MAC3701 Assignment 2 Semester 2 2023 (Answers)

MAC3701 Assignment 2 Semester 2 2023 (Answers) QUESTION 1 (100 Marks) EnerFizzCo Drinks Ltd (“EnerFizzCo”), situated in Dersley in the Gauteng Province, is one of the leading energy drink and effervescent tablet manufacturers in the East rand operating in a fiercely competitive market. The company operates two divisions namely the Drink division (DrinkD) and the Tablet division (TabletD). EnerFizzCo’s head office makes all the long-term borrowings decisions and allocates corporate head office expenses at its discretion. All other decisions are made by the respective divisional managers. EnerFizzCo has a 31 July financial year end and makes use of the absorption costing system. EnerFizzCo management strives to ensure that all ingredients and manufacturing processes comply with food regulatory requirements. The company’s budgeted required rate of return is 9% per annum. 1. DRINK DIVISION (DRINKD) DrinkD manufactures two cherry-flavoured energy drink products namely, Streak which contains sugar, and Glitzo, which is sugar-free. Different from its competitors, Streak is sold in a can containing 250 millilitres (ml) while a Glitzo can contain 500 ml of energy drink. DrinkD values all types of inventories using the first-in-first-out costing method. 1.1 Budgeted information for the financial year ending 31 July 2023 The company was hacked for ransom towards the end of the year resulting in some customer information leaking. This was primarily due to their outdated firewall systems. The DrinkD resolved to restore backup data, however, due to the old backup systems, there was a loss of some backup data which included extracts of the budgetary information. You have been provided with the following information from the extracts the management accountant could find from the backups, with additional information supplemented through divisional meeting minutes: 1.1.1. DrinkD’s maximum manufacturing capacity is based on the availability of the prepared water. DrinkD buys the prepared water exclusively from AquaCraft (Pty) Ltd at R2,00 per litre. A maximum of 5 million litres of prepared water will be made available by AquaCraft. Each litre of energy drink requires 900 ml of water. 1.1.2 The company budgeted to produce 15 million cans and sell 12 million cans. Both production and sales will be at a rate of two cans of Streak for every one can of Glitzo. 1.1.3 Streak is sold at R17 per can and Glitzo at R24 per can, which is considered to be above competitor prices. 1.1.4 DrinkD budgeted to have no opening inventory of any kind. 1.1.5 Sugar was budgeted at R25 per kilogram (kg) and 0,16 kg is used for one litre of manufactured Streak. 1.1.6 Artificial sweetener was budgeted R162 per kg and 0,11 kg is used for one litre of manufactured Glitzo. Page 3 of 8 MAC3701 Assessment 02/S2/2023 [TURN OVER] QUESTION 1 (continued) 1.1.7 Both Streak and Glitzo contain caffeine. Caffeine was budgeted at R169 per 100 grams (g), and 80 milligrams (mg) is required per 250 ml manufactured. (1 000 mg equals one gram) 1.1.8 Guarana is budgeted at R175 per 100 g and 1 000 mg is required per 250 ml for both Streak and Glitzo. 1.1.9 Both products contain Cherry flavouring at 0,2 ml per litre manufactured. Cherry flavouring was budgeted at R40 per 20 ml. 1.1.10 Direct labour costs are R30 per direct labour clock hour. 10% idle time is allowed for both products, and it takes 10 direct labour clock minutes to manufacture one litre of Streak and eight direct labour clock minutes to manufacture one litre of Glitzo. DrinkD has recently come under scrutiny and was criticised for not employing locals and that they prefer to employ mostly male employees in management positions as they believe that this provides stability to management. 1.1.11 Variable manufacturing overhead (VMO) costs are allocated based on machine time used in the manufacturing of each product. The variable manufacturing overhead recovery rate per machine hour is R12 per hour and it takes 12 machine minutes to manufacture one litre of energy drink. Machine capacity is budgeted at 1 000 000 hours. 1.1.12 The fixed manufacturing overhead (FMO) cost is budgeted at R35 million and is allocated to products based on the budgeted machine hours. The recovery rate per machine hour is the same for both products. 1.1.13 Other budgeted fixed costs are R55 million. 1.1.14 Variable selling and distribution costs are budgeted at R1,20 per unit sold. 1.2 Actual information for the year ending on 31 July 2023 1.2.1 For both Streak and Glitzo, the actual number of cans sold was 20% lower than the budgeted number of cans sold per product. The company sold Streak for R20 per can, and Glitzo at R25 per can as a result of an aggressive advertising campaign, which pitched both products as premium products. Both products were produced and sold in the same budgeted ratio. 1.2.2 AquaCraft is investigating possible contamination at one of its reservoirs. The supplier used an alternative source and short-supplied DrinkD on water, resulting in both Streak and Glitzo, being produced at 20% less than the budgeted production. The supplier is still investigating if any of the water supplied to EnerFizzCo could have been affected. EnerFizzCo management has decided not to test its water but rather wait for the results of the supplier. 1.2.3 Due to labour strikes and resignations as a result of wage rate disputes, the company was forced to hire new labourers. These new labourers had to learn the production process and received limited supervision on the use of machinery. These new labourers took 12 direct labour clock minutes to manufacture one litre of Streak and nine direct labour clock minutes to manufacture one litre of Glitzo. They were paid R22,00 per clock hour and the actual idle time was 5%. The company has aggressively managed labour costs by paying below the minimum wages and by employing some undocumented foreign workers. Page 4 of 8 MAC3701 Assessment 02/S2/2023 [TURN OVER] QUESTION 1 (continued) 1.2.4 One of the key suppliers for caffeine was placed under liquidation, as a result, the procurement department had to source caffeine from an award-winning supplier at 10% more than the budgeted price per 100 g. However, only 70 mg of caffeine was used per 250 ml. 1.2.5 The sugar, artificial sweetener and Guarana were purchased at the budgeted price and the standard quantity was used. 1.2.6 The actual machine time for the year was 800 120 machine hours. 1.3 Budgeted information for the financial year ending 31 July 2024 1.3.1 Some of the budgeted information for DrinkD’s 2024 financial year is: Details Standard cost Streak energy drink per can R Glitzo energy drink per can R Selling price 18,00 25,00 Prime costs 6,75 17,90 Variable selling and distribution costs 1,30 1,30 Fixed manufacturing overheads 2,50 4,00 Variable manufacturing overheads 0,65 1,25 1.3.2 The labour disputes are expected to have an impact on the available labour capacity. As a result, DrinkD management expects to have only 660 000 direct labour clock hours available during 2023. The direct labour clock time per product is expected to be the same as the actual direct labour clock time per product for the 2023 financial year. 1.3.3 DrinkD has budgeted to produce and sell 12 million cans of energy drinks of which 70% will be Streak and the rest Glitzo as a result of labour and material input issues. 1.3.4 The water supply issues are also expected to persist in the 2024 financial year. AquaCraft informed DrinkD that they can only supply 80% of the 2023 budgeted capacity of water made available. 2. TABLET DIVISION (TABLETD) This division operates a process costing system in the manufacturing of cherry-performance effervescent tablets (Cherivive). TabletD values all types of inventories using the weighted average costing method. The TabletD management team receives a performance-related bonus if their division achieves a return on investment (ROI) of 12% or above for the particular financial year. The head office is considering incorporating other non-financial performance measures. Page 5 of 8 MAC3701 Assessment 02/S2/2023 [TURN OVER] QUESTION 1 (continued) The TabletD manufacturing process begins with mixing the direct raw materials (Vitamins, Citric Acid, Sodium Bicarbonate, Flavourants and Artificial sweeteners). The raw materials are mixed and undergo granulation to be compressed into tablets. The tablets are packaged into plastic tubes of 200 g each, which represents one unit of Cherivive. These units are packed in boxes for distribution to various retailers. All the direct raw materials required to manufacture Cherivive are added at the beginning of the manufacturing process. Direct labour and manufacturing overheads are incurred evenly throughout the manufacturing processes. One kg of the direct raw materials yields one kg of Cherivive. Normal losses in the form of broken and rejected tablets amount to 5% of the direct raw materials added. These broken and rejected tablets are identified at the 80% completion point of the manufacturing process. 2.1. Actual information for the month of July 2023 was as follows: 2.1.1 On 30 June 2023, there was 3 000 kg of work in process (WIP) which was 90% completed. The direct raw material costs included in this WIP were R262 000 and the direct labour and manufacturing overheads were R558 500. 2.1.2 16 tonnes of direct raw materials, costing R1,6 million were added into the process. 2.1.3 The current direct labour and manufacturing overheads totalled R1,35 million 2.1.4 60 000 units were completed in the month. 2.1.5 On 31 July 5 000 kg of the WIP were 75% completed. 2.2. Actual information for the year ended 31 July 2023 was as follows: 2.2.1 The Division achieved a residual income of R125 000. 2.2.2 Controllable assets were R12 million. 2.2.3 Controllable liabilities were R4,5 million. 2.2.4 Head office allocated costs of R250 000 were deducted from the gross profit amount to arrive at the controllable profit used in the residual income calculation; and 2.2.5 The following transaction was excluded from the information provided above. TabletD’s management bought a new granulator on 01 February 2023 at a cost of R1 800 000. TabletD management team sold their old granulator for the scrap value of R 250 000 and used the funds as a deposit for the new machine. They arranged 100% long-term financing for the remaining purchase price with interest only accruing after 12 months. This granulator is depreciated over 48 months on a straight-line basis. Page 6 of 8 MAC3701 Assessment 02/S2/2023 [TURN OVER] QUESTION 1 (continued) The management accountant provided the following calculation in determining the achieved return on Investment for the year: Achieved return on investment (ROI) = Controllable profit / Controllable investments = R1 275 000 ÷ R7 275 000 = 17,53% Comment: The management team achieved a return on investment of 17,53% which is higher than the required ROI of 12% to earn performance-related bonuses. Therefore, the management team will receive performance-related bonuses for the 2023 financial year.  Controllable profit Details R Residual income 125 000 Add: Cost of capital charge 900 000 Used controllable profit 1 025 000 Add: Head office allocated costs 250 000 Therefore, revised controllable profit R1 275 000  Given  (R less R4 500 000) = R7 500 000 x 12% = R900 000  R1 800 000 ÷ 48 months x 6 months = R225 000  Controllable investment Details R Controllable assets  Less: Controllable liabilities 6 300 000 Therefore, Controllable investments R7 275 000  R + R1 800 000 (new granulator) – (R225 000) depreciation = R  R4 500 000 + R1 800 000 (granulator finance) = R6 300 000 Page 7 of 8 MAC3701 Assessment 02/S2/2023 [TURN OVER] QUESTION 1 (continued) REQUIRED For each question below, remember to: • Clearly show all your calculations in detail; • Where necessary, indicate irrelevant amounts/adjustments with an R0 (nil-value); • Except where otherwise stated, round all the final Rand-amount workings to two decimals; and • Ignore time-value-of-money and all taxation implications. QUESTIONS (a) TO (e) RELATE TO DRINKD’s FINANCIAL YEAR ENDING ON 31 JULY 2023 (a) Calculate DrinkD’s budgeted break-even sales units per product type for the 2023 financial year. Ignore the implications, if any, of opening- and closing inventory. (12) (b) Prepare DrinkD’s budgeted statement of profit or loss (income statement) for the year ended 31 July 2023. The income statement should contain a column for each product type and a total column. (17) (c) Briefly identify and discuss three social and ethical concerns that DrinkD faced during the 2023 financial year. (6) (d) Briefly identify and discuss five business risks that DrinkD faces during 2023. (10) (e) For answering question (e) only, assume the following: • a standard costing system is in place. • the implications, if any, of opening and closing inventory should be ignored. • Streak: Standard gross profit (GP) of R4 and actual GP R3,50 per unit. • Streak: Standard contribution of R3,80 and actual contribution of R3,40 per unit. Calculate the following variances for the year ended 31 July 2023: (i) Sales price variance for Streak only. (ii) Sales volume variance for Streak only. (iii) Caffeine direct material usage variance in grams for Glitzo only. (iv) Direct labour efficiency variance in work hours for both products and in total. (v) Total variable manufacturing overhead efficiency variance. (2) (2) (3) (5) (3) QUESTION (f) RELATE TO DRINKD’S 2024 FINANCIAL YEAR (f) Calculate DrinkD’s budgeted optimum manufacturing mix per product for the financial year 2024. • the implications, if any, of opening and closing inventory should be ignored. (13) Page 8 of 8 MAC3701 Assessment 02/S2/2023 [TURN OVER] QUESTION 1 (continued) QUESTIONS (g) TO (j) RELATE TO THE TABLETD (g) (i) Comment on whether or not the shortcut method is applicable in calculating the actual quantity statement for July 2023. (ii) Prepare TabletD’s actual quantity statement for July 2023. Where applicable, round your workings to the nearest unit of measure. (2) (10) (h) Based on the answer in (g), calculate TabletD’s equivalent cost per unit for July 2023. (3) (i) Draft a memorandum to the Chief Executive Officer (CEO) (2 format marks) wherein you critically evaluate the management accountant’s calculation and comments. (Review workings for errors and/ or omissions, and where applicable, provide correct workings.) (2) (7) (j) Briefly describe three non-financial measures that can be used to evaluate TabletD’s performance in terms of the efficiency of their manufacturing process. (3) Total question one [100] © UNISA 2023 All rights reserved. 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