OVER$]$

QUESTION $1$

$(50$ Marks; $90$ minutes$)$

Ngwane Beauty Limited $($Ngwane Beauty$)$ is a proudly South African manufacturer of cosmetic products. The

company was founded in $2010$ by three South Africans, Asanda Nene, Connie Clark and Kabo Thusi. These three

entrepreneurs worked abroad for multinational cosmetic companies before deciding to come back home and start

their own beauty company with an $$African touch$.$ Having worked closely with retail chain stores, hotels, spas and

beauty salons, Ngwane Beauty has managed to capture a large share of the beauty industry and its products are

quickly becoming household names. These products are manufactured and sold under three separate divisions,

namely Skincare, Makeup and Haircare. Asanda Nene is the managing director of the company, while Connie Clark

oversees the operations of the Skincare division, and Kabo Thusi is responsible for both the Makeup and the

Haircare division. Each division is responsible for its investing and financing decisions, marketing and all its other

operations.

$1.$ SKINCARE DIVISION

The Skincare division specialises in luxurious body lotions, body wash and soaps that are made from natural

ingredients. These products are manufactured from the same plant in Makhanda, Eastern Cape. The division uses

Activity$-$Based Costing $($ABC$)$ to allocate its fixed manufacturing overheads to products as part of their product

costs and its inventories are valued using the first$-$in$-$first$-$out method. Below is the financial information relating to

the division budgeted for the financial year ending $31$ December $2024$ as per its three product lines, Body Lotion

$($Lotion$)$; Body Soap $($Soap$)$ and the liquid Body Wash $($Wash$).$

FINANCIAL INFORMATION

Lotion

Soap

Wash

Average selling price per unit

R$105$

R$120$

R$95$

Maximum manufacturing capacity $($units$)$

$200000$

$120000$

$180000$

Market demand for the product $($units$)$

$150000$

$124000$

$180000$

Direct material cost per unit

R$24,50$

R$30,00$

R$18,50$

Direct labour minutes per unit

$9$

$12$

$9$

Machine minutes per unit

$15$

$5$

$10$

$1\mathrm{.}1.$

NOTES AND ADDITIONAL INFORMATION

There has been an ongoing drought and water purification issues around Makhanda and the Skincare division has

been severely affected by this as it makes intensive use of water in its manufacturing process. Therefore, it is

estimated that, for each product line, actual production cannot exceed $90\%$ of the maximum manufacturing

capacity. The division does not keep opening and closing inventory on any of its products or raw materials. The

division also strives to meet demands on all its products, where operationally possible.

Direct labourers are paid R$80$ per hour.

The products are manufactured in production batches of $200$ units for the Lotion; $1000$ units for the Soap; and $300$

units for the Wash.

Variable manufacturing overheads are projected at R$10$ per unit for all products. The following activities give rise

to the budgeted fixed manufacturing overheads, which are allocated to products using ABC $($for each activity the

key cost driver is also assigned$)$:

ACTIVITY

Cost driver

Fixed

manufacturing

overheads

R $000$

Machine setup

Number of setups

$2796$

Machine servicing

Product machine minutes

$3400$

Branding

Branding hours

$1026$

Quality inspection

Number of inspections

$1824$

$9046$The machine is set up at the start of each production batch, and the quality is inspected after every $6$th batch for

each product. The following branding hours are taken to brand $($label$)$ all the products:

Lotion: $5220$ hours

Soap: $5412$ hours

Wash: $5400$ hours

The Skincare division entered into a five$-$year contractual agreement with a marketing agency for the promotion of

the entire Skincare product range across different mediums starting in the $2024$ financial year. The total fixed

contractual cost of R$6$ million is split equally between the three products over the five$-$year period. Distribution costs

are a variable cost and are expected to average R$4$ per unit of each product.

The division$$s fixed administration costs estimated for the $2024$ financial year are R$2,63$ million. Finance costs

expected to be incurred by the division for the $2024$ financial year are R$3,18$ million. These finance costs relate to

interest expense on variable interest rate loans taken out by the division. The division$$s fixed administration costs

and finance costs are common fixed costs and will also not be split between the three products for purposes of the

budgeted statement of profit or loss, but only be shown as part of the totals.

$1\mathrm{.}2.$

POSSIBLE DISCONTINUATION AND SALE OF BODY SOAP PRODUCT LINE IN $2025$

Connie Clark is concerned that if the water challenges and restrictions currently in place in Makhanda are not

addressed soon, the Skincare division will inevitably start making losses. She has proposed that the Body Soap

product line be sold early in $2025$ as it does not compliment the Body Lotion and Body Wash lines well, and has

the least demand of the three product lines. She claims that there are fewer synergies between the Body Soap and

the other two products, and the product is not doing well in the market. She can also not guarantee that the Body

Soap sectional head $($manager$)$ with whom she had a fallout a few months ago, will continue to be employed by

the division after the manager raised concerns with Connie about large quantities of Body Soap products Connie

often removes from the production floor for personal and other private use. Connie has repeatedly explained to the

manager that these form part of the Drawings account when it comes to accounting and bookkeeping.

Many spas and hotels in the Eastern Cape usually order all three products; however, some retail shops in the

province tend to order less Body Soap due to the competitiveness of the soap industry, which aggressively

promotes its products. Connie Clark has also confirmed that she has already found a buyer for the Body Soap

product line, who at this stage would like to remain anonymous, and who has expressed great interest in the Body

Soap product line business, considering that it does not make significant use of water.

$2.$ MAKEUP DIVISION

The Makeup division manufactures Eyeliner and Lipliner pencils that are sold to beauty salons and major retail

stores across the country. For both the Eyeliner and the Lipliner product types, the manufacturing process is highly

automated. Manufacturing capacity is limited and, therefore, efficiency is of great importance to the division.

The product types have a separate process that involves equipment specific to the product type. For each product

type, the process starts with formulation stage where ingredients such as stearic acid, cetyl alcohol, oil pigments

and preservatives are introduced. Mixing is the next step, in which the ingredients are carefully mixed according to

the recipe to achieve the desired colour and texture. Differences in colour or texture have no effect on the cost of

production. The mixture then goes through the heating stage at about $7080$ degrees Celsius to get a smooth

and refined texture. This smooth mixture moves to the cooling stage for cooling. The mixture is then injected inside

the $($empty$)$ pencil barrel and afterwards the pencil is sharpened. Pencils are then branded and moved to the

packaging belt where they are packed in pre$-$branded boxes. The process has been refined over time to a point

whereby a very small percentage of mixture $($about $24\%)$ is lost during the heating phase. There are also rare

instances of system malfunction when the mixture is injected inside the pencil barrel, and the affected pencils are

then scrapped REQUIRED

For each subsection below, remember to:

$$ Where applicable, clearly show all your calculations in detail;

$$ Where necessary, indicate irrelevant amounts$/$adjustments with a R$0($nil$-$value$)$; and

$$ Ignore all potential taxation and time value of money implications.

In terms of the Skincare division

$($a$)$ Based on the information provided in the scenario, determine whether the organisational

structure that Ngwane Beauty Limited operates, is divisionalised or functional, and discuss three

points $($items$/$determinants from the scenario$)$ to motivate your answer.

$(4)$

$($b$)$ Prepare the budgeted statement of profit or loss $($up to Profit before tax$)$ for each product of the

Skincare division for the year ending $31$ December $2024.$

$[$The statement of profit or loss should include a column per product line as well as the Total

column.$]$

$(20)$

$($c$)$ Discuss six factors that would need to be considered by Ngwane Beauty Limited before deciding

on discontinuing the Body Soap product line.

$[$Your answer may address quantitative and$/$or qualitative factors. However, ignore legal,

regulatory and tax implications.$]$

$(6)$

$($d$)$ For part $($d$)$ only, assume the following:

$$ There is sufficient manufacturing capacity to produce all the products required by the market

$($market demand$)$ and the standard sales mix is based on the market demand.

$$ The budgeted contribution is R$50$ per Body Lotion unit; R$53$ per Body Soap unit and R$48$ per

Body Wash unit.

$$ The rest of the information in the scenario remains the same.

Calculate the budgeted units of each of the three products that the Skincare division will have to

manufacture and sell during the $2024$ financial year to achieve a divisional profit before tax of

R$8,8$ million.

$(6)$

In terms of the Makeup division

$($e$)$ Discuss the costing system that is most appropriate to the Makeup division in allocating the

production costs of Eyeliner and Lipliner pencils.

$[$Important: This question is not about direct or absorption costing.$]$

Your discussion $($incorporating information provided where applicable$)$ must consist of:

$$ Identification of three costing systems that can be considered by the Makeup division for

allocating the production costs to the products $(3$ marks$)$;

$$ Recommendation of the most appropriate system for the Makeup division from these three

costing systems identified $(1$ mark$)$;

$$ A discussion of points from the information provided in the scenario that support your

recommendation as opposed to the other two systems $(3$ marks$)$; and

$$ An outline of the cost accounting treatment of the Makeup division$$s products $($how they will

be accounted for$)$ in terms of the most appropriate costing system and the information

provided $(3$ marks$).$

$(10)$

$($f$)$

Briefly discuss four potential non$-$financial performance measures of production efficiency

that can be used in measuring and managing the performance of the Makeup division.