ACN317-5 ACN307-3 RAC317-R May / June 2006 Exam

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QUESTION 1 (32 marks) (38 minutes) Rollews Limited manufactures and distributes bathroom fittings. Imported bathroom ranges, following international trends, have resulted in a review of the company’s existing rage of products. A market and feasibility study costing R100 000 was completed and paid for on 1 April 2006. Consideration is being given to replacing an existing machine in the production process, with a new machine, which will increase the production capacity and also enable a new range of products to be manufactured. If the existing machine is retained, the current market share and sales will only be maintained if the current selling price per unit of the product is reduced by 20%. The existing machine was installed and commissioned on 1 July 2003 and if it is retained, it will require a modification costing R700 000 in order to maintain its current production capacity. If a new machine is acquired, it will be installed on 1 July 2006. The following additional information is available as a 1 July 2006 : Machine Existing Cost price (including installation) Current market value Estimated useful life Selling price per unit (current) Less : Variable production cost per unit Marginal income per unit Annual fixed overheads (excluding depreciation) Estimated annual sales - units

New

R 2 500 000 750 000

R 4 250 000 4 000 000

7 years R 450 210

4 years R 620 280

240

340

144 000

90 000

4 800

4 500

The estimated annual unit sales of the envisaged new machine is expected to increase by 30% for the year following the first year and will then remain at that level for the remainder of its useful life. The annual wear and tear allowance as granted by the taxation authorities is in agreement with the internal accounting policy, which makes provision for depreciation at 25% per annum to be written off based on the total cost of the machinery, as well as any modification cost which may be incurred. Codec Finance is prepared to finance the proposed new machine and its installation cost by means of a 12% per annum instalment sale agreement over a period of four years. The instalments are payable in equal amounts, annually in arrear. The total interest to be paid on the agreement over the four year period estimated at R1 346 860. The required rate of return is 14% and the current rate of taxation is 29%. The annual income is sufficient to utilise any tax benefits in the year in which they arise. REQUIRED : Determine by using net present values whether the existing machine should be replaced by the proposed new machine. Work to three decimal places and round all figures off to the nearest Rand. (32)

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QUESTION 2 (24 marks) (29 minutes) Computer Warehouse sells various computer hardware products. The business currently assembles two models of computers internally, namely the Educational and Gaming computers. Assembly takes place according to demand, therefore no stock of assembled computers is kept. A standard costing system is used to control the costs of the assembled computers. A bin system is used where the storeroom staff place all the components required to assemble a computer, into a component bin. Component bins are issued to the assembly section on request at actual cost. Where one or more of the components in a bin are defective, the staff document it on the bin and these bins are kept in the assembly section as replacement components for other defective components. The following standards are available for a normal month : Standard per assembled computer :

Educational

Gaming

R

R

Selling price Less : Cost of sales

3 500 2 600

5 000 3 950

Components Direct labour Overheads - Variable - Fixed (120 per hour)

1 200 200

2 200 250

240 960

300 1 200

900

1 050

Gross profit

During a normal month, 400 computers are assembled. The standard ratio of Educational to Gaming computers sold is 70% to 30% respectively. Overheads are allocated based on labour hours. The following actual information is available for April 2006 : 1.

During April, the Gaming computers were advertised nationwide on an Easter special at a discounted price of R4 500. This had the effect of the sales volume of Gaming computers increasing to 250 computers and that of Educational computers decreasing to 230. The Educational computers were sold at standard selling prices.

2.

Stock records show that 231 Educational and 252 Gaming component bins were issued to the assembly section at a cost of R1 250 and R2 100 per bin respectively.

3.

Direct labour hours worked were 4 238 at a cost of R105 950.

4.

Fixed overhead amounted to R410 000.

REQUIRED : (a)

Calculated the following variances for each type of assembled product for April 2006 : (i) (ii)

(b)

Selling price variance (3) Sales mixture, quantity and volume variance based on units for sales reconciliation purposes (6)

Reconcile budgeted sales to actual sales

(3)

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QUESTION 2 continued (c)

Calculate all possible component variances

(6)

(d)

Calculate the fixed overhead capacity and efficiency variances

(6)

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QUESTION 3 (26 marks) (31 minutes) Flyaway Charter Services (Pty) Ltd is a company which charters tourists to exclusive holiday destinations in Africa. The company is currently experiencing a great demand for chartered trips to the Radikwe Game Reserve. Management decided to acquire an extra eight seater aircraft to fulfil the demand for their chartered flights. The following information relates to the new aircraft : Economic operating life (years) Cost price payable on delivery (R’million)

10 15

Estimated realisable value at end of economic useful life

Nil

The financial director is currently considering two financing options : Option 1 A lease, in terms of which the company will pay leasing charges of R4.5 million per annum at the beginning of years one to four. Option 2 In order to buy the aircraft for R15 million, 18% debentures can be issued, with the capital repayable in four equal instalments at the end of each year. Other information : 1

Ignore inflation.

2

Wear and tear will be allowed for income tax purposes at 25% per annum on the cost price, calculated on the straight line method.

3

The estimated taxation recoupment at the end of the initial lease period will be R1 million.

4

The rate of company taxation is expected to be 30% throughout the period.

5

The company has sufficient taxable income from other sources to utilise any tax benefits in the year in which they arise.

6

The company’s after tax cost of debt is 15% per annum.

7

Assume that, unless otherwise indicated all cash flows occur on the last day of the year concerned.

8

The aircraft will be taken into use on the first day of the financial year.

REQUIRED : (a)

Determine, by using the net present value method, which financing option should be selected by the company. Perform all calculations correct to one Rand. (25)

(b)

Motivate your choice between option 1 and option 2 by referring to your calculations in (a). (1)

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QUESTION 4 (18 marks) (22 minutes) This question consists of multiple choice questions 4.1 to 4.6 which must be answered on the examination mark reading sheet at 1 to 6. Please ensure that you follow the 10 instructions meticulously. Each question must be considered independently, except where specific reference is made to information in another question. Each question has only one correct answer. Calculations are not marketed and can be done in your blue examination script. One completion of the question, please place the examination mark reading sheet in your examination script. The unique paper numbers are as follows : ACN317-5

414832

ACN307-3

414840

Use the following information to answer questions 4.1 and 4.2. Wooden Floors manufactures wooden strips for floor panels. A specialised saw is used in the production of the panels. The maximum production capacity of this saw is 130 units per day for 25 days a month. The normal sales for June 2006 are 2 500 units. The semi-variable overhead cost at a production level which equals the sales for June 2006 is R7 000. If the production level is at the maximum capacity, the semi-variable cost will be R8 500. 4.1

The number of units which will be available for an additional order in June 2006 is : (1) (2) (3) (4) (5)

4.2

What is the amount of fixed overheads included in the budgeted semi-variable overheads? Round calculations off to two decimal places. (1) (2) (3) (4) (5)

4.3

R2 000 R4 327 R6 875 R4 873 None of the above

Which one, or more, of the following considerations constitute disadvantages of Zero Base Budgeting? (a) (b) (c) (d)

(1) (2) (3) (4) (5) 4.4

1 400 750 3 250 3 900 None of the above

The preparation of the budget is very costly due to the amount of time which needs to be spent there-on. Annual review of methods to reach goals as efficiently as possible. The limited time of management is to a large extent taken up by the evaluation of the various decision packages. The annual revision leads to greater participation by subordinates and leads to an improvement in the quality of the information that is provided to managers. (a) and (b) (a) and (c) (b) and (d) (c) and (d) None of the above

(3)

The first payment on an instalment sale agreement for the acquisition of a machine by Crum Ltd, which includes interest of R187 200, amounts to R437 128 and will be paid in June 2006. Depreciation on the machine will be R312 000 for the year ending 30 June 2006.

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QUESTION 4 continued It is expected that the turnover for the year ending 30 June 2006 will occur on an equal monthly level as follows :

-

Cash turnover

R 3 000 000

-

Credit turnover (Debtors)

4 200 000

There were no debtors on 1 July 2005 and the debtors accounts are paid within 21 days from the invoice date. Invoices are presented at the end of the month. Which one of the following alternatives, if any, represents the expected net cash inflow/(outflow) for June 2006? (1) (2) (3) (4) (5)

R(24 328) R136 872 R162 872 R(187 128) None of the above

(3)

Use the following information to answer questions 4.5 to 4.6. One 28 February 2006, a delivery vehicle was acquired for R150 000. The transaction was financed by, means of a suspensive sale agreement at a guaranteed effective rate of 16%. No deposit was paid. The full amount payable in terms of the suspensive sale agreement is repayable in 4 equal annual instalments, payable annually in arrear. The Commissioner of Inland Revenue allows wear and tear on vehicles at 20% per annum on cost, based on the straight line method. Depreciation is written off on the cost of all vehicles at 25% per annum on the straight line method. Round off all calculations to the nearest Rand. 4.5

The amount which should be shown in the Budgeted Income Statement for the year ending 28 February 2007 regarding the loan is : (1) (2) (3) (4) (5)

4.6

R24 000 R30 000 R37 500 R53 610 None of the above

(3)

The amount which should be shown in the Cash Budget for the year ending 28 February 2007 regarding the loan is : (1) (2) (3) (4) (5)

R24 000 R30 000 R37 500 R53 610 None of the above

(3)