QUESTION 1 (45 marks; 81 minutes)
Qhubeka (Pty) Ltd (“Qhubeka”) is a small company and was formed three years ago by Nelson
Mthembu, in an effort to make locally produced electronic appliances more accessible to South
...
QUESTION 1 (45 marks; 81 minutes)
Qhubeka (Pty) Ltd (“Qhubeka”) is a small company and was formed three years ago by Nelson
Mthembu, in an effort to make locally produced electronic appliances more accessible to South Africans.
Qhubeka produces two types of microwave ovens for domestic use and, at this stage, these are the only
products manufactured by the company. Qhubeka’s financial year-end is 31 March, and the company
uses the absorption costing system and values all its inventories using the first-in-first-out (FIFO) method.
The company generates revenue as follows:
(i) the sale of the two types of microwave ovens: Instaheat and Grillmaster;
(ii) the after-sale service, maintenance and repairs of the microwaves.
The Instaheat unit is an entry-level microwave and the Grillmaster has a convenient grill and bake
function in addition to only heating.
Various divisions are involved in the manufacturing process such as the Cover Division, Magnetron
Division and the Control Switches division. Each division is responsible for its own operational and
investment decisions and “controllable net assets” are used as the investment figure when divisional
performance is evaluated. Qhubeka’s head office is responsible for all the financing decisions, and the
respective divisions may not use their own discretion on how they borrow funds. The Qhubeka Head
Office is responsible for all administration-related decisions relating to the divisions. A required rate of
return of 8% is used in the divisional performance measurement.
1. THE COVER DIVISION
Manufacturing and sales
The cover or outer case of a microwave oven is usually a one-piece, wrap-around metal enclosure. The
oven’s inside panels and door are made of stainless steel and are given a coating of acrylic enamel.
Some of the covers used in Qhubeka’s microwave ovens are bought from the Cover Division. The Cover
Division manufactures two types of covers. The covers are manufactured in batches of 50 units, but each
cover is sold as a single unit. The division has a maximum annual manufacturing capacity of 150 000
Instaheat covers and 180 000 Grillmaster covers. The Cover Division is deciding whether to discontinue
one of its product types, and if so, which one. The decision is a short-term decision.
The following budgeted management information relates to the Cover Division for the year ended
31 March 2022:
Note Instaheat
Covers
Grillmaster
Covers
Total
Number of units sold 1 10 000 12 000 22 000
Direct labour hours 8 000 12 000 20 000
Machine hours 9 000 16 000 25 000
R R R
Sales 1 ? ? ?
Direct labour (950 000) (1 140 000) (2 090 000)
Direct materials 2 (700 000) (910 000) (1 610 000)
Manufacturing overheads as per
the original budgeted absorption
costing income statement
3 (522 000) (928 000) (1 450 000)
Additional information
In the original budgeted absorption costing income statement, total manufacturing overheads were
allocated between the product types using a single divisional overhead allocation rate that was arbitrarily
MAC3761/Assignment02/0/2021
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based on machine hours. However, some of the manufacturing overheads are variable by nature, of
which a portion varies based on direct labour hours worked, and the remainder varies based on the
number of batches manufactured. In addition, some of the manufacturing overheads are product-specific
fixed costs and can be avoided if the manufacturing of the specific product is discontinued. The rest of
the manufacturing overheads are general fixed manufacturing overheads (FMO) and can only be avoided
if the Cover Division factory in its entirety is closed down. The Cover Division suspects that using the
original absorption costing income statement could potentially result in the incorrect discontinuation
decision being taken but is not sure why. As a result, the division requested you to prepare a revised
2022 budgeted income statement by:
(i) Applying direct costing principles;
(ii) Assigning the exact amount of FMO specifically related to a product type to the associated
product type; and
(iii) No longer allocating general FMO to individual product types.
Notes
1. The budgeted selling price per Instaheat cover is R250, whereas the budgeted selling price per
Grillmaster cover is R237,50. Budgeted opening and closing inventory of finished goods were both
Rnil for the 2022 financial year.
2. Budgeted opening and closing inventory of direct materials were both Rnil for the 2022 financial year.
3. The following information relates to the total manufacturing overheads:
Total manufacturing overhead costs R
Variable based on labour hours 280 000
Variable based on number of batches 70 000
FMO specifically related to the product: 725 000
- Instaheat
- Grillmaster
300 000
425 000
“General” FMO allocated 375 000
1 450 000
2. THE MAGNETRON DIVISION AND THE CONTROL SWITCHES DIVISION
The internal components of a microwave include a magnetron tube, which is a high-powered vacuum
tube that generates microwave energy. Without this component, a microwave will not be able to heat at
all and therefore is considered the most essential component in a microwave. This magnetron tube is
manufactured by the Magnetron Division and then sold to external customers as well as to the Control
Switches division, which, in turn, manufactures various control switches, relays and motors that are fitted
inside of each microwave unit.
The following information relating to these two divisions was extracted from the actual management
accounts records for the year ended 31 March 2021:
Detail Magnetron
R
Control switches
R
Sales 1 250 000 1 480 000
Variable costs 640 000 715 000
Contribution 610 000 765 000
Fixed costs 525 000 615 000
Finance costs 55 000 90 000
During the year ended 31 March 2021, the Magnetron Division manufactured 100% of its capacity of
125 000 units. 50 000 units were transferred to the Control Switches Division, which met 80% of that
division’s demand. A further 75 000 units were sold to external customers but their demand was 85 000
units. The current market price is R5,85 per magnetron tube
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