MASTER OF BUSINESS ADMINISTRATION (MBA)

2024 ACADEMIC YEAR

Module Name: ACCOUNTING FOR MANAGERS

Module Code: MBA4807

Student Number 44962398

Candidate Name: Kuhle Zandile Toni

Assignment Number: 2
Table of Contents
Table of Contents......................................................................................................................... 2
QUESTION 1......................................................................................................................................... 3
A) BREAK-EVEN POINT.................................................................................................................... 3
B) EFFECT ON INCOME IF THE COMPANY INCREASES ADVERTISING EXPENDITURE BY R22 000.00......3
C) THE MAXIMUM AMOUNT THE COMPANY COULD PAY FOR ADVERTISING...........................................4
QUESTION 2......................................................................................................................................... 5
1. HIGH-LOW METHOD- VARIABLE COST PER UNIT AND ANNUAL FIXED COSTS FOR THE COMPANY......5
Variable Cost per Unit................................................................................................................... 5
Annual fixed cost for year 3.......................................................................................................... 5
2. BREAKEVEN POINT...................................................................................................................... 5
3. MARGIN OF SAFETY.................................................................................................................... 6
Margin of Safety Percentage........................................................................................................ 6
Operating Leverage...................................................................................................................... 6
4. OPERATING PROFIT.................................................................................................................... 6
QUESTION 3......................................................................................................................................... 8
SUNK COST........................................................................................................................................ 8
FINANCIAL REPORTS VS. MANAGERIAL REPORTS................................................................................10
QUESTION 4....................................................................................................................................... 11
1. PRODUCTION BUDGET............................................................................................................... 11
2. DIRECT LABOUR BUDGET........................................................................................................... 11
3. OVERHEAD BUDGET.................................................................................................................. 13
REFERENCES.................................................................................................................................... 15

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Question 1
a) Break-Even Point

Selling price per unit = Sales/ units sold

=750000/100000
=7,50

Variable cost per unit =Total variable Costs/Units Sold

=400000/100000
=4,00

Contribution margin per unit = Selling price – Variable cost per unit
= 7,50-4,00
=3,50

Fixed cost per unit = Total Fixed cost/ Units sold

=210000/100000
=2,10
Break-even point
¿ ¿ costs ÷ Contribution margin per unit
=2,10/3,50
=0.60
The breakeven point is 60 000 units.

b) Effect On Income If the company increases advertising

expenditure by R22 000.00

= (Increase in Sales* Contribution Margin per unit)-

Increase in Expenditure
=(8000*3.50)-22000
=R6000.00 Increase in income.

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 c) The Maximum amount the company could pay for Advertising
=Increase in Sales *contribution margin per unit
=8000*3.50
=R28 000.00

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Question 2

1. High-Low Method- Variable cost per unit and Annual fixed costs
for the company

Variable Cost per Unit= (Highest activity cost-Lowest activity cost)/( Highest
activity units-Lowest activity units)
= (6 600 000-2 100 000)/(420 000-120 000)
=4 500 000/ 300 000
=R15.00 per unit

Annual fixed cost for year 3

Total Cost = Fixed Cost + Variable Cost
6 600 000 =FC+(15*420 000)
6 600 000 =FC+(6 300 000)
Fixed Cost = 6 600 000- 6 300 000
= R300 000.00

2. Breakeven Point

Selling price per unit = Sales/ units sold

= (18*420 000)/420 000
=7 560 000/420 000
=R18.00

Variable cost per unit =R15.00

Contribution margin per unit = Selling price – Variable cost per unit
= 18-15
=R3.00

Fixed cost per unit = Total Fixed cost/ Units sold

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 =300 000/ 420 000
=R0.71
Break-even point
¿ ¿ costs ÷ Contribution margin per unit
=300 000/3
=100 000 Units
The breakeven Sales is 100 000* R18.00 = R1 800 000.00.

3. Margin of Safety

Margin of Safety Percentage

= ((Expected Sales-Break-even Sales)/Expected Sales)*100
= ((150 000-100 00)/150 000)* 100
=33.33%

Operating Leverage

Contribution Margin %= (Sales per unit-Variable costs per unit)* Expected Sales
= (18-15)* 150 000
=R450 000.00

Operating Margin% =Sales Revenue -Total Variable costs- Fixed costs

=2 700 000-2 250 000- 300 000
= R150 000.00

Operating Leverage = Contribution Margin/ Operating Margin

=450 000/150 000
=3

4. Operating Profit

Maximum bonus = 80 000*50%

=R40 000.000

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Operating profit for maximum bonus=Maximum bonus/ 2%
=40 000/2%
=R2 000 000.00
Therefore the minimum desired level of Sales revenue from the manager’s point of
view if he wishes to maximise his income is R2 000 000.00 + R80 000.00=
R2 080 000.00

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 Question 3

Sunk Cost

A sunk cost is a retrospective cost, a cost that has been incurred and cannot be
recovered. This means that the money has already been invested or spent on the
good or service and whether the purchase was worth it or not is a whole different
story. The sunk cost effect shows itself as a stronger inclination to stick with a project
if time, money, or effort have been committed. A typical example of a sunk cost
would be the investment on electricity infrastructure in most of the townships in
South Africa or even better the eTolls project by SANRAL. For the purpose of this
exercise, we will focus more on the eTolls example.
The 186 km Gauteng expressway was designated as a toll road by the government
in 2008.The PIC (Public Investment Corporation) funded a huge share of the R21
billion in bonds that covered the construction costs of the freeway expansion. To
offset these costs, the South African National Roads Agency Ltd
(ORGANISATION UNDOING TAX ABUSE NPC, n.d.)
. (SANRAL) chose to institute an electronic tolling
system (e-toll), to collect money. The e-toll construction project was completed in
2011 at the value of 17.9 billion rands. It is worth noting that this 17.9-billion-rand
expense was about 60% more than the 11.9 billion rands, which was initially
indicated in 2008. A further 9.9 billion Rand tender was awarded to ETC-JV for the
management of the five-year operations and once again this amount was about 60%
more than the tendered value indicated by SANRAL. In March 2012, OUTA
(Organization Undoing Tax Abuse), took the National treasury and SANRAL to court
with the intention of scrapping off the e-tolls. OUTA lost the battle and the e-toll
gantries began operating in December 2013. The operation continued despite the
outcry of the general public, business, labour and political parties. Motorists resisted
paying their e-tolls on the get go and the compliance levels went from 40% to 20%
by 2019 despite the coercive strategies that were used to ensure that motorists pay.
SANRAL and the National treasury continued to explore other ways of encouraging
motorists to pay their e-tolls and boost their revenue because of the substantial initial
investment made to the development if the e-toll system.

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In this scenario, the initial cost for developing the e-toll system, which is about 27.8
billion is considered a sunk cost. The funds used to produce the product are non-
refundable, regardless of how well it performs in the market, which wasn’t the case
here. The sunk cost fallacy, on the other hand refers to the propensity to persist in
the undertaking based on prior investments, even though it is no longer economically
reasonable to do so, this influenced SANRAL’s decision to keep spending in
operations and marketing.

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Financial Reports Vs. Managerial Reports

Financial reporting is for the external stakeholders such as banks, investors and
regulators, it is also required by law and regulated by financial bodies such as
PFMA. The primary objective of financial reporting is the overall financial
performance of an organization. Management reporting on the other hand, is for
internal stakeholders such as CEO’s owners and management, it is not legally
required to perform but it provides valuable insights for the business. It examines
some of the company’s areas from an operational and financial standpoint
(Financial Reports vs. Management
. Considering this,
the treatment of sunk costs will differ depending on the differing objectives and
audiences of these two reports.
Financial reports aim to provide an in-depth overview of the financial performance
and the position of the company. Sunk cost, in this regard would not be emphasized
too much since investors are more concerned with the company's present and future
financial condition than they are with previous costs that cannot be recovered. As a
result, financial reports tend to downplay or omit the sunk cost element and place
more focus on the company’s revenue, cash flow and profitability.
Managerial reports aim to provide insights for decision making and strategic planning
for managers within a business. Sunk costs are looked at closely in these reports as
they offer valuable information of efficiencies and the cost benefit of past
transactions and decisions. Identifying sunk costs can also assist management
decide on the viability of continuing or discontinuing to fund certain projects or
investments.

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Question 4

1. Production Budget

Closing Inventory Total Units

Month Sales (Units)
(Units) Needed (Units)

68 900*60% 73200+41340
April 73 200
= 41 340 =114 540

65400*60% 68 900+39 240

May 68 900
=39 240 =108 140

67 300*60% 65 400+40 380

June 65 400
=40 380 =105 780

Therefore the total units required for the quarter = 114 540+ 108 140+ 105 780
=328 460 units

2. Direct labour budget

Total Direct Labour Total Direct Labour
Hours Cost
Month =Total units Needed for =Total direct labour hours
month*Direct Labour for the month*Average
Hours per unit wage cost per hour

=114 540*2.5 =286 350*R14

April
=286 350 hours =4 010 900

=108140*2.5 =270 350*R14

May
=270 350 hours =3 785 900

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 =105 780* 2.5 =264 450*R14
June
=264 450 hours =3 702 300

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Total Direct Labour Hours for the quarter
=286 350+ 270 350+ 264 450
=821 150 hours

Total Direct Labour Cost for the quarter

=R4 010 900.00+R3 785 900.00+R3 702 30
0.00
=R11 499 100.00

3. Overhead Budget
Variable overhead
Fixed costs Total Overhead costs
Month Overhead =Direct labour hour * =Fixed Overhead Costs+
Costs Variable overhead Variable Overhead Costs
rate

=R286 350.00*R6.00 =R1718100+R15000

April R15 000.00
=R1 718 100.00 =R1 733 100.00

=R15 000.00+R1 622 100.0

=R270 350.00*R6.00
May R15 000.00 0
=R1 622 100.00
=R1 637 100.00

=R15 000.00+R1 586 700.0

=R264 450*R6.00
June R15 000.00 0
=R1 586 700.00
=R1 601 700.00

Total Variable overhead cost for the quarter=

R1 718 100.00+R1 622 100.00+R1 586 700.00
=R4 926 900.00

Total Fixed overhead Cost for the quarter = R15 000.00* 3

= R45 000.00

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Total Overhead Cost for the Quarter = R4 926 900.00+R45 000.00
=R4 971 900.00

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 References
1. LABEL, D. W. (2006). Accounting for Non- Accountants. Illinois: Sourcebooks.

2. Financial Reports vs. Management Reports: What’s the Difference? (n.d.).

Retrieved May 9, 2024, from https://www.growthforce.com/blog/financial-reports-
management-reports-differences
3. ORGANISATION UNDOING TAX ABUSE NPC. (n.d.).

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