ACC2022F Management Accounting 1 2011 Class Test 1 Solution

QUESTION 1 PART A
UNIVERSITY OF CAPE TOWN

Markers Comments:
Students still did fairly well in the section. It is worrying that students could get the Predetermined
overhead rate correct, but then did not know how to apply that PREDETERMINED OVERHEAD RATE
(POHR) to the jobs worked on during the year. The application of overheads is recognised by the
following general journal entry: Dr Work in process and Cr Manufacturing overhead (with the
Overhead Applied = POHR X ACTIVITY BASE (direct labour cost) = 150 % of direct labour cost x R4
000 000 = R6 000 000 overheads applied during the year). This led to students not getting the
correct over applied overhead of R170 500 (R6 000 000 R5 829 500 (given)) in part 3 fortunately
the error was carried forward from 2 to 3, 4 and 5. Students failed to balance general ledger
accounts correctly many lost mark here. Students confused with the gross profit mark up on cost
and the gross margin on selling price. Please revise your Financial Accounting 1A notes with regard
to the mark up.

DEPARTMENT OF ACCOUNTING
ACC2022F MANAGEMENT ACCOUNTING 1
Class Test 1 24 March 2011

1.

SUGGESTED SOLUTIONS
Should you wish to appeal against the making of your test script please complete the appeal
form under Resources on Vula and submit this within one week of receiving your test script. The
closing date for appeals on Class Test 1 is 12h00 on Friday 15 April 2011

Very important general comments on test 1:

Well done. On the whole your lecturers are happy with the marks for test 1. The markers have
made some specific comments on the questions and we encourage you to read these.
The knowledge you gain in Management Accounting 1 each week is cumulative and the material
covered by test 1 is the important foundation for the more difficult work we have done like
relevant costing and the topics we will cover this term. It is important for you to maintain your
positive approach to your work.
Test 2 is always going to be more difficult because of the work covered and will be a real test of
your management accounting ability. Your mark will drop. Students who are not afraid of this
challenge will make sure that they come to lectures and continue to work hard. They will survive
test 2 and go on to do well in the final examination and in the course as a whole. I will not
highlight the negative and destructive tactics adopted by students because I know that none of
you are going to do this.
If test 1 did not go well it is not the end and you urgently need some help. First step is to write the
test on your own without time constraints and see where you have gaps in your knowledge. Make
use of your lecturers, the course helpdesk, the hot set, etc. Do not leave the matter and hope it
will come right on its own.

Predetermined overhead rate for the year.

Manufacturing overhead
Direct labour cost

R 5 800 500 X 100

3 867 000

= 150 % of direct labour cost

2.
Work in Process
4 400 000 Finished goods
4 000 000 Closing balance
13 800 000
6 000 000
28 200 000
Opening balance
3 750 000
1
(R2 100 000 + 13 300 000 1 600 000) 2 (4 000 000 x 150 %) CF
Opening balance
Direct labour
Direct material 1
Manufacturing overhead applied 2

3.

24 450 000
3 750 000

28 200 000

Under / over applied manufacturing overhead

Applied Manufacturing overhead CF

Actual Manufacturing overhead
Manufacturing overhead over-applied

R6 000 000
5 829 500
R170 500

4.
Dr
Cr

Manufacturing overhead CF
Cost of goods sold

170 500
170 500

5.
Work in process and finished goods would have been overstated resulting in cost of goods being
overstated and net profit being understated.

Your lecturers

ACC2022F Management Accounting 1 2011 Class Test 1 Solution

ACC2022F Management Accounting 1 2011 Class Test 1 Solution

QUESTION 1 PART A continued

QUESTION 1 PART A continued

6.
Price of job No. 345
Direct materials
Direct labour: R90 000 x 100/150
Applied manufacturing overhead
Total cost to manufacture
Add: Mark up (R195 000 x 45 %)
Charge customer on invoice

Weighted Average Contribution Margin:

RadBerry:
R144 x 4/5
115.20
JPhone
R450 x 1/5
90.00
R205.20 per phone

45 000
60 000
90 000
195 000
87 750
R282 750

7.
Direct labour
Manufacturing overhead (R1 200 000 x150%)
Therefore direct materials

No of units to make R4 200 000 profit:

Units = R10 862 280 + R 1 698 456 + R4 200 000
R205.20

= 81 680 phones in sales mix

No of RadBerrys and JPhones:

RadBerrys
81 680 x 4/5 = 65 344 RadBerrys
J Phones
81 680 x 1/5 = 16 336 JPhones

R1 200 000
1 800 000
750 000
R3 750 000

OR BATCH METHOD
QUESTION 1 PART B
Markers Comments:
Students failed to show their workings when calculating total variable costs to determine the
contribution margin and the apportionment between the RadBerry (4/5) and JPhones (1/5). Many
students did not recognise the selling and marketing expenses as part of total fixed costs and
students applied the batch method to calculate the breakeven point in units and did not do well in
their attempts (some examples of the correct batch methods are provided below). Any errors were
carried forward especially in the calculation of the revenue part 2. Students did not know the
degree of operating leverage (DOL). Overall students could have prepared better, hopefully they
will for test 2.
1.

Selling price per phone

Sales
Variable costs

Net profit
R4 200 + 12 560 736
16 760 736
X
Break even units
RadBerry:
JPhone:

Two approaches were possible:

RadBerry
R1 200
R1 200 x 4 =
R4 800
R1 056 x 4
R4 224

SP x - VC x FC

=
=
=
=

16 336 x 4

Jphone
R2 500
R2 500 x 1 = R2 500
R2 050 x 1 = R2 050

Total
R7 300
6 274
1 026

7 300x 6 274x (10 862 680 + 1 698 456)

1 026 x
1 026 x
16 336 units

65 344 units
16 366 units

CONTRIBUTION MARGIN PER UNIT APPROACH:

2. Sales Revenue:
RadBerry
R1 200

Selling Price
Less: Variable costs
Direct Materials:
Radio Transmitter
R400
LCD Display
R292
Casing
R204
GPS
Direct Labour (RadBerry R240 x 30/60) (JPhone
R120
R240 x 45/60)
Packaging
R40
Contribution Margin (CM)
R144
(minus 1 if included fixed manufacturing overheads in contribution margin)

JPhone
R2 500

RadBerry
JPhone

65 344 x R1 200 =
78 412 800
16 336 x R2 500 =
40 840 000
R119 252 800

R650
R750
R310
120
R180

3 Degree of operating leverage =

16 760 736
Contribution Margin 205.20 x 81 680 =
Net Profit
4 200 000
4 200 000
Change in sales of 10% = 10% x 4 = 40% change in profit

R40
R450

Bonus questions:
4.
Steve Jobs
5.
4% and 50% respectively

= 3.99 (or 4)

13,650
R60.00
14,000
R48.00

4.
Abnormal spoilage
- transferred in
- materials
- conversion costs

430 EU x R26.00
430 EU x R48.00
172 EU x R60.00

14,000
R26.00

Conversion
R
n/a
* 819,000

13,650

Materials
R
n/a
672,000

14,000
70
430
2,500
17,000
(3,000)
14,000

5.
Closing Work in Process
- transferred in
- materials
- conversion costs

2,500 EU x R26.00
2,500 EU x R48.00
1,250 EU x R60.00

R134.00

* R327,600 + R327,600 x150% = R327,600 + R491,400 = R819,000

Cost Work in process inventory, 1 January

Cost incurred in January

Total
R
282,000
1,855,000
2,137,000
2. Costs and cost per unit

17,000
2,500
Beg. WIP 1 Feb

Equivalent units of production

Cost per equivalent unit
Cost per completed unit

Transferred in
R
n/a
364,000

100

100
100
100
100
14,000
70
430
2,500
17,000
Completed (given)
Normal loss (0.5% x 14,000 units)
Closing WIP (balancing figure)

3,000
11,000
Beg. WIP(given)
Transf. Making Dept

QUESTION 2 PART A continued

3.
Opening WIP completed
- conversion costs
1,200 EU 1 x R60.00
72,000
1
Opening Work in Process was 60% completed with respect to conversion
costs in the previous period so 40% was completed in this current period.
3,000 units x 40% = 1,200 units.

100

14,000

14,000
70
430
2,500
17,000
100
100
100
100

Materials
%
EU
Transferred in
%
EU
Physical units (January)- FIFO
3,000 Beg. WIP completed
14,000 Started and completed

Physical units and Equivalent units

1.

QUESTION 2 PART A

ACC2022F Management Accounting 1 2011 Class Test 1 Solution

60

10
0
40
40
50

Conversion
%
EU

14,000
28
172
1,250
15,450

ACC2022F Management Accounting 1 2011 Class Test 1 Solution

11,180
20,640
10,320
42,140

65,000
120,000
75,000
260,000

Markers comments:
This was a high level question and on the whole this was well answered. Process costing requires a
good methodical approach and where students did not practice the method they got confused. A
common error was to ignore transferred in costs. If you are the second department in a process
you will always have transferred in equivalent units and costs.
QUESTION 2 PART B
i.

ii.

iii.
iv.
v.
vi.

We would only drop a segment, division, or product if the company overall profit
increased. This would only happen if the fixed cost savings exceeded the lost
contribution margin.
In make or buy decisions we should consider: Variable costs saved; Fixed costs
saved; Additional contribution margin (from another component) we gain by not
producing this component
A special order is profitable as long as incremental revenues exceed incremental
costs of the order.
In a special order decision normal sales and production should cover the
manufacturing costs
When a constraint is a person or a machine its known as a bottleneck
We decide to process further when the incremental revenue exceeds the
incremental processing costs incurred after the split-off point.

Markers comments:
This was straight from the lectures and unfortunately poorly answered. This unfortunately brought
down the average mark for question 2.
6