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Department of Finance and Investment Management

Advanced Cost and Management Accounting



Time: 3 hours 20 minutes Assessor: Mr R van der Walt (UJ) - internal Marks: 100

Moderators: Ms S von Abo (UJ) internal

This paper consists of 11 pages. ANSWER EACH QUESTION ON A NEW ANSWER SHEET. Silent, non-programmable calculators may be used, unless otherwise instructed. Where applicable, show all calculations clearly. Answers with Tippex and in pencil will not be marked. Scratch out all open spaces and empty pages. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. ROUND OFF TO 2 DECIMALS AT EVERY STEP.

Question 1 2 3

Objective questions Various topics Short questions Budgets / Activity Based Costing Long question CVP / Relevant Costing / Pricing

Marks 10 40 50 100

Time 18 minutes 72 minutes 90 minutes 180 minutes


B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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[10 marks]

Select the correct option by WRITING the corresponding letter of the answer in the answer book provided.


Identify which of the following costs would be classified as variable costs with respect to volume. A B C D property taxes on the manufacturing facility the wheels on an automobile the cost of installing production equipment the cost of fumigating a factory



Identify which of the following costs would be classified as fixed costs with respect to volume. A B C D the salary of the manager of the Research and Development Department the cost of a copy machine in the Human Resource Department the property taxes on the manufacturing facility all of the above



When calculating the absorption-costing income for external reporting A B C D all manufacturing costs ultimately become nonmanufacturing costs all manufacturing costs are product costs and product costs are never expensed the costs of selling manufactured products are classified as product costs all selling and administrative costs are classified as non-manufacturing costs



Ramon Company reported the following units of production and sales for June and July 2011 Units Produced 100 000 100 000

Month June 2011 July 2011

Sold 90 000 105 000

Net income under absorption costing for June was R40 000; net income under variable costing for July was R50 000. Fixed manufacturing costs were R600 000 for each month. Calculate the net income for July 2011 using absorption costing A B C D R50 000 R20 000 R80 000 R40 000



B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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In the month just ended, Aldebraun Industries produced 40 000 units and sold 37 000 units. There were 2 000 units in finished goods inventory at the start of the month. Manufacturing costs are stable from month to month. The fixed overhead rate was R8 per unit. Aldebraun uses absorption costing. Calculate what the difference in net income would have been if Aldebraun used variable costing A B C D R24 000 R16 000 R40 000 R8 000



Identify which of the following is not an expected outcome of activity analysis A B C D What activities are performed? How many people perform the activities? The time and resources required to perform the activities. All of the above are expected outcomes.



In the graphic method of solving a linear programming problem, which of the following is depicted on the graph? A B C D coefficient of correlation constraint least-squares line of best fit break-even point



A company keeps 15 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average R5,000 per day. A competitor keeps 12 days of inventory on hand, and the competitor's carrying costs average R3,000 per day. The value-added costs are: A B C D R0 R5 000 R30 000 R75 000



Identify which of the following costs would not be included in calculating inventory values under the absorption-costing basis A B C D direct materials fixed overhead selling and administrative expenses direct labour



B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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The following information pertains to Stark Ltd.: Beginning inventory Ending inventory Direct labour per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit 0 units 5,000 units R20 R16 R4 R10 R12 R16

Calculate the value of closing inventory using the variable costing method A B C D R200 000 R250 000 R310 000 R390 000




B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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[40 marks]
(7 marks)

The Beyond Budgeting Round Table, an independent research body sponsored by CIMA, is often in the news and suggests that traditional budgeting should be done away with. The Round Table has performed extensive research on current budgeting practice and has identified several criticisms of the way companies and organisations are currently using traditional budgeting. REQUIRED: 2.1 Describe some of the criticisms that the Beyond Budgeting Round Table have made against traditional budgeting.




(5 marks)

You are the financial manager at LegalLobster (Pty) Ltd, a company that catches lobsters on the east coast of South Africa. The company has reviewed their previous budgets and compiled the following information: 8 000 Units R 360 000 54 000 56 000 78 10 000 units R 450 000 60 000 56 000 78

Direct materials Maintenance Factory rental Selling price per lobster

Factory rental increases to R65 000 at a production level above 11 800 units. REQUIRED: 2.2 Calculate the flexed budget at a level of 11 500 units and 12 000 units. (5)



B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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(5 marks)

The top management of LegalLobster (Pty) Ltd finalised the budget and distributed it down to their two divisional managers, one working at the catching division and the other at the processing division respectively. Shortly after announcing the budget top management noticed that the morale of the two managers of the divisions have become noticeably negative. REQUIRED: 2.3 Explain to top management the reasons for the negative impact the budget seems to have had on the morale of the two divisional managers.




(3 marks)

The top management of LegalLobster (Pty) Ltd was dismayed about the negative impact that rolling out their budget has had on some of their employees. They are considering implementing a Zero-based budget. They want to create a pilot budget to see if it meets the organisations requirements but they are unsure about how to approach the setting up procedure. REQUIRED: 2.4 Explain to management the three typical questions that should be asked when adopting a zero-based budgeting approach.




B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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(20 marks)

StudyScurry (Pty) Ltd has recently started making two types of special face cream using the juice from garden snails. The products are sold in small bottles and are called SnailZap and SnailCure. It is a complicated process for which they currently use a conventional product costing system, but management is considering implementing an Activity-Based-Costing system. Details of the product are as follows: Hours per unit Labour hours Machine Hours 1 3 1 1 Material Per unit R25 R12 Volume Units 7 000 1 250

SnailZap SnailCure

Direct labour costs R6 per hour. Production overheads are absorbed on a machine hour basis and the rate for the period is R28 per machine hour. Further analysis shows that the total production overheads can be allocated to the following activity centres as follows: Costs relating to set-ups Costs relating to machinery Costs relating to materials handling Costs relating to inspection Total production overhead 35% 20% 15% 30% 100%

The following activity volumes are associated with the product line for the period as a whole. Total activities for the period: Number of set-ups Number of movements of materials 87 21 Number of inspections 670 180

SnailZap SnailCure REQUIRED: 2.5

480 115

Calculate the cost per unit for the product SnailZap and SnailCure using Activity-Based-Costing principles. (15) Discuss briefly what the differences are between accounting for overhead costs using a traditional approach and using an Activity-Based-Costing approach.





B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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[50 marks]
(20 marks)

LegalLobster (Pty) Ltd is an engineering company that engages in various manufacturing activities. Their main product that they manufacture is a highly specialised Garbage Bins. The board of directors is in the process of evaluating the budget for the forthcoming year. You are the financial manager of the company and you have been provided with the budget for garbage bins for the year ending 30 September 2011. In addition, the following information is available regarding the cost structures of the LegalLobster operations. Estimated total annual costs LegalLobsters total annual fixed and variable costs for manufacturing are estimated as follows, all categories have fixed and variable costs: Garbage bins (in units) Steel plating Floor construction Painting and sealing Final unit assembly Total 10 R 7 000 1 000 2 000 4 200 14 200 30 R 19 000 2 600 5 000 7 800 34 400 40 R 22 920 3 900 6 800 10 900 44 520

Raw material costs A volume discount has been negotiated with the supplier, where steel bulk orders exceed the raw material requirements for 30 containers. It is group policy to limit raw material purchases to anticipated annual production requirements. Manufacturing plant The manufacturing plant, which has a maximum capacity of 40 units per annum, was purchased two years ago for R300 000. The estimated useful life of the plant is five years and depreciation is R6 000 per year after considering the residual value. Overheads Total production and administrative overheads have been allocated to the activities above. However, should activity levels exceed 30 units, additional overhead costs amounting to R4 300 per annum will be incurred. Marketing LegalLobster's marketing director provided the following pricing and volume information: Market research showed that if we price our containers at R1 900 per unit for the coming year, we can expect to sell 30 units. If we increase the unit price to R2 200, we will only secure orders for 10 units. Additional information LegalLobster is considering submitting a tender to secure a contract with an Indian shipping company. It is anticipated that potentially, orders would be received for an additional 10 and/or 20 garbage bins should the tender be successful.


B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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REQUIRED: 3.1 Calculate the break-even point for LegalLobster without the Indian contract at a selling price of R1 900 and R2 200 per unit. Calculate the total profit for both unit price alternatives. Calculate the minimum price that can be quoted for orders of 10 and 20 units from the Indian company. Critically evaluate additional issues that should be considered in submitting a tender for the Indian contract.

(5) (4)

3.2 3.3




Presentation (2) SUB-TOTAL FOR QUESTION 3 PART A (20)


B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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(30 marks)

You are the financial manager of Rip Hurl (Pty) Ltd a highly successful company manufacturing a wide range of casual beach dresses. The company's success has largely been attributed to reliable supply and service to their retail customers. The company operates an absorption costing system. A special order has been received from CramBook (Pty) Ltd, a new, fast growing retail shop. CramBook require 2 500 Surf dresses, a new design for their summer range. They are prepared to pay R80 per dress and require delivery of the dresses within one month. In order to manufacture these dresses in terms of CramBooks requirements, the production manager of Rip Hurl has estimated the costs following per dress: Per dress Direct materials Cotton A Metres Cotton B Metres Direct skilled labour hours Machine hours 1.5 0.5 0.5 1.5

Currently there are sufficient machine hours available to manufacture the special order. Cotton A is in stock and was purchased at a cost of R25 per metre. According to CramBook's requirements, the fabric will need to be dyed at an additional cost of R3 per metre, prior to manufacturing the dresses. It is estimated that during the dying process Cotton A will incur losses through shrinkage of 10%. Each dress requires 1.5 metres of Cotton A after allowing for shrinkage losses. If the special order is not accepted, Cotton A will be sold to the waste centre for R10 per metre. Cotton B is in stock and regularly used and replaced by the company. The current book value of Cotton B is R45 per metre while the replacement cost is R50 per metre. Skilled labour workers currently employed by the company, are paid at a rate of R30 per hour. Skilled labour workers are currently fully utilised during normal working hours. If the special order were to be undertaken either skilled labour would be required to work overtime at a rate of R45 per overtime hour. Alternatively the production of the Rihanna dresses, another range, would have to be reduced. The normal selling price and product cost per Rihanna dress, assuming they are produced in normal working hours, are as follows: Per dress R150 R80 R60 R90

Selling price Direct material Direct skilled labour (Variable) Fixed manufacturing overheads

Fixed manufacturing overheads are absorbed on a machine hour basis at a rate of R45 per machine hour. Should the order be accepted, a special dye machine will be rented for the month at a cost of R15 000. No other additional fixed manufacturing or selling and administration overhead costs will be incurred if the special order is accepted.


B.Com Honours (ACMA) Financial Management (FNB13X7) (AO2 05 OCTOBER 2011)

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REQUIRED: 3.5 Evaluate if the special order would deliver a positive cash flow to the company (Hint: use a total cost approach). (25) Explain three possible pricing strategies available to CramBook when deciding on a price for the special order dresses and recommend in your opinion the best strategy. Briefly provide an explanation for your recommendation.