NAMIBIA UNIVERSITYOF SCIENCE AND TECHNOLOGY

FACULTY OF MANAGEMENTSCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS & FINANCE

QUALIFICATION: BACHELOR OF ACCOUNTING (CHARTERTED ACCOUNTANCY)

QUALIFICATION CODE: 07BACC LEVEL: 6

COURSE CODE: FAM601Y

COURSE NAME: FINANCIAL MANAGEMENT200

SESSION: NOVEMBER 2018 PAPER: PRACTICAL AND THEORY DURATION: 3.45 HOURS MARKS: 150

ASSESSMENT OPPORTUNITY 6 QUESTION PAPER

EXAMINERS: G Sheehama; H Namwandi; A Makosa & L Odada

MODERATOR: Mahlatsi M

INSTRUCTIONS

e This question paperis made up of four (4) questions.

e Start each question on a new page.

e AnswerAll the questions and in blue orblack ink.

e You are advised to pay due attention to expression and presentation. Failure to do so will

cost you marks.

e Start each question on a new pagein your answerbooklet and showall your workings.

e Questionsrelating to this paper may beraised in the initial 30 minutes after the start of

the paper. Thereafter, candidates mustusetheir initiative to deal with any perceived error

or ambiguities and any assumption madeby the candidate should be clearly stated.

PERMISSIBLE MATERIALSNon-programmable calculator/financial calculator

THIS QUESTION PAPER CONSISTS OF 11 PAGES(Including this front page)

QUESTION1 (40 Marks)

Shinuku (Pty) Ltd manufactures one type of pair of shoes called Snicker. The company uses

an absorption costing system for both internal and external reporting purposes. Inventories

are valued at the appropriate standard cost per unit. Manufacturing overheads are absorbed

on the basis of unit produced, using a predetermined rate established at the beginning of the

company’s financial year. The latter runs from the 1% July to 30 June each year. Managementaccounts are prepared on a quarterly basis.

You are the recently appointed management accountant of Shinuku (Pty) Ltd. Your

predecessorresigned whilst preparing the managementaccountsfor the first two quarters of

the financial year. The following is the only information you have to hand:

1. The previous management accountant determined the following total budgeted costof

a product per unit, based on normal operating capacity of 20 000 units produced and

sold, per three-month period. It was assumed that this would remain unchangedforboth quarters underreview:

N$Direct labour (4 hours x N$20/hr) 80Direct material (4 kgs x N$15/kg 60Manufacturing Overheads (Variable andfixed) 40Full production cost 180Variable selling (Per unit sold) 10Fixed Administration (Per unit sold) 50Total Cost 240

2. The budgeted manufacturing overhead for a three-month period, assumed thefollowing volumerelationship:

Activity (units) 10 000 20 000Overheads (N$) 700 000 800 000

3. The budgeted selling price per unit was determined by applying a mark-up of 20% to

the budgeted total cost. The actual selling price per unit in each quarter was exactlyas budgeted.

4. The unit variable manufacturing costs incurred in each quarter were exactly as

budgeted.

5. The actualfixed manufacturing overheadsincurred in each quarter and the actualunits

of production were asfollows:

1/07/2017 to 1/10/2017 to30/07/2017 31/12/2017

Actual Fixed Manufacturing Overheads N$620 000 N$590 000Actual production (units) 20 000 19 000

. The actual selling and administration costs for each quarter were:

1/07/2017 to 1/10/2017 to30/09/2017 31/12/2017

Total Fixed Administration As budgeted 5%higher than budgetUnit Variable Selling Unit cost as budgeted Unit cost 10% lower

than budget

. Actual sales volume for each quarter wasasfollows:

1/07/2017 to 1/10/2017 to30/09/2017 31/12/2017

Actual Sales (Units) Under budget (on normal Exceeded normalcapacity) by 3000 units capacity by 1000 units

. There was no opening inventory of raw materials, work-in-progress or finished

inventory on the 1/07/2017. There was no closing inventory of raw materials or work-

in-progressat the end of either quarter. Taxation should not be considered.

Required:

(a) Using the company’s normal basis of reporting, prepare the statementof| 21profit or loss for each quarter showing the actual results.

(Note: Details of individual production costs are not required)

(b) Prepare the statementofprofit or loss for each quarter showing the actual 9results according to variable costing principles.

(c) Reconcile for each quarter, the absorption costing net profit to variable 3costing netprofit.

(d) Assuming that the Managing Director said to you: “| have compared thetwo sets of financial statements you have prepared for me. | am confusedbecausethefirst set (i.e. (a) above) showsa larger net profit in the firstquarter and a smaller profit in the second quarter when comparedto thesecondset(i.e. (b) above). Also, I’m not happy about having two differentsets of accounts. Why can’t we just have one?”

(I) Explain to the Managing Director why the different sets ofreporting methods derive different profit outcomes for each 4 quarter.

(Il) Discuss whetherthe existing reporting method should continueto be used by the company. 3

Total 40

QUESTION 2 (30 Marks)

PART A (20 Marks)

Ace Ltd is based in Omaruru,it produces andsells dairy products (yogurt, cheese and cream).The dairy products are sold on local market and the company has been successful over thepast two years in doing so. Ace Ltd uses a joint processing system for the manufacture ofthree of its products. All three products are further processed before being sold. You havebeen presented with the following information relating to the three products for the month ofMay 2018.

Yogurt Cheese Cream Total

N$ N$ N$ N$Sales 81 000 150 000 75 000 306 000Less: Cost of sales 52 500 90 000 53 000 195 000Grossprofit 25 500 60 000 22 000 110 500

The company has four production department (general department, flavoring department,

cutting department and whipping department). The joint production start in the general

department were yogurt, cheese and cream are produced by adding large quantity of milk in

the machine which processes by skimming milk that result in separation of milk and cream.

Some quantity of processed milk is then fermented to form yogurt, while the remaining

processed milk is added acid to thicken milk which form cheese. This result in a joint

production cost of N$150 000 incurred.

The three products are further processedasfollows:

e Further processing of yogurt only takes place in the flavoring department were

chocolate flavor is added in yogurt to give a uniquetaste.

e Further processing of cheese only take place in the cutting department where cheese

is shredded.

e Further processing of cream only take place in whipping department were cream is

whipped until its think to make buttercream.

Additional details are provided asfollows:

Department Product Volume Selling price Selling price perper unit@ unit after furtherSplit-off point processing

N$ N$Flavoring Yogurt 3 000 25 27Cutting Cheese 6 000 20 25Whipping Cream 5 000 11 15

Joint cost as are allocated based on sales valueatsplit-off point. There is no opening or

closing inventories.

Required:

(a) Calculate the total joint costs that is allocated to each product type and any 6additional cost that was incurred on the products in each department.

(b) i. Recommend to managementof Ace Ltd (with supporting calculations) 9clearly showing which products are to be processedfurther so thatprofits are maximized.

ii. Based on your recommendationin (i), prepare a revised profitstatement to show how muchprofit will be generated by Ace Ltd. 3

(c) Explain whetherjoint costs should be considered when deciding whether or 2not to process a productfurther.

Total 20

PARTB (10 Marks)

You have been approached for assistance by a new client, Rainbow Limited, which has

recently commenced manufacturing operations in Oshakati. The company produces a

specialized range of paint for a period. The managing director, Nakale ya Nakale, is aware

that other paint manufacturers uses processcosting and has asked youto provide information

about this method of assigning costs to production and inventory.

Required:

(a) Differentiate process costing from job costing. 2(b) Describe how process costing system operates and provides examples of 5

other industries where processcosting is appropriate.(c) Explain the meaningof the following terms:

e Equivalent units

e Normal loss

e Abnormal loss 3

Total 10

QUESTION 3 (40 marks)

The Sweater Companyis a large producer of sweaters underthe “Cignal” label. The company

buys raw woolfrom local farmers and storesit for production. The company processes raw

wool into wool yarns. The companyrecently purchased raw wool amounting to N$540 000.

On average, raw wool costing N$45 is used to make one spindle of wool yarn. Direct labour

cost of N$50 is required to convert raw wool into one spindle of wool yarn. Wool yarns are

then further processedinto children sweaters, and on averageit takes one spindle of wool

yarn to make one sweater.

Wool yarns are issued to production based on their daily production capacity. Knitters knit

sweaters manually on flat knitting machine as per the design provided to them. In piece rate

production knitting one worker can make one sweaterwithin 2.5 hours. However, when the

demand of sweaters increases one workeris required to make two sweaters within 4 hours,

but this is not always the case. The company sometimes gets a special order from individual

customer who wants the sweater designed according to his/her specification, for example, a

customer may want the sweater that has side pocket, belt, front placket, etc. Flat knitting

machinesare available in different gauze setting to produce children sweaters for different

weights. Small componentslike placket and belts are made in automatic knitting machines.

Sweaters are available in front opening as well. So button attaching and button holing is done

in finishing stage. Sweaters design might have zipperfor front opening. Zippers are attached.

Washcaselabel and brand label are attached using single needle Lock stitch machine.

On averageit takes a knitter 2.5 hours to make one sweater. Knitter is usually remunerated at

an hourly rate of N$30. Apart from woolyarns, other raw materials amount to N$130 are used

to make one sweater. The selling prices of wool and sweater are N$145 and N$450 perunit,

respectively.

Originally, all of the wool yarn was used to produce sweaters, but in recent years a market

has developed for the wool yarn itself. The wool yarns are purchased by other companiesfor

use in the production of wool blankets and other wool products. Since the developmentof the

market for the wool yarns, a continuing dispute has existed in the Sweater Company asto

whether wool yarns should be sold simply as woolyarns or processed into sweaters.

The market for sweaters is temporarily depressed, due to unusual warm weatherin the SADC

region where the sweaters are sold. This has made it necessary for the companyto discount

the selling price to N$450 from the normal N$500price. Since the market for wool yarns has

remained strong, the dispute has again surfaced over whether wool yarns should be sold

outright rather than processed into sweaters. The sales managerthinks that the production

of sweaters should be discontinued; she is upset about having to sell sweaters at loss, when

wool yarn could be sold for a profit. However, the production superintendent is equally upset

at the suggestion that he closes down a large portion of the factory. He argues that the

companyis in the sweater business, not wool yarn business, and that the company should

focus onits area of strength. The company has a capacity of manufacturing 12 000 wool yarns

and 4 000 sweaters.

Dueto the nature of the production process, virtually all of the overhead costs are fixed and

they cannot be avoided. Overheadsare assigned to products on a basis of 150% of total direct

labourcost.

REQUIRED:

(a) Calculate the break-evenpoint in terms of units and sales revenue,

assuming the company produces both wool yarns and sweaters, clearly

indicate the break-evenpoint in terms of units and sales revenue for each

productindividually.

14

Calculate the break-even point in terms of units and sales revenue,

assuming the company produces only wool yarns and the production of

sweaters is discontinued.

14

Discussthe financial reasons as to why you do agreeordisagree with sales

managerthat the production of sweaters should be discontinued.

(d) Based on requirementin (c), advise the Sweater Company’s management

by mentioning four non-financial factors to be considered if they should

continue producing the sweaters. Total 40

QUESTION4 (40 MARKS)

There’s an un-official saying that goeslike this: ‘You have not been to Namibia ifyou have not

been to Joe’s Beerhouse (henceforth “JBH”). Best you check it out.

JBHis for those wholike the road less travelled. A place where the unexpected can occur,

where quirky is normal, and where nothingis ordinary. A bit like Namibia really. Comfortably,

gloriously different.

A colourfulhistory is one of the elements that gives JBH its sense and charm.JBHfirst opened

its doors in October 1991 on Grimm Street in Windhoek, relocated two and a half years later

to Independence Avenue,and in 2001, settled firmly on 160 Nelson Mandela Avenue. JBH

was founded by German-born Joachim Gross. Joachim is a master chef who had workedall

aroundthe world. He arrived in Namibia in 1986 and within a few years opened JBH.

JB was recently acquired by a conglomerate of four entrepreneurs as a going concern. The

previous ownerof the business (Joachim Gross) sold the business becausethe bar had run

into financial problems dueto factors that he could not identify outright. Because it was his

first business, he made numerous mistakes, but he however recently managed to turn the

business around by changing the business strategy and managed to make a small profit in

the yearprior to the sale to the entrepreneurs.

As part of their research on taking over JBH, the entrepreneurs held interviews with the

existing staff members that consisted of the barmen, two waitresses and two chefs. The

entrepreneurs are of the opinion that they will retain the current team of bouncers and other

staff membersthat are already existing in the as a way of continuity. The entrepreneurs asked

the employees and the bouncer whatthey think had resulted in the demise of the JBH under

the previous owner. These were someof the answersthat were provided:

“The ownerused to run out of stock and was forced to run to a nearby service station to buy

more stock at retail prices,” said one staff member.

“After the daily close of the business, the owner used to come backwith friends to entertain

them anddrink all the alcohol with his friends on credit that was not settled most of the time,”

said one of the bouncers.

The entrepreneurs implemented new procedures and strategy of serving customers which had

a real positive impact on the business and resulted in a lot of repeat business. They

implemented a loyalty program whereregular customersare given a free drink after every 10

drinks that they purchased. This strategy regained customerloyalty and customerdetails were

also recordedin order to send personalized marketing messages to them.

The entrepreneurs recently heard that you are second yearfinancial managementstudent and

they have approached you to advise them on how they had performedin their first year of

trading taking into account someof the changes they had implemented. The entrepreneurs

have provided you with the abridged financial statements for you to analyse:

JB STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED 30 JUNE

NOTE 2018 2017

N$ N$

Sales 3,360,000 2,640,000

Cost of sales 1 560,000 1,320,000

GrossProfit 2,800,000 1,320,000

Expenses

Salaries and wages 2 300,000 480,000

Marketing 3 625,000 250,000

Consulting 125,000 -

Insurance costs 189,000 -

Travelling and vehicle cost 14,000 19,000

Rent 306,000 231,000

Entertainment 180,000 96,000

Operating Profit 1,061,000 244,000

Finance costs 4 129,600 5,880

Net Profit Before Tax 931,400 238,120

Taxation 260,792 66,674

Net Profit After Tax 670,608 171,446

JB STATEMENTOF FINANCIAL POSITION AS AT 30 JUNE

2018 2017

Fixed Assets N$ N$

Furniture andfixtures 160,000 60,000

Sound equipment 72,000 12,000

232,000 72,000

Current Assets

Inventory 62,000 15,000

Accounts receivable - 40,000

Cash and cash equivalents 73,000 9,000

135,000 64,000

Total Assets 367,000 136,000

Equity and Liabilities

Shareholders’ equity 180,000 60,000

Accumulated profit 52,000 (51,000)

232,000 9,000

Non-currentLiabilities

Interest bearing shareholders loan 120,000 -

Current Liabilities

Accounts payable 15,000 120,000

Bank overdraft - 7,000

15,000 127,000

Total Liabilities 135,000 127,000

Total Equity and Liabilities 367,000 136,000

Note 1: The entrepreneurs saw the opportunity to turn the business around through changing

some of the business processes and changing suppliers of all stock purchases. When the

entrepreneurs took over, they found that the existing stock suppliers were slightly expensive.

Minimum stock levels were also established so that stock could be orderedin time as to avoid

stock outs.

Note 2: The previous owner wasalso the managerof JB. He paid himself a salary but would

also withdraw cash from the business to cover his own personal expenses. The entrepreneurs

havefull time jobs; therefore, they do not require salaries from the business.

Note 3: The entrepreneurs invested significantly in marketing to attract new and different

crowd after purchasing the business. A consultant washired that advised the entrepreneurs

on how to improvethe look and feel of the JB and what marketing techniques to use to meet

the desired objectives.

10

Note 4: Finance costs result from someinterest-bearing liabilities charged at the prime rate.

The entrepreneurs purchased JB from their own capital, of which 60% is regarded as equity

and 40% asaninterest-bearing shareholders’ loan.

Additional information:

° Use a 365-day year in your calculations;

° The companytax rate is 28% and is expected to remain at this rate for the foreseeable

future;

° All interest-bearing liabilities are charged at the prime interest rate of 9%, with the

exception of the overdraft facility;

e The overdraft facility carries interest at a rate of prime plus 5%; and

° The entrepreneurs managed to declare a dividend in the current year.

Required:

Analyse the performance and the financial position of JHB based on thefinancial information provided. The analysis should include the followingratios:

Profitability:Gross Margin (4)Net Margin (4)Return on Equity (4)

Liquidity:Currentratio (4)Quickratio (4)

Asset management:Days inventory on hand (4)Debtorscollection period (4Creditors payment period (4 Gearing:Debt to Equity (4)Interest Cover (4)

Total 40

THE END

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