Blades (Pty) Ltd (“Blades”) is a manufacturer that specialises in the manufacturing of Saws. Blades uses an absorption costing system and is currently planning the entity’s budgeted activity for the following financial year ending 2025. The following information pertains to the financial year ended 31 December 2024.

Budget details for the financial year ended 2024

Blades only manufactures a single product, Saws, which it plans to sell at a mark-up of 100% on prime cost. Prime cost is R600 per unit, of which 60% comprises raw materials and 40% is direct labour.

Production overheads show the following cost-volume relationship, and this is not expected to change in the foreseeable future:
Units produced 30 000 40 000

Cost in Rands 11 000 000 12 000 000

• The budgeted production is 35 000 units.

• Blades pays a commission of 5% of the sales value per unit for each product sold.
• Fixed selling and administration costs amount to R5 000 000.

• The entity wishes to achieve a budgeted profit of R2 400 000 before tax.

Actual results for the financial year ended 2024

Actual sales units were 35 000. The selling price per unit and all costs were exactly as budgeted.

Blades had no opening inventory of any kind. The closing inventory was 4 000 units of finished goods.

Additional information

• The managing director attempted to calculate the number of units Blades should sell in order to achieve its targeted profit of R2 400 000 before tax, as follows:
= R2 400 000 + [(R11 000 000 + R12 000 000)/2)] / (R600 x 2)

= 11 583.33 units

• The managing director is confused. “We had no price or cost variances, our sales were exactly as planned, yet we still made a higher profit than what we planned for. I’m not complaining, but there might be a mistake. I don’t want to pay more tax than I have to!”
• Inventory is valued according to the FIFO method.

REQUIRED:

1.1 Critically evaluate the managing director’s calculation of the number of units that Blades (Pty) Ltd should sell in order to achieve its targeted profit of R2 400 000 before tax. Support your answer by including all the necessary calculations. (13 marks)

1.2 Prepare the actual income statement based on the absorption costing system. (7.5 marks)

1.3 Prepare the actual income statement according to variable costing principles. (4.5 marks)

1.4 Briefly explain to the managing director why the profit is not as expected. (3 marks) Round your answers to two decimal places where required.

Production overheads show the following cost-volume relationship, and this is not expected to change in the foreseeable future:

QUESTION 2 (27 marks)

Murumba (Pty) Ltd (“Murumba”) manufactures and sells car brake pads. Murumba produced its 2024 financial year budget based on the assumption that the entity would be able to sell the brake pads for R6 000 each. The variable cost of each brake pad was projected at R3 000, and the annual fixed costs were budgeted at R1 300 000. Murumba’s fixed costs accrue evenly during the financial year.

The entity requires a profit of R3 000 000 for the financial year in order to meet its target return on capital: R1 000 000 in the first six months and R2 000 000 in the remaining six months.

The entity normally expects its sales to rise during the second quarter of the financial year. However, the June 2024 management accounts show that sales volumes were not in line with expectations. During the first six months of the 2024 financial year, variable costs were as projected, but at the budgeted selling price of R6 000, only 250 units had been sold.

Additional information

To ensure that the entity still meets its required profit of R2 000 000 for the remaining six months, the following mutually exclusive alternative plans of action were developed:

Plan A

Reduce the selling price by 10%. The sales director believes that this will generate sales of 2 700 units during the remaining six months of the financial year. Total fixed costs and variable costs per unit will not be affected and will remain as budgeted.

Plan B

Reduce variable costs per unit by 12,5% through the use of less expensive raw materials. Fixed costs will not be affected. This will allow the selling price to be reduced by 7,5%. Based on the reduced selling price and variable costs, the sales director believes that sales of 2 200 units will be achieved during the remaining six months of the financial year.

Plan C

Reduce fixed costs by R130 000 per annum. This will allow the selling price to be reduced by 5%. Variable costs per unit will not be affected. Based on the reduced selling price, the sales director believes that sales of 2 000 units will be achieved during the remaining six months of the financial year.

REQUIRED:

2.1 If no changes are made to the selling price or cost structure, determine the number of units that Murumba (Pty) Ltd had to sell during the first six months of the 2024 financial year in order to:

2.1.1 Break-even. (3 marks)

2.1.2 Achieve a profit of R1 000 000. (1.5 marks)

2.2 Calculate the margin of safety ratio if no changes are to be made to the selling price or cost structure. Assume that the sales director’s estimates of projected sales volume for the first six months is 2 500 units.  (1.5 marks)

2.3 For each of the three alternative plans (plans A, B and C) of action:

2.3.1 Calculate the number of units required to be sold during the remaining six months of the 2024 financial year in order for Murumba (Pty) Ltd to achieve its
profit objective of R2 000 000. (8 marks)

2.3.2 Calculate the margin of safety percentage based on the sales director’s estimates of projected sales volume for the remaining six months of the 2024 financial year for each of the three alternative plans of action. (7.5 marks)

2.3.3 Briefly comment on the level of risk perceived in each of the three alternative plans of action. Conclude which plan has the lowest level of risk.

Round your answers to two decimal places where required. (5.5 marks)

QUESTION 3 (18 marks)

You were recently appointed as the management accountant of PaintMe (Pty) Ltd (“PaintMe”). The entity operates a joint process to manufacture specialised paints namely Mellow and Sleazy, using only one type of raw material.

In January 2024 material usage amounted to 32 000 kg at a total cost of R725 000. Conversion costs (Joint cost) amounted to R580 000 and the output was as follows: Products Kg’s
Mellow 10 000

Sleazy 30 000

The output of Sleazy is sold at R60 per kg without further processing, but the output of Mellow was processed further at a conversion cost of R18 per kg. The Mellow product is sold for R30 per kg.

PaintMe presently apportions joint costs to the products according to the weight of output at the split-off point.
The managing director has suggested that, in order to save costs, it may be advisable to discontinue all sales of Mellow.

Additional information

Assume that a unit of paint produced equals 1 kg.

REQUIRED:

3.1 Calculate the profit or loss per kg of the products Mellow and Sleazy respectively, according to the existing joint cost allocation basis. (7 marks)

3.2 Comment on the managing director’s suggestion that it may be advisable to discontinue all sales of Mellow, in order to save costs. Using the results calculated in your answer to question 3.1. (2 marks)

3.3 Calculate the profit or loss per kg of the products Mellow and Sleazy respectively, according to the market value at split-off point. (7 marks)
3.4 Comment on the managing director’s suggestion that it may be advisable to discontinue all sales of Mellow, in order to save costs. Using the results calculated in your answer to question

QUESTION 4 (27 marks)

This question consists of three unrelated parts: Part A, Part B and Part C.

You are a prestigious management accounting consultant and have been presented with three different cases from unrelated clients.

PART A (8 marks)

Beverages (Pty) Ltd (“Beverages”) has four different divisions. One of their divisions (“Energy”) which produces energy drinks called “LessFire” has been struggling for the past three years due to intense market competition.

The results of the division for the financial year ended June 2024 were as follows:

Rands

Sales 2 000 000

Direct Material (1 450 000) Depreciation (400 000) Salaries and wages (650 000)
Profit/(Loss) (500 000)

Should the Energy the division be shut down the entire workforce will be retrenched at a cost of R250 000.

REQUIRED:

Determine whether the Energy division should be shut down or not.

Should you wish to intentionally include or omit a figure from the workings, provide a brief motivation for this decision. Use the format below. Rands Reason for Inclusion /Omission

Round your answers to two decimal places where required (8 marks)

PART B (10 marks)

A household music producer branched into the manufacturing space upon realising that his personal name is a brand on its own.

He decided to start a manufacturing company in 2021 called Kicks (Pty) Ltd (“Kicks”) which manufactures sneakers branded “Phori”.

The normal monthly demand is 8 000 pairs of sneakers, and the maximum capacity is 10 000 pairs. The sneakers sell at R1 200 per pair. The variable cost to manufacture one pair of sneakers is R600. Fixed costs amount to R304 000 per month.

Kicks (Pty) Ltd received a special order for 3 000 pairs of sneakers at a reduced selling price of R950 per pair of sneakers. If this order is accepted, it has to be delivered in full within the next month.

REQUIRED:

Determine whether the special order should be accepted or not.

Should you wish to intentionally include or omit a figure from the workings, provide a brief motivation for this decision. Use the format below.
Rands Reason for Inclusion /Omission

Round your answers to two decimal places where required.

PART C (9 marks)

Storage (Pty) Ltd (“Storage”), is a manufacturer of storage boxes. Storage received a special order for which the entity needs to determine the minimum price .

Additional information

• 1 100 kg’s of material X is required for this order. There is currently 100 kg’s of material X in stock (purchased at R7 per kg). Material X is used regularly by Storage and the current purchase price is R10 per kg.
• 300 kg’s of material Y is required for this order and there is just enough in stock (purchased at R5 per kg). Material Y has no foreseeable use in the business and if not used for this order it will be disposed of at a total cost of R700.
• Machinery required to complete this order will be reaching the end of its useful life and needs to be replaced at a cost of R20 000. Storage uses this machinery in all their production processes. The expected useful life thereafter is 10 years.
• Fixed overheads are normally R6 per unit but are expected to increase to R8 per unit for this order.
• The special order is for 600 units and will take 3 months to complete.

REQUIRED:

Determine the minimum price for the special order.

Should you wish to intentionally include or omit a figure from the workings, provide a brief motivation for this decision. Use the format below.
Rands Reason for Inclusion /Omission

Round your answers to two decimal places where required.

Answers to Above Questions on Management Accounting 

Answer 1: The managing director aims to achieve a target profit of R2400000, and to achieve this profit the number of units that the company needs to sell is calculated as follows:
Target Profit: R2400000
Average production cost per unit: (R11000000 + R12000000) /2 = R11500000
Total Units to be Sold: R1390000/R1200 = 11583 units

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