QUESTION $1(29$ marks$)$

Speed HD $($Pty$)$ Ltd $($Speed$)$ produces three models of cars for sale in the automotive

retail market. Speed currently operates a standard absorption costing system.

Budgeted information for the financial year ended $31$ December $2024$ is as follows:

Models

Momo Cannal Bulo Total

Rands Rands Rands Rands

Sales $6400000096400000104000000264400000$

Direct material $(18600000)(28400000)(41200000)(88200000)$

Direct labour $(11800000)(14800000)(17600000)(44200000)$

Contribution $336000005320000045200000132000000$

Production overhead $(79600000)$

Gross profit $52400000$

Models

Momo Cannal Bulo

Production$/$Sales $($units$)200022001800$

Machine hours per car $200300400$

The current production overhead cost is absorbed using a machine$-$hour rate.

Speed is considering changing to an activity$-$based costing system. The main activities

and their associated cost drivers and overhead costs have been identified as follows:

Activity Cost driver

Production overhead

cost

Machining Machine hours R$14000000$

Set$-$up Number of Set ups R$23000000$

Quality inspection Number of quality inspections R$24500000$

Stores receiving Number of component deliveries R$18100000$

R$79600000$The analysis revealed the following information:

Momo Cannal Bulo

Cars per production run $($Note $1)542$

Quality inspections per production run $203040$

Number of component deliveries $400600800$

Note $1$:

$$ The machines are set up for each production run of each model.

$$ Each car is considered a unit.

REQUIRED:

$1\mathrm{.}1$ Calculate the total gross profit for each type of model using the:

$1\mathrm{.}1\mathrm{.}1$ Current absorption costing system. $(5$ marks$)$

$1\mathrm{.}1\mathrm{.}2$ Proposed activity$-$based costing system. $(20$ marks$)$

$1\mathrm{.}2$ Explain why an activity$-$based costing system may produce more accurate

product costs than a traditional absorption costing system.

$(4$ marks$)$QUESTION $2(30$ marks$)$

Fashion $($Pty$)$ Ltd $($Fashion$),$ owned and managed by Lwazi, manufactures machineknitted cotton tops for summer and hand$-$knitted woollen jerseys for winter. A cotton

top requires $500$ grams of cotton yarn, purchased at R$60$ per kg$,$ and each jersey

requires $1\mathrm{.}5$ kg of wool, purchased at R$120$ per kg$.$ Lwazi has $5$ employees. Two

employees earning R$30$ per hour, knit the cotton tops on the knitting machine and

three knitters are responsible for the woollen jerseys, earning R$35$ per hour. It takes

approximately $45$ minutes to complete a knitted cotton top and $1\mathrm{.}5$ hours to complete

a woollen jersey. Finished cotton tops are sold at R$350$ each and woollen jerseys are

sold at R$900$ each. The projected sales are $800$ cotton tops and $1600$ woollen jerseys

for the financial year ended December $2024.$

Following are the budgeted inventory levels for the financial year ended $31$ December

$2024$:

Budgeted inventory levels Opening inventory Closing inventory

Finished cotton tops $120130$

Finished woollen jerseys $150190$

Wool $6$ kg $3$ kg

Cotton yarn $8$ kg $12$ kg

Variable manufacturing overheads are incurred at R$20$ per direct labour. Fixed

manufacturing overheads are R$750$ per month. Selling and administrative costs

amounts to R$10500$ for the financial year. Fashion uses an absorption costing system

and fixed manufacturing overheads are absorbed using direct labour hours.

REQUIRED:

Prepare the following budgets for the financial year ended $31$ December $2024$:

$2\mathrm{.}1$ Production budget in units. $(4$ marks$)$

$2\mathrm{.}2$ Raw materials purchases budget. $(9$ marks$)2\mathrm{.}3$ Direct labour budget. $(4$ marks$)$

$2\mathrm{.}4$ Total manufacturing overheads budget. $(4$ marks$)$

$2\mathrm{.}5$ Calculate the total budgeted cost per unit. $(9$ marks$)$

Round your answers to two decimal places where requiredQUESTION $3(26$ marks$)$

BRIKZ $($Pty$)$ Ltd $($BRIKZ$)$ is a small and exclusive bricks manufacturing entity. BRIKZ

produces specialised building blocks, and the manufacturing process is labour

intensive. BRIKZ applies a standard absorption costing system.

The management of BRIKZ emphasised that the performance of these building blocks

needs to be well monitored in order to ensure its sustainability.

The following is an extract of the standards for June $2024$ for the production and sale

of $15000$ units of building blocks:

Standard information per building block:

Selling price R$50$ per building block

Direct materials

Sand $1\mathrm{.}6$ kg at R$8$ per kg

Cement $0\mathrm{.}4$ kg at R$3$ per kg

Direct labour $0\mathrm{.}5$ hours paid at a rate of R$20$ per hour

Variable manufacturing overheads R$5$ per direct labour

Fixed manufacturing overheads R$1\mathrm{.}50$ per building block

The accountant provided you with the following actual profit statement based on the

manufacturing and sales information for the $16500$ building blocks that were

manufactured and sold during June $2024$:

Rands

Sales $742500$

Direct materials $(202950)$

Sand $(1\mathrm{.}2$ kg at R$9$ per kg$)178200$

Cement $(0\mathrm{.}6$ kg purchased at R$2\mathrm{.}50$ per kg$)24750$

Direct labour $($R$25$ per labour hour$)(309375)$

Variable manufacturing overheads $($R$4$ per direct labour$)(49500)$

Fixed manufacturing overheads $(19800)$

Actual gross profit $160875$Additional Information

The following variances were identified by the accountant. You may assume that the

variances are correct.

Rands Favourable$/$Adverse

Direct material variance

Price $-$ Sand $52800$ A

Price $-$ Cement $16500$ F

Usage $-$ Sand $52800$ F

Usage $-$ Cement $9900$ A

Direct labour

Rate $61875$ A

Efficiency $82500$ A

Variable overheads

Expenditure $12375$ F

Efficiency $20625$ A

Fixed manufacturing overheads

Expenditure $2700$ F

Volume $2250$ F

REQUIRED:

$3\mathrm{.}1$ Discuss two $(2)$ possible causes for each variance identified by the accountant.

$(10$ x $2$ marks$)$

$3\mathrm{.}2$ Calculate the material mix variances $.(6$ marks$)$

Round your answers to two decimal places where requiredQUESTION $4(15$ marks$)$

This question consists of two unrelated parts: PART A and PART B$.$

PART A $(9$ marks$)$

Drive$-$With$-$Us $($Pty$)$ Ltd $($DWU$)$ is a rental company that has three mutually exclusive

rental projects to undertake. Management believes that the success of the projects will

depend on consumers reaction. There is a $20\%$ chance that consumer reaction will be

strong, $45\%$ chance that consumer reaction will be good and $35\%$ chance that

consumer reaction will be weak. DWU uses expected values to make this type of

decision.

The estimated net present value for each possible outcome is as follows:

Projects

Consumer demand Class A Class B Class C

Rands Rands Rands

Strong $200000026000002200000$

Good $450000500000575000$

Weak $400000340000300000$

A market research company called Solutions $($Pty$)$ Ltd believes that it can provide

perfect information on whether the consumer reaction will be strong, good or weak.

REQUIRED:

Calculate the maximum amount that Drive$-$With$-$Us $($Pty$)$ Ltd should be willing to pay

to Solutions $($Pty$)$ Ltd for the market research information.

Round your answers to two decimal places where required.

$($PART B $(6$ marks$)$

Quality $($Pty$)$ Ltd$,($Quality$)$ uses a third$-$party for the packaging of Quality$$s products.

The current average cost per packaging is R$124.$ Quality is trying to decide whether

to establish an in$-$house packaging service. A number of factors could affect the

average total cost per packaging for the in$-$house service. The table below shows the

possible average total costs and the probability of each one occurring.

Average total cost in Rands Probability $\%$

$10714$

$11212$

$12213$

$12410$

$12816$

$13520$

$14815$

The expected value of the average total cost, based on the probability distribution

above is R$126\mathrm{.}36.$

REQUIRED:

Explain the decision that the management of Quality $($Pty$)$ Ltd is likely to make, based

on the probability distribution and the current packaging cost of R$124$ per packaging,

if the management is:

$($a$)$ Risk neutral

$($b$)$ Risk averse

$($c$)$ Risk seeker

Round your answers to two decimal places where required.

$($