QUESTION 1: PART B DIRECT AND ABSORPTION [30 Marks] Tshanduko Investment Holdings Ltd is a company that holds a 100% interest in Millennials (Pty) Ltd and Thumamina Construction (Pty) Ltd respectively. Millennials produces baby formula products while Thumamina operates in the construction industry. Millennials (Pty) Ltd Millennial manufactures and distributes a single product: a baby formula called "Millennial". Millennial is sold in cans and each can be referred to as a "unit" of the product. The target market of the product is different segments of LSM (Living Standards Measure). The company strategy is working as evidenced by decent profits each reported period since the company's inception. The following budgeted information relates to Millennial for the year ended 30 June 2020: Budgeted R/Unit Selling price 300 Direct material 80 Direct labour 30 Variable manufacturing overhead 24 Variable selling costs 20 Budgeted fixed manufacturing overheads associated with product Millennial amounted to R600 000 for the 2019 financial year. The blanket predetermined fixed manufacturing overhead recovery rate is based on annual normal production capacity. The annual normal production capacity quantity for product Millennial is 60 000 cans. Completed cans of Millennial are packaged in 4 (four) cans in a box and each empty box costs R20. The packaging is designed for effective marketing and ensures that the packaged products are not damaged. Packaging costs are not yet included in any of the budgeted costs above, but are seen as an integral part of the production of each can ("unit") and are treated by the company as "other direct costs". During the financial year ended 30 June 2020, 56 000 cans of Millennial were actually manufactured, of which 53 000 units (the full demand for the period) were sold. There was no opening inventory as at 1 July 2019. Actual fixed manufacturing overheads incurred by the company amounted to R590 000 in total for the year ended 30 June 2020. MAC2601/105 9 Thumamina Construction (Pty) Ltd Thumamina operates in the construction industry and uses the job costing system. The companys operations are divided into the following: building construction, civil engineering, roads and earthworks. The companys past success is attributed to decades of appropriate and accurate costing of its construction projects using the job costing system and dedicated management. Below is an extract from the request for information that the company received from one of the local competition authorities. Thumamina has been requested to respond to the competition authority. You are alleged to have been involved in collusive practices whereby the costing of certain completed projects were overstated by as much as 50% in the 2018 financial period. Clients were then over quoted by 20% above the market prices. Your attention is drawn to the fact that should you be found guilty; the authority may impose an administrative penalty equal to 10% of Thumamina Construction (Pty) Ltd total sales for the preceding financial years sales. REQUIRED Marks In respect of Millennials (Pty) Ltd: (a) Prepare an actual Statement of Comprehensive Income for Millennials (Pty) Ltd for the year ended 30 June 2020, according to the absorption costing method. (17) (b) Write a report to management listing three (3) advantages and two (2) disadvantages of the absorption costing method. (Write the body of the report in point form). (5) (c) Indicate whether the following statement is True or False, and provide an explanation. In terms of Direct and Absorption costing, assuming no opening inventory existed: When sales units are equal to production units, profits for the absorption costing method and the direct costing method will be the same. (2) In respect of Thumamina Construction (Pty) Ltd: (d) As the Senior Management Accountant of the company, write a memorandum raising your ethical concern regarding management practices with regard to alleged collusive practices. Restrict the discussion to the use of job costing, the extract from the request for information received from competition authorities and the effect the penalty may have on profitability. (Assume that the allegations are valid). (6)