QUESTION 1 (continued) 2.2.5 The following transaction was excluded from the information provided above. ETD's management bought a new granulator on 01 July 2022 at a cost of R1 800 000. ETD management team sold their old granulator for the scrap value of R 250 000 and used the funds as a deposit for the new machine. They arranged 100% long-term financing for the remaining purchase price with interest only accruing after 12 months. This granulator is depreciated over 48 months on a straight-line basis. The management accountant provided the following calculation in determining the achieved return on Investment for the year: Achieved return on investment (ROI) = Controllable prot I Controllable investments = R1 275 000(D + R7 275 00069 = 17,53% Comment: The management team achieved a return on investment of 17,53% which is higher than the required ROI of 12% to earn perfonnance-related bonuses. Therefore. the management team will receive performance-related bonuses for the 2022 nancial year. (D Controllable profit Details R l Residual income l 125 000 l Add: Cost of capital charge 900 0002) Used controllable profit 1 025 000 Add: Head office allocated costs 250 000 Therefore, revised controllable prot R1 275 000 ((3 Given (3 (R12 000 00003 less R4 500 000@) = R7 500 000 x 12% = R900 000 (3 R1 800 000 + 48 months x 6 months = R225 000 Controllable investment -:- Controllable assets 13 575 000 Less: Controllable liabilities 6 300 0006) Therefore, Controllable investments R7 275 000 (5) R12 000 000 + R1 800 000 (new granulator) (R225 000) depreciation = R13 575 000 R4 500 000 + R1 800 000 (granulator finance) = R6 300 000 QUESTION 1 (continued) REQUIRED For each question below, remember to: . Clearly show all your calculations in detail; - Where necessary, indicate irrelevant amountsladjustments with an R0 (nil-value); . Except where otherwise stated, round all the nal Rand-amount workings to two decimals; and - Ignore time-value-of-money and all taxation implications. QUESTIONS (a) T0 (e) RELATE TO EDD's 2022 FINANCIAL YEAR (a) Calculate EDD's budgeted break-even sales units per product type for the 2022 (12) financial year. ignore the implications, it any, of opening and closing inventory. (b) Prepare EDD's actual statement of prot or loss (income statement) for the year ended (17) 31 December 2022 and note the following: o The income statement must contain a column for each product type and a total column. (0) Briefly identify and discuss three social and ethical concerns that EDD faced during (6) the 2022 nancial year. (d) Besides the social and ethical concerns identied in question (0), briefly identify and (10) discuss ve additional business risks thatthe EDD faced during the 2022 nancial year. (e) For answering Question (e) only, assume the following: o a standard costing system is in place. 0 the implications, if any, of opening and closing inventory should be ignored. 0 Bolt: Standard gross profit (GP) of R4 and actual GP of R3, 50 per unit. 0 Bolt: Standard contribution of R3, 80 and actual contribution of R3,40 per unit. Calculate the following variances for the year ended 31 December 2022: (i) Sales price variance for Bolt only. (2) (ii) Sales volume variance for Bolt only. (2) (iii) Caffeine direct material usage variance in grams for Nerd only. (3) (iv) Direct labour efciency variance in work hours for both products and in total. (5) ( (3) v) Total variable manufacturing overhead efficiency variance. QUESTION (f) RELATE TO EDD's 2023 FINANCIAL YEAR (1') Calculate the EDD's budgeted optimum manufacturing mix per product for the financial (13) year 2023. - the implications, if any, of opening and closing inventory should be ignored. QUESTION 1 (continued) 1.1.7 1.1.8 1.1.9 1.1.10 1.1.11 1.1.12 1.1.13 1.1.14 1.2 1.2.1 1.2.2 1.2.3 1.2.4 Both Bolt and Nerd contain caffeine. Caffeine was budgeted at R169 per 100 gram (g), and 80 milligram (mg) is required per 250 ml manufactured. (1 000 mg equals one gram) Taurine is budgeted at R175 per 100 g and 1 000 mg is required per 250 ml for both Bolt and Nerd. Both products contain Citrus flavouring at 0.2 ml per litre manufactured. Citrus flavouring was budgeted at R40 per 20 ml. Direct labour costs are R30 per direct labour clock hour. 10% idle time is allowed for both products. and it takes 10 direct labour clock minutes to manufacture one litre of Bolt and 8 direct labour clock minutes to manufacture one litre of Nerd. EDD has recently come under scrutiny and was criticised for not employing locals and that they prefer to employ mostly male employees in management positions as they believe that this provides stability to management. Variable manufacturing overhead (VMO) costs are allocated based on machine time used in the manufacturing of each product. The variable manufacturing overhead recovery rate per machine hour is R12 per hour and it takes 12 machine minutes to manufacture one litre of energy drink. Machine capacity is budgeted at 1 000 000 hours. The fixed manufacturing overhead (FMO) cost is budgeted at R35 million and is allocated to products based on the budgeted machine hours. The recovery rate per machine hour is the same for both products. It is the accounting policy of BevSoft to treat the related under-(over) recovery as a period cost. Other budgeted fixed costs are R50 million. Variable selling and distribution costs are budgeted at R1.10 per unit sold. Actual information for the year ending on 31 December 2022 For both Bolt and Nerd, the actual number of cans sold was 20% lower than the budgeted number of cans sold per product. The company sold Bolt for R20 per can, and Nerd at R25 per can as a result of an aggressive advertising campaign, which pitched both products as premium products. Both products were produced and sold in the same budgeted ratio. Quench is investigating possible contamination at one of its reservoirs. The supplier used an alternative source and short-supplied EDD on water, resulting in both Bolt and Nerd, being produced at 20% less than the budgeted production. The supplier is still investigating if any of the water supplied to BevSoft could have been affected. BevSoft management has decided not to test its water but rather wait for the results of the supplier. EDD had no opening inventory of any kind Due to labour strikes and resignations as a result of wage rate disputes, the company was forced to hire new labourers. These new labourers had to learn the production process and received limited supervision on the use of machinery. These new labourers took 12 direct labour clock minutes to manufacture one litre of Bolt and 9 direct labour clock minutes to manufacture one litre of Nerd. They were paid R22,00 per clock hour and the actual idle time was 5%. The company has aggressively managed labour costs by paying below the minimum wages and by employing some undocumented foreign workers. QUESTION 1 (continued) 2. EFFERVESCENT TABLET DIVISION (ETD) This division operates a process costing system in the manufacturing of the citrus performance effervescent tablets (Bazooka). ETD values all types of inventories using the weighted average costing method. The ETD management team receives a performance-related bonus if their division achieves a return on investment (ROI) of 12% or above for the particular nancial year. The head ofce is considering incorporating other non-financial performance measures. The ETD manufacturing process begins with mixing the direct raw materials (Vitamins, Citric Acid, Sodium Bicarbonate, Flavourants and Artificial sweeteners). The raw materials are mixed and undergo granulation to be compressed into tablets. The tablets are packaged into plastic tubes of 200 g each, which represents one unit of Bazooka. These units are packed in boxes for distribution to various retailers. All the direct raw materials required to manufacture Bazooka are added at the beginning of the manufacturing process. Direct labour and manufacturing overheads are incurred evenly throughout the manufacturing processes. One kg of the direct raw materials yields one kg of Bazooka. Normal losses in the form of broken and rejected tablets amount to 5% of the direct raw materials added. These broken and rejected tablets are identified at the 80% completion point of the manufacturing process. 2.1. Actual information for the month of December 2022 was as follows: 21.1 On 30 November 2022, there was 3 000 kg of work in process (WIP) which was 90% completed. The direct raw material costs included in this WIP were R262 000 and the direct labour and manufacturing overheads were R558 500. 2.1.2 16 tonnes of direct raw materials, costing R1,6 million were added into the process. 2.1.3 The current direct labour and manufacturing overheads totalled R1 ,35 million 2.1.4 60 000 units were completed in the month. 2.1.5 On 31 December 5 000 kg of the WIP were 75% completed. 2.2. Actual information for the year ended 31 December 2022 was as follows: 2.2.1 The Division achieved a residual income of R125 000. 2.2.2 Controllable assets were R12 million. 2.2.3 Controllable liabilities were R4,5 million. 2.2.4 Head ofce allocated costs of R250 000 were deducted from the gross prot amount to arrive at the controllable profit used in the residual income calculation; and QUESTION 1 (continued) 1.2.5 1.2.6 1.2.7 1.2.3 1.2.9 1.2.10 1.3 1.3.1 1.3.2 1.3.3 1.3.4 One of the key suppliers for caffeine was placed under liquidation. as a result, the procurement department had to source caffeine from an award-winning supplier at R186 per 100 9. However. only 70 mg of caffeine was used per 250 ml. The water. sugar. articial sweetener. citrus flavouring and taurine were purchased at the budgeted price and the standard quantity was used. The VMO recovery rate per machine hour was R13 per hour and it took 15 machine minutes to manufacture one litre of Nerd energy drink while Bolt was manufactured at the standard machine time. The actual annual FMO for Nerd and Bolt were R17,61 million and R1598 million respectively. Other budgeted fixed costs were R55 million. Variable selling and distribution costs were R1.20 per unit sold. EDD'S 2023 FINANCIAL YEAR BUDGET Some of the budgeted information for EDD's 2023 financial year is: Standard cost Bolt energy drink Nerd energy drink per can per can R R Selling price 18.00 25.00 Prime costs 6.75 17.90 Variable selling and distribution costs 1 1.20 1.20 Fixed manufacturing overheads l 2.50 4.00 Variable manufacturing overheads ' 0.65 1.25 The labour disputes are expected to have an impact on the available labour capacity. As a result, EDD management expects to have only 660 000 direct labour clock hours available during 2023. The direct labour clock time per product is expected to be the same as the actual direct labour clock time per product for the 2022 financial year. EDD has budgeted to produce and sell 12 million cans of energy drinks of which 70% will be Bolt and the rest Nerd as a result of labour and material input issues. The water supply issues are also expected to persist in 2023. Quench informed EDD that they can only supply 80% of the 2022 budgeted capacity of water made available. QUESTION 1 (100 Marks) BevSoft Drinks Ltd (\"BevSoft\"), situated near Springs in the Gauteng Province, is one of the leading energy drink and effervescent tablet manufacturers in the East rand operating in a fiercely competitive market. The company operates two divisions namely the Energy drink division (EDD) and the Effervescent tablet division (ETD). BevSoft's head ofce allocates corporate head office expenses at its discretion. All other decisions are made by the respective divisional managers. BevSoft has a 31 December nancial year end and makes use of the absorption costing system. BevSoft management strives to ensure that all ingredients and manufacturing processes comply with food regulatory requirements. The company's budgeted required rate of return is 9% per annum. 1. ENERGY DRINK DIVISION (EDD) EDD manufactures two citrus-flavoured energy drink products namely, Bolt which contains sugar, and Nerd, which is sugar-free. Different to its competitors, Bolt is sold in a can containing 250 millilitres (ml) while a Nerd can contain 500 ml of energy drink. EDD values all types of inventories using the first-in- first-out costing method. 1.1 Budgeted information for the nancial year ending 31 December 2022 The company was hacked for ransom towards the end of the year resulting in some customer information leaking. This was primarily due to their outdated firewall systems. The EDD resolved to restore backup data, however, due to the old backup systems, there was a loss of some backup data which included extracts of the budgetary information. You have been provided with the following information from the extracts the management accountant could nd from the backups, with additional information supplemented through divisional meeting minutes: 1.1.1. EDD's maximum manufacturing capacity is based on the availability of the prepared water. EDD buys the prepared water exclusively from Quench (Pty) Ltd (\"Quench") at R2,0U per litre. A maximum of 5 million litres of prepared water will be made available by Quench. Each litre of energy drink requires 900 ml of water. 1.1.2 The company budgeted to produce 15 million cans and sell 12 million cans. Both production and sales will be at a rate of two cans of Bolt for every one can of Nerd. 1.1.3 Bolt is sold at R17 per can and Nerd at R24 per can, which is considered to be above competitor prices. 1.1.4 EDD budgeted to have no opening inventory of any kind. 1.1.5 Sugar was budgeted at R25 per kilogram (kg) and 0,16 kg is used for one litre of manufactured Bolt. 1.1.6 Articial sweetener was budgeted R162 per kg and 0,11 kg is used for one litre of manufactured Nerd. [TURN OVER]