Vhembe Engineering Ltd is a company based at Thohoyandou. It tenders for various size contracts in most parts of South Africa. It has recently successfully tendered for a Local Authority contract in Makhado in the Limpopo province. Work is due to begin in January next year. The price that the company submitted with which it won its bid was R432 000 000. The company has also been requested to undertake another contract in Bela Bela in the Limpopo province. The price that has been offered for this work is R528 000 000. However, due to staffing problems, the two contracts cannot both be carried out at the same time. Vhembe Engineering has to choose which is the most financially rewarding to the company. Phumelela is able to withdraw from the contract in Mangaung, thanks to a clause that was written into the contract before it was signed. However, if this is done the company would have to notify the Local Authority of its intention by October this year and pay a penalty clause of R42 000 000. Currently, Vhembe Engineering Ltd has an existing contract in Mangaung from which it receives a rental income of R9 000 000. If it chooses the Makhado contract, the company it will keep the Mangaung contract; however, the Mangaung and Bela Bela contracts are mutually exclusive. Vhembe Engineering Ltd is able to withdraw from the contract in Mangaung, thanks to a clause that was written into the contract before it was signed. However, if this is done the company would have to notify the Local Authority of its intention by October this year and pay a penalty clause of R42 000 000. The following estimates relating to the costs and revenue of each contract have been compiled: Makhado Bela Bela R000 R000 Materials : Material A (in stock, original cost) 32 400,00 - Material B (in stock, original cost) - 37 200,00 Committed orders at original cost for material A 45 600,00 - Further material A required (current cost) 90 000,00 - Further material C required (current cost) - 106 800,00 Direct labour wages from local agency 129 000,00 165 000,00 Plant on site: depreciation 14 400,00 19 200,00 Site foremen 51 000,00 51 000,00 Temporary accommodation for foremen 10 200,00 8 400,00 Interest cost at 8% 7 680,00 9 600,00 Total contract costs 380 280,00 397 200,00 Central overheads from headquarters 19 014,00 19 860,00 Total costs 399 294,00 417 060,00 Contract price 432 000,00 528 000,00 Anticipated profit 32 706,00 110 940,00 Additional information is as follows: 1. Material A does not have a resale value outside of the company, as it is not used commonly in the engineering industry. It could be used as a substitute for another material which currently costs 10% less than the original cost of material A. 2. The price for material B has increased to twice the amount at which it was first purchased. Material B can be resold at its current market price, in which case the costs of disposal are 12% of the selling price. If not sold, any material B could be used on any future contracts as it does not deteriorate. 3. The plant that would be required is common to both contracts. If it were used on the Bela Bela contract, all of the plant would be required due to the nature of the work to be undertaken. However, if the Makhado contract goes ahead, less plant will be required. The plant that is not used will be rented to a neighbouring business for a total rental of R9 000 000 during the period of the contract. 4. The interest charge of 8% relates to a notional charge for working capital that may be required during the period of the contract. The customer would pay the company progress payments according to the work completed. 5. Both contracts would run for a 12-month period. 6. Site foremen are paid an annual salary. This does not vary according to the amount of work undertaken. They will however, be expected to stay in temporary accommodation near the contract site. The accommodation costs have been estimated based on past experience. 7. The costs of the central headquarters consist of the salaries of the personnel who work in the administration and payroll departments, which amount to R162 000 000 in total. The headquarters supervise approximately 15 contracts at any one time. 8. It is not expected that labour will be in short supply. Required: Making use of the principles of relevant costing, prepare a statement that compares the relevant net benefits of the two contracts in Rand terms and conclude QUESTION 2 (15 Marks) Mvudi (Pty) Ltd owns a fleet of five (5) AMG 45 CLA motor vehicles of which they give the right of use to their managerial staff. They approached you for advice regarding insurance costs. Current insurance: The vehicles are currently insured through Your Way Insurance and Mvudi (Pty) Ltd pays a fixed monthly premium of R1 300 per vehicle. The financial manager however received a quote from another insurance company (Unisure) to insure the vehicles based on a fixed rate plus a statistically determined rate per kilometer driven by the motor vehicle on a monthly basis. New insurance quote: The minimum payment will be R875 per vehicle, irrespective of kilometers travelled. The following estimates of total insurance premium were obtained from the potential new insurer (Unisure): Number of kilometers driven (km) Insurance premium per month (R) 800 875 1 500 1 150 1 900 1 400 2 500 1 725 The financial manager is considering changing their insurer to Unisure, but he is not sure whether it will be beneficial for Mvudi (Pty) Ltd. Assume that all vehicles in the fleet have to be insured by the same insurance company. Required: Calculate and conclude whether it will be more beneficial for Mvudi (Pty) Ltd to pay a fixed monthly insurance premium per vehicle or to opt for the new option to pay a semi-variable premium, assuming: 2.1 Three (3) of the vehicles in the fleet travel on average 2 000km per month each and the remaining vehicles each travel 1 300km per month. (11 marks) 2.2 Two (2) of the vehicles each travel 600km per month and the remaining vehicles each travel 2 000 km per month. (4 marks) QUESTION 3 (22 Marks) 3.1 Classify the following costs incurred by a step railing manufacturing company as direct materials, direct labour, factory overhead, or period costs: 3.1.1 Wages paid to production workers (1 mark) 3.1.2 Utilities in the office (1 mark) 3.1.3 Depreciation on machinery in plant (1 mark) 3.1.4 Steel (1 mark) 3.1.5 Accountants salary (1 mark) 3.1.6 Rent on factory building (1 mark) 3.2 Compare/contrast financial accounting and management accounting. (10 marks) 3.3 The timesheet of employee (Mashudu) who works for Univen as a financial controller, shows that he worked 48 hours during the 3rd week of February 2019.The normal working hours per week is 40 hours. On Monday and Saturday he worked 4 hours overtime respectively in order to cover the lost time due to strike by students. The normal overtime remuneration (1 x normal wage) is paid. His normal wage is R8 per hour. Medical and pension fund contributions (8% and 12% of normal wages respectively) are paid on a 50:50 basis by employer and employee. SITE (12% of taxable income) is the only other deduction being made. Required: Calculate the net earnings (wages) of Mashudu for the 3rd week of February 2019. (6 marks) QUESTION 4 (15 Marks) In the production of cotton fabric, Fine Fabric makes use of two processes. As a management accountant, you have been requested to calculate the value of finished goods for the month ended 31 March 2019. You have been provided with the following information related to Process B for the month ended 31 March 2019: Opening work-in-progress (OWIP) costs: R Process 1 420 Material 550 Conversion costs 1 600 Costs incurred during March 2019: R Transferred from the previous process 5 470 Material 4 100 Conversion costs 12 006 Metres of polyester fabric for Process 2 (March 2019): OWIP (80% complete) 50 metres Transferred in from the previous process 1 500 metres Finished goods 1 200 metres Closing WIP (35% complete) 120 metres Additional information for Process 2: Material is issued at the 20% mark of the production process. Conversion costs are incurred evenly during the process. Normal wastage is estimated at 10% of input and takes place when production is 40% complete. Cotton fabric that is wasted has a saleable value of R1.20 per metre. Abnormal loss units do not share in the normal loss allocation. The company uses the weighted average stock valuation method. Required: Calculate the value of finished goods for the month ended 31 March 2019. QUESTION 5 (15 Marks) Really Limited operates a cost accounting system, which is fully integrated with the financial accounts. As the chief management accountant of Really Limited, it is your duty to prepare the months accounting records each month. You are presented with the following information for the month of April 2019: R Stores ledger control account (Opening balance) 34 175 Work in progress control account (Opening balance) 49 210 Finished goods control account (Opening balance) 44 164 Material purchased on credit 86 150 Material issued to production 76 350 Material issued to factory maintenance 13 280 Material issued between batches 11 450 Selling and distribution overhead incurred 15 240 Other production overheads incurred 37 650 Cost of finished goods sold 129 830 Physical stock value of work in progress at the end of the month 34 360 The total overheads amount was transferred to production on the 30 April 2019. Really Limited require their sales to be based on cost of sales plus 20%. Required: Prepare the following general ledger accounts for the month ended 30 April 2019: 5.1 Stores ledger control account. (3 mark) 5.2 Work in progress control account. (3 mark) 5.3 Finished goods control account. (3 mark) 5.4 Production overhead control account. (3 mark) 5.5 Profit and loss account. (3 mark) All entries to the accounts should be rounded to the nearest whole number. Clearly show any workings supporting your answer, and accounts must be closed off. QUESTION 6 (18 Marks) The management of Simply Sweet (SS) Limited requires your assistance to produce a monthly cash budget for the month of January 2019. SS makes and sells one product, Alpha. Each unit of Alpha is sold at R60. Sales information is given as follows: November 2018 (actual) 800 units December 2018 (actual) 1 100 units January 2019 (budgeted) 1 200 units February 2019 (budgeted) 1 300 units Additional information: 1. 20% of all sales are done on a cash basis. 2. The company has the following policy about collections from debtors: 50% of all credit sales are collected in the month of sale. The rest is collected in two equal instalments in the two months following the month of sale. 3. The inventory requirements for each month must be sufficient to meet 30% of the next months sales value. 40% of all purchases is done on a cash basis. The credit purchases are paid in the month following the month of purchase. 4. Manufacturing overheads amount to R6 000 per month. This includes depreciation of R1 000. All overheads are settled as they arise. 5. The bank balance on the 31st of December 2018 was R50 000 (favourable). Required: Prepare a cash budget for Simply Sweets Limited for the month of January 2019. Show all workings.