Skwama Bags (Pty) Ltd (Skwama) manufactures and sells different types of bags to boutique clothing and accessory shops across South Africa. Ms Skhosana, owner-manager of the business, started selling hand-made bags of different shapes and sizes in her hometown of Mokopane and expanded Skwama gradually over the course of ten years into a well-known brand. A portion of the production work is now automated, but Ms Skhosana retained the human touch to some extent to stay aligned with customer preferences and to develop sewing skills in various communities across the country. Skwama uses an absorption costing system; applies the first-in-first-out (FIFO) method to value all its inventories; and has a 31 March year-end. Skwamas product range consists of three product types, namely make-up bags (MakeBs), drawstring shoe bags (DrawBs) and shoulder sling bags (ShoulderBs). Although each product type is available in a variety of colours and with some design differences, such as in terms of zips (also called zippers or zip fasteners), location and shape of pockets, and finishes, the production cost of each bag of a specific product type is deemed to be the same. In other words, the production costs of all MakeBs are equal; the production costs of all DrawBs are equal; and the production costs of all ShoulderBs are equal, but there are differences between the production costs of a MakeB and a DrawB and a ShoulderB. No opening inventory of any materials, work-in-progress or finished goods existed as at 1 April 2022. 1. EXTRACTS FROM INFORMATION RELATING TO BUDGETS PREPARED FOR THE 2023 FINANCIAL YEAR (FY2023): 1.1. Budgeted sales units for FY2023 are in line with the demand for the products. Skwamas production budget shows that there were no required finished goods inventory at the end of FY2023. Budgeted sales units and selling prices for FY2023 were as follows: Product type Units to be produced and sold Selling price per unit MakeB 18 000 R65 DrawB 45 000 R50 ShoulderB 27 000 R80 1.2. Budgeted prime costs for FY2023 were estimated at the following amounts per product: Cost item Note MakeB (R per unit) DrawB (R per unit) ShoulderB (R per unit) Direct materials 1.2.1 16,00 19,00 30,00 Direct labour 1.2.2 10,80 ? ? 1.2.1. One of the direct materials used in all product types are zipper pulls (the handle of the zip). One MakeB uses two zipper pulls; one DrawB uses one zipper pull and one ShoulderB uses four zipper pulls. 1.2.2. The same direct labour rate per hour applies to all product types. The budgeted direct labour minutes per MakeB is 18. One DrawB is budgeted to require 12 minutes of direct labour and one ShoulderB is budgeted to require 30 minutes of direct labour. 1.3. The budgeted variable manufacturing overhead rate for FY2023 is R0,20 (twenty cents) per direct labour minute. 1.4. Budgeted fixed manufacturing overheads (FMO) amounted to R400 500 for the 2023 financial year. Budgeted FMO are allocated to production based on units produced. 1.5. Skwamas selling costs are mixed costs and are estimated by means of applying to historic figures a mathematical cost estimation method that compares the change in costs between two Page 6 of 7 MAC3761 Test 1/April 2023 CONFIDENTIAL [TURN OVER] appropriate activity levels, and then adjusting for expected price increases, if any. The variable selling cost per unit is the same for all product types. Variable selling cost per unit was expected to increase by 4% in FY2023. In estimating the selling costs for FY2023, the following actual selling cost information for the 2022 financial year (FY2022) was used as a starting point: Quarter of FY2022 Total units sold Total selling costs 1 18 000 R128 000 2 17 500 R130 000 3 22 000 R148 000 4 25 000 R161 875 1.6. Budgeted fixed administrative costs for FY2023 were R118 000. 2. EXTRACT FROM THE ACTUAL INFORMATION FOR THE 2023 FINANCIAL YEAR: The following actual income statement (statement of profit or loss and other comprehensive income) was prepared for MakeB ONLY: Details Note R Sales 2.1 1 020 000 Less: Cost of sales 2.1 ? Opening inventory 0 Plus: Direct materials 2.2 336 000 Plus: Direct labour ? Plus: Variable manufacturing overheads ? Plus: Applied FMO 2.3 A Less: Closing inventory B Gross profit 2.4 ? Notes and additional information: 2.1 Of MakeB, 17 000 units were actually sold during the period and 20 000 units were actually manufactured during the period. 2.2 Direct materials are recognised at actual cost. No opening or closing inventory of direct materials is kept. 40% of the actual direct material costs related to fabric and the actual cost of this fabric was R16,80 per metre, which was R3 per metre more than what was budgeted for. 2.3 Fixed manufacturing overheads are absorbed at a pre-determined FMO absorption rate on the basis of production units. 2.4 Actual gross profit per unit of MakeB was R27. 3. CONSIDERING IMPLEMENTATION OF ACTIVITY-BASED COSTING (ABC) FROM THE 2024 FINANCIAL YEAR (FY2024) Ms Skhosana completed a Diploma in Small Business Management but also did Principles of Management Accounting (MAC2601) as an additional module at Unisa. At a recent management meeting the question was raised whether it may be advisable to start implementing ABC from FY2024. After the meeting, the following statement was made by the Management Accountant of Skwama: I currently suspect that our current system at Skwama (traditional costing) is not sufficiently accurate in allocating overheads. But let us not waste time and money on determining whether ABC will be more accurate. As long as I get my salary and bonus, I am not concerned about whether the decisions I make, is in the best interest of the owners of Skwama. Skwama underpays me anyway. Page 7 of 7 MAC3761 Test 1/April 2023 CONFIDENTIAL QUESTION 1 (continued) REQUIRED For each sub-question below, remember to: Ignore taxation and the time value of money; Clearly show all your calculations in detail; and Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value). (a) Calculate the total budgeted selling costs for Skwama for FY2023. (5) (b) Assume the following in answering sub-question (b) only: Zipper pulls are in short supply in South Africa and only 150 000 zipper pulls are expected to be available to Skwama to purchase for production in FY2023; and All the other information remains as given in the scenario. Calculate Skwamas budgeted optimal production mix in units for the 2023 financial year. (10) (c) Assume the following in answering sub-question (c) only: The budgeted contribution per unit for FY2023 is R30 for MakeB; R15 for DrawB and R20 for ShoulderB; and All the other information remains as given in the scenario. Calculate Skwamas budgeted break-even point in units per product type for the 2023 financial year. (6) (d) Determine the following missing figures in the actual income statement for MakeB (show all calculations): (i) Applied FMO (A) (ii) Closing inventory (B) (2) (2) (e) Assume the following for answering sub-questions (e)(i) and (e)(ii) only: For MakeB, the budgeted contribution per unit is R30 and the budgeted gross profit per unit is R22 for FY2023; Standard costing principles are applied to calculate variances for performance evaluation purposes; and All the other information remains as given in the scenario. For MakeB only: (i) Explain to Ms Skhosana how to calculate the FY2023 Direct Material Price Variance for fabric and describe two questions she may want to ask in interpreting this variance. (ii) Calculate the FY2023 Sales (Margin) Volume Variance and provide a possible reason for the variance. (5) (3) (f) With reference to the section CONSIDERING IMPLEMENTATION OF ACTIVITY-BASED COSTING (ABC) FROM FY2024 above: (i) Discuss two differences between traditional costing and ABC. (ii) Critically evaluate from an ethical perspective the statement that the Management Accountant of Skwama made. (4) (3) Total question 1 [40] UNISA 2023 All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means without prior written permission of Unisa.