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AMA811S- ADVANCED MANAGEMENT ACCOUNTING- 2ND OPP- JUNE 2023 |
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nAmI BIA un IVERSITY
OF SCIEnCE Ano TECHnOLOGY
FACULTY OF COMMERCE, HUMAN SCIENCES AND EDUCATION
DEPARTMENT OF ECONOMICS, ACCOUNTING AND FINANCE
QUALIFICATION: BACHELOR OF ACCOUNTING (HONOURS)
QUALIFICATION CODE: 08BOAC
COURSE CODE: AMA811 S
SESSION: JULY 2023
LEVEL: 8
COURSE NAME: ADVANCED MANAGEMENT
ACCOUNTING
PAPER: THEORY AND CALCULATIONS
DURATION: 3 HOURS
MARKS: 100
SECOND OPPORTUNITY EXAMINATION QUESTION PAPER
EXAMINER
Lameck Odada
MODERATOR Lazarus Shinkeva
INSTRUCTIONS
1. Answer ALL FOUR questions in blue or black ink only. NO PENCIL.
2. Start each question on a new page, number the answers correctly and clearly.
3. Write clearly, and neatly and show all your workings/assumptions.
4. Work with four (4) decimal places in all your calculations and only round off only final
answers to two (2) decimal places unless otherwise stated.
5. Questions relating to this examination may be raised in the initial 30 minutes after the start
of the examination. Thereafter, candidates must use their initiative to deal with any
perceived error or ambiguities and any assumptions the candidate makes should be
clearly stated.
PERMISSIBLE MATERIALS
1. Silent, non-programmable calculators
THIS QUESTION PAPER CONSISTS OF _6_ PAGES (excluding this front page)
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QUESTION 1
[25 MARKS]
The Food Company Ltd (hereafter FCL) is a Namibian Stock Exchange (NSX) listed company
operating in the fast-moving consumer goods industry. The industry average debt-to-equity
ratio for both 2021 and 2022 is 38%. FCL manufactures and distributes everyday food items
such as bread, pasta, rice, sauces, and canned food throughout Namibia. FCL's success is
mainly attributed to its strategy of continuous improvement and innovation.
The company requires a large amount of capital expenditure to upgrade its plant and
equipment. Energy efficiency will be a key part of this upgrade. Facilities will be fitted with
energy-efficient lighting and refrigeration. FCL is also planning to use biodegradable
packaging for some if its products. While this project will require a significant capital outlay, it
will also result in a significant cash injection into the economy and the creation of job
opportunities.
The following information relates to FCL.
2022
2021
Skills development spend (N$'m)
39,32
36,86
Energy (Kwh)
86,19
83,32
Production (tons)
1 545 880
1 557 276
Carbon emissions
0,17
0,15
Capital structures (debt/equity)
45:55
35:65
During the current year at one of the manufacturing sites in the Khomas region, the food
inspection officer realised expired ingredients were being used while baking bread. The
inspector was afraid to notify management as, in the past, colleagues of his were fired
immediately for not timeously identifying and removing expired ingredients, despite the error
being their first. He thought it would be best if he and his team managed the problem
independently. He called a friend, who owns a fleet of trucks, loaded all the 'damaged' loaves
of bread onto his trucks, and asked his friend to dump the loaves of bread onto an unoccupied
piece of land about 100km away from the manufacturing facility.
Some of the initiatives undertaken by FCL, post-year end, include significantly reducing the
salt and sugar content of various products and increasing the level of detail about ingredients
on the packaging.
REQUIRED
a) Discuss the non-financial performance of FCL.
MARKS
20
Advise FCL on whether it should fund the plant and equipment upgrade
5
b)
using debt financing. Provide reasons for your answer.
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QUESTION 2
[25 MARKS]
DRAB Limited (Ltd) is a division of Odada Enterprises and has been allocated N$ five million
for capital expansion in the forthcoming year. The management of DRAB Ltd believes that the
company must spread its risk by investing in projects with different risk profiles and has
identified two possible investments (projects A and B). The capital available to DRAB Ltd is
sufficient to invest in only one of the projects. The following information has been made
available:
Economic growth
(annual average)
Zero
3%
6%
Probability of
occurrence
0.3
0.4
0.3
Estimated return%
Project A
Project B
14
8
10
6
8
22
Existing
investments
6
12
16
Book value
Market value
N$5 million
N$5 million
N$5 million
N$5 million
N$10 million
N$15 million
The division manager has requested you as the accountant to determine which of the two
projects should be accepted using the portfolio theory to make the selection.
REQUIRED
MARKS
Calculate the expected returns together with the risk for both projects and
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a)
the existing investments
Determine the expected returns of the portfolio, assuming that DRAB
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b)
forms a portfolio of each project and the existing investments
Determine the risk of the portfolio, assuming that DRAB forms a portfolio
10
c)
of each project and the existing investments
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QUESTION 3
[25 MARKS]
Odada (Pty) Limited (Ltd) is a company operating in the retail industry in the two regions in
Namibia. The company is privately owned with a staff complement of 100. The company is
forty percent equity funded.
Kalista Limited (Ltd) is a company that is also operating in the retail industry. The company is
operating across Namibia and has a board of eight directors. The company also has a staff
complement of 2 500. Kalista Ltd is twenty percent equity funded and has a beta of 0.7.
Additional information:
• The market rate of return is thirteen percent
• Odada (Pty) Ltd debt consists of a bank loan at 8.5% interest per annum
• Five-year Government Bonds are currently trading at seven percent
• The tax rate in Namibia is twenty-eight percent
REQUIRED
MARKS
a) Calculate a suitable beta for Odada (Pty) Ltd to the nearest whole number
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b) Calculate the cost of equity of Odada (Pty) Ltd
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c) Calculate the after-tax cost of debt
3
Estimate the Weighted Average Cost of Capital (WACC) of Odada (Pty)
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d)
Ltd
Discuss the difference between systematic and unsystematic risks,
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e)
giving an example of each and their impact on the beta of a company
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QUESTION 4
[25 MARKS]
Mzoli Chairs (Pty) Limited (hereafter Mzoli Chairs) is a company that manufactures and sells
two types of chairs that are sold locally, namely the "comfy" and the "modern". At the beginning
of the current financial year, the company produced the following budget:
Budgeted statement of profit or loss for the year ending 30 September 2023
Products
Sales units
Sales
Cost of sales
Material
Transferred in costs
Labour
ManufacturinQ overheads
Manufacturing gross profit
Marketing division
Transport
Administration
Profit
Comfy
30 000
N$
7 200 000
(2 400 000)
(1 500 000)
(1 650 000)
1650000
Modern
20 000
N$
3 400 000
(400 000)
(2 000 000)
(300 000)
(200 000)
500 000
Total
50 000
N$
2 150 000
(400 000)
(335 000)
(300 000)
1 115 000
Budget information:
1. The modern chair requires the base structure of a standard chair that is transferred in
from Vilikazi (Pty) Limited (hereafter Vilikazi), a company within the group. The
transferred-in price is set by Vilikazi.
2. All labour costs are variable.
3. Manufacturing overheads for the modern chair are variable. No fixed overheads are
allocated, as the modern chair is treated as a marginal product for manufacturing
purposes. The budget costs for the comfy chair consists of variable plus fixed
overheads.
4. The marketing division costs are all variable. The comfy chair incurs twice as much
cost per unit as the modern chair.
5. Transport costs have not been allocated to each product. Management is of the
opinion that N$85 000 fixed cost should be allocated to the modern chair. The balance
of the transport cost is incurred by the comfy chair, and 40% of this is considered fixed.
6. Administration costs are fixed. Where product profitability is assessed, one third of
the cost is allocated to the modern chair.
Actual results for the year ended 30 September 2023
Products
Sales units
Selling price per unit
Production units
Comfy
32 000
N$250
35 000
Modern
15 000
N$175
15 000
Total
47 000
50 000
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Modern
1. Manufacturing costs incurred were per budget, except for transferred-in costs which
were charged by Vilikazi at a cost of N$114 per unit.
Comfy
1. Actual raw material cost incurred was 10% higher than budget cost per unit.
2. Labour cost incurred were per budget.
3. The total manufacturing overhead cost incurred for the comfy chair was N$1 825 000,
which represents the same cost structure per the budget cost above.
Other costs
1. Marketing costs incurred were per budget, as were the variable transport costs. Fixed
transport costs were however 20% higher.
2. Administrative costs were 10% below budget.
Transferred-in material for the modern chair:
Mzoli chairs ordered 20 000 standard chairs from Vilikazi, on condition that the purchase price
was fixed at N$100 per unit or lower. Vilikazi, however, stated that it was currently selling the
required standard chairs at a market price of N$114 and the selling price to Mzoli Chairs would
have to be the same.
Mzoli Chairs was very unhappy with the new selling price and as a result, cut its order to 15
000 units in order to maximise company profit.
Vilikazi sells its standard chairs in an imperfect market and is faced with the following selling
price/demand structures.
Sellin~ price
N$120
N$114
N$106
Demand
10 000
15 000
18 000
The company incurs a variable manufacturing cost of N$80 per unit and has a manufacturing
capacity of 35 000 units.
Mzoli Chairs, on the other hand, is faced with the following selling price/demand constraints.
Selling price
N$175
N$170
N$154
Demand
15 000
20 000
25 000
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REQUIRED
MARKS
Re-evaluate the transfer price decision made by Vilikazi (Pty) Limited and state 25
what, in your opinion, the transfer price should have been and the consequences
for Mzoli Chairs (Pty) Limited.
END OF EXAMINATION PAPER
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