Faculty of Accounting and Informatics Assignment - Durban University of Technology

Assignment Task

You are the newly appointed management accountant for Easypass Limited. The company has been in existence for 15 years but has lately begun to record operating losses. The company is made up of a number of different divisions, each specializing in the production of a range of similar products. The following information is available:

1. PowerCore division

The financial results for the division are deteriorating fast. The abbreviated results for the financial year ended 30 September 2022 are as follows:

The managing director is concerned about the results of this division. The production manager is adamant that production is proceeding with the minimum of delays, idle

time and wastage. The marketing manager has suggested that the product mix may be wrong and the managing director would appreciate your input on this matter. The following additional information is provided:

A statistical analysis of the material and labour costs shows the following variable elements in the costs:

• Material 90%
• Labour 70%

The movement in overheads was monitored over the last three months of the year and the following relationship was noted:

20% of the administration cost is attributable to common head office overhead costs allocated to the different divisions on a pro-rata basis. The administration cost directly related to the division may be divided between fixed and variable cost in a 40:60 ratio.

The following apportionment of the sales and elements of the costs among the three products manufactured in this division has been identified as part of an activity based costing study

RWC division

A decision has already been taken at the board level to close this division as it does not seem to be economically viable any longer. The only question remaining now is when the division should be closed. The managing director would like to close the division on the 30th of September 2022 so that future losses are kept to minimum, but the divisional manager requests that the division be kept operational until 31 December 2022, so that all business transactions and contracts may be completed before closure.

Finished goods inventory on hand

The division has finished goods of their product Watchek on hand on the 30th of September 2022. The original production cost of the completed products was R800 000. The goods can be sold for R650 000 on the 30th of September 2022. Alternatively, the division could use the finished goods to complete outstanding contracts for the period up to 31 December 2022. If the contracts are thus completed, the division will receive payment of R720 000 from clients.

Additional production required

2, 000 units of products Bluebay must still be manufactured in order to complete outstanding contracts. Should the contracts not be completed, a penalty payment of R250 000 will be incurred by the division on 30 September 2022. The production cost for the products are R55,00 per unit, which includes R5 fixed overhead.

Labour cost

All the labourers from the division will be retrenched. The retrenchment packages amount to R130 000 if paid on 30 September 2022 and R150 000 if paid on 31 December 2022

Rent

If the division is closed on 30 September 2022, rental payments amounting to R10 000 per month will be avoided.

Overhead

Total overheads of R300 000 per annum is charged an equal monthly portions to the RWC division. 40% of this cost is apportioned head office costs and 60% is directly traceable to the division. The directly traceable cost will no longer be incurred if the division is closed. It is estimated that further 5% saving per month on the apportioned head office costs could also be realized.

Transferly division

The Transferly division currently makes use of 80% of their production capacity to manufacture 80 000 units of single product, the TFC

The MoneyMover division has expressed interest in buying 40,000 units (no more, no less) of the TFC product from Transferly division. A saving of 2% in respect of selling and marketing expenses is expected for these 40,000 units if transferred internally. The MoneyMover division can buy the TFC product in the external market at a cost of R2 000 per product.

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