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QUESTION $1[50$ MARKS$]$

Demure Lux $($Pty$)$ Ltd is a high$-$end brand that manufactures and sells luxury bags and wallets. Each

division has its own accountants and operational managers. The wallet division has two subdivisions. The

accountants and operational managers of each division have to present their monthly reports to the

company CFO at the end of the following month. The company applies an absorption costing system.

On $30$ January, the accountants and divisional managers presented their reports for the month ended $31$

December.

Bags division

Each division has its accountant. The accountant calculated the closing inventory value to be R $2278$

$962.$ This figure concerned the CFO as she believed it was too high for closing value. She indicated that

the value is almost $50\%$ of the sales value.

The bags division accountant calculated the closing value with the below information:

$1.$

Sales R $4607500($Point $2)$

Opening Inventory $720$

Closing Inventory $?$

Leather material

input

R $780$ per meter $($Point $3)$

Labour Machine operators R $175$ per hour

Quality controllers R $425$ per hour

$($Point $3)$

Production units $3250$

$2.$

Bags are sold to retailers for R$980$ per bag. The actual sales for the month amounted to R $4607500.$

Budgeted sales units amounted to $3750.$

$3.$

The company has a specialised machine that requires leather material input, and it completes the

manufacturing process. Machine operators are trained by the company to operate this specialised

equipment. The manufacturing process of the bag involves $7$ stages. Extrusion, cutting, moisture,

weaving, printing, webbing, and sewing. There are two quality checks performed, one after webbing,

which also includes a burst test after sewing. The final check is performed at the end of the process to

confirm the level of quality. The quality check process is considered direct labour.

Scrap material of $5\%$ is expected during the manufacturing process. All scrap material is sold to the wallet

division for R $45$ per metre.

A bag takes $1$ hour to complete and quality control takes $30$ minutes to complete.

BCompt$\_$PMAC$\_$ASG$\_2024$ Regenesys Business School $3$

$4.$

The following relates to leather material input for the month:

$$ Opening $1550$ meters

$$ Purchases $7250$ meters

$$ Closing $280$ meters

$5.$

The budgeted manufacturing overheads amounted to R $550,000.$

Wallet Division

The wallet division has two subdivisions the women$$s wallets subdivision and subdivision men$$s wallet

division. These divisions each have their operational managers. The company currently apply ROI as a

divisional performance measure for the subdivisions.

The accountant of the division performs separate financial statements for each subdivision for decisionmaking

purposes. He raised concerns regarding the use of Return on Investment as a performance

measure as it may not encourage goal congruence.

Below is the financial information for the two subdivisions:

$1.$ Controllable profits:

Women$$s wallet subdivision $$ R $325000$

Men$$s wallet subdivision $$ R $385000$

$2.$

Extract Statement of financial position for the month ended $31$ December $2023.$

Women$$s wallet

subdivision

Men$$s wallet

subdivision

Non$-$current Assets

Property, plant and equipment $450000585100$

Current Assets

Inventory $117500217300$

Trade Receivables $213800285500$

Cash and Cash Receivables $10145096000$

Total Assets $8827501183900$

Equity

Retained Earnings $221000510000$

Non$-$current Liabilities

Loan $483250550000$

Current Liabilities

Trade Payables $78500123900$

Current portion of loan $100000-$

Total Equity and Liabilities $8827501183900$

BCompt$\_$PMAC$\_$ASG$\_2024$ Regenesys Business School $4$

$3.$ Total assets are the net investment employed in the subdivisions. The current WACC of the

company is $12\%$

Required:

a$)$ Confirm the accuracy of the closing inventory value for December presented by the accountant

of the bags division. $($Indicate whether you agree with the value presented by the accountant$).$

$(30)$

b$)$ Explain the wallet division$$s accountant's concerns about the use of return on investment as a

performance measure and provide an alternative measure. $(8)$

c$)$ Calculate Return on Investment and Residual Income for the wallet subdivisions

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