and absorb the performance measures reported on in the following pages. Note the
commonalities and focus areas of the different companies.
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STUDY UNIT 5.2 Transfer pricing in divisionalised companies
Prior Learning
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
Before studying this topic, you should be Applicable references: Applicable references:
able to: Chapter 20: Chapter 20:
• Discuss the purpose of transfer pricing Drury pages 509 – 510 Drury pages 526 – 527
• Apply alternative transfer pricing methods Drury pages 511 – 518 Drury pages 527 – 535
• Consider proposals for resolving transfer Drury pages 518 – 521 Drury pages 535 – 538
pricing conflicts
• Recommend domestic transfer pricing Drury pages 521 – 523 Drury pages 538 – 539
• Evaluate international transfer pricing Drury pages 523 – 525 Drury pages 539 – 541
• Discuss the economic theory of transfer Drury pages 526 – 532 Drury pages 543 – 549
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
8th ed. 9th ed.

• Proposals for resolving transfer pricing conflicts Drury pages 518 – 521 Drury pages 535 – 538
• Domestic transfer pricing recommendations Drury pages 521 – 523 Drury pages 538 – 539
• International transfer pricing Drury pages 523 – 525 Drury pages 539 – 541
• Appendix 20.1: Economic theory of transfer Drury pages 526 – 532 Drury pages 543 – 549
pricing
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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 The minimum transfer price should comprise the incremental cost (usually variable cost plus
any increase in fixed costs) and opportunity cost.
o Opportunity cost exists only if there are sacrificed external sales due to the internal transfer
of goods (and is the contribution thus lost).
2. Maximum transfer price (that the receiving division would pay)
o If there is an external market to buy from, the transfer price should be the Market price less
savings on selling and transport expenses
3. The maximum negotiated profit
o This refers to the incremental profit that would be made by the receiving division on the
ultimate sale of the goods.
4. 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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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:

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

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.
Ensure that you can
1. Motivate a recommended transfer price

2. Apply transfer price principles to different cost bases
3. 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 short-
term 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
• Have a critical understanding of key concepts, rules and established principles of decision-
making.
• 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.
• ‘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
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:

Before studying this topic, you should be able Applicable Applicable
to: references: references:
Define risk and uncertainty. Drury page 279 - 280 Drury page 287 - 288
Calculate probability distribution and expected
value. Drury page 281 - 282 Drury page 289 - 290
Measure the amount of uncertainty/risk. Drury page 282 - 283 Drury page 290 - 291
Describe individuals’ attitudes to risk. Drury page 283 - 284 Drury page 291 - 293
Establish the buying of perfect and imperfect
information Drury page 286 - 287 Drury page 294 - 295
Calculate maximin, maximax and regret criteria. Drury page 287 - 289 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
Drury 8th ed. Drury 9th ed.
• Measuring the amount of uncertainty Drury page 282 - 283 Drury page 290 - 291
• Buying perfect and imperfect information Drury page 286 - 287 Drury page 294 - 295
• Maximin, maximax and regret criteria Drury page 287 - 289 Drury page 296 - 297
• Risk reduction and diversification Drury page 289 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 Probability of Rate of Rate of return Rate of return

economy State of return Share B Share C
Economy Share A
Boom 0.15 0.30 0.45 0.33

Good 0.25 0.12 0.10 0.15
Poor 0.55 0.01 -0.15 -0.05
Bust 0.05 -0.20 -0.30 -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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Feedback 1
1. Calculate the expected return of the portfolio.
State Prob Share A Weighting Share B Weigh- Share Weighting Return Portfolio
(40%) ting (20%) C (40%) Sum return
Return Return*40% Return Return*20 Return Return*40% of
% weight Weight*
returns Prob
Boom 0.15 0.30 0.12 0.45 0.09 0.33 0.132 0.342 0.0513
Good 0.25 0.12 0.048 0.10 0.02 0.15 0.06 0.128 0.032
Poor 0.55 0.01 0.004 -0.15 -0.03 -0.05 -0.02 -0.046 -0.0253
Bust 0.05 -0.20 -0.08 -0.30 -0.06 -0.09 -0.036 -0.176 -0.0088
0.0492
Expected value 4.92%
2. Calculate the standard deviation (σ) of the portfolio.
State Probability Return Portfolio Squared variances Weighted amount

(R) variances
R-EV (R-E)2 (R-E)2 * Probability
Boom 0.15 0.342 0.2928 0.085732 0.0128598

Good 0.25 0.128 0.0788 0.006209 0.0015524
Poor 0.55 -0.046 -0.0952 0.009063 0.0049847
Bust 0.05 -0.176 -0.2252 0.050715 0.0025358
σ2 0.0219326
σ 14.81%
3. 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 Machine Zozo

Profit Profit
Low 0.5 R100 000 R10 000

High 0.5 R160 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:
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.
1. Expected value
2. Co-efficient of variation
3. Perfect information
4. Risk diversification
5. Standard deviation
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PART 3, TOPIC 7 – Information application to decisions
TOPIC 2 LEARNNG OUTCOMES

• 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.
• 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
ensure that you are up to date with the prior learning for relevant costs and revenues for decision-
making. 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:
Before studying this topic, you should be able Applicable Applicable

to: references: references:
• Describe the meaning of relevance. Drury page 195 Drury page 199
• Highlight the importance of qualitative factors. Drury page 195 - 196 Drury page 199 - 200
• Make special pricing decisions. Drury page 196 - 200 Drury page 200 - 204
• Make product-mix decisions when capacity
constraints exist. Drury page 200 - 203 Drury page 204 - 207
• Consider outsourcing and make or buy
decisions. Drury page 204 - 207 Drury page 208 - 211
• Make discontinuation decisions. Drury page 207 - 209 Drury page 211 - 213
• Determine the relevant costs of direct materials
and direct labour. Drury page 209 - 210 Drury page 213 - 214
• Explain the relevant cost information that should
be presented in price setting firms for both short-
Drury page 227 - 241 Drury page 231 - 245
term and long-term decisions.
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 non-
bottleneck operations, the theory of constraints (TOC).
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Study
Drury 8th ed. Drury 9th ed.

• The key concept that should be applied for
presenting information for product-mix decisions
when capacity constraints apply. Drury page 200-203 Drury page 204-207
• Replacement of equipment and the irrelevance of
past costs. Drury page 203-204 Drury page 207-208
• Appendix 9.1: The theory of constraints and
throughput accounting. Drury page 212-216 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 • Sunk cost

Ordered or received, not yet paid • Sunk cost (already committed to pay), unless able to
return the goods to the supplier
No other use at present • No value (0)
Could be sold directly • Net realisable value
May be used on another job • Lost contribution (opportunity cost)
Frequently used • Replacement cost
Used as a substitute • Cost saved by not having to purchase other
material
Must otherwise be disposed of • 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:

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

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

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.
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)

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)

Feedback 2
Relevancy, expectancy and constraints are the core of this question.
Activity 3

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Feedback 3
Consider the layouts and combining with qualitative aspects.
Activity 4

Feedback 4
A combination of absorption costing, variable costing and inventory required.
Activity 5

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.
Activity 8
Attempt test 1 MAC4861 BEFORE attempting test 1 of MAC4862. Ensure that principles are
understood clearly.
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MAC4861 – TEST 1 (MAC4861)
QUESTION 40 marks
Jump (Pty) Ltd (‘Jump’) is a company that manufactures and sells jumping castles. Jump
manufactures 3 ranges of jumping castles, King, Queen and Joker. Jump also has a 100% owned
subsidiary, Parties (Pty) Ltd (‘Parties’), which rents out jumping castles for various occasions to the
public.
During the last few months Jump and Parties have experienced a drop in sales and rentals
respectively.
Because of extensive load shedding, the manufacturing plant has experienced downtime in terms of
production and the company is incurring losses on a monthly basis. The manufacturing plant has a
generator installed as back up, but it is not powerful enough to run the whole manufacturing plant
during load shedding. To run the generator hours on end is proving to be very costly with the high
diesel prices. This has caused the variable manufacturing overheads to increase for the current year.
The marketing department has informed Mr Fun, the group companies’ managing director, that they
are experiencing a decline in sales and rentals. The management accountant has prepared a
Statement of Comprehensive Income for management’s consideration.
Mr Fun is considering discontinuing the manufacturing of one of the ranges of jumping castles.
JUMP (PTY) LTD
Actual results for the year ended 28 February 2015:
King Queen Joker
Sales – units 800 200 150

Sales price per unit R10 000 R11 000 R13 000
Closing inventory - units 300 Nil ?
Actual production units 1 000 100 150
Budgeted production units 1 000 120 430
Total units used in actual production for the year ended 28 February 2015:
Direct material
- Material A (meters) – R100/m 16 000 2 750 3 000

- Material B (meters) – R124/m 8 000 2 750 4 500
40 000 3 500 7 500
Variable labour hours – R55/h
Variable manufacturing overheads – per unit R340 R290 R425
Fixed manufacturing overheads - actual R1 250 000

Fixed selling and administrative costs - actual R1 750 000
Budgeted fixed manufacturing overheads are allocated based on budgeted labour hours of 50 000
hours at a rate of R20/labour hour.
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Statement of Comprehensive Income for the year ended 28 February 2015:
Turnover 12 150 000

Cost of Sales (8 254 556)
- Opening inventory 2 546 573
- Production costs 8 553 750
- Closing inventory (2 845 767)
3 895 444
(Over-)/under recovery of fixed manufacturing overheads (20 000)

Expenditure variance (250 000)
Gross profit 3 625 444
Less: Non-manufacturing costs (1 750 000)
Profit/(Loss) 1 875 444
The auditors, Solutions Inc, are questioning the closing inventory valuation in the profit statement as
prepared by the management accountant. They found that the management accountant used the
actual fixed manufacturing overheads to allocate the fixed manufacturing overheads.
PARTIES (PTY) LTD
Jumping castles are rented out to clients on a daily basis with a daily rate. They inflate with an air
compressor that uses normal electricity. Clients can either collect the jumping castles themselves or it
can be delivered to the venue at an extra cost.
Parties have received numerous complaints from clients. Clients are not aware of the possibility that
the jumping castles cannot be used during load shedding when renting the castles. Although it is
something that is not within the company’s control it is causing major concern as the profit of the
company has decreased significantly compared to 2014.
Mr Fun has arranged a workshop with the marketing department to brainstorm solutions to the drop in
rentals. It is important for Mr Fun to retain their good reputation in the market and have recurring
clientele.
Mr Fun is considering buying generators to rent out together with the jumping castles for the same
amount as the rental of each of the jumping castles. Each generator has a meter that measures the
time the generator has been running as well as a fuel gauge that shows the amount of diesel left in the
generator. In the case that the generators are not used the amount paid can be refunded to the client.
Each of these generators costs R10 000.
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REQUIRED Marks
(a) Calculate the break-even sales units of each of the jumping castle ranges for
Jump (Pty) Ltd. (12)
(b) Calculate the closing units for the Joker range and value the cost of sales
correctly by taking into consideration the difference found by the auditors. (14)
Communication: Layout and logic (1)
(c) Show by way of detailed journal entries (including narratives), how the
management accountant should have treated the fixed manufacturing
overheads in the management accounts. (5)
(d) As part of the workshop, discuss the risks for the company when renting out
jumping castles as well as the generators. (5)
(e) Briefly explain why Mr Fun is focused on the company’s reputation and
recurring clients. (3)
TOTAL 40
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MAC4861 – TEST 1 (2015)
SUGGESTED SOLUTION 40 marks
R/W – Right/Wrong mark C – Consequential mark
With regard to the layout error (misalignment) in the MAC4861 test: all students have been
given an additional 2 marks (5%) to compensate for additional time it might have taken to
understand the information.
Part (a) Calculate the break-even sales units of each of the jumping castle ranges for Jump
(Pty) Ltd
Markers comments:
It is clear that students struggle with multi product break-even calculations. Many students divided
the fixed costs between the various products. This is NOT correct. The contributions have to be
weighed to get to an weighted average contribution per unit. Fixed costs should be calculated in
total and then the break-even should be calculated and then assigned to each product.
Sales units should be used to weigh the contribution and not production volume.
Total fixed costs = R1 250 000 + R1 750 000 = R3 000 000 (1) r/w
King Queen Joker

R R R
Sales price per unit 10 000 11 000 13 000
Less variable costs per unit *
Direct material – A 1 600 2 750 2 000 (1½) r/w
Direct material – B 992 3 410 3 720 (1½) r/w
Direct labour 2 200 1 925 2 750 (1½) r/w
Variable manufacturing overheads 340 290 425 (1½) r/w
Contribution per unit 4 868 2 625 4 105 (1½) c
ALTERNATIVE King Queen Joker

R R R
Less variable costs
Direct material – A 1 600 000 275 000 300 000 (1½) r/w
Direct material – B 992 000 341 000 558 000 (1½) r/w
Direct labour 2 200 000 192 500 412 500 (1½) r/w
Variable manufacturing overheads 340 000 29 000 63 750 (1½) r/w
(340 x 1000)/(290 x 100)/(425 x 150)
Total 5 132 000 837 500 1 334 250

Divided by total production units 1000 100 150
Total variable cost per unit 5 132 8 375 8895
Contribution per unit 4 868 2 625 4 105 (1½) c
* Variable costs per unit = total usage / units produced x rate

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ALTERNATIVE:
King 10 000 - 5 132 [(16 x 100)+(8 x 124)+(40 x 55)+340] = 4868
Queen 11 000 - 8 375 [(27.50 x 100)+(27.50 x 124)+(35 x 55)+290] = 2625
Joker 13 000 - 8 895 [(20 x 100)+(30 x 124)+(50 x 55)+425] = 4105
King Queen Joker Total

Sales units (given) 800 200 150 1 150
Total contribution (R) 3 894 400 525 000 615 750 5 035 150
Weighted average contribution per unit = Total contribution/Total Sales volume

= R5 035 150 / 1 150 (2)c Must use sales volume,
not production volume.
= R4 378,39
Alternative: (R4 868 x 800 / 1 150) + (R2 625 x 200 / 1 150) + (R4 105 x 150 / 1 150) (2)c
= R4 378,38
Break-even point (units) = R3 000 000 / R4 378,39 (1) c

= 685,18 units
Break-even in units per range:

King Queen Joker
(685,18 x 800/1 150) (685,18 x 200/1 150) (685,18 x 150/1 150)
= 477 = 120 = 90 (1½) c
ALTERNATIVE:
Total sales = (R10 000 x 800) + (R11 000 x 200) + (R13 000 x 150)
= R12 150 000
Contribution % = R5 035 150 / R12 150 000

= 41,442%
Break-even (Rand) = R3 000 000 / 0,41442 (1) c

= R7 239 032,87
Weighted average sales per unit = R12 150 000 / 1 150

= R10 565,22 (1) c
Break-even (units) = Break-even (Rand) / Weighted average sales per unit

= R7 239 032,87 / R10 565,22 (1) c
= 685,18 units
Break-even in units per range:

King Queen Joker
(685,18 x 800/1 150) (685,18 x 200/1 150) (685,18 x 150/1 150)
= 477 = 120 = 90 (1½) c
Total 12
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Part (b) Calculate the closing units for the Joker range and value the cost of sales correctly by
taking into consideration the difference found by the auditors.
Markers comments:
It was clear that many students are not comfortable with the basic principles of variable and
absorption costing.
Firstly the absorption costing per unit should have been calculated using the incorrect approach as
indicated in the question to calculate the closing units of Joker. Once the closing units have been
calculated the correct absorption costing per unit had to be calculated to calculate the correct Cost
of Sales.
Closing inventory as given = R2 845 767 NB: If this

was not
King Queen Joker calculated
R R R
in (a) but
Variable costs as calculated in (a):
Direct material – A 1 600 N/A 2 000 in (b) then
Direct material – B 992 3 720 marks
Direct labour 2 200 2 750 should be
Variable overheads 340 425 awarded in
Total variable cost per unit 5 132 8 895 (1)c
Fixed manufacturing overheads

=R1 250 000 / 51 000 x (40 000 / 1 000) 980 (1)r/w
=R1 250 000 / 51 000 x (7 500 / 150) 1 225 (1)r/w
Total absorption cost per unit 6 112 10 120 (1)c
Closing inventory value (R6 112 x 300) 1 833 718 (1)c

Rounding: OR 1 833 600
∴ R2 845 767 – R1 833 718 = 1 012 049 (1)c

OR R2 845 767 – R1 833 600 = OR 1 012 167
Closing inventory units:

R1 012 049 / R10 120 100 (1)c
ALTERNATIVE:
Total variable cost per unit 5 132 8 895 (1)c

=R1 250 000 / 50 000 x (40 000 / 1 000) 1 000 (1)r/w
=R1 250 000 / 50 000 x (7 500 / 150) 1 250 (1)r/w
Total absorption cost per unit 6 132 10 145 (1)c
Closing inventory value (R6 132 x 300) 1 839 600 (1)c
∴ R2 845 767 – R1 839 600 = 1 006 167 (1)c

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Closing inventory units:

R1 006 167 / R10 145 99,2 OR 100 (1)c
Correct value of Cost of Sales:
King Queen Joker
R R R
Total variable cost per unit (above) 5 132 8 375 8 895

= R20 x (40 000 hr / 1 000) 800 (1)r/w
= R20 x (3 500 hr / 100) 700 (1)r/w
= R20 x (7 500 hr / 150) 1 000 (1)r/w
Total absorption cost per unit 5 932 9 075 9 895 (1½)c
Opening inventory 100 100 100

Production 1 000 100 150
Sales (800) (200) (150)
Closing inventory 300 - 100

R R R R
Cost of Sales 8 101 223
Had to
Opening inventory (given) 2 546 573 (1)r/w calculate an
Production 5 932 000 907 500 1 484 250 8 323 750 (2)c absorption
Closing inventory (1 779 600) - (989 500) (2 769 100) (1½)c cost for the 2
marks
ALTERNATIVE (IF CLOSING UNITS = 99)

R R R R
Cost of Sales 8 109 351
Opening inventory (given) 2 546 573 (1)r/w
Production 5 932 000 907 500 1 484 250 8 323 750 (2)c
Closing inventory (1 779 600) - (981 372) (2 760 972) (1½)c
Communication skills: Layout and logic ( if absorption costing was applied) (1)
Total 17
Max 15
Part (c) Show by way of detailed journal entries (including narratives), how the management
accountant should have treated the fixed manufacturing overheads in the management
accounts.
Markers comments:
Basic principles are that: ‘overs or unders’ are calculated relative to the budget quantity and that
each product unit in inventory under absorption should carry fixed overhead. Majority of the
students did not know how to account for the fixed manufacturing overheads by way of journals.
This question was answered poorly.
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R R
Dr Factory fixed overhead control account 1 250 000 (½)r/w
Cr Creditors / Bank 1 250 000 (½)r/w
Accounting for actual overheads incurred (½)
R R
Dr Work-in-progress (R20 x 51 000 hrs) 1 020 000 (1)r/w

Cr Over recovery / Volume variance (51 000-50 000) x R20 20 000 (1)r/w
Cr Factory fixed overhead control account 1 000 000 (1)r/w
Allocating overheads to inventory account based on (½)
budgeted rate per hour and actual hours and accounting
for volume variance (over recovery).
Dr Fixed overhead expenditure variance (R1250k-R1000k) 250 000 (1)r/w

Cr Factory fixed overhead control account 250 000 (1)r/w
Difference between actual and budgeted overheads (½)
expensed
Total 7(½)
Max 5
Part (d) As part of the workshop, discuss the risks for the company when renting out jumping
castles as well as the generators.
Markers comments: Many students discussed risks for the customers and not the company. It is
important to keep your answer to risk for the company. Many students also listed risks in terms of
financing and the impact thereof. The question clearly stated risk when renting out the jumping
castles.
The basic principle of any renting out process is that a ‘large’ deposit is required upfront before the
rental is concluded, more so in the case of a movable object than for a ‘fixed’ asset.
Many students said that the generators will not be used is load shedding ends. It is discussed very
often in the papers that load shedding is still going to happen for at least the next 2 -3 years.
• Generators and jumping castles being stolen and the company incurring losses. (1)
• Damage to generators and jumping castles and the cost of maintenance. (1)
• Clients renting out the generators to third parties. (1)
• Generators and jumping castles returned late and not being available for other (1)
clients.
• Claims against the company in case of an injury. (1)
• High cash outflow when renting the generator and the jumping castle. It might deter
the clients from renting the jumping castles. (1)
• Tampering with the generators (time meter or fuel gauge) with the intention to
defraud the company for the generator refund. (1)
• Any other valid point. (NOT: financing decision and impact) (1)
Total 8
Max 5
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Part (e) Briefly explain why Mr Fun is focused on the company’s reputation and recurring
clients.
Markers comments: This question was answered well overall.
• If the company gets a bad reputation then they will not rent/sell jumping castles, (1)
which will result in financial losses and vice versa.
• There is a lot of competition and the company needs to keep a good reputation. (1)
Loss of clients can result in financial losses.
• It is cheaper in terms of marketing costs, to keep an existing client than to obtain a (1)
new client.
• An existing customer base facilitates the sale of value added or add-on products (1)
and services.
• Good reputation and recurring clients can be an asset, which can increase (1)
shareholder value.
• Recurring business i.t.o. rentals can make budgeting easier for the following year. (1)
• Any other valid point (1)
Total 7
Max 3
TOTAL 40
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MAC4862 – TEST 1 (2015)
QUESTION 40 marks
THIS TEST CONSISTS OF THREE INDEPENDENT PARTS, ALL OF WHICH MUST BE

ATTEMPTED
PART A
Seminar Networks (Pty) Ltd (‘SN’) is a company specialising in providing medical seminars to health
professionals. It was started six years ago in Johannesburg by Dr Floyd Nightingale, a retired general
practitioner, and is accredited by the Health Professions Council of South Africa (HPCSA) to provide
Continuing Professional Development (CPD) to the medical community. The company now offers
seminars in both Johannesburg and Cape Town. The company offers three seminars per month from
January to November in each location – two half day seminars and one full day seminar.
The following information relates to the budget for the year ending 29 February 2016:
1. The budgeted seminar fee is R1 800 per half day seminar and R3 900 per full day seminar.
2. The budgeted number of attendees are 4 150 attendees for half day seminars and 1 520 for full
day seminars.
3. SN has contracted with a well-known South African hotel chain to hire venues at a fixed amount of
R20 000 per half day and R25 000 per full day in Johannesburg and R15 000 per half day and
R20 000 per full day in Cape Town during the year. A catering fee of R85 per half day attendee
and R365 per full day attendee at both venues was also negotiated. SN informs the hotel 2 days
in advance of the number of attendees.
4. Each attendee receives various small marketing items at the seminars i.e. a pen, notepad and
folder with the company name and logo. This is budgeted at R50 per attendee.
5. SN has contracted with a Johannesburg printer to print and deliver the seminar hand-outs at a cost
of R80 per half day seminar hand-out and R100 per full day seminar hand-out. Due to the printing
and delivery time needed, SN orders hand-outs a week in advance for the maximum expected
number of attendees at each venue. The following standing orders apply for the 2016 financial
year:
Johannesburg Cape Town
Half day seminar hand-outs per seminar 120 100

Full day seminar hand-outs per seminar 80 80
6. Presenters for the seminars are sourced from the local universities in Johannesburg and Cape
Town. They are paid R10 000 per half day seminar and R15 000 per full day seminar.
7. Dr Nightingale has employed two co-ordinators, one in Johannesburg and one in Cape Town, to
be present at the venues on the day of the seminars to welcome and register the attendees and
perform other administrative duties. The Johannesburg co-ordinator will receive a salary of R9 000
per month while the Cape Town co-ordinator will receive R8 000 per month.
8. SN has budgeted to pay R600 000 accreditation fees to the HPCSA to register as an accredited
CPD service provider.
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9. The following items are also budgeted for:
R
Marketing and entertainment expenses 1 000 000
Salary – Dr Nightingale 1 100 000
Admin and operating expenses 700 000
Depreciation 200 000
3 000 000
10. SN has obtained a sponsor for the seminars for the 2016 financial year. The sponsor is a software
company that supplies accounting packages for medical practices. The sponsor’s details will
appear on the folders containing the seminar hand-outs and marketing material will be included in
the folder. The software company will pay R300 000 to SN in terms of the sponsorship agreement.
11. The budgeted income taxation rate is 30%.
PART B
Doggy Treats (Pty) Ltd manufactures two varieties of treats for dogs, namely Goofy and Pluto. They
are manufactured in the same factory using the same equipment but with different ingredients and
recipes. Both types of dog treats are sold in 1 kilogram bags only.
The following information is available for the year ended 28 February 2015:
1. There was no budgeted or actual opening inventory of raw materials, work-in-progress or

completed products.
2. There was no budgeted or actual closing inventory of raw materials or work-in-progress.
3. The following production and sales information is available:
Goofy Pluto
Budgeted production 850 000 kg 310 000 kg
Actual production 880 000 kg 321 000 kg
Budgeted sales 845 000 kg 302 000 kg

Actual sales 878 000 kg 309 000 kg
4. The following labour and machine information is available:
Goofy Pluto
Budgeted labour hours 95 000 hours 46 000 hours
Actual labour hours 100 000 hours 53 000 hours
Budgeted machine hours 136 000 hours 65 100 hours

Actual machine hours 140 000 hours 70 100 hours
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5. The following information relating to fixed manufacturing expenses is available:
R
Budgeted fixed labour expense 8 460 000
Actual fixed labour expense 8 500 000
Budgeted other fixed overhead expense 10 055 000

Actual other fixed overhead expense 10 000 000
Other fixed overheads are allocated based on machine hours.
6. The following actual costs are available:
Goofy Pluto
R per unit R per unit
Ingredients 12,00 17,00
Packaging 4,00 4,50
The management accountant of Doggy Treats has investigated the possibility of implementing activity-
based costing (ABC). He has collected the following information regarding the budgeted fixed
overheads:
Activity area Cost Driver Total cost

R
Materials handling Set-ups 5 000 000
Mixing and baking Processing time 11 500 000
Packaging Packaging time 2 015 000
Total 18 515 000
The following data relates to the 2015 budget:

Goofy Pluto
Batch size 5 000 kg 3 100 kg
Set-ups 2 per batch 3 per batch
Processing time 0,08 hours / 100 kg 0,2 hours / 100 kg
Packaging time 2,0 hours / batch 2,2 hours / batch
PART C
Management accounting requires grounding in real life business knowledge, where its students must
not only consume business news on a daily basis but seek greater understanding of underlying
reasons. Within this context, this section assesses parts of the syllabus as it relates to:
a) Vehicle manufacturers keep on manufacturing model ranges after their initial lifespan has passed.
b) Most products are now available from traditional stores as well as e-platforms.
c) Fuel has different prices in different regions.
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REQUIRED
PART A
REQUIRED Marks
(a) Calculate the number of attendees of each type that Seminar Networks needs to
have in order to break-even in the 2016 financial year. (12)
(b) Calculate the total budgeted margin of safety percentage for Seminar Networks. (1)
Total 13
PART B
REQUIRED Marks
(c) Calculate the actual value of closing inventory per unit for Goofy and Pluto. Round
all calculations to three decimals. (5)
(d) Calculate the total volume variance for fixed overheads as well as the total
expenditure variance for the year ended 28 February 2015. Briefly explain how
these amounts will be treated in the management accounts. (6)
(e) Calculate the budgeted amount of overheads that would have been allocated to
each product in terms of activity-based costing (ABC). (9)
Total 20
PART C
REQUIRED Marks
(f) Briefly explain why vehicle manufacturers such as Volkswagen and Ford can price
the Polo Vivo and Figo much lower than their comparable replacement models, the
Polo and Fiesta. (2)
Communication skills – logical argument (1)
(g) Briefly explain why Takelot.com / Kalahari.com can price (text) books much lower
than traditional brick-and-mortar bookshops. (2)
(h) Briefly explain why fuel is more expensive in
(i) The Northern Provinces vs Coastal Provinces of South Africa (1)
(ii) South Africa vs its neighbouring countries (1)
Total 7
TOTAL 40
Note: You will be exposed to similar scenarios as in PART C during 2016.

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MAC4862 – TEST 1 (2015)
SUGGESTED SOLUTION 40 marks

R/W – Right/Wrong mark C – Consequential mark
Part (a) Calculate the number of attendees of each type that Seminar Networks needs to have in order
to break-even in the 2016 financial year.
Seminars per year:

Half day = 2 per month x 11 months = 22 seminars x 2 cities = 44 seminars
Full day = 1 per month x 11 months = 11 seminars x 2 cities = 22 seminars
Fixed costs
R
Venue hire (22 x R20 000) + (11 x R25 000) + (22 x R15 000) + (11 x
R20 000) = R440 000 + R275 000 + R330 000 + R220 000 1 265 000 (1) r/w
Printing ((120 + 100) x 22 x R80) + ((80 + 80) x 11 x R100) =
R387 200 + R176 000 563 200 (1) r/w
Presenters (44 x R10 000) + (22 x R15 000) = R440 000 + R330 000 770 000 (1) r/w
Co-ordinators (R9 000 x 12) + (R8 000 x 12) = R108 000 + R96 000 204 000 (½) r/w
Accreditation fees 600 000 (½) r/w
Marketing & entertainment 1 000 000 (½) r/w
Salary – Dr Nightingale 1 100 000 (½) r/w
Admin & operating expenses 700 000 (½) r/w
Depreciation 200 000 (½) r/w
Sponsorship (300 000) (1) r/w
Total 6 102 200
Note: Deduct one (1) mark if fixed costs were split between half day and full day and used as such.
Contribution Half day Full day

R R
Seminar fees 1 800 3 900 (1) r/w (½ each)
Less: Catering (85) (365) (1) r/w (½ each)
Less: Marketing items (50) (50) (1) r/w (½ each)
Contribution 1 665 3 485
Weighted average contribution per attendee:
= (R1 665 x 4 150 / 5 670) + (R3 485 x 1 520 / 5 670) (1) c Must use sales volume,
= R1 218,65 + R934,25 not production volume to weigh
= R2 152,90 per attendee
Alternative: Weighted average contribution = Total contribution / total attendees

= [(R1 665 x 4 150) + (R3 485 x 1 520)] / 5 670 (1) c
= R12 206 950 / 5 670
= R2 152,90 per attendee
Break-even = Fixed cost / Weighted average contribution per attendee

= R6 102 200 / R2 152,90 (1) c Must divide by
= 2 834,409 in total a weighted average
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Break-even number of attendees per type of seminar:

Half day = 2 834,409 x 4 150 / 5 670 (1) c Must use sales
= 2 074,567 volume to split
= 2 075 attendees
Full day = 2 834,409 x 1 520 / 5 670 (1) c Must use sales

= 759,842 volume to split
= 760 attendees
ALTERNATIVE 1:
Ratio of attendees per batch: 4 150 : 1 520
2,730 : 1
Contribution per batch = (2,730 x R1 665) + (1 x R3 485) (1) c Must use sales
= R4 545,45 + R3 485 volume, not production
= R8 030,45 per batch volume to weigh
R6 102 200
Break-even = R8 030,45 = 759,883 batches (1) c
Half day attendees = 759,883 x 2,730 = 2 074,481 = 2 075 attendees (1) c
Full day attendees = 759,883 x 1 = 760 attendees (1) c
ALTERNATIVE 2:
Total contribution = (R1 665 x 4 150) + (R3 485 x 1 520)

= R6 909 750 + R5 297 200 = R12 206 950
Total revenue = (R1 800 x 4 150) + (R3 900 x 1 520)

= R7 470 000 + R5 928 000 = R13 398 000
Contribution % = R12 206 950 / R13 398 000 = 91,110%
Break-even (Rand) = Fixed cost / Contribution %

= R6 102 200 / 0,9111 (1) c
= R6 697 618
Alternative 2.1
Weighted average revenue per attendee = Total revenue / sales volume

= R13 398 000 / 5 670 attendees
= R2 362,963
Therefore break-even attendees = R6 697 618 / R2 362,963 = 2 834,415 (1) c

Half day = 2 834,415 x 4 150 / 5 670 (1) c
= 2 074,572
= 2 075 attendees
Full day = 2 834,415 x 1 520 / 5 670 (1) c

= 759,843
= 760 attendees
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Alternative 2.2
Revenue ratio:
Half day = R7 470 000 / R13 398 000 = 0,55755
Full day = R5 928 000 / R13 398 000 = 0,44245
Break-even revenue per type of seminar

Half day = 0,55755 x R6 697 618 = R3 734 257 (½) c
Full day = 0,44245 x R6 697 618 = R2 963 361 (½) c

Half day = R3 734 257 / R1 800 = 2 074,6 = 2 075 attendees (1) c
Full day = R2 963 361 / R3 900 = 759,8 = 760 attendees (1) c
Total 14
Max 12
Markers’ comments:
This question focussed on the correct identification of fixed and variable costs in terms of the driver
of the costs and revenues i.e. the number of people attending the two types of seminars. For each
additional person attending a seminar additional revenue is generated and certain additional
variable costs are incurred. Fixed costs will not increase if an additional person attends e.g. an
additional venue or presenter will not be used if one more person attends. Most students correctly
identified that the sponsorship income was a fixed income that should be deducted from fixed
costs.
Fixed costs had to be calculated in total for the year and not per seminar (half day and full day) or
per city (Cape Town and Johannesburg) as was done by many students. . A very large number of
students happily added rental, presenter fees and printing cost per seminar to salaries per month
and other overheads per year.
Most students that applied weighting did so correctly, although a fair number incorrectly applied a
weighting of 2:1, being two half day seminars : one full day seminar.
Subsequently, one break-even calculation had to be done to determine the total number of
attendees which then had to be split between half day and full day. Numerous students did two (or
four) break-even calculations which indicates a lack of knowledge regarding the topic.
Part (b) Calculate the total budgeted margin of safety percentage for Seminar Networks.
Margin of safety % = Expected sales – Break-even sales

Expected sales
= 5 670 – 2 835 OR = R13 398 000 – R6 697 618

5 670 R13 398 000 (1) c
= 2 835 / 5 670 = R6 700 382/ R13 398 000

= 50% = 50%
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Although the question is clear that the total budgeted margin of safety was required, a fair number
of students tried to calculate this for half- and full day attendance instead.
Part (c) Calculate the actual value of closing inventory per unit for Goofy and Pluto. Round all
calculations to three decimals.
Budgeted fixed labour rate

R 8 460 000
(95 000 hrs + 46 000 hrs)
= R 8 460 000
141 000 hrs
= R60/hour (1) r/w
Budgeted labour hours per kg

Goofy
95 000 hours
850 000 kg = 0,112 hr/kg (½) r/w
Pluto
46 000 hours
310 000 kg = 0,148 hr/kg (½) r/w
Budgeted other fixed overhead rate

R 10 055 000
(136 000 hrs + 65 100 hrs)
= R 10 055 000
201 100 hrs
= R50/hour (1) r/w
Budgeted machine hours per kg

Goofy
136 000 hours
850 000 kg = 0,160 hr/kg (½) r/w
Pluto
65 100 hours
310 000 kg = 0,210 hr/kg (½) r/w
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Value per unit Goofy Pluto

R per kg R per kg
Ingredients 12,00 17,00 (½) r/w
Packaging 4,00 4,50 (½) r/w
Fixed labour (1) for
G: R60/hr x 0,112 hr/kg 6,72 including
P: R60/hr x 0,148 hr/kg 8,88 both Fixed
Other fixed overhead labour and
G: R50/hr x 0,160 hr/kg 8,00 Fixed
P: R50/hr x 0,210 hr/kg 10,50 overhead
30,72 40,88
Total 6
Max 5
Many students calculated a Fixed labour overhead and Other fixed overhead rate but used actual
Rand values and hours instead of budgeted. (If the budgeted rates were calculated in part (d) the
marks were awarded subsequently.) Very few students calculated the four hour per kilogram rates
that were needed to calculate the cost per unit as was required. The majority proceeded to add
overhead costs per hour to the materials cost per kg.
Part (d) Calculate the volume variance for fixed overheads as well as the total expenditure variance
for the year ended 28 February 2015. Briefly explain how these amounts will be treated in the
management accounts.
If calculations were not done in part (c) but were done in (d), Goofy Pluto Total
then marks should be awarded in (d). R R R
Allocated to / Absorbed in production: 19 174 580
Fixed labour 8 764 080
G: R60/hr x 0,112 hr/kg = R6,72 x 880 000 5 913 600 (½) c
P: R60/hr x 0,148 hr/kg = R8,88 x 321 000 2 850 480 (½) c
Fixed overhead 10 410 500
G: R50/hr x 0,160 hr/kg = R8,00 x 880 000 7 040 000 (½) c
P: R50/hr x 0,210 hr/kg = R10,50 x 321 000 3 370 500 (½) c
Budget 18 515 000

Fixed labour 8 460 000 (½) r/w
Fixed overhead 10 055 000 (½) r/w
Volume variance 659 580
Treatment of the volume variance in management accounts:

R659 580 added (‘income’ / credit / reduce expense) in calculation of gross profit. (1) c
Expenditure variance
R
Budget (R8 460 000 + R10 055 000) 18 515 000 (½) r/w
Actual (R8 500 000 + R10 000 000) 18 500 000 (½) r/w
Favourable expenditure variance (OR –R40 000 (A) + R55 000 (F)) 15 000 F
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MAC4862/102
Treatment of favourable expenditure variance in management accounts:

R15 000 added (‘income’ / credit / reduce expense) in calculation of gross profit. (1) c
Total 6
Max 6
Students generally did not perform well in part (d). Numerous students calculated the difference
between allocated overheads and actual overheads to arrive at a figure for over or under
absorption. A few calculated the difference between budgeted and actual for the volume variance
(and then proceeded to do the same in their calculation of the expenditure variance). A large
number of students ignored fixed labour in this part of the question.
Similarly to part (c), most students had not calculated the four hour per kilogram rates and used the
overhead costs per hour (R60 and R50) and multiplied them with the total actual labour hours and
machine hours respectively to determine the allocated (absorbed) amounts. This approach did not
work in this case since the four budgeted hour per kilogram rates differed from the actual hour per
kilogram rates. This approach would only work if the budgeted and actual hour per kilogram rates
were the same.
Part (e) Calculate the budgeted amount of overheads that would have been allocated to each product
in terms of activity-based costing (ABC).
Activity Goofy Pluto Total

No. of batches: 270 batches
G: 850 000kg / 5 000kg per batch 170 batches (½) r/w
P: 310 000kg / 3 100kg per batch 100 batches (½) r/w
Set-ups: 640 set-ups
G: 170 batches x 2 set-ups/batch 340 set-ups (1) r/w
P: 100 batches x 3 set-ups/batch 300 set-ups (1) r/w
Processing hours: 1 300 hrs
G: 850 000kg / 100kg x 0,08 hrs per 100kg 680 hrs (1) r/w
P: 310 000kg / 100kg x 0,2 hrs per 100kg 620 hrs (1) r/w
Packaging hours: 560 hrs
G: 170 batches x 2,0 hrs/batch 340 hrs (1) r/w
P: 100 batches x 2,2 hrs/batch 220 hrs (1) r/w
Activity Goofy Pluto Total

R R R
Materials handling: (or R7 812,50 / set-up) 5 000 000
G: 340 / 640 set-ups x R5 000 000 2 656 250 (½) c
P: 300 / 640 set-ups x R5 000 000 2 343 750 (½) c
Mixing and baking: (or R8 846,15 / hr) 11 500 000
G: 680 hrs / 1 300 hrs x R11 500 000 6 015 385 (½) c
P: 620 hrs / 1 300 hrs x R11 500 000 5 484 615 (½) c
Packaging: (or R3 598,21 / hr) 2 015 000
G: 340 hrs / 560 hrs x R2 015 000 1 223 393 (½) c
P: 220 hrs / 560 hrs x R2 015 000 791 607 (½) c
Total 9 895 028 8 619 972 18 515 000
100
MAC4862/102
Note: No marks are awarded if allocation was based only on the given drivers e.g. 2/5 & 3/5 or
0,08 / 0,28 & 0,2 / 0,28 or 2,0 / 4,2 & 2,2 / 4,2.
Total 10
Max 9
This question was generally answered very well with a large number of students obtaining full
marks. Some students did not read the Required well which asked for the budgeted amount of
overheads and instead used the actual production kilograms. Surprisingly several students based
their allocation merely on the drivers as supplied in the scenario instead of calculating the actual
quantity of each type of driver. Remember that ABC is an extension of absorption costing and is
applied to fixed manufacturing overheads only.
Part (f) Briefly explain why vehicle manufacturers such as Volkswagen and Ford can price the Polo
Vivo and Figo much lower than their comparable replacement models, the Polo and Fiesta.
• The new models have a long period of development and testing with a
commensurate cost (research and development (R&D) cost) to be recovered and (1)
vice versa (i.e. old models’ R&D cost has already been recovered).
• The manufacturing equipment / tooling (capital investment) of the old models
have been written down when their manufacturing life is extended – the fixed (1)
overhead cost allocated is thus much lower and vice versa (i.e. new models still have
high capital investment costs that are being written down).
Max 2
• Communication skills – logical argument (1)
Max 3
Very few students earned any marks for this question. The vast majority of students mentioned the
features of the different models instead of looking at the question from a business and
management accounting perspective.
Part (g) Briefly explain why Takelot.com / Kalahari.com can price (text) books much lower than
traditional brick-and-mortar bookshops.
• The (accepted) operating profit margin is much lower for internet companies. (1)
• The fixed cost – rent and staff cost etc. – much lower for internet companies. (1)
• They can hold much lower inventory and order from suppliers as and when
required – stockholding cost low. (1)
• Centralised warehouse can reduce stockholding costs for internet companies. (1)
• Internet companies can benefit from economies of scale (i.e. larger volume sold
therefore lower operating cost per unit). (1)
• They operate on ABC basics which may incorporate vestiges of variable cost. (1)
Total 6
Max 2
Most students scored at least one mark for identifying that the fixed costs (e.g. rent and staff cost)
of internet companies are much lower.
101
MAC4862/102
Part (h) Briefly explain why fuel is more expensive in: (i) The Northern vs Coastal Provinces of South
Africa; (ii) South Africa vs its neighbouring countries
• (i) The Northern provinces have to pay for the transport of the fuel. (1)
Max 1
• (ii) There are fuel tax differentials between the countries. (1)
Max 1
Most students earned the one mark allocated for (i), but few earned marks in (ii). A surprising
number of students answered (i) based on the supposed higher petrol consumption in the northern
provinces, for example ‘up north people drive bigger cars; up north people travel more; at higher
than sea level cars are heavier on petrol’ etc.
General markers’ comments:

Part (f), (g) and (h): Students should note that they can expect more such discussion type
questions in future.
102
MAC4862/102
MAC4862 – TEST 2 (2015)
QUESTION 40 marks
Agmi Ltd operates two divisions: an agricultural division (Agri) situated in Hoopstad and a chemical
division (Chemco) situated in Sasolburg. The two divisions reported the following financial
performance for the year ended 28 February 2015:
R million Agri Chemco
Revenue 6 680 4 121

Operating profit 431 156
Segmental non-current assets 5 539 2 435
Net working capital 765 570
The following target key performance indicators (KPI’s) were set for the two divisions for the 2015 year
end:
Agri Chemco
Operating margin 12% 5%

Net working capital 16% 8%
• Operating margin: profit before interest and taxes as a percentage of revenue.

• Net working capital: inventory plus receivables minus payables expressed as a percentage of
revenue.
In addition to the above, Agmi Ltd strives for an annual return on investment (ROI) of 14%.
In commenting on the performance of the two divisions, the Board of Agmi Ltd made the following
statements:
• Good early rains may result in excellent projected yields.

• An unfavourable ammonia (A) to urea (U) ratio, as applied in the manufacturing of fertilizer,
continued.
• A weaker Rand was experienced.
• The SA manufacturing industry is in a declining state due to a wide range of factors such as
over-regulation and labour strikes, whilst a slowdown in mining activities due to weak
commodity prices continue.
• Competitors’ lower safety and health standards make Agmi Ltd vulnerable.
• Newly found and anticipated gas deposits in Africa may open new markets.
• EBITDA is showing a continued positive trend.
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MAC4862/102
The management accountant of the Agri division produced the following information for March 2015:
The production facility has a normal monthly capacity of 400 000 bags of product, equivalent to 20 000
tons. The standard input per 10 ton (t) of output * is as follows:
R
Material A: 5t @ R62 000 per ton 310 000

C: 2t @ R20 000 per ton 40 000
U: 4t @ R38 000 per ton 152 000
Labour – fixed cost 2 055
Variable overhead 3 000
Fixed overhead 6 250
Packaging - 200 units at R22,50 per unit 4 500
517 805
* The above output is excluding the production of a by-product of 0,2 ton, which is sold at
R780,50 per ton.
Raw materials are held in inventory at standard cost. During March 2015 an output of 390 000 bags
were achieved with a by-product output of 400 tons. The following costs were incurred:
• Material A: 10 000 t purchased at R63 000 per ton. The supplier offered a 5% settlement
discount if paid within 10 days, which was duly done. 9 500 tons were issued to production.
• Material C: 4 000 t purchased @ R20 500 per ton – on credit. Issued to production 4 100
tons.
• Material U: 8 000 t purchased @ R37 500 per ton. This was acquired from a new supplier who
required 50% payment on delivery. 100 tons were returned to the supplier due to poor quality
before the month end. Issued to production 7 795 tons.
• Labour: paid as budgeted plus overtime of R440 000 – refer later for detail.
• Variable overheads paid R6 110 000.
• Fixed overheads paid R5 140 000. Depreciation recorded as budgeted R7,5 million.
• Packaging: 380 000 bags acquired @ R22 each. Issued to production: 396 000 bags.
• Quality control indicated that 30 000 bags of completed product was sub-standard and had to
be destroyed.
• The salaries account generally consists of:
PAYE: 12% of total bill

Benefits – other: 6% of total bill
Pension contributions: 14% of total bill
Net pay: the remainder of the total bill
• No material opening and closing inventory of completed products were held.

104
MAC4862/102
REQUIRED Marks
(a) Determine whether the Agri and Chemco divisions reached their target
KPI’s for the year ended 28 February 2015. (5)
Communication skills – layout and structure (1) (6)

(b) Determine by how much the Agri division’s operating profit must change for
it to earn Agmi Ltd’s target ROI, using the financial information for the year
ended 28 February 2015. (4) (4)
(c) List opportunities and risks which Agmi Ltd and its operating divisions may
be subject to. (8) (8)
(d) Prepare journal entries for the Agri section to reflect the following:
• Acquisition during March 2015 of materials A, C and U. (6)

• Payment of production labour salaries. (2)
• Recording of sub-standard products. (1)
Detailed narratives are not required.
Communication skills – layout and structure (1) (10)

(e) Calculate the following standard costing variances for the Agri section:
• Mix and yield variances for the March production. (5)

• Fixed overhead, packaging and by-product variances in as much
detail as possible. (5) (10)
(f) Briefly explain the meaning and use of the term ‘EBITDA’ used by the
Board of Agmi Ltd. (2) (2)
TOTAL 40
105
MAC4862/102
MAC4862
TEST 2 – SUGGESTED SOLUTION (2015)
(a) Target KPI’s
Agri Chemco
Actual Target Actual Target
431 156
Operating margin 6 680 4 121
= 6,5% 12% X = 3,8% 5% X (2) R/W
765 570
NWC 6 680 16% X 4 121 8%  (2) R/W
= 11.45% = 13.83%
• Only one of the four targets was met. (1)

• Layout – structure and conclusion (comparison to targets and conclusion) (1)
6
(b) Target ROI

431 (½) R/W
Current ROI = 5 539 + 765 (1) R/W
= 6,84%
∴ Profit must increase by 7,16% (14% - 6,84%) of net assets (½) C
Which implies a profit increase of R451,4m (7,16% x R6 304m) (1) C
Alternative ROI calculation:
14% of (5 539 + 765) = 882,6 (2½) R/W
Less current OM 431,0 (½) C

Increase by 451,6 (1) C
This in turn implies that the target operating margin will have to be reviewed *or ROI – OM indicates a
target OM of 882,6/6 680 = 13,2% (1) R/W
Max (4)
106
MAC4862/102
(c) Risks and opportunities of the divisions
Risks
• Unfavourable A:U ratio will negatively impact on costs and may also impact on output
and quality. (1)
• Weaker Rand will impact negatively on imported raw materials. (1)
• Manufacturing industry will order fewer products and inhibit sales growth. (1)
• Mining (using explosives) will order less. (1)
• Non-compliance as a result of over-regulation in manufacturing industry. (1)
• Competitors may ‘steal’ clients as lower standards will reflect in lower costs and
prices. (1)
• Both divisions are dependent on raw materials from mostly one supplier which
inherently is risky in terms of their production. (1)
Opportunities
• Weaker Rand will impact positively on export sales. (1)

• Good crops may enable farmers to order more products/fertilizer. (1)
• Exploration and fracking (gas) may cause sales growth of products and (export) (1)
• Compliance with the laws will strengthen the brand (competitive advantage) (1)
Max 8
(d) Journal entries

Dr Cr
‘000 ‘000
Inventory Material A 620 000 (½)R/W

Price variance 10 000 (½)R/W
Creditors 630 000 (½)R/W
Inventory Material C 80 000 (½)R/W

Price Variance 2 000 (½)R/W
Creditors 82 000 (½)R/W
Inventory Material U 304 000 (½)R/W

Price variance 4 000 (½)R/W
Bank 150 000 (½)R/W
Creditor 150 000 (½)R/W
Creditor 3 750 (½)R/W

Price variance 50 (½)R/W
Inventory Material U 3 800 (½)R/W
Max 6
PAYE [of total] 546 (½)R/W

Benefits [of total] 273 (½)R/W
Pension [of total] 637 (½)R/W
Net salaries 3 094 (½)R/W
Bank 4 550 (½)R/W
[Cost R2 055 ÷ 10 x 20 000 + 440 000]
Max 2
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MAC4862/102
Loss on production/cos 77 670,75 (½)R/W

Completed inventory 77 670,75 (½)R/W
[1500 x 517 805 ÷ 10] Or [517 805 ÷ 200 x 30 000]
Max 1
Communication mark: allocated when the journal balances.
(e) Material - Mix and yield
Mix Actual Std for Variance Price RVariance

Actual
A 9 500 9 725 (5/11) 225 62 000 13 950 000 F (½)R/W

C 4 100 3 890 (2/11) (210) 20 000 4 200 000 U (½)R/W
U 7 795 7 780 (4/11) (15) 38 000 570 000 U (½)R/W
21 395 21 395 9 180 000 F
(½) for AQ (½)Total AQ
Yield:
Materials cost per ton of [(R310k plus R40K plus R152k) ÷ 10] R50 200 (½)R/W
output
Input (materials) 21 395 t (½)R/W
Should yield (output) 19 450 21 395 x 10/11 (½)R/W
Actual yield (output) 19 500 [390 000 ÷ 20] (½)R/W
Variance 50 F R2 510 000 F (½)R/W
Max 5
By-product Variance
Should yield 19 500 x 0,2/10 390t
Actual yield 400t
10 t (½)R/W
At value (10 x R780,50) 7 805F (½)(C)
Fixed overhead Variance
Expenditure (5,14m + 7,5m) – (R6 250 x 2 000) 140 000U (2)R/W

[1] [1]
Volume (20 000 – 19 500) x R625 312 500 U (1)R/W
Packaging Variance
Price 380 000 x (22,00 – 22,50) 190 000 F (½)R/W
Usage (396 000 – 390 000) x 22,50 135 000U (½)R/W
Max 5
108
MAC4862/102
Alternative 2 - Yield variance
With actual production of 19 500 tons (390 000 ÷ 20) (½)R/W
Actual Standard quantity Variance Price R - Variance

@std mix
ratio
A 9 725 9 750 (0.5 x 19500) 25 62 000 1 550 000 F (½)R/W

C 3 980 3 900 (0.2 x 19500) 10 20 000 200 000 F (½)R/W
U 7 780 7 800 (0.4 x 19500) 20 38 000 760 000 F (½)R/W
21 395 21 450 2 510 000 F
(½)Total AQ
(f) EBITDA
EBITDA expressed – no mark
•EBITDA is a signifier of cash generated as non-cash items added to earnings. (1)

•Used by companies where high capital expenditure impacts on profit is the norm. (1)
•Can also be used for comparing profitability of Agmi with other companies in the industry.
(1)
• This can be used as a replacement for all decisions where a cash component is required
e.g. project evaluation or valuations. (1)
Max 2
REVIEW FOR TEST 2:
 Franchisor, specifics of business

 Share price growth  (b)
 Diversification – impact, risk  (b), (e)
 Growth and cash reserves  (b)
 Key part, work force  (b)
 Acquisition, different periods for NPV  (b)
 BBBEE rating – 6 is low  (b)
 Loan, 24J instrument, market rate provided  (a)
 Effective tax rate  (a)
 Dividend pay-out ratio and dividend  (f)
 Share price and marketing capitalisation  (c)
Required focus areas:
(a) Market value, 2015 Now, discount

(b) SWOT, memo Internal, external
(c) Cost of equity, info GG or CAPM
(d) Critically – reasons and calculations Positive and Negative
(e) Qualitative Not fin
(f) New dividend and comment Ratio, Positive and
negative

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Tutorial Letter 102/0/2016: Applied Management Accounting MAC4862 NMA4862 ZMA4862

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Tutorial Letter 102/0/2016

- WEEK from 27 January to 2 February 2016 (Topics 1 – 3)

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

CONTENT – THIS MODULE

Management Strategy, Risk,

Tutorial Tutorial letter 102 Tutorial letter Tutorial

Topics Integrated self-

MODULE PURPOSE ......................................................................................................................... 2

PART 1 – COST ACCOUNTING BASES AND ALLOCATION ......................................................... 5

PART 1, TOPIC 1 – Nature, classification and allocation of cost ........................................................ 6

PART 1, TOPIC 2 – Product costing systems .................................................................................. 22

PART 2 – PLANNING AND CONTROL .......................................................................................... 29

PART 2, TOPIC 3 – Planning, budgeting and control ....................................................................... 30

PART 2, TOPIC 4 – Standard costing .............................................................................................. 41

PART 2, TOPIC 5 – Performance measurement ............................................................................. 47

PART 3 – DECISION-MAKING ....................................................................................................... 65

PART 3, TOPIC 6 – Information for decision-making ...................................................................... 66

PART 3, TOPIC 7 – Information application to decisions ................................................................ 72

PART 4 - INTEGRATED SELF-ASSESSMENT ............................................................................. 77

PART 1 - COST ACCOUNTING BASES AND ALLOCATION

• Key terms and guidelines

1. Nature, classification and allocation of cost

2. Product costing systems

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.

ONDERWERP 1 LEER UITKOMSTE

Na bestudering van hierdie onderwerp behoort u in staat te wees om:

• Die definisies relevant tot kostestelsels te omskryf.

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

STUDY UNIT 1.1 Nature and classification of cost

Prior learning Drury 8th ed. Drury 9th ed.

Before studying this topic, you Applicable references: Applicable references:

• Define and illustrate a cost. Drury Chapter 2: An Drury Chapter 2: An

Study unit 1.1 in MAC4861/102, available on myUnisa under Additional Resources.

Attempt question: (Drury textbook)

8th ed: Question 23.14 p626 (Solution p766)

Attempt question: (Dury Student Manual)

8th ed: Question 2.2

(i) the product is the cost object

2. Maintaining a cost database.

4. Provide an example of a fixed and a variable cost in a

without using the same example more than once.

STUDY UNIT 1.2 Variable and absorption costing

Prior learning Drury 8th ed. Drury 9th ed.

Before studying this topic, you Applicable references: Applicable references:

Illustration of the difference between absorption and variable/direct costing

Gross profit 1 270

Less: Other variable costs (non-manufacturing) (250)

• Contribution = Turnover – ALL variable costs

• When absorption costing is applied: Under- or over-recovery of overheads = Volume variance +

• When variable costing is applied: Under- or over-recovery of overheads = Expenditure variance.

How do we allocate manufacturing overheads to products?

To calculate the budgeted overhead rate: