FACULTY OF MANAGEMENT AND LAW

SCHOOL OF ACCOUNTANCY

ASSESSMENT OPPORTUNITY 3

MODULE: CMAB 040 08 JUNE : 2023

MANAGEMENT ACCOUNTING & FINANCE IV
CMAD 080
ADVANCED MANAGEMENT ACCOUNTING AND FINANCE

TIME: 3 HOURS MARKS : 100

FIRST EXAMINERS: MR. T LUNGA CA (SA)

MS. MAMIZE AT
MS. LETSOALO PR

SECOND EXAMINER: MR. T MAGUNDA CA (SA)

THIS PAPER CONSISTS OF …8…PAGES INCLUDING COVER PAGE

INSTRUCTIONS:
• All questions are compulsory and MUST be attempted.
• During reading and planning time only the question paper may be annotated. You must NOT start
writing on your answer booklet until instructed by the invigilator.
• Silent non-programmable calculators are allowed.
• Start every question at the top of a page.
• If you use tippex or pencil on your answer sheet, you do not qualify for a remark.
• Scratch out open spaces and empty pages.
 CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

QUESTION 1 60 MARKS

Zuva Power (Pty) Ltd (“Zuva Power”) is a leading manufacturer of solar panels in South Africa. Zuva
Power was established in 2010 in Durban, South Africa, and remains one of the pioneers of the South
African Photovoltaic (PV) solar panel manufacturing industry. These solar panels are the most efficient
method of generating electrical power by using solar cells to produce electricity from sunlight. Zuva
Power has a 31 March financial year end.

Zuva Power sells most of its solar panels on credit and its main customers are large wholesale chains
as well as a number of small wholesalers in South Africa. Zuva Power’s main competitors are solar
panel producers in Europe and China. Despite Zuva Power’s cost advantage – gained from lower
transport and insurance costs – the European and Chinese suppliers are able to compete in the local
market because of their lower production cost arising from economies of scale. Furthermore, South
Africans perceive imported solar panels to be of higher quality.

Zuva Power currently has cash-flow problems mainly because large wholesale chains have been
delaying payments. This in turn has resulted in Zuva Power breaching the payment terms of its
suppliers and late payment of salaries in some months. In addition, the manufacturing industry in South
Africa as a whole has come under severe strain from rising cost of production, load shedding and
labour unrests.

Staff Incentive scheme

Performance is monitored on an annual basis and the company uses the formula below to calculate
the total bonus pool for the company. This bonus pool is then allocated to staff based on the number
of hours worked. For the executive management team, all hours worked are multiplied by a factor of 3
to compensate for the stressful nature of their work.

Formulae:
Bonus Pool = (𝑁𝑁𝑁𝑁𝐶𝐶𝐶𝐶 − 𝑁𝑁𝑁𝑁𝑃𝑃𝑃𝑃 ) ∗ 30%
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 ∗
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
Where:
𝑁𝑁𝑁𝑁𝐶𝐶𝐶𝐶 = Net profit for the current year
𝑁𝑁𝑁𝑁𝑃𝑃𝑃𝑃 = Net profit for the prior year
Hours = Time card hours worked by the employee during the period
Total hours = Time card hours worked by all employees during the period

Solar panel manufacturing process

The technology used in solar manufacturing is always changing. Zuva Power currently uses the latest
technologies available to manufacture solar panels using the following processes:

• Solar cells: Each solar panel is made up of 75 solar cells that are wired together. The imported
solar cells are extremely fragile and need to be handled with great care while being transported
and used in the manufacture of solar panels.

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 CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

• Laminating and framing: A sheet of glue is placed on the front and back of the wired solar cells.
A layer of solar glass is added on top (the part of the solar panel that will face the sun) and a
plastic film (PVF) at the back. A laminating machine heats the sheets of glue so that they melt and
‘glue’ the glass, solar cells and PVF together and seal the solar panel. An aluminium frame that
enables the solar panel to be mounted is added around the panel. Finally, a junction box, which
connects panels to each other and/or to other electrical circuits, is connected to the solar panel.

• Testing and quality control: Once the solar panels have been framed and the junction boxes
connected, a highly skilled electrician performs a series of stringent quality control tests on the
solar panels before they are cleared for sale and distribution.

Budgeted information for the year ended 31 March 2023 (FY2023)

Zuva Power operates a variable standard costing system. The following standards were set for FY2023:

1. A standard selling price of R1 760 per solar panel was set based on budgeted sales of 11 125 solar
panels.

2. Each solar panel requires 75 solar cells. Based on an expected exchange rate of the Chinese yuan
(CNY) to South African rand (ZAR), the budgeted cost is expected to be R5.5 per solar cell.

3. Each solar panel requires 2,5m² solar glass which can be purchased at a cost of R132 per m² and
2,5m² PVF at a total cost of R330 per solar panel.

4. The budgeted cost of other direct materials, incorporating the wiring, junction box, glue sheets and
aluminium frame is R176 per solar panel.

5. Packaging and branding costs are expected to be R46 per solar panel.

6. Production overheads include water and electricity costs, depreciation on machinery and the
salaries of the machine operators and electrician. The production overheads are expected to be R8
644 000 if the company produces 9 800 units. If the company produces 14 750 units, the production
overheads are expected to be R10 030 000.

7. No losses were budgeted to occur as a result of the inspection and quality control tests.

Actual information for the year ended 31 March 2023 (FY2023)

1. Total revenue for FY2023 was R20 636 000. Sales were boosted above the budgeted 11 125
solar panels when Zuva Power won a tender, which was not budgeted for, to supply solar panels
for a solar farm installation on the roof of a large shopping mall in Johannesburg. Unsubstantiated
claims have surfaced alleging Zuva Power to have paid a bribe to win the contract.

2. Fixed production overheads were as budgeted except for the additional R75 000 overtime cost
paid to the machine operators and electrician to ensure that the tender did not have any impact on
existing budgeted sales volumes.

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 CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

3. In January 2023, Zuva Power switched to a new supplier of PVF whose price was 5% cheaper
than that of the supplier they had used previously. A total of 2 350 m² of PVF was purchased from
the new supplier and used in production in January 2023. However, because the new PVF turned
out to be of a poorer quality, 100 solar panels failed the quality assurance tests and had to be
scrapped.

4. A total of 875 550 solar cells were purchased and used, at an average price of R6.18 each.

5. 11 825 solar panels were produced (which include the 100 solar panels that were scrapped)
during FY2023. At the end of FY2023, 100 solar panels were still on hand.

6. There were no price increases for any of the other direct materials.

Apart from those arising from the information provided above, no other variances arose during
FY2023. There was no opening stock of raw materials or finished goods on hand at the start of
FY2023.

New Division: Solar geyser

To improve the company’s profitability in FY2024, the directors decided to tap into the solar geyser
market. The demand for solar geysers is growing exponentially in South Africa because of the rising
cost of electricity. Zuva Power will make solar geysers using solar panels that it is currently producing
(packaging and branding will not be required for these solar panels). The production process would
however take place under a separate division. Zuva Power will therefore have two operating divisions;
the solar panel division and the solar geysers division. The two divisions will be operated as investment
centres.

Based on extensive market research, Zuva Power expects to sell 4 500 solar geysers in FY2024 at a
price of R9 500 each. The budgeted cost of producing one solar geyser in FY2024 is as follows:

Solar panel Note 1

Raw materials (excluding solar panel) 1 800
Direct labour cost 1 350
Variable production overheads 1 120
Fixed production overheads 980

Note 1: Each solar geyser will use 1 solar panel and all solar panels will be sourced from the solar
panel division. The production team is not sure of the price that the solar panel division should charge
the solar geyser division. The solar geyser division will target a gross profit margin of 25% on each
solar geyser sold to cover other costs and still generate a return on investment.

Zuva Power does not have an alternative supplier of solar cells and the Chinese supplier has indicated
that they can only supply a maximum of 1 106 250 solar cells per year. No other capacity constraints
exist. The solar division’s budgeted information for FY2023 is the same as its FY2024 budgeted
information.

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CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

Marks
QUESTION 1 – REQUIRED [IGNORE TAXATION] Sub- Total
total
(a) Identify and describe the business risks that Zuva Power (Pty) Ltd is
exposed to. 11

Communication skills- Clarity of expression 1 12

(b) Critically evaluate the current staff current incentive scheme used by Zuva
Power (Pty) Ltd. 10

Communication skills – logical argument 1 11

(c) Calculate all standard costing variances that occurred during the FY2023 in
as much detail as possible based on the given information.
17
Please round your answers to two (2) decimal places

Communication skills – presentation 1 18

(d) Calculate the minimum transfer price (per solar panel) at which the solar
division would be willing to provide the solar geyser division with solar panels
in FY2024. 12 12

(e) Calculate the maximum transfer price (per solar panel) at which the solar
geyser division would be willing to pay for solar panels from the solar panel
division. 7 7

Total 60

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 CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

QUESTION 2 40 MARKS

Powertech Brakes (Pty) Ltd (“Powertech Brakes”) manufacturers and distributes brake pads to the
automotive industry in South Africa. Powertech Brakes has its own testing lab and advanced complete
inspection equipment that ensure the quality of the products. The production of brake pads is strictly
managed according to the ISO9001, TS16949 quality system, ECE, R90, AMECA. You have recently
joined Powertech Brakes as a financial accountant. The managing director and majority shareholder
has asked you to assist him in interpreting the draft financial results for the year ended 31 May 2023
and to review the budget for the new financial year ending 31 May 2024.

As part of his preparation for the budget for the year ended 31 May 2023, the previous accountant
completed a breakeven analysis and concluded that the breakeven production and sales volumes
amounted to 20 500 units. The fact that Powertech Brakes only sold 20 000 units but is reporting a
preliminary profit of R390 000 for the year ended 31 May 2023, has raised concern about the integrity
and reliability of the information prepared by your department.

The following is the actual draft income statement for the year ended 31 May 2023:

Notes R
Sales 6 000 000
Cost of sales
Production costs 5 100 000
Inventory at beginning of year 2 -
Raw materials 3; 4 1 500 000
Direct labour costs 3; 4 1 800 000
Production overheads 4; 7 3 075 000
Inventory at year end: Finished products 2 (1 275 000)
900 000
Production overheads – over-recovery 270 000

Gross profit 1 170 000

Administration costs 6 (240 000)
Selling costs 5 (540 000)
Net income before tax 390 000

1 Sales and production had been budgeted at 22 000 units for the 2023 year. The budgeted selling
price for the 2023 financial year was R300 per unit.

2 The company has access to a reliable supply of raw materials and therefore does not carry any
raw materials inventory. There were no work-in-progress inventories at the beginning or end of the
year.

3 Actual production volumes amounted to 25 000 units.

4 The actual unit costs were equal to the budgeted unit costs.

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 CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

5 Selling costs are mixed in nature. The actual fixed cost component which equals the budgeted
amount is R60 000 less than the variable cost component.

6 Administration costs are fixed in nature and the actual cost equals the budgeted amount.

7 Production overheads are a mixed cost in nature. The fixed production overhead absorption rate
was set at R90 per unit at the beginning of the 2023 financial year. This was based on planned
production volumes of 22 000 units which also reflect Powertech Brakes’ normal capacity.

Budget for the year ending 31 May 2024

As a result of the unexpected profit, a review of the 2024 budget was deemed necessary. Based on
a discussion with the managing director and the sales and production managers, the following key
assumptions (based on the 2023 financial year actual amounts) were agreed upon:

1 Unit sales prices are expected to increase by 8%.

2 Sales volumes are expected to be 22 000 units.

3 Raw materials costs per unit are expected to increase by 20%. All other unit variable costs are
expected to increase by 10%.

4 All fixed costs are expected to increase by 5%.

5 Production volumes of 21 000 units are forecast.

Profit target for the year ending 31 May 2024

A key objective in the forthcoming financial year is to improve the company’s profitability. The
managing director has prepared the following list of possible measures to achieve that:

1. Increase production to defer fixed costs absorbed in closing inventory into future periods;
2. Increase sales price to recover increased costs;
3. Increase sales volumes by increasing local market share and exporting into neighbouring
countries;
4. Reduce production costs by importing half of their budgeted production volume from a reputable
European manufacturer and by using cheap illegal immigrants; or
5. Increase production efficiencies

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CMAB 040/CMAD 080 ASSESSMENT OPPORTUNITY 3 2023

Marks
QUESTION 2 REQUIRED [IGNORE TAXATION] Sub- Total
total
(a) Re-perform the calculation of the breakeven production and sales
volumes based on the 2023 budget assumptions. 10 10

(b) i) Prepare a reconciliation of the absorption preliminary profit of R390 000

to a variable costing profit (loss) and 3

ii) Discuss, with reasons, the apparent contradiction between the

budgeted breakeven production and sales volumes and the preliminary 3 6
profit of R390 000 achieved in the year ended 31 May 2023.

(c) Calculate the budgeted gross profit for the year ending 31 May 2024.
Clearly show all your calculations. 12 12

(d) Comment on each of the measures proposed by the managing director

to enable the company to improve its profitability in the year ending 31 11
May 2024.
1 12
Communication skills: Logical arguments and clarity of expression

TOTAL [40]

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