Question
4.1 JAMAGA (PTY) LTD 50 Marks Jamaga (Pty) Ltd (Jamaga) manufactures and sells guitars from its Fordsburg-based factory outside Johannesburg. The company currently manufactures two
4.1 JAMAGA (PTY) LTD 50 Marks Jamaga (Pty) Ltd (Jamaga) manufactures and sells guitars from its Fordsburg-based factory outside Johannesburg. The company currently manufactures two types of mahogany wood guitars, namely the Acoustic Guitar (Acoustic) and the Classic Guitar (Classic). Jamaga has a 31 May financial yearend, adopted the absorption costing system for internal reporting purposes and values all its inventories using the first-in-first-out (FIFO) method. 1. EXTRACTS FROM THE BUDGETED AND ACTUAL RESULTS FOR THE YEAR ENDED 31 MAY 2021: Budget Actual Production units 30 000 32 000 Sales units ? 30 500 Fixed administrative costs (m = millions) R10m R9,5m Additional information: 1.1. The budgeted production units were 20 000 Acoustics and 10 000 Classics. The actual production units were 21 000 Acoustics and 11 000 Classics. 1.2. Jamaga budgeted to sell all its budgeted production units. The actual sales units were 20 000 Acoustics and 10 500 Classics. Jamaga budgeted for no opening inventories and no closing inventories of any type. No actual opening inventory existed as at 1 June 2020. 1.3. The selling prices were budgeted at R2 800 per Acoustic and R3 800 per Classic. However, the actual selling prices were R3 000 per Acoustic and R3 700 per Classic. 1.4. The primary material used in the manufacturing process of both guitar types is mahogany wood (wood). The standard wood usage is equivalent to the actual usage of wood for both guitar types. In this regard, the standard usage is 1,2 kilograms for Acoustic and 1,6 kilograms for Classic. The budgeted- and the actual purchase price was R1 000 per kilogram of wood. 1.5. The budgeted costs of other direct material were equivalent to the actual costs. These costs were budgeted for at R420 and R470 per Acoustic and Classic, respectively. 1.6. The company employs direct labourers to work on the manufacturing processes. The labourers can work interchangeably between the two guitar types. The standard time to manufacture a guitar is 120 clock minutes per Acoustic and 150 clock minutes per Classic. The actual manufacturing clock minutes were 90 per Acoustic and 120 per Classic. The budgeted- and the actual direct labour rate was R100 per clock hour. The standard idle time allowance was 10% and the actual idle time percentage was 12%. 1.7. The budgeted- and the actual variable manufacturing overheads per guitar were R80 for both guitar types. 1.8. The budgeted fixed manufacturing overheads were R20 000 000 for the financial year. Fixed manufacturing overheads are allocated based on budgeted direct labour clock hours, and the related over- (or under-) allocation amount is treated as a period
The COVID-19 pandemic has brought about families spending a lot of time indoors and Jamaga noticed an increase in the demand for musical instruments. To take advantage of this, Jamaga is investigating the possibility to manufacture and sell 8 000 semi-hollow electric guitars (SHG), from the beginning of the 2022 financial year. These 8 000 SHGs are equal to the full manufacturing capacity and demand. The Management Accountant has thus far gathered the following information and presented it to the executive management team of Jamaga: 2.1. Jamaga will introduce a divisionalised organisational structure comprising of a Head Office, and two divisions managed by independent management teams, namely: The Traditional Guitars Division (which will manufacture the Acoustic- and Classic guitars) and The Electric Guitars Division. The SHG will be exclusively manufactured by the Electric Guitars Division. The Head Office will be fully responsible for the management of working capital of the entire structure, and the divisions will be fully responsible for all their other respective operational decisions. 2.2. SHGs will be sold at a selling price of R9 900 per guitar. Without the knowledge of and inputs from Sales Managers and Production Managers, this selling price was jointly agreed upon by the Chief Executive Officers of Jamaga and Eibanez (Pty) Ltd (Jamagas only competitor). 2.3. To bring out the deep-solid sound through SHGs semi-hollow body, the Electric Guitars Division will use a special spruce wood, the primary material used in its manufacturing process, at a cost of R4 000 per SHG. Suppliers of spruce wood constantly attract negative news headlines for deforestation and for the use of pesticides known for accelerating soil erosion at their plantations. 2.4. The Management Accountant noted with concern that the Electric Guitars Divisions wood material wastage will be dumped on a site near a residential dwelling, which is against the Local Municipality regulations. 2.5. SHGs other direct material costs are estimated at R20 000 000 for the 2022 financial year. 2.6. The Electric Guitars Division will employ a supervisor to oversee the manufacturing of the SHGs at an annual salary of R240 000. Furthermore, three direct labourers (two of whom are underaged children) will be employed to work exclusively on the SHGs at a monthly salary of R5 000 each. It was noted during the preliminary investigation that the equivalent hourly direct labour salary is below the published minimum wage regulations for the industry. 2.7. SHGs annual manufacturing overheads are estimated at R8 780 000, excluding depreciation. 2.8. The Head Office estimated a R50 000 SHG bad trade debt write-off for the 2022 financial year. 2.9. The SHGs will require an investment in a state-of-the-art manufacturing plant at a cost of R45 000 000. The plant is depreciated on a straight-line basis over its fifteen-year useful life, and will be funded via the long-term borrowings and own funds, combined in a ratio of 10:90. The loan is repayable in full in three years time. 2.10. The Electric Guitars Divisions total current assets and total current liabilities at the end of the 2022 financial year are estimated at R3 000 000 and R2 100 000, respectively. 2.11. For the purposes of performance management, all controllable assets and controllable liabilities are taken into consideration. 2.12. The companys target rate of return on investment is 30% per annum.
REQUIRED (a) Calculate Jamagas budgeted fixed manufacturing overheads allocation rate per direct labour clock hour for the 2021 financial year. (4) (b) Calculate the budgeted number of units per guitar type that Jamaga will need to sell in order to achieve a target profit of R2 000 000 for the 2021 financial year. (12) (c) Assume that a standard costing system is in place at Jamaga, and the standard fixed manufacturing overheads allocation rate per direct labour clock hour is R300. Calculate the following standard costing variances for the 2021 financial year: (i) Sales price variance for the Classic guitar type only. (ii) Total fixed manufacturing overheads volume capacity variance. (iii) Total direct labour idle time variance. (3) (4) (4) (d) From a quantitative perspective only, comment on whether or not the Electric Guitars Division will achieve the target rate of return on investment during the 2022 financial year, if it manufactures and sells the proposed 8 000 semi-hollow electric guitars. Comment (1 mark); calculations (10 marks). Ignore the implications of the special order as per question 2 (e) below. (11) (e) Assume that the Electric Guitars Division budgeted to manufacture 8 000 SHGs and sell these to their regular market. Thereafter, the Division received a one-time special order of 200 SHGs required by the Katlehong Gospel Choir. Briefly discuss two qualitative factors that the Electric Guitars Division should consider before bidding for the Katlehong Gospel Choir special order. (4) (f) Identify and briefly discuss four social, ethical, and/or environmental concerns associated with the proposed manufacturing and selling of the new semi-hollow electric guitars. (
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