MAC3761/201/0/2022

Tutorial Letter 201/0/2022

Management Accounting III

MAC3761

Year module

Department of Management Accounting

This tutorial letter contains important information

about the module.

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 MAC3761/201/0/2022
CONTENT

Page

1. INTRODUCTION .......................................................................................................................... 3
2. TEST 01: MARK QUERIES .......................................................................................................... 3
3. SUGGESTED SOLUTIONS .......................................................................................................... 4
4. REFERENCES ........................................................................................................................... 11

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 MAC3761/201/0/2022
1. INTRODUCTION
Dear Student
This tutorial letter contains the suggested solutions to the questions of Test 01 of 2022. It is in
your own interest to work through the suggested solutions in conjunction with the test questions
and your answers. To help you follow through the suggested solutions, calculations/workings are
referenced and/or cross-referenced using symbols such as the following: ,,,,, and .

The average of your best three tests (based on the highest mark obtained) will constitute
your year mark. (For more information, refer Tutorial Letter 101/0/2022.) The year mark
will weigh 30% in the calculation of the final mark of the module, which will be made up
us follows:

Contribution to
Assessment final mark
Average of best three tests (year mark) 30%
Final examination (summative
assessment) 70%
Total 100%

It is important and in your own best interest that you go onto myUnisa to visit the MAC3761 module
site on a regular basis, as we post study materials, important announcements, and additional
resources such as notes and links to videos, on the site.

Kind regards
MAC3761 lecturers

Lecturers’ contact details: Refer to myUnisa.

E-mail: [email protected]

2. TEST 01: MARK QUERIES

A mark plan and an announcement will be uploaded on myUnisa in due course, specifying how
you should go about if you would like to query the number of marks awarded to your test 1 script.
It is imperative for you to follow the process exactly as described in the announcement, otherwise
your query will not be attended to.

Direct all administrative queries on Test 01, such as whether the University received your test
script or not, to the Student Assessment Administration Department by sending an e-mail to
[email protected].

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 MAC3761/201/0/2022
3. SUGGESTED SOLUTIONS
QUESTION 1: WATCH-IT LIMITED

(a) Actual income statement [12]

Details Total

Sales 21 000 000

Less: Cost of sales 11 350 980

Opening inventory 92 200

Add: Current period production costs 11 708 400

Buckles 1 650 000

Leather bands 758 400

Cases 2 106 000

Hands 1 432 800

Direct labour & variable manufacturing overheads (VMO) 2 543 700

Applied fixed manufacturing overheads (FMO) 3 217 500

Less: Closing inventory 449 620

Add: Over-applied FMO 207 500

Gross profit 9 856 520

Less: Selling and administration costs 2 000 000

Variable 1 050 000

Fixed 950 000

Net profit (before taxation) 7 856 520

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 MAC3761/201/0/2022
QUESTION 1(a) (continued)
 Given

 (2 000 x R3 000) + (6 000 x R2 500) = R6 000 000 + R15 000 000 = R21 mil

 Buckles: R200 x 8 250 = R1 650K

or R200 x 2 100 + R200 x 6 150 = R420K + R1 230K = R1 650K

 Total current production units = 2 100 + 6 150 = 8 250

 Leather bands: 20/100 x 2 100 x R400 + 24/100 x 6 150 x R400= R168 000 + R590 400
= R758 400 or R80 x 2 100 + R96 x 6 150

 Cases: 2 100 x R300 + 6 150 x R240 = R630 000 + R1 476 000 = R2 106 000

 Hands: 2 100 x R60 x 2 + 6 150 x R96 x 2 = R252 000 + R1 180 800

= R1 432 800

 Direct labour & VMO: 2 100 x R280 + 6 150 x R318 = R588 000 + R1 955 700
= R2 543 700

 20/100 x R400 = R80; and 24/100 x R400 = R96

 FMO rate: R3 299 400 / 8 460 = R390 per unit

 Applied FMO: R390 x 8 250 = R3 217 500

or R390 x 2 100 + R390 x 6 150 = R819 000 + R2 398 500 = R3 217 500

 R3 010 000 - R3 217 500 = R207 500 over-applied

 Inventory values per product type:

Details Classic Fashion
Total Per unit Total Per unit
(total / 2 100) (total / 6 150)
Buckles 420 000 200 1 230 000 200
Leather bands 168 000 80 590 400 96
Cases 630 000 300 1 476 000 240
Hands 252 000 120 1 180 800 192
Direct labour & VMO 588 000 280 1 955 700 318

Applied FMO 819 000 390 2 398 500 390

TOTAL 2 877 000 8 831 400

Divided by: 2 100 6 150

Production units
TOTAL PER UNIT R1 370 R1 370 R1 436 R1 436

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 MAC3761/201/0/2022
QUESTION 1(a) (continued)

 Total closing inventory value = [(50 + 2 100 - 2 000) x R1 370] + [(20 + 6 150
- 6 000) x R1 436] = [150 x R1 370] + [170 x R1 436] = R205 500 + R244 120 = R449 620

or 150 x (R200+R80+R300+R120+R280+R390)
+ 170 x (R200+R96+R240+R192+R318+R390) = 150 x R1 370 + 170 x R1 436
= R205 500 + R244 120 = R449 620

 Total opening inventory value: [R47 000 + R20 000] + [50 x R360 + 20 x R360]
= R67 000 + [70 x R360] = R67 000 + R25 200 = R92 200

or [R47 000 + 50 x R360] + [R20 000 + 20 x R360] = [R47 000 + R18 000] + [R20 000 + R7
200] = R65 000 + R27 200 = R92 200

 [2 000 x 5% x R3 000] + [6 000 x 5% x R2 500] = R300 000 + R750 000 = R1 050 000

or [R6 000 000 x 5%] + [R15 000 000 x 5%] = R300 000 + R750 000 = R1 050 000

or R21 000 000 x 5% = R1 050 000

(b) Budgeted break-even units per product type [6]

Total fixed costs R5 064 000

Weighted average contribution per unit R517,50

= 9 785,507…

≈ 9 786 units (always round-up)

Fashion break-even units 9 786 x 75% = 7 340

 Given

 R4 000 000 + R1 064 000 = R5 064 000

 R400 x [2 500 + 7 500) = R400 x 10 000 = R4 000 000

or R1 700 000 + R800 000 + R1 500 000 = R4 000 000

 R950 000 x (100% + 12%) = R1 064 000

 (Classic: R480 x 25% = R120) + (Fashion: R530 x 75% = R397,50) = R517,50

 Classic:2 500 ÷ 2 500 = 1; Fashion: 7 500 ÷ 2 500 = 3

 1 + 3 = 4; ¼ =0,25 or 25%; ¾ = 0,75 or 75%

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 MAC3761/201/0/2022
QUESTION 1 (continued)

(c) Compare the budgeted allocated fixed manufacturing overheads per Classic watch for the
2023 financial year between the traditional and ABC methods and recommend to Watch-
[7]
It management which method would be more suitable to use. Provide one reason to
motivate your recommendation.
ABC

Activity Cost pool Cost driver Activity Allocated to Allocated to

volume rate Classic Classic PER UNIT
(R) (C = A/B)
(A)
(B)

Packing 1 700 000 55% + 45% R17 000 R935 000 R935 000/2 500
= 100% per 1% = R374

Sourcing 800 000 1 200 hours + 800 R400 R480 000 R480 000/2 500
quality hours = R192
materials = 2 000 hours per hour

Quality 1 500 000 2 500/10 + 7 R2 400 per R600 000 R600 000/2 500
inspection 500/20 inspection = R240
= 250 + 375

= 625

Total 4 000 000 R2 015 000 R806

Traditional

R400 per unit.

(In total: R400 x 2 500 = R1 000 000)

Comparison: The ABC method will allocate R806 (calc. above) – R400 = R406 per unit) more FMO to
Classic than the traditional method. (Alternative: ABC R2 015 000 – traditional R1 000 000 = R1 015 000;
R1 015 000 / 2 500 units = R406 per unit more.)

Recommendation: The ABC method will be more suitable for Watch-It’s use.

Motivation/reason (note that only one reason had to be provided, but we list a number of reasons in
this tutorial letter for learning purposes):

• Using the traditional method, the Classic Watch product type will be allocated too little of the FMO/the
Fashion Classic Watch product type will be allocated too much of the FMO.
• Using the activity-based costing method to allocate FMO will be more accurate due to:
o the arbitrary allocations that the traditional system relies on.
o the cause-and-effect allocation bases/activities as cost-drivers that ABC uses.
o Classic proportionally making more use of activities that drive the cost in relation to
Fashion, and this will not be reflected if traditional costing is used.

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 MAC3761/201/0/2022
QUESTION 1(c) (continued)
 Given

 R17 000 per 1% x 55 = R935 000

 R400 per hour x 1 200 hours = R480 000

 R2 400 per inspection x 250 inspections = R600 000

(d) Briefly discuss one potential “barrier to entry” evident from the scenario that should be
considered if Porter’s Five Forces Framework is used to determine whether the proposed new [2]
product type (clocks) is expected to be profitable.
• High level of capital intensity
If the decision is taken to introduce the clocks as a new product type, a special machine will have to be
acquired for purposes of manufacturing the clocks.
In contrast with the watches, clock production will require minimal manual involvement.
• Stringent (environmental or other) regulation
Transporting the batteries is highly regulated as they can set alight.

(e) Calculate the cost of capital to be used in evaluating the proposed introduction of clocks as a
[7]
new product type on 1 April 2022.
Instrument Portion of capital Cost of capital Calc. Weighted cost of
structure (A)* capital
(B)

Ordinary shares 70% 7,94%  5,56%

Interest-bearing 30%/3 = 10% 7,20%  0,72%

loans

Preference shares 30%/3 = 10% 11,50%  1,15%

Debentures 30%/3 = 10% 4,80%  0,48%

100% 7,91%
Total

 Given

* As per target capital structure.

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 MAC3761/201/0/2022
QUESTION 1(e) (continued)

Calculations:

COST OF CAPITAL

 Ordinary shares

INSTRUMENT COST OF EQUITY

Ke = (D1 / P0) + g
ORDINARY SHARES P0 = Cum div – div = Share price ex div = R150
D1 = (R154,20 – R150,00) x (100% + 5%) = R4,20 x 1,05
D1 = R4,41
Ke = (4,41 / 150) + 0,05 = 7,94%

 Given

 Interest-bearing loans

INSTRUMENT MARKET VALUE

Kd1 = 10% x (100% - 28%) = 7,2%

INTEREST-BEARING
LOANS
 Given

 Preference shares

INSTRUMENT MARKET VALUE

PREFERENCE SHARES Kp = 11,5%

 Given

 Debentures

INSTRUMENT MARKET VALUE

Kd2 = 4,8%

DEBENTURES
 Given

 1+1+1=3 (the question states that the debt instruments must be reflected in equal proportions and there are
three debt instruments applicable here; namely, interest-bearing loans, preference shares and debentures).

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 MAC3761/201/0/2022
QUESTION 1 (continued)

(f) Assuming that the decision is taken to introduce the clocks as a new product type, briefly
discuss two suitable debt finance products that Watch-It can use in its financing of the [2]
cost of the special manufacturing machine.
The question states that “Watch-It will finance as much as possible of the cost price of the special
machine by suitable debt finance products provided by banks and/or other financial institutions”
(own emphasis). Therefore, only Vehicle and asset finance and Medium-term loans (text book,
page 255) will be suitable.

o Vehicle and asset finance: Watch-It may finance the special manufacturing machine (a
specific asset) by means of vehicle and asset finance using the machine as security for the
debt. The debt can be linked to the lifespan of the machine and the debt can be structured as
an instalment-sale agreement, finance lease or operating lease (Skae, Benade, Combrink, De
Graaf, Jonker, Ndlovu, Nobatyi, Plant, Steyn & Steyn 2017:255).
o Medium-term loans: Watch-It may take out a medium-term loan from a bank or other financial
institution to finance this fixed asset over a period of between one and ten years. The loan
period will be “fixed instalments, with or without a balloon payment at the end” (Skae, et al.
2017:255).

(g) From an ethical perspective, identify and briefly discuss two details (pieces of
information) that you would advise Watch-It to mention on their packaging of the [4]
proposed new clock product-type.

1. The clock will have a limited lifespan of 15 000 hours. Customer expectations should be
managed by being transparent about the clock not being able to work “forever”.

2. The plastic bag used to package a clock poses a safety hazard for small children. A warning
about the danger of the plastic bag presenting a risk that small children can choke from it. Some
products in the market state that a plastic bag is not a toy. Customers should be warned that
they should keep the bag away from small children.

3. Transporting a rechargeable lithium-ion battery is dangerous as the battery can set alight. A
warning about the battery being a fire hazard should be provided so that customers can take
safety precautions when using or transporting the product or its battery.

4. That the universal USB charger that is required to charge the battery is not included with the
clock. To be transparent about what is included in the product and what the customer will have
to buy in addition to the product in order to put it in operation. Customers are often price-
sensitive and will need to know about this before buying the product, as they may have to spend
additional money on top of the product selling price (if they do not already have the relevant
charger at home) in order to be able to use the product as intended and this may influence their
buying decisions. Hiding this from the customer would not be ethical and fair. Furthermore, even
if a customer is not price sensitive, he/she is likely to be upset or inconvenienced or it may even
result in an emergency if he/she gets home and cannot operate the product immediately
because he/she does not have the relevant charger.

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 MAC3761/201/0/2022
QUESTION 1(e) (continued)

5. The batteries are hazardous to the environment if not disposed of correctly at the end of their
useful life. An appeal for responsible disposal/recycling of the product or its battery when it is not
working anymore. Possibly guidance in this regard (basic guidelines on how to dispose of it
safely or where to obtain the relevant information). Some products in the market have a picture
of a dustbin with an x through it to indicate that it “cannot be put in the general waste” (Johnson
2022).

6. That charging of the battery is required in order for the product to work. If the battery is not
charged, the product will not work. The customer can be informed of this so that he/she can take
an informed decision in buying the product when a product that works immediately (as opposed
as after charging time) is perhaps required or if electricity is not available for charging.

7. That the battery is rechargeable. Environmentally-conscious and/or cost-conscious customers

may want to know that they can recharge the battery instead of continuously buying new
batteries. The battery is, however, the most expensive component of the clock so it is not
necessarily cheaper for a customer to have the rechargeable battery-product than a product
where batteries need to be continuously bought, so one cannot necessarily say this will save
costs (if they would like to mention reduced costs they will first need evidence to prove that it is
indeed the case).

8. The plastic bag can cause pollution if not responsibly discarded/recycled. An appeal for
responsible disposal/recycling of the plastic bag. Possibly guidance in this regard (basic
guidelines on how to dispose of it safely or where to obtain the relevant information). Some
products in the market have a picture of a dustbin with an x through it to indicate that it “cannot
be put in the general waste” (Johnson 2022).

4. REFERENCES

Johnson, E. 2022. Lost in translation: Recycling signs - what do they actually mean? iHASCO blog.
[Online.] Available from: https://www.ihasco.co.uk/blog/entry/2293/recycling-signs-what-do-they-mean
[accessed 30 March 2022].

Skae, F.O., Benade, F.J.C., Combrink, A., De Graaf, A., Jonker, W.D., Ndlovu, S., Nobatyi, A.E., Plant,
G.J., Steyn, B.L. and Steyn, M. 2017. Managerial Finance. 8th ed. LexisNexis: Durban.

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UNISA 2022
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