QUESTION 1 (50 marks; 75 minutes)

Part A:
FlowerPower (Pty) Ltd (“FlowerPower”) manufactures synthetic flowers. The
company was established five years ago when Mr. Flo and Mr. Po, two cousins, saw
a gap in the flower market for flowers that lasted more than just a few days. Since the
incorporation of FlowerPower, the business has grown in leaps and bounds and
FlowerPower has a large market share even within this highly competitive market.
FlowerPower manufactures three types of synthetic flowers i.e. daisies, roses and
lilies. FlowerPower implements an integrated absorption costing system. They
currently allocate overhead costs based on the number of direct labour hours used to
manufacture these flowers, since the assembly of these flowers is extremely intricate
and complex.
The following budgeted information for the 2017 financial year has been provided by
the Management Accountant of FlowerPower:
Total budgeted overhead costs:
R
Salaries 480 000
Inspection cost 20 000
Canteen expenses 50 000
Procurement costs 40 000 TOH/Budgeted units = Allocated cost per unit
Cutting expenses 33 000

Total overhead costs 623 000

Other budgeted information:

Each daisy requires R7.50 worth of materials, roses require double the amount of
materials required by daisies. One lily requires two thirds of the amount of materials
required by one rose.
Each flower (regardless of the type) requires 0.25 direct labour hours. The direct
labour cost is R22 per hour.

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The following budgeted data was derived from the Enterprise Resource Planning
System of FlowerPower:
Activity Daisies Roses Lilies Total
Indirect labour hours 7 000 12 250 8 750 28 000
Number of inspections 100 250 190 540
Number of employees 4 7 5 16
Number of material receipts 11 17 13 41
Number of machine hours 4 000 7 000 5 000 16 000
applied for cutting

The budgeted number of units to be sold for the 2017 financial year were as follows:
Units
Daisies 10 000
Roses 25 000
Lilies 19 000

FlowerPower budgeted to have no inventory on hand at year end.

Additional information:
All overheads are fixed.
At the end of the 2017 financial year, the Chief Financial Officer (“CFO”) of
FlowerPower expressed his concern over the financial performance of the company
the past year, specifically the steep decline in the number of units sold, in spite of a
general increase in sales in the synthetic flower industry.
The CFO called an executive committee meeting immediately after the 2017 figures
were reported. One of the attendees of the meeting recently read an article in an
accounting magazine on highly sophisticated systems of cost allocation. He suggested
that FlowerPower could perhaps consider implementing a more sophisticated costing
system such as an Activity-Based-Costing (“ABC”) system. The other members of the
executive committee does not have the required knowledge about the implementation
of an ABC system. As a result the attendee who made the suggestion was given the
assignment to prepare a presentation, setting out the details of effect of this system,
compared to their traditional way of assigning costs.

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Part B:
Actual information for the 2017 financial year were as follows:
The selling prices per flower and total flowers sold for the period were as follows:
Cost per flower Total sales
Daisies R30 9 300 flowers R30 * 9300 = 279 000
Roses R40 22 000 flowers R40 * 22 000= 880 000
Lilies R33 18 200 flowers R33 * 18 200= 600 600
Total sales = 1 759 600
The total actual overheads incurred was R600 000. During the 2017 financial year
FlowerPower produced 10 000 daisies, 23 000 roses and 18 700 lilies.
All other costs were as budgeted and labour hours were incurred as planned.
Administrative expenses are incurred as follows:
Units sold in total for all Total cost
product lines
60 000 R160 000
10 000 R35 000

There were no opening inventories at the beginning of the 2017 financial year.

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 REQUIRED: Marks
PART A:
(a) Calculate the total unit cost per flower for daisies, roses and lilies
if the executive committee of FlowerPower does not change their
7
current costing system.

(b) Calculate the total unit cost per flower for daisies, roses and lilies
if FlowerPower decides to implement an Activity-Based-Costing
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system.

(c) Write a report to the executive committee of FlowerPower in

which you review the advantages and disadvantages of the two
cost allocation systems FlowerPower is considering and 8
recommend which one is best suited for FlowerPower’s
operations.
 
Layout and language 2

PART B:
(d) If the executive committee of FlowerPower decided against the
implementation of an Activity-Based-Costing system and
calculated their product cost using a Traditional costing system,
prepare the profit statement for FlowerPower for the 2017
20
financial year on both a variable- and absorption costing basis.
Clearly show an under- / over-recovery where applicable.

(e) Reconcile the profit calculated in (d) under the variable costing
system with the profit calculated in (d) under the absorption
costing system. 2

Show all calculations clearly. Round all calculations and your final
answer to 2 decimals, i.e. 4,138329 rounded to 4,14.

Total for question 1 50

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