Page 1 of 8 MANCOSA ACCOUNTING FOR DECISION-MAKING MARKING MEMORANDUM SUPPLEMENTARY EXAM NOVEMBER 14 QUESTION ONE 1.1 Tax rate R268 800/R672 000 = 40% (2 marks) 1.2 Correct disclosure of long-term loan R348 000 should be disclosed as Non-current liabilities R60 000 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 1.4.2 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.
Page 2 of 8 QUESTION TWO 2.1.1 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 R460 000. However, the balance sheet reflects inventories as R432 000. 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 *The inventory is obsolete.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 R1 152 000 1 = 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 = R216 000 X 365 R3 164 000 = 24.92 days (3 marks)
Page 3 of 8 2.5 Current ratio = Current assets Current liabilities = R888 000 R264 000 = 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 = R888 000 R432 000 R264 000 = R456 000 R264 000 = 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
Page 4 of 8 QUESTION THREE 3.1 Per unit x Volume = Total % 4 000 2 800 Contribution margin 1 0 x 1 500 units = 1 800 000 Fixed costs 1 800 000 Operating profit 0 OR Break-even quantity = Fixed costs t Contribution margin per unit = = R1 800 000 R1 0 1 500 units 3.2 Per unit x Volume = Total % 4 000 2 800 Contribution margin 1 0 x 3 600 = 4 3 000 Fixed costs 1 800 000 Operating profit 2 5 000 Allocate 1 mark for correct fixed costs if operating profit is incorrect. 3.3 Per unit x Volume = Total % 3 250 2 800 Contribution margin 450 x 4 000 = 1 800 000 Fixed costs 1 800 000 Operating profit 0
Page 5 of 8 3.4 Per unit x Volume = Total % 4 000 (2 800+250) 3 050 Contribution margin 950 x 2 000 units = 1 900 000 Fixed costs 1 900 000 Operating profit 0 Margin of safety = 4 000 00 OR R16 000 000 R8 000 000 4 000 R16 000 000 = 50% 50% 3.5 BEFORE CHANGE Per unit x Volume = Total % 4 000 2 800 Contribution margin 1 0 x 4 000 = 4 800 000 Fixed costs 1 800 000 Operating profit 3 000 000 AFTER CHANGE Per unit x Volume = Total % 3 500 2 800 Contribution margin 700 x 4 500 = 3 150 000 Fixed costs (1 800 000 + 0 000) 2 000 000 Operating profit 1 150 000 No. Operating profit will decrease (by R1 850 000).
Page 6 of 8 QUESTION FOUR 4.1.1 Raw material usage variance (Actual quantity Standard Quantity) X Standard price = (34 000 32 000 ) X R5 = R10 000 (unfavourable) 4.1.2 Direct labour rate variance (Actual rate Standard rate) X Actual hours = (R42 R40 ) X 11 500 = R23 000 (unfavourable) 4.1.3 Direct labour efficiency variance (Actual time worked Standard time allowed) X Standard rate = (11 500 hrs 12 000 hrs ) X R40 = R 000 (favourable) 4.2.1 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) 4.2.2 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) 4.2.3 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)
Page 7 of 8 QUESTION FIVE 5.1 Production budget January February March forecast 700 600 400 Desired closing inventory 180 1 150 Total budgeted production needs 880 7 550 Opening inventory (210) (180) (1) Required production 670 540 430 (6 marks) 5.2.1 NPV Machine X Machine Y 7 0 000 7 0 000 Operating costs (800 000) (7 000) Fixed costs (3 600 000) (3 600 000) Annual inflow 2 800 000 2 880 000 Discount factor X 3.4331 X 3.4331 Total PV 9 612 680 9 887 328 Investment (9 000 000) (9 600 000) NPV (positive) 612 680 287 328 OR 612 960 OR 287 616 If cash flows calculated for each year Machine X should be chosen as the NPV is greater. (9 marks)
Page 8 of 8 5.2.2 ARR (Machine X) = Average annual profit X 100 Average investment 1 = R1 000 000 X 100 R4 500 000 1 = 22.22% * Average annual profit = R2 800 000 R1 800 000 = R1 000 000 Average investment = R9 000 000/2 = R4 500 000 (5 marks)