MANCOSA ACCOUNTING FOR DECISION-MAKING MARKING MEMORANDUM SUPPLEMENTARY EXAM NOVEMBER 2014 QUESTION ONE

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1 Page 1 of 8 MANCOSA ACCOUNTING FOR DECISION-MAKING MARKING MEMORANDUM SUPPLEMENTARY EXAM NOVEMBER 14 QUESTION ONE 1.1 Tax rate R /R = 40% (2 marks) 1.2 Correct disclosure of long-term loan R should be disclosed as Non-current liabilities R should be disclosed as Current liabilities 1.3 Three possible reasons why the gross profit is less than expected The company may have consciously reduced margins in order to increase sales. Margins may have been reduced to maintain sales levels in the face of increased competition. Price increases may have increased sales but the company may not have been able to pass all the inflationary increases in the cost of sales to customers. The sales mix may have been unfavourable i.e. a greater number of lower profit-bearing products were sold. Etc (6 marks) 1.4 Explain the accounting concept of consistency and explain why this concept is significant. The consistency concept is based on the principle uniformity that prevails in the accounting treatment of like items within each accounting period and from one period to the next. This will ensure that meaningful comparisons can be made using an entity s financial statements for several years. Etc The impact on the carrying value of inventory in the Balance Sheet when the LIFO method rather than FIFO method of valuing inventory is used during periods of inflation The closing inventory figure in the balance sheet will be lowest with the LIFO method. This is because the cost of inventory still held will be based on the earlier (and cheaper) purchases.

2 Page 2 of 8 QUESTION TWO Amounts reflected for depreciation in the Income Statement Diminishing balance method results in a higher depreciation expense and thus lower net profit in the early years of the life of the asset. In the later years, depreciation expense will be less and net profit will be higher. 2.2 The cost price of inventories held by Pisces Limited was R However, the balance sheet reflects inventories as R Provide three possible reasons for this. *The inventory is damaged or deteriorated. *The inventory is obsolete. *The market price of the inventory has fallen. *The inventory item is being used as a loss leader. * Etc (6 marks) 2.3 Return on equity = Profit after tax X 100 Owners equity 1 = R403 0 X 100 R = 35% 2.4 Yes. The return is much greater than the inflation rate, interest on fixed deposit etc. (3 marks) Creditor payment period = Accounts payable X 365 Credit purchases = R X 365 R = days (3 marks)

3 Page 3 of Current ratio = Current assets Current liabilities = R R = 3.36:1 The liquidity position is satisfactory as the company has sufficient current assets to pay off short-term debts. Etc OR Acid test ratio = Current assets Inventory Current liabilities = R R R = R R = 1.73:1 The liquidity position is satisfactory as the company should be able to pay its short-term debts without relying on the sale of its inventories. Etc

4 Page 4 of 8 QUESTION THREE 3.1 Per unit x Volume = Total % Contribution margin 1 0 x units = Fixed costs Operating profit 0 OR Break-even quantity = Fixed costs t Contribution margin per unit = = R R units 3.2 Per unit x Volume = Total % Contribution margin 1 0 x = Fixed costs Operating profit Allocate 1 mark for correct fixed costs if operating profit is incorrect. 3.3 Per unit x Volume = Total % Contribution margin 450 x = Fixed costs Operating profit 0

5 Page 5 of Per unit x Volume = Total % ( ) Contribution margin 950 x units = Fixed costs Operating profit 0 Margin of safety = OR R R R = 50% 50% 3.5 BEFORE CHANGE Per unit x Volume = Total % Contribution margin 1 0 x = Fixed costs Operating profit AFTER CHANGE Per unit x Volume = Total % Contribution margin 700 x = Fixed costs ( ) Operating profit No. Operating profit will decrease (by R ).

6 Page 6 of 8 QUESTION FOUR Raw material usage variance (Actual quantity Standard Quantity) X Standard price = ( ) X R5 = R (unfavourable) Direct labour rate variance (Actual rate Standard rate) X Actual hours = (R42 R40 ) X = R (unfavourable) Direct labour efficiency variance (Actual time worked Standard time allowed) X Standard rate = ( hrs hrs ) X R40 = R 000 (favourable) Disadvantage of full cost transfer prices to supplying division It will gain no profit from the transfer. No incentive to transfer goods internally. Profits will be understated if transfers comprise a significant part of supplying division s capacity. Etc (2 marks) Operating below full capacity: The relevant cost is the variable cost (25% of R30) which is R7.50. The outside price is R21 per hour. The business would lose R13.50 per hour. (3 marks) Operating at full capacity: The outside supplier may be better as the outside price of R21 would be lower than the cost to the business (which would incur both fixed and variable costs). (3 marks)

7 Page 7 of 8 QUESTION FIVE 5.1 Production budget January February March forecast Desired closing inventory Total budgeted production needs Opening inventory (210) (180) (1) Required production (6 marks) NPV Machine X Machine Y Operating costs ( ) (7 000) Fixed costs ( ) ( ) Annual inflow Discount factor X X Total PV Investment ( ) ( ) NPV (positive) OR OR If cash flows calculated for each year Machine X should be chosen as the NPV is greater. (9 marks)

8 Page 8 of ARR (Machine X) = Average annual profit X 100 Average investment 1 = R X 100 R = 22.22% * Average annual profit = R R = R Average investment = R /2 = R (5 marks)