Structuring Your Portfolio of Evidence File

Unit Standard: 119341

In order to assist you we have listed each activity by page.
Remove these documents and place them in your POE file.

As you will see the content of each section is listed and we have also given you some tips on
what should be contained in the section.
Please read the activity question carefully and make sure that the evidence you select is
what is asked for. Failure to do so will result in the assessor returning your POE to you for
additional information.

When submitting evidence, please make sure that you write a short report as to why you
have selected this evidence so that the assessor can see the evidence in context.
Please ensure that the evidence supplied is your own work
The Structure of the Assessment
The assessment of this unit standard will take place in the form of formative and summative
assessments.

Formative assessments as well as preparation towards the summative assessment should

be conducted during the contact time in class.
Assessment Criteria
In assessing submitted work, the following will carry weight:

Originality of the work presented;

Knowledge of the preparation and analysis of municipal financial reports;

Insight into the application of municipal financial reports;

Ability to analyse identified problems and identify possible solutions;

Comprehension of the subject content; and

Ability to organise assignment content in a logical and structured manner.

Assessment Methods/Strategies
The assessment of this module will be conducted in a form of formative and summative
assessments. Formative assessments comprise of activities to be conducted in class as well
as a presentation to be presented during the last day of facilitation. The summative

assessment comprises of the submission of a Portfolio of Evidence by each learner on the

activities included in the manual.
NB: Please note that although formative assessment will take place in class when you are
working with your fellow learners, it is important that you ensure that you are an active part
of the discussion or activity.

You will be required to include your notes in your POE. It will also be advantageous for you
to review and add to your notes before placing them in your POE. It is your responsibility to
prove that you are competent against the unit standard

Divider 1:

Section 1: Background Information

1. Your CV
2. A Certified Copy of Your ID
3. Your Organisational Profile

NB: This refers to a brief overview of your council and its main focus regarding
products / services.

4. Departmental organogram
NB: Your departmental organogram enables the assessor to see where you fit into
the municipality. Highlight your position in the department.

If you do not work in the municipal finance department but serve on a related
committee, then indicate the portfolio or section in which you serve.

5. Your Job Profile

6.

Your motivation for completing this programme

Divider 2:

Section 2: Unit Standards

This POE relates to Unit Standard 119341

Apply cost management information systems in the preparation of management
reports

Unit Standard 119341

All qualifications and unit standards registered on the National
Qualifications Framework are public property. Thus the only
payment that can be made for them is for service and
reproduction. It is illegal to sell this material for profit. If the
material is reproduced or quoted, the South African Qualifications
Authority (SAQA) should be acknowledged as the source.
SOUTH AFRICAN QUALIFICATIONS AUTHORITY

REGISTERED UNIT STANDARD:

Apply cost management information systems in the preparation of
management reports
SAQA US ID

UNIT STANDARD TITLE

119341

Apply cost management information

preparation of management reports

ORIGINATOR
SGB
Public
Management

systems

REGISTERING PROVIDER
Administration

and

in

the

FIELD

SUBFIELD

Field 03 - Business,
Management Studies

Commerce and Public Administration

ABET BAND

UNIT
TYPE

STANDARD NQF LEVEL

CREDITS

Undefined

Regular

Level 5

15

REGISTRATION
STATUS

REGISTRATION
START DATE

REGISTRATION
END DATE

SAQA
DECISION
NUMBER

Reregistered

2008-02-26

2011-02-26

SAQA 0160/05

LAST DATE FOR ENROLMENT

LAST DATE FOR ACHIEVEMENT

2012-02-26

2015-02-26

This unit standard does not replace any other unit standard and is not replaced by
any other unit standard.
PURPOSE OF THE UNIT STANDARD
Learners working towards this standard will be working within a Public Sector
environment, specialising in Public Finance Management and Administration, where
the acquisition of competence against this standard will add value to one`s job. This

standard will also add value to public officials who are seeking to develop a career
pathway towards becoming an accomplished public finance management and
administration specialist.
The qualifying learner is capable of:
Identifying and applying different methods of accounting for costs in the
public setting
Compiling costing information of management control
Preparing cost performance reports using variance analyses techniques
Presenting relevant data to support non-routine short-term decisions

LEARNING ASSUMED TO BE IN PLACE AND RECOGNITION OF PRIOR

LEARNING
Learners accessing this Unit Standard must be in possession of a Further
Education and Training Certificate or equivalent qualification
UNIT STANDARD RANGE
N/A
Specific Outcomes and Assessment Criteria:
SPECIFIC OUTCOME 1

Identify and apply different methods of accounting for costs in the public setting.
OUTCOME RANGE
Different cost accounting methods include but are not limited to job-order, activitybased costing and service costing
ASSESSMENT CRITERIA
ASSESSMENT CRITERION 1
Different costing approaches are considered to measure the performance of
different segments
ASSESSMENT CRITERION 2

A range of costing systems are used to account for costs incurred in the public
sector
ASSESSMENT CRITERION 3
Appropriate cost centres and elements of costs are recognised and reported
ASSESSMENT CRITERION 4
Difficulties associated with categorisation of costs by behaviour in a public sector
organisation are explained
SPECIFIC OUTCOME 2

Compile costing information for management control.

ASSESSMENT CRITERIA
ASSESSMENT CRITERION 1
Relevant cost data is selected and presented to management to support a specific
decision-making process
ASSESSMENT CRITERION 2
Cost information relating to income and expenditure is analysed and reported to
support management functions

ASSESSMENT CRITERION 3
Variances in reports are identified where relevant
ASSESSMENT CRITERION 4
Knowledge of cost variability is applied to incremental analysis in decision-making
problems
ASSESSMENT CRITERION 5
Elements of costing are identified and applied in the assessment of cost variability
ASSESSMENT CRITERION 6

Overhead costs associated with public service delivery are allocated, apportioned
and absorbed to measure cost recovery levels
SPECIFIC OUTCOME 3
Prepare cost performance reports using variance analyses techniques.
ASSESSMENT CRITERIA
ASSESSMENT CRITERION 1
A range of costing systems and reports are considered for the compilation of
management reports

ASSESSMENT CRITERION 2
Standard costs and related variance analyses are calculated to prepare reports
needed to manage by exception
ASSESSMENT CRITERION 3
Reports are prepared so as to inform planning and control functions of
management
ASSESSMENT CRITERION 4
Recommendations are made to assist in the identification of ways to reduce costs
and enhance value

SPECIFIC OUTCOME 4
Present relevant data to support non-routine short-term decisions.
ASSESSMENT CRITERIA
ASSESSMENT CRITERION 1
Cost revenue data is prepared to support short-term decisions
ASSESSMENT CRITERION 2
Sound economic principles are applied to inform the reports prepared to support

non-routine decisions
ASSESSMENT CRITERION RANGE
Economic principles that apply to non-routine decisions include but are not limited
to opportunity cost, marginal review, hidden costs, sunk costs
ASSESSMENT CRITERION 3
Specific recommendations that are made are explained in a clear and appropriate
manner and substantiated with valid statistics/financial indicators
ASSESSMENT CRITERION 4

Qualitative factors affecting routine short-term decisions are identified

UNIT STANDARD ACCREDITATION AND MODERATION OPTIONS
Any individual wishing to be assessed (including through RPL) against this
unit standard may apply to an assessment agency, assessor or provider
institution accredited by the relevant ETQA, or an ETQA that has a
Memorandum of Understanding with the relevant ETQA.
Anyone assessing a learner against this unit standard must be registered as
an assessor with the relevant ETQA, or an ETQA that has a Memorandum
of Understanding with the relevant ETQA.
Any institution offering learning that will enable achievement of this unit

standard or assessing this unit standard must be accredited as a provider

with the relevant ETQA, or an ETQA that has a Memorandum of
Understanding with the relevant ETQA.
Moderation of assessment will be conducted by the relevant ETQA at its
discretion.

UNIT STANDARD ESSENTIAL EMBEDDED KNOWLEDGE

The learner must demonstrate an understanding of:
Municipal Finance Management Act
Public Finance Management Act
A comprehensive understanding of legislation, rules and statutory

requirements applicable to the public sector as it relates to asset

management
Costing techniques and principles
Standard costing and budgetary control systems
Variance analysis
Value analysis
Accounting principles and theory

UNIT STANDARD DEVELOPMENTAL OUTCOME

N/A

UNIT STANDARD LINKAGES

N/A
Critical Cross-field Outcomes (CCFO):
UNIT STANDARD CCFO IDENTIFYING
Identify and solve problems using critical and creative thinking processes to analyse
and report on costs
UNIT STANDARD CCFO WORKING
Work effectively with others as a member of a team, group, organization or

community to compile costing reports

UNIT STANDARD CCFO ORGANISING
Organise and manage oneself and one`s activities responsibly and effectively in
order to ensure that cost management is proactively undertaken and the reports are
completed within given timeframes
UNIT STANDARD CCFO COLLECTING
Collect, analyse, organize and critically evaluate information in order to determine
variance analyses

UNIT STANDARD CCFO COMMUNICATING

Communicate effectively using visual, mathematical and/or language in the modes
of oral and/or written persuasion to compile cost management reports
UNIT STANDARD CCFO SCIENCE
Use science and technology effectively and critically, showing responsibility to the
environment and health of others in ensuring that costing systems are effectively
utilized and managed
UNIT STANDARD CCFO DEMONSTRATING
Demonstrate an understanding of the world as a set of interrelated systems by

recognising that problem-solving contexts do not exist in isolation in controlling

costs and that various factors will impact on cost management
UNIT STANDARD CCFO CONTRIBUTING
Participating as responsible citizens in the life of local, national and global
communities by preparing costing reports needed to manage by exception
QUALIFICATIONS UTILISING THIS UNIT STANDARD:
ID

QUALIFICATION TITLE

LEVEL STATUS

END
DATE

Core

49554 National Diploma: Public Finance

2011-02Level 5 Reregistered
Management and Administration
26

Elective

61349 National
Certificate:
Resource Management

Divider 3

Heritage

Level 5 Registered

2011-0611

Section 3 + 4: Formative / Summative Assignments

In this programme formative and summative assignments are integrated. For clarity we have
listed them in Section 4 of this POE Guide.
We would suggest that you include notes taken in class during your group and individual
activities in this section.
This will demonstrate to your assessor that you were an active participant in the course
activities and that you understand the concepts and material

We require you to submit evidence, for the following activities to demonstrate that you are
able to effectively demonstrate the outcomes of the Unit Standards as indicated by this POE.
This module is assessed by one comprehensive individual assignment.
You must make and keep a copy of your individual assignment before submitting your POE
to your provider.

Please note that there is a separate page for each evidence activity
We suggest that you put a divider between each assignment
Please ensure that you have completed all the activities as listed below

Divider 4.1 Activities and assignments

Place a divider between each of the 3 sections
Activities based on Unit 1:
Identify and apply different methods of accounting for costs in the public sector

ACTIVITY NO 1.1:

Evidence Activity

Is Evidence
Present in File

Activity 1.1
See if you can identify possible cost units in the following instances:

Service
Electricity delivery

Cost Unit
Charge (variable or scaled) per

Water purification

watt/kilowatt
Charge (variable or scaled) per

Fire Protection Service

kilolitre
Flat rate per call out/per hour

Refuse removal

serviced
Charge per bin\ton of waste

Library Facilities

Charge per access\periodically (e.g.

Sewerage Service

hourly rate)
Charge per household or flat monthly
rate per customer

ACTIVITY NO 1.2:

Evidence Activity

Is Evidence
Present in File

Activity 1.2
Based on the calculation of R1 400 per m2, what would the estimated

total cost be to repair the roads in the following Johannesburg suburbs?

Suburb

Area

needing

repairs

Thokozo

756 m2

Hillbrow

1 327 m2

Cost

R1 058 400

R1 857 800

Berea

65 m2

R91 000

Soweto East

8 871,5 m2

R12 420 100

ACTIVITY NO 1.3:

Evidence Activity

Is Evidence
Present in File

Activity 1.3
Try to think what the costs are that make up the R896 000.

In other words break up the R896 000 into its component costs.
Do not concern yourself with rand value but only the types of costs.
Costs:
1. Labour costs e.g. employees
2. Material used in production of goods or services
3. Contracted services e.g. consultants
4. Plant and Equipment e.g. machinery
5. Contingents i.e. to factor in variation in scope of work and price

ACTIVITY NO 1.4:

Evidence Activity

Is Evidence
Present in File

Activity 1.4
Use Activity 3 and identify the costs as direct or indirect costs

Cost

Direct

1. Labour costs e.g. employees

2. Material used in production of
goods or services
3. Contracted
services

e.g.

consultants
4. Plant
and

e.g.

machinery

Equipment

X
X
X
X

Indirect

5. Contingents

i.e.

to

factor

in

variation in scope of work and

price

ACTIVITY NO 1.5:

Evidence Activity

Is Evidence
Present in File

Activity 1.5
Complete the following table for the allocations to departments A D.
Public Works (PW) indirect costs have already been calculated and put
into the table.

Cost
Electricity for
building

Total
Amount
R230 000

R23

R34

R34

R80

000

500

500

500

P/Works

Basis

R57 500

Use m2
Use kms

Depreciation of
Pool vehicle

R64 000

R26

R10

667

667

R8000

R64
000

R12 267

travelled:
A 50 000 km
B 20 000 km
C 15 000 km
D 12 000 km
PW 23 000 km

ACTIVITY NO 1.6:

Evidence Activity

Is Evidence
Present in File

Activity 1.6

Complete the above example (on page 25 of the learner manual) for the
other cost pools assuming that the labour hours were allocated were as
follows:

Cost pool
MRP
Repairs & Maintenance
Area Rehabilitation

Ontdekkers
Rd:

Ontdekkers Rd
50 hours
15 hours
150 hours

MRP: ((50/90) X 180 000)

Jabulani Rd
25 hours
25 hours
210 hours

Empire Rd
15 hours
10 hours
80 hours

R100 000

Repairs & Maintenance:

Jabulani Rd:

((15/50) X 320 000)

Area Rehabilitation:

R96 000

((150/440) X 230 000)

MRP: ((25/90) X 180 000)

R78 409.09
R50 000

Repairs & Maintenance:

((25/50) X 320 000)
Area Rehabilitation:

R160 000

((210/440) X 230 000)

MRP: : ((15/90) X 180 000)

Empire Rd:

R109 772.72
R30 000

Repairs & Maintenance:

((10/50) X 320 000)
Area Rehabilitation:
((80/440) X 230 000)

R64 000
R41 818.18

Evidence Activity

Is Evidence
Present in
File

Activity 1.7
Complete the table in order to determine the cost of each of the cost objects
of the municipality.

Cost pool
Project Planning
MRP
Repairs & Maintenance
Area Rehabilitation
Total cost

Ontdekkers Rd
R 121,500
R100 000
R96 000
R78 409.09
R395 909

Jabulani Rd
R 94,500
R50 000
R160 000
R109 772.72
R414 273

Empire Rd
R 54,000
R30 000
R64 000
R41 818.18
R189 818

Note: We are now able to determine the unit cost for each course by
taking the total cost from the above table and dividing this by the
number of courses offered.

ACTIVITY NO 1.8:

Evidence Activity

Is Evidence
Present in
File

Activity 1.8

Note: We are now able to determine the unit cost for each course by
taking the total cost from the above table and dividing this by the
number of courses offered. You did this in Activity 1.7.
Cost pool
Number of projects
Total cost
Cost/project

Ontdekkers Rd
Jabulani Rd
Empire Rd
250
325
185
R395 909
R414 273
R189 818
R1583,64
R1274,69
R1026,04

ACTIVITY NO 1.9:

Evidence Activity

Is Evidence
Present in
File

Activity 1.9

Complete an integrated case study on ABC.

Estimate the cost of a prepaid machine using an ABC approach and the
cost drivers suggested by the CFO

Stores:
R50 000 000/2 000 = R25 0000 x 10 components/10 000 units

R25.00

Production Line:
R30 000 000/10 000 set ups = R3000 x 6/10 000 units

Dispatch:
R10 000 000/20 000 = R500 x 500/10 000

R1.80
R25.00

Other o/h:
R30 000 000/100 000 hours = R300 x (25 min/60 min)

Total overhead cost:

R125.00
R176.80

Total Cost:
Materials
D/Labour
Overheads
Total:

R45.00
R50.00
R176.80
R271.80

ABC Municipality Case Study:

ABC Municipality produces electricity card prepaid card machines for its consumers. The
municipality needs to produce the card machines so that all households will ultimately be
able to afford to install these machines.
The municipal manager is concerned about the reliability of its product costing system. The
municipality currently uses an absorption costing system, and absorbs overheads on the
basis of the budgeted direct labour hours. On this basis the estimated cost of the card
machine is as follows:
Direct Material

R45,00;

ACTIVITY NO 1.10:

Evidence Activity

Is Evidence
Present in
File

Activity 1.10

ACX Municipality has a Vehicle Repair Department that uses job costing to
record its activities.
The department took in a vehicle from the Roads Department for an
overhaul on 1 March 2007.

The following information is available for the job:

Job number
Parts
Oil
Labour hours
Labour rate per hour

1476WH
R 1,200
R 200
20 hours
R 25

Overhead is allocated to jobs based on labour hours.

The total overhead for the month was R280,000 and the total number of
labour hours was 260 hours.

Prepare the job cost sheet given below for the job, and determine what the total
cost for the job was.
POHR = R280 000 / 2 800 = R100

Activities based on Unit 2:

Compile costing information for management control
ACTIVITY NO 2.1:

Evidence Activity

Is Evidence

Present in File
Activity 2.1
1.1.1

Calculate the total variable cost that is incurred if the activity

levels in the table occur.

The gravel used to pave roads cost R 50 per metre square.

Square metre paved

300 m2 is paved

Variable cost per

m2 paved
R50

Total variable cost

R15 000

2 000 m2 is paved
R50
R100 000
1.1.2 Draw a graph to illustrate the behaviour of the material cost

Evidence Activity

Is Evidence
Present in File

Activity 2.2

Suppose that the Public Roads Department of a municipality owns a

single compactor that costs R500 000.
The depreciation on this compactor is R25 000 per year.
Calculate the depreciation cost per square metre and in total:

Square metre paved

300 m2 is paved
2 000 m2 is paved

Fixed cost per

m2paved
R83.33
R12.50

Total fixed cost

R25 000
R25 000

ACTIVITY NO 2.3:

Evidence Activity

Is Evidence
Present in File

Activity 2.3
Suppose that the Public Roads Department of a municipality owns a

single compactor that cost R500 000.

The depreciation on this compactor is R25 000 per year for up to 1000
square meters of paving.
For amounts of paving between 1001 and 2000 square meters an
additional compactor will need to be purchased at the same cost and
depreciation as the original compactor.

Calculate the depreciation cost per square metre and in total:

Square metre paved

300 m2 is paved
1 000 m2 is paved
1 000 m2 is paved

Fixed cost per

m2paved
R83.33
R25
R25

Total fixed cost

R25 000
R50 000
R50 000

ACTIVITY NO 2.4:

Evidence Activity

Is

Evidence

Present in File
Activity 2.4

Think of other types of mixed cost that are relevant in a

municipality.
Telephone account: The institution may pay a fixed monthly costs
up to a certain from which costs vary per usage.
Rent: The municipality may pay a fixed monthly costs up to a
certain from which costs vary per additional space required.
Insurance: The municipality pays a set premium to the maximum
claim point agreed with insurer from thereon additional charges

apply.
Remuneration for short-term labourers: the remuneration of shortterm labours may be fixed for the 8 working hours after which
variable costs will apply commensurate to the hours and type of
skills procured.
Machinery: some machinery is leased at a fixed rate per month but
the additional charges may be levied depending on whether
production output exceeds the contractual value

ACTIVITY NO 2.5:

Evidence Activity

Is Evidence
Present in File

Activity 2.5
Based on the above costs calculate the total cost of the following levels

of activity.
Note: The costs can be found after Activity 4 in your learner manual (pg
44 & 45).

Calculation of the
Days Stayed

23 days
147 days

total

Total fixed + variable cost

variable cost
R70.59 x 23 =

R1 623.57 + R3 800

R1 623.57
R70.59 x 147 =

=R5 423.57
R10 376.73 + R3 800

R10 376.73

=R14 176.73

ACTIVITY NO 2.6:

Evidence Activity

Is Evidence
Present in File

Activity 2.6
Based on the above costs calculate the total cost of the following levels

of activity.
Note: The costs can be found after Activity 4 in your learner manual (pg
44 & 45).

Calculation of the
Days Stayed

23 days
147 days

total
variable cost
R70.59 x 23 =

Total cost i.e. variable +

fixed costs
R1 623.57 + R3 800

R1 623.57
R70.59 x 147 =

=R5 423.57
R10 376.73 + R3 800

R1 623.57

=R14 176.73

ACTIVITY NO 2.7:

Evidence Activity

Is Evidence
Present in File

Activity 2.7
A local municipality wants to determine the cost function for the total cost

of a local recreation centre, so that it can plan its costs in future more
accurately.
It was determined that there is a relationship between the number of
people who use the centre in a month and the cost incurred.

The following information was provided:

Month
January
February
March
April
May
June
July

Number of
users
56
71
50
65
73
80
62

Cost
R 790
R 850
R 740
R 820
R 910
R 980
R 780

2.7.1

Determine the cost function for the centre, using both

i.

a scatter graph and

ii.

the high-low method.

i)

Scatter Graph

ii)

High-Low Method

Variable Costs = Y2 Y1
X2 X1
= R9 100 R7 900
73 56
= R70.59

Fixed Costs = R380 (As a rule of thumb)

High
Low

Number of Users
80
50

Cost (R)
R980
R740

Difference

30

= 240/30
=8
Variable Cost = 8 x 80 = R640
Total Cost = R980 (High Activity)
Fixed Cost = R980 R640 = R340

R240

Total Cost = Variable Cost + Fixed Cost

Total Cost = R640 + R340
= R980

2.7.2

Now determine the cost for August and September if it is

expected that 78 and 102 users will use the facilities for these two

months.
Total cost for 78 users:
= (8 X 78) + 340
=R624 + R340

Total Cost = R964

Total cost for 102 users:
= (8 X 102) + 340
= R816 + R340
Total Cost = R1156

ACTIVITY NO 2.8:

Evidence Activity

Is Evidence
Present in File

Activity 2.8
The following information relates to a contract for transporting municipal

workers during May 200X:

Fuel and other variable overheads

R 92 000

Fixed costs:

Drivers wages and UIF

R 15 200

Other fixed overheads

R 230 000

Number of kilometres travelled

2 600 Km

Calculate the cost per kilometre under

a. Full absorption costing
=92 000 + 15 200 + 230 000
2600
= R129.69

a. Variable (marginal) costing:

=92 000/2 600

= R35.38

ACTIVITY NO 2.9:

Evidence Activity

Is Evidence
Present in File

Activity 2.9
2.9.1

Complete the following flexed budget for a department in the LQ

Municipality.
2.9.2

Also prepare a reconciliation of the actual surplus with the flexed

budget surplus.

Note: The municipality plans for a surplus in order to subsidise the

prepaid electricity meters to its poorer suburbs.
LQ Municipality install prepaid electricity meters in houses in the
local community, where requested to do so by the individual

ratepayers and homeowners.

In suburb Z the municipality planned to install 125 units but due to
economic pressures demand for prepaid meters declined to only
120 units during this reporting period

Unit
data

Budget

Actual

(125

(120

hours)

hours)

Revenue

R2,200
R

275,000
R
229

240,000
R

Cost of revenue

1,835

375
R

221,812

100,000

R 95,940

Material A

R800

Flexed
budget
(120

Variance

hours)
264,000

-R24000
-R1612

R
000

96
+R60

RECONCILIATIONS
Flexible Budget

R43 800

Material A

60

Material B

- R 5 060

A-Workers

-R

B-Workers

- R 1 188

360

Variable Overhead

+ R 1 536

Fixed Overhead

+R 3400

Deviation Revenue

-R24 000

Total

R18 188

ACTIVITY NO 2.10:

Evidence Activity

Is Evidence
Present in File

Activity 2.10
Assume the income statement below was prepared for the bus service of

FHG Municipality.

Calculate the contribution margin ration for the following

municipality department to determine how much of each Rand of
revenue contributes towards paying for the fixed expenses of R 4
000 for operating this service:

Contribution income statement

Per
Service revenue (2,000 services)
LESS: Variable expenses
Contribution
LESS: Fixed expenses
Net surplus/(loss)

R
10,000
4,000
6,000
4,000
2,000

service
R 5.00
R 2.00
R 3.00

%
100%
40%
60%

Contribution margin = Contribution X100

Revenue

= 6 000/10 000
= 60%

ACTIVITY NO 2.11:

Evidence Activity

Is Evidence
Present in File

Activity 2.11
Use the same contribution income statement as for Activity 10.

Calculate the breakeven point in terms of cost units and in Rand by using
the above formulae This is to be found on pg 82 of the learner manual.

BEPservices = Fixed Expenses/Contribution per service

=R4 000/R3.00
=R1 333.33
BEPrand = Fixed Expenses/Contribution Margin

= R4 000/0.6
=R6 666.67

ACTIVITY NO 2.12:

Evidence Activity

Is Evidence
Present in File

Activity 2.12

Let us further examine the graph of FHG Municipalitys bus service.

What other useful decision-making information do you think can be
derived from such a graph?
Note: Place your notes for this activity here.

The break-even point shows the level where the total cost and the total
revenue are equal. The graph indicates that FHG Municipality needs to
sell more or less 1 380 bus tickets in order to break even. The
municipality incurs R4 000 in fixed expenses, this means even if no
tickets are sold the municipality will still incur costs.
At 850 tickets the municipality is able to cover the fixed costs. The area
above the break-even point shows the surplus area of the municipality.

ACTIVITY NO 2.13:

Evidence Activity

Is Evidence
Present in File

Activity 2.13
Suppose the municipal department in Activities 10 and 11 want a target

surplus of R6,000 on the statement of financial performance at the end of

the financial period.
2.13.1 Calculate the target number of cost units that must be delivered in
order to reach the target surplus.

Target revenue services = [Fixed expenses + Target surplus]

Contribution per service

= [6 000 +4 000]
R3.00
= R3 333.33
2.13.2 Also indicate what the Rand value of the target revenue will be.

Target revenue rand = [Fixed expenses + Target surplus]

Contribution margin

= [6 000 +4 000]
0.60
= R16 666.67

ACTIVITY NO 2.14:

Evidence Activity

Is Evidence
Present in File

Activity 2.14
Still using the break-even point information from Activity 9, calculate the

margin of safety if actual revenue is derived from 3000 cost units or

R15 000.

Margin of safety rand = Actual revenue Break-even revenue

= R15000 - R6666
= R8334
OR
Margin of safety services = 3000 - 1333

= 1667 services
OR
Margin of safety % = Actual revenue Breakeven revenue
Actual revenue
= 8334
15 000
= 56%
By what % can revenue decrease before break-even point is reached?

The margin of safety indicates that revenue can decrease by 56% before
the break-even point is reached.

ACTIVITY NO 2.15:

Evidence Activity

Is Evidence
Present in File

Activity 2.15
Assume the municipal department in the previous examples delivers

3,000 services.
Calculate the operating leverage if the following income statement
applies:

Service revenue (3000 services)

LESS: Variable expenses
Contribution
LESS: Fixed expenses
Net surplus/(loss)

R
15,000
6,000
9,000
4,000
5,000

Operating leverage =Contribution

Net surplus
=9 000
5 000
=1.8
This means that the contribution covers fixed expenses 1.8 times. The
higher the figure, the less risky is the municipalitys operations.

ACTIVITY NO 2.16:

Evidence Activity

Is Evidence
Present in File

Activity 2.16
Do a sensitivity analysis for the one library of ABY Municipality, by

calculating the effect that the three proposals will have on the
i.

contribution margin,

ii.

the BEP and

iii.

on the margin of safety.

The library had the following financial results in the past financial year:
Per
Revenue (48,000 members)
Variable expenses
Contribution
Fixed expenses
Net surplus

R
1,200,000
420,000
780,000
520,000
260,000

member
R 25.00
R 8.75
R 16.25

%
100%
35%
65%

ADBs CFO wants to improve the librarys surplus, seeing that revenue has recently
decreased as a result of increased competition from second-hand bookshops.
They want to know what the effect will be if the following changes introduced.
The changes are mutually exclusive, meaning that only one can be implemented.

Proposed Changes:
a.

Launch an advertising campaign of R60,000 whereby school children are told about
the librarys benefits. The expectation is that this will increase the number of members
by 5%.

b.

Purchase high quality books which will increase the variable costs per unit to
R12.60. This is expected to be attractive to richer residents and is expected to increase
the number of members by 15%.

c.

Reduce the membership fee to R15.00. This change, together with an advertising

campaign of R30,000, is targeted on the poorer residents and is expected to increase

total members by 20%.
Baseline

Contribution Margin =

780 000.00
1 200 000.00

0.65

BEP Members =

520 000.00
16.25

= 32 000.00

BEP Rand =

520 000.00
0.65

= 800 000.00

Margin of Safety Rand =

1 200 000.00 800 000.00

= 400 000.00

Margin of Safety Members =

48 000.00 32 000.00

=16 000.00

Option a:
Increase members by
5%

Option A

Revenue

Members

Contribution
Fixed Expenses

50 400.00

Advertising increases fixed costs

by R60000

1 260 000.00

25.00

441 000.00

8.75

819 000.00
580 000.00

16.25

Option b:
Increase members by
15%

Option B

Revenue

Members
Variable
Expenses
Contribution
Fixed Expenses

55 200.00

Increase Variable cost to R12.60

1 380 000.00

25.00

695 520.00

12.60

684 480.00
520 000.00

12.40

Option c:
Increase members to
57600

Option C

Revenue

Members

57 600.00

Increases fixed costs by R30000

864 000.00

15.00

Variable Expenses

504 000.00

8.75

Contribution
Fixed Expenses

360 000.00
550 000.00

6.25

ACTIVITY NO 2.17:

Evidence Activity

Is Evidence
Present in File

Activity 2.17
Think of some examples of the above costs that you may have seen in

the municipal environment you work in.

Note: The costs being referred to are those discussed in 8.7 of the
learner guide.
Activity Notes
Avoidable Costs, Differential costs, Incremental costs, sunk costs,

opportunity costs.
Examples:

Keeping or replacing equipment replacement costs

Dropping or retaining a division or department of a municipality

Appointment of consultants

Decision on whether a special order should be accepted or not

Determining the best use of a constrained resource

Establishing whether a joint product should be sold at the split-off

point or processed further.

ACTIVITY NO 2.18:

Evidence Activity

Is Evidence
Present in File

Activity 2.18
What would you do if the cost-benefit analysis of a replace/dont replace
exercise shows a difference of only R500 more for the new fleet?

Tip:

Explain what decision you would make and why you would make
this decision.

The most determining factor is whether the benefits outweigh costs.

Therefore, if it would cost the municipal in time and other resources more
than R500, it should not be accepted. It must also be established if the
R500 is an ongoing benefit or once-off. Furthermore it must be
established whether other benefits will be derived from a new fleet.

ACTIVITY NO 2.19:

Evidence Activity

Is Evidence
Present in File

Activity 2.19

What other factors (costs or otherwise) can you think of that need to be
taken into account in a decision such as the one above where dropping
a line of service is considered?

There are a variety of factors that need to be considered. The first factor
may be whether that decision will result in real cost-saving for the
municipality. The municipality may also consider whether that decision
gives it competitive advantage of having the service available to
consumers. The consumers that will stop using other services as a result
of the specific service not being available any longer.

ACTIVITY NO 2.20:

Evidence Activity

Is Evidence
Present in File

Activity 2.20

What other factors (costs or otherwise) can you think of that need to be
taken into account in a decision such as the one above where
outsourcing a function is considered?

A factor to consider may be whether the decision will lead to enhanced

performance by the municipality as a result of better quality etc. When
the function is delivered by a service provider that does not have vested
interest in the municipality, that can lead to enhanced performance or it
can minimise it.
The municipality needs to consider whether it has the capacity to
manage the performance contract of a service provider as if the service
provider is not efficiently managed, this may lead to ineffective

ACTIVITY NO 2.21:

Evidence Activity

Is Evidence
Present in File

Activity 2.21

Can you think of any other qualitative factors that need to be taken into
account when decisions are made?

Internal capacity
Municipalitys constitutional obligation to deliver services

Employee motivation and satisfaction

Municipalitys contribution to national and provincial budgets and

outcomes
Quality of products or services
Customer satisfaction

Effect on future operations

ACTIVITY NO 2.22:

Evidence Activity

Is Evidence
Present in File

Activity 2.22
ABC Municipality has asked you to advise them on the following situation.

The CFO has recently reported a large adverse variance in the usage of material (using
more material than planned). An initial investigation has shown that the variance is caused
by a faulty machine.
The workshop supervisor is trying to decide whether to close down the machine for a day to
allow engineers to perform emergency maintenance work that could rectify the problem.
Past experience of investigating material usage variances suggests that there is a 70%

chance of correcting the fault. If the emergency maintenance work is not carried out now it is
estimated that extra material costs of R600,000 per month for the next six months will be
incurred. After this time the problem will definitely be corrected by scheduled maintenance
work during the municipalities scheduled shut down of this section.
Two maintenance engineers would be required to carry out the emergency maintenance
work. Maintenance engineers are paid R250,000 per annum and each engineer works for
250 days each year. There is currently surplus capacity in the maintenance department. The

emergency maintenance would use parts costing R100,000. These parts would have to be
replaced again during the scheduled annual maintenance. Emergency maintenance would
involve stopping production for a day resulting in lost production with an estimated income
value of R1,600,000, direct material cost of R450,000 and direct labour cost of R900,000.
Direct labour would continue to be paid during the one-day stoppage. In this time the
otherwise idle labour would be used to repaint the departments premises, saving R70,000 in
outside painting contractor costs. The municipality carries no stocks of the product and there
is an unlimited demand for the product.

Required:
Using relevant cost principles, calculate whether the emergency
maintenance should be performed.
Expected benefit of investigation:

Expected benefit of investigation:

Saved material costs R600 000 x 70% x 6 months = R2 520 000.

Costs of investigation:

Engineers salaries are deemed irrelevant;

Parts

R100 000

Lost sales

R1 600 000

Saved DM cost

R 450 000

Saved painting

R 70 000.

Net benefit

R 300,000.

Benefit of R300,000 and should therefore be pursued.

Activities based on Unit 3:

Prepare cost performance reports using variance analyses techniques
ACTIVITY NO 3.1:

Evidence Activity

Is Evidence
Present in File

Activity 3.1
TT Municipalitys Roads Department uses 10 litres of a tar for a square
meter of road repair, which cost R10 per litre, and 10 labour hours.
The labour rate is R25 per hour. Variable overhead is charged at R4 per
labour-hour and the predetermined overhead rate for fixed overhead is
R2 per labour hour.

Calculate the standard cost per unit using absorption and variable
costing.

Material
Labour
Variable

Resources

Standard

Required
10 litres
10 hours
10 labour hours

cost
R10
R25
R4

Standard cost per unit

Absorption
Variable
costing

costing
R100
R250
R40

R100
R250
R40

overhead
Fixed overhead

10 labour hours

R2

R20
R410

R390

ACTIVITY NO 3.2:

Evidence Activity

Is Evidence
Present in File

Activity 3.2
Use the following information to calculate:

i.

All revenue,

ii.

Material,

iii.

Labour, variable overhead

iv.

and fixed overhead variances for the department and

v.

Reconcile the budgeted surplus with the actual surplus

afterwards.

The following information was used to set a budget for a municipal

department for its financial year:
Number of services delivered

450

Fee per service

R 675

Standard costs per service:

Materials (12 kg at R18.75 per kg)
Labour (6 hours at R8.00 per hour)

R 225
R 48

Variable overhead (R22.00 per labour-hour)

Fixed overhead*

R 132
R 45,900

Standard surplus per service

R168
*An absorption costing system is in use, with a predetermined overhead
rate based on 2,700 labour hours.

The actual results for the period were:

Number of services delivered

480

Revenue

R 333,600

Direct materials (15.2 kg per unit at R15 per kg)

Direct labour (5 hours at R8.58 per hour)
Variable overhead (R 25.30 per labour-hour)

R 109,440
R 20,592
R 60,720

Fixed overhead

R 46,500

Surplus

R 96,348

Materials price variance

AQ x AP
AQ x SP

15.2 kg x 480 services x R15

15.2 kg x 480 services x R18.75

Materials quantity variance

AQ x SP
15.2 kg x 480 services x R18.75
SQ x SP
12 kg x 480 services x R18.75
Labour rate variance
AH x AR
AH x SR

5 hours x 480 services x R8.58

5 hours x 480 services x R8.00

R 109,440
R 136,800
R 27,360 favourable
R 136,800
R 108,000
R 28,800 unfavourable
R 20,592
R 19,200
R 1,392 unfavourable

variance
AH x SR
SH x SR

5 hours x 480 services x R8.00

6 hours x 480 services x R8.00

R 19,200
R 23,040
R 3,840 favourable

Variable overhead spending variance

AH x AR
5 hours x 480 services x R25.30
AH x SR
5 hours x 480 services x R22.00

R 60,720
R 52,800
R 7,920 unfavourable

Variable overhead efficiency variance

AH x SR
5 hours x 480 services x R22.00
SH x SR
6 hours x 480 services x R22.00

R 52,800
R 63,360
R 10,560 favourable

Fixed overhead budget variance

Actual
Provided
Budgeted
Provided

R 46,500
R 45,900
R 600 unfavourable

Fixed overhead volume variance

450 services x 6 hours per service x
Budgeted
R17
480 services x 6 hours per service x
Applied
R17

R 45,900
R 48,960
R 3,060 favourable

Selling price variance

AQ x AP
AQ x SP

Provided
480 services x R675

R 333,600
R 324,000
R 9,600 favourable

Sales volume variance

AQ x SP
SQ x SP

480 services x R168

450 services x R168

R 80,640
R 75,600
R 5,040 favourable

Predetermined overhead rate:

POHR = Estimated overhead cost
Estimated activity levels
= 45 900
2 700

=R17.00 per labour hour

Reconciliation of budgeted profit to actual profit

Budgeted profit

R 75,600

Sales

Volume variance
Price variance

R 5,040
R 9,600

Materials

Price variance
Quantity variance

R 27,360
R -28,800

Rate variance

R -1,392

ACTIVITY NO 3.3:

Evidence Activity

Is Evidence
Present in File

Activity 3.3

PLC Municipality purifies water obtained from natural resources.

The ingredients and labour to provide the purified water are standardised with all portions
strictly monitored and controlled.
The following is a standard cost card for the purification process:
Chemicals
Engineers costs

0.1 kilograms at R160 per kilogram = R16,00;

10 minutes at R60 per hour = R10,00;

 Fixed overhead

30 minutes at R10 per hour = R5,00

Total Cost

= R31,00

Fixed overhead absorption rates are based upon budgeted daily overheads of R11,000 and
a budgeted daily supply of 2200 mega litres purified water.
i.

In the most recent month 2400 mega litres water were purified using 480
kilograms of chemicals.

The purification department purchased the 480 kilograms of chemicals at R150

per kilogram.
380 direct labour hours were worked and paid at R60,50 per hour.
Actual fixed overheads were R11,000.

Required:
3.3.1

Calculate the following variances from the standard cost for the
specific day:

i.

Raw material price:

R160 R150 = R10/kg x 480kg =

ii.
Raw material usage:

R4800 F

0.1kg x 2400meals = 240kg. Act 480kg.

Difference 240kg x R160/kg =
iii.
Labour rate:

R38 400 U

R60 R60,50 = 0.50/hr x 380hrs =

R190 U
iv.

Labour efficiency:

10min x 2400 meals = 24000min or 400 hrs.

Actual 380hrs. Difference 20hrs x R60 =

R1200 F

v.

Fixed overhead price:

R11 000 R11 000 Actual

0
vi.

Fixed overhead volume:

2400 meals R2200 meals = 200 meals

x R5 =

R1000 F

3.3.2

Explain the meaning and possible causes of the raw material

and fixed overhead variances you have calculated in part
(a).

RM price: unplanned discount or price reduction new supplier.

RM usage: Poorer quality of RM or poor workmanship or wastage or theft
etc.

f/o price: no effect on pricing at all budget cost equalled actual cost of
fixed overheads.
Volume: More units produced in order to absorb overhead.

3.3.3

Prepare a statement reconciling the standard cost of

preparing the purified water to the actual cost of the water

showing all the variances calculated in (a) above.

Standard cost R31 per mega litre purified water x 2400 mega litre
purified water = R74,400
Variances:

MPV
MUV
LRV
LEV
O/H P
O/H V
Net variance

4 800
38 400
190
1 200
1000

31 590

Actual cost of mega litres R74 400 + R31 590 R105 990
purified water:

Proof:

DM 480kg x R150/kg
=

R72 000

DL 380hrs x R60.50

R22 990

O/H
Total

R105 990

R11 000

Place a divider between each of the 4 case studies

Evidence Activity

Is Evidence
Present in File

Case study 1

The ABC Municipality operates a holiday resort in the Magaliesberg mountains on the
outskirts of Rustenburg.

The lodge at the resort has 50 rooms that are let for R120 per night regardless of the
number of people occupying the room.

The variable cost per occupied room is R18 per room per night. (A room night
represents one room occupied for one night.)

The average number of guests per room per night is 1.5.

On average, each guest spends R56 00 per night in the lodge restaurant.

The restaurant contribution to sales ratio is 40%.

June
Rooms rented (w1)
Income rooms
Restaurant (w2)
Total income
Contribution:
Room rentals (w3)
Restaurant (w4)

July

August

961
115 320
80 724
196 044

504
60 480
42 336
102 816

520
62 400
43 680
106 080

98 022
32 290

51 408
16 934

53 040
17 472

Total contribution

130 312

68 342

70 512

Fixed Costs

84 400

84 400

84 400

Surplus
W1 June nights = 115 320/120 per night

45 912

(16 058)

(13 888)

= 961 room nights

July nights

= R60 480/120 per night

= 504 room nights

August nights = 62 400/120 per night

=520
W2 June restaurant = 961 room nights X 1.5 guests X R56/guest
= R80 724
July restaurant = 504 room nights X 1.5 guests X R56/guest
= 42 336

August restaurant = 520 room nights X 1.5 guests X R56/guest

= 43 680

W3 June room contribution = room nights X contribution

= 961 x (R120 R18)
= R98 022
July room contribution = 504 x (R120 R18)
= R51 408

August room contribution = 520 x (R120 R18)

= R53 040
W4 June restaurant contribution = Restaurant Sales x contribution sales ratio
= R80 724 x 40%
= R32,290
July restaurant contribution = R42 336x 40%
= R16 934

August restaurant contribution = R43 680 x 40%

= R17 472
Break-even = Fixed Costs/contribution per room per night
= R84,400/R135,60
= 622.4 rooms
W5 total contribution/number of room nights = total contribution/number of room nights
For June = R130,312/961

= R135,60

MEMORANDUM
To:

Municipal Manager

From:

H. Maigurira
Senior Manager Resonance Institute ``````

SUBJECT: BASIS FOR LODGE CLOSURE

DATE: 31 December 2014
The information regarding the activity of the lodge has been analysed to better inform the
response to the proposal for the closure of the lodge in July and August 2008. The analysis
included the trend in the occupation of rooms as well as spending by the guests both on

accommodation as well as restaurant sales which are the biggest revenue drivers for the
lodge.
The current information shows that the occupation of the lodge as well as the spending in
the restaurant was extremely lower in July and August 2007 as compared to June 2007.
While this information shows that there were losses incurred in these two months, it does not
provide longitudinal trend to have full analysis of the behaviour of these two costs drivers
during these months. Therefore to make a decision to close the lodge based on the analysis

of one year may not be sound. Additional information will need to be provided for a much
more detailed analysis. This information can include, spending data for the previous five
years, budgeted and actual data for comparisons.
Since the usage of the lodge is deemed to be seasonally, deeper analysis will need to be
performed to see if there were any changes to the external conditions in 2007 that could
have affected the usage of the lodge and whether those factors are seasonal or not. Further
considerations need to be made whether the lodge will incur any fixed costs during closure

such as salaries and maintenance costs. Additional costs may also be incurred in advertising
the closing and re-opening of the lodge.
A full and comprehensive cost-benefit analysis is required before this decision is taken.
Kind Regards,
H. Maigurira
Evidence Activity

Is Evidence

Present in File
Case study 2
ABC Municipality purifies water before it enters the reticulation network.

There are currently three purification processes available to the municipality.

These processes are referred to as A, B and C.

Budgeted costs and purification information for the coming period is as follows:
Service
A
B
C

(all per 1000 kiloliters)

Costs:
Direct Materials
Direct labour
Equipment hours
Labour hours
Output in 1000kl
They are usually produced

R120
R100
R42
R42
6hrs
6hrs
0.1hr
0.1hr
1200
1000
in production runs of

R60
(Chemicals etc)
R28
4hrs
0.02hrs
800
10,000 kl and distributed to

consumers in batches of 5,000 kl.

The municipality uses a cost plus 20% mark up in order to calculate prices.

Budgeted purification fixed overhead is absorbed using equipment hour rate

and the budgeted overhead for the coming period and has been analysed as follows:
Rent,
supervision,
power
and R260000;
depreciation
Set up costs
Goods (Chemicals) inwards
Quality inspection
Reticulation
Total

R150000;
R96000;
R52500;
R97500.
R656000

Budgeted equipment hours for the period are 16400 hours

Required:
(a)
i.

Calculate the budgeted total cost per 1000 kl for each process, showing
clearly the prime cost, overhead cost and total cost;

ii.

Using your total cost estimates from (a) (i) and a mark up of 20% on cost,
calculate the budgeted price per 1000kl of each of the three processes.

(b) The municipal manager of the municipality has complained that the neighbouring
municipality is able to purify its water to its constituents at a considerable reduction in
cost.
ABC Municipalitys price on process C on the other hand is lower than that of the
neighbouring municipality.

The MM believes these cost differences are caused by the neighbouring municipality
using an activity based costing (ABC) system to cost processes, and a cost plus 20%
on total activity based cost to calculate prices.
In an attempt to make the municipalitys costing more accurately reflect the usage of
resources by services you have ascertained that the cost drivers for the overhead activities
are as follows:

Cost Pool
Rent, supervision,

power

Cost driver
& equipment hours

Budgeted driver activity

16400 hours;

depreciation
Set up costs
No purification runs
300;
Goods inwards costs
No requisitions
120;
Quality inspection costs
No purification runs
300;
Reticulation costs
No distribution units
600.
In order to test the costing principles, the number of requisitions raised by goods inwards
(chemical orders) was 40 for each process and the number of distribution units was 60.

Required:
(b)
i.

calculate the budgeted cost driver rate for each activity;

ii.

calculate the budgeted total cost per 1000kl for each service using activity
based costing approach;

iii.

using your total cost estimates from (b) (ii) and a mark up of 20% on total cost,
calculate the price per 1000kl of each of the three services. Comment briefly on

the causes of any changes in prices.

(c) Describe three benefits which might result from the introduction of an activity based
costing system.
(d) Describe two circumstances in which activity based costing would be more appropriate
approach to services costing than traditional approaches to overhead absorption

CASE STUDY 2
a) Budgeted total per 1000kl
ITEM

Materials - Chemicals
Labour
Prime Cost
Overhead
Total Cost

120
42
162
240
402

Overhead Cost:
Budgeted Overhead: R656 000
Budgeted Hours:

16 400

100
42
142
240
382

60
28
88
160
248

=R656 000/16 400 = R40/hr

Overhead Cost per 1000kl
A: R40 X 6hrs = R240
B: R40 X 6hrs = R240
C: R40 X 4hrs = R160
ii) Absorption Costing Method

ITEM
Total Cost
Mark up on Cost

B
R402.00
R482.40

C
R382.00
R458.40

R248.00
R297.60

b) (i) Cost driver rates

Cost Pool
Rent, Supervision,
power

R
260 000

Driver
Equipment hrs

Driver Activity
16 400 hrs

Driver Rate
R15.85/equip hr

Set up costs
Goods inwards
Quality testing
Reticulation

150 000
96 000
52 500
97 500

Purification runs
Requisitions
Purification runs
Distribution units

300
120
300
600

R500/run
R800/requisition
R175/run
R162.50/unit

ii)

Service

Overhead Cost

Rent, Supervision, power R15.85 X6hrs

A
R95.10

B
R95.10

C
R63.40

(4)
Set up: (1 200 000kl/10 000kl) = 120 runs/

R50.00

R50.00

R50.00

1200 X R500
Good inwards R800 X (40/1200)

R26.67

R32.00

R40.00

Quality testing

R17.50

R17.50

R17.50

(1,200,000kl/10,000kl) =120
runs/1200 x R175
Reticulation: (1,200,000/5,000kl)
=240/1200 x R162,50 =
Total Overhead Cost

R32.50

R32.50

R32.50

R221.77

R227.10

R203.40

Prime Cost

A
R162

B
R142

C
R88

Overhead Cost (C3)

Total Cost

R221.77
R383.77

R227.10
R369.10

R203.40
R291.40

A
R383,77
R460,52

B
R369.10
R442,92

C
R291,40
R349.680

(iii) Budgeted Price /1000Kl

Service
Total Cost
Markup on cost (Total Cost+20%)

c) Three advantages of ABC:

Unit costs calculated under ABC should more accurately reflect the activities performed
and resources used to produce the service;

ABC can help in distinguishing between profitable and unprofitable services;

By focussing attention on cost drivers it will help managers understand and manage
overhead cost;

d) Most useful ABC

Overheads form a high portion of total cost;

More than one service is provided;

Different services result in different levels of activities and resource consumption;

Where overhead expenditure is not driven by volume of output, but by the complexity
and diversity of operations.

Evidence Activity

Is Evidence
Present in File

Case study 3
The general technical department of ABC Municipality has been requested to provide a fixed
price quotation for some building work required by the local community crche run by the
municipality.
The technical department have been instructed by the council to base its projection of costs

on a break even principle.

The following figures and notes were provided to you by the technical department and the
CFO to be used as a basis for the quotation:
Direct materials:
Bricks 200,000 at R100 per thousand
100,000 at R120 per thousand
Other materials

R20000
R24000
R5000

note 1;
note 2;

Direct Labour:
Skilled 3200 hours at R12 per hour
Unskilled 2,000 hours at R6 per hour
Other costs:
Scaffolding hire
Depreciation on machinery
General overheads 5,200 hours at R1 per hour
Plans
Total Cost and suggested price

R38400
R12000

note 3;
note 4;

R3500
R2000
R5,200
R2000
R112100.

note 5;
note 6;
note 7;
note 8.

Notes:
1. The contract requires 400,000 bricks, 200,000 are already in stock and 200,000 will have
to be bought in. This is the standard type of brick regularly used by the department. The
200,000 bricks in stock were purchased earlier in the year at R100 per 1,000 bricks. The
current replacement cost of this type of brick is R120 per 1,000. If the bricks in stock are
not used in this job, the department are confident that they will be able to use them later
in the year for other jobs.

2. Other materials will be bought as required; this figure represents the purchase price.
3. A construction manager will be needed on site whilst the building work is performed. The
manager could do 800 hours of the skilled work himself. The remainder of the skilled
work will be done by skilled workers from the department at the above rate i.e. R12 an
hour. If the manager does not undertake this skilled work he could work on other existing
projects at R12 per hour or spend 800 hours on a new project. The new project will
require R12000 in labour if the manager is not utilised on the new project.
4. The department employs four unskilled workers on contracts guaranteeing them a 40

hour week at R6 per hour. These unskilled workers are currently idle and would have
sufficient spare time to complete the proposal under consideration.
5. This is the estimated cost of hiring scaffolding.
6. It is estimated that the project will take 20 weeks to complete. This represents 20 weeks
straight line depreciation on machinery used. If the machinery is not used on this job it
will stand idle for the 20 weeks.
7. This represents the rental cost of using the facilities next door to the crche for storing
the materials and equipment. If the job is not undertaken, these storage facilities could

be rented out to an outside tenant for R500 per week for the full duration of the 20
weeks.
8. This is the cost of the plans that the department drew up for the crche work two years
ago when this project was originally identified.
The CFO is surprised at the suggested price and considers it rather high.
He knows that the council have earmarked this project as a priority at the lowest possible
cost to the crche and the community that uses this facility.

Required:
Write a memorandum to the CFO. Using relevant costing principles, calculate the lowest
price that the department could quote the crche for this work.
Explain your treatment of each item in the estimate.

Case Study 3

MEMORANDUM
To:

Chief Financial Officer, CFO

From:

Henry Maigurira
Resonance Institute of Learning

SUBJECT: DEPARTMENTAL QUOTATION FOR THE CRECHE

This memo provides information on the lowest price that the Department could quote
for the crche.
Different items are quoted below with the relevant explanatory note for each item.

Minimum price to be quoted

Relevant
explanatory
note

Direct materials
Bricks
Other materials
Direct Labour
Skilled Labour (2000hrs X R12/hr +R12 000)
Unskilled Labour
Scaffolding Hire
Depreciation
General Overheads
Plans
Total Cost

48 000
5 000

Note 1
Note 2

40 800
3 500
10 000
107 300

Note 3
Note 4
Note 5
Note 6
Note 7
Note 8

Explanatory Notes:

Note 1: All bricks are charged at replacement cost as they are regularly used in the
municipality and those in stock will need to be replaced at R120 per 1,000;

Note 2: Charged at their incremental purchase price; The construction managers labour is
charged at its value in its best alternative use (opportunity cost). If not working on the project
he could do work on existing projects for 800 hours at R12/hr = R9600 or save
Note 3: R12000 by working on the new project himself as opposed to outsourcing it at
R12000. The latter is the best alternative use of his time. The remainder of the skilled labour
is charged at its incremental cost of R12/hr.

Note 4: There is no incremental cost of using unskilled labour on this project.

Note 5: This is the incremental hire cost.
Note 6: Depreciation is not an incremental cash flow. The value of the asset is not affected
by the project, therefore there is no cost attached to using it.

Note 7: The value of the next door storage premises in its best alternative use is R500 x 20
weeks = R10 000.
Note 8: The work has already been done and its cost is sunk, therefore irrelevant.

Evidence Activity

Is Evidence
Present in File

Case study 4
The Chief Financial Officer of the XYZ Municipality has heard of Activity Based Costing
(ABC) and wants to implement it in the municipality.
However, because ABC involves a number of changes to how service costs are determined,
he has decided to implement it only in the Refuse Department at first. He has asked you to
help him with this major task.
The CFO was able to provide you with the following income and expenditure information:
1.

Consumers are charged differently according to the services they require:

Per

Income
Availability Charge (Per consumer type)
1st Consumption per Unit (Container type or size)
2nd Consumption per Unit (Frequency of collection)

consumer
Flat rate
Normal bin
Large container
Daily
Weekly

per month
R20
R10
R150
R50
R20

1. The following overhead costs are incurred in a normal month:

Overhead expenditure (per month)

Administrative

Employee Related Expenses

Repairs and Maintenance
General Expenses

R140
R500

Part of the
removal process
R380
R11 500

* Printing and Stationery

* Insurance
* Vehicle Running Costs
* Consumables & Small Equipment
* Depreciation (Direct and Indirect)
* Purchases of refuse bins for re-sale

R1 000
R850
R460

R2 000
R17 000
R590
R27 500
R8 540

2. After some research with a consultant, it was determined that the following activity
measures apply to the Refuse Departments overhead costs:

Expected activity

Overhead expenditure (per month)

Activity measure

Employee-Related Expenses
Repairs and Maintenance
General Expenses:
* Printing and Stationery
* Insurance
* Vehicle Running Costs
* Consumables & Small Equipment
* Depreciation (Direct and Indirect)
* Purchases of refuse bins for re-sale

Number of employees
Kilometres travelled

per month
210 employees
10 000 km

Number of consumers
Kilometres travelled
Kilometres travelled
Number of consumers
Not applicable
Number of bins purchased

1 800 consumers
10 000 km
10 000 km
1 800 consumers
R550 000
180
ns

3. All office or administrative assets are rented and is therefore not insured (the owner
carries the cost of insurance) and also not depreciated.

4. Depreciation of vehicles is not allocated to consumers, since it is not part of wearand-tear, but a writing-off of vehicles and is written off as a single expense each
month. Wear-and-tear is covered by Repairs and Maintenance.
5. Refuse removal areas are divided into suburbs. The removal truck will do its route,
whether there are 1 or 100 bins
.

6. The cost of a consumer is influenced by:

a.

the type of removal (specific type of vehicle);

b.

size of the removal (normal bins vs. bulk containers); and

c.

the distance of the suburb from the municipal vehicle lot and the landfill site

7. Each consumer makes use of three employees, namely the person at the
administration office, the driver of the truck and the person who empties the bin.

8. Assume that the land-fill site is managed as a separate department.

REQUIRED
a.

Prepare an Activity Based Costing analysis for the XYZ Municipality, based on the
above information.

b.

Establish what the income and overhead cost for the municipality to serve the
following consumers:

i.

Billys Fish Takeaways is a takeaway restaurant that has a normal bin, but it
has to be emptied daily.

ii.

He is situated 5km from the dumping site and 10 km from the vehicle lot.

For daily removals, a vehicle with a cost price of R120 000 is used.

He required a new bin at the start of the month.

Beths Hairdressers is a hair salon.

They use a normal bin that is emptied weekly.

The salon is situated 2 km from the dumping site and 15 km from the
vehicle lot.

iii.

For weekly removal, a vehicle with a cost price of R230 000 is used.

TY Construction uses a large container that needs to be taken away and

emptied weekly.

The construction site TY is currently working on is situated 142 km from

the dumping site and 5km from the vehicle lot.

For large container removals, a vehicle with a cost price of R340 000 is
used.

b. An outside company has offered to take over the refuse function of the municipality at
a single monthly cost of R75 000.
Write a report to state whether you think the offer should be accepted or not.

Mention all quantitative and qualitative factors you can think of in the report.

CASE STUDY 4
A) Activity Rates for Overhead Costs

1) Employee-related admin = Employee-related cost/Nr of employees

= R520/210
= R2.48 per employee

2) Repairs & maintenance = Repair & maintenance cost/Km travelled

= R12 000/10 000
= R1.20 per km
3) Printing & stationery = Printing & stationery cost/Nr of consumers
= R1 000/1 800
= R0.56 per consumer
4) Insurance = Insurance/Km travelled
= R2 000/10 000

= R0.20 per km
5) Vehicle running costs = Vehicle running costs/Km travelled
= R17 000/10 000
= R1.70 per km
6) Consumables & small equipment = Consumable & small equipment cost/Nr of
consumers
= R1 440/1 800
= R0.80 per consumer

7) Depreciation = Depreciation/Value of the assets

= R27 500/R550 000
= 5%
8) Purchase of refuse bins for resale

= Purchase of bins cost / Nr of bins

= R9 000/180
= R50 per bin

B) Billys Fish Takeaways

ITEM
Income
Once-off fee
Type of bin

R
80.00
20.00
10.00

Regularity of consumption
Costs
Employee Related Costs (R2.48 X 3)
Repairs and Maintenance (R1.20 X 15Km)
General Expenses
Printing and Stationery
Insurance (R0.20 X 15Km)
Vehicle running Costs (R1.70 X 15Km)
Consumables and Small Equipment
Depreciation (Direct and Indirect)
Purchases of refuse bins for re-sale

50.00
25.40
7.44
18.00
79.86
0.56
3.00
25.50
0.80
N/A
50.00

Total
Beths Hairdressers
ITEM
Income
Once-off fee
Type of bin
Regularity of consumption
Costs
Employee Related Costs (R2.48 X 3)
Repairs and Maintenance (R1.20 X 17Km)

R105.26
R
50.00
20.00
10.00
20.00
7.44
20.40
27,84

General Expenses
Printing and Stationery
Insurance (R0.20 X 17Km)
Vehicle running Costs (R1.70 X 17Km)
Consumables and Small Equipment
Depreciation (Direct and Indirect)

0.56
3.40
28.90
0.80
N/A
61.50

Total
TY Construction

ITEM
Income
Once-off fee
Type of bin
Regularity of consumption
Costs
Employee Related Costs (R2.48 X 3)
Repairs and Maintenance (R1.20 X 147Km)
General Expenses
Printing and Stationery

R
190.00
20.00
150.00
20.00
183.84
7.44
176.40
117.23
0.56

Insurance (R0.20 X 147Km)

Vehicle running Costs (R1.70 X 147Km)
Consumables and Small Equipment
Depreciation (Direct and Indirect)
Purchases of refuse bins for re-sale
Total

C.

29.40
86.47
0.80
N/A
N/A
R301.07

Total overhead costs of the Refuse Department amounts to just over R70 000 per
month. The offer from the outside company is higher at R75 000. From a cost
viewpoint it seems not to be a good idea, but other factors also need to be taken
into account. The reliability of the outside organisation and whether the
organisation will increase prices even more in future are factors to consider when
the outside organisation is considered. However, keeping the refuse function in
the municipality means that the municipality is vulnerable to increases in fuel

prices and it has to incur various other expenses and face various risks it will not
have if the function is outsourced.

Evidence Activity

Is Evidence
Present in File

Case study 5
DEF Municipality uses a standard absorption costing system to control the cost of one of its
services, namely the supply of water to its constituents.

The fixed budget for the reticulation process for the municipality shows a budgeted
total overhead cost of R2,000,000 per period when 50,000 kiloliters of water are
distributed and R2,640,000 per period when 90,000 kiloliters are distributed.

In period 9, when the distribution was 65,000 kiloliters, total actual overhead was

R2,450,000 (R1,250,000 fixed and R1,200,000 variable).

The standard fixed overhead absorption rate is R24 per kiloliter.

Required:
(a) Using the high low technique, calculate the following:
(i)

the budgeted variable overhead per kiloliter;

(ii)

the budgeted fixed overhead per kiloliter.

(b) Calculate the following:

(i)

the total fixed overhead absorbed in period 9;

(ii)

the fixed overhead price variance;

(iii)

the fixed overhead volume variance.

(c) Explain two possible operational causes of each of the following:

(i)

an adverse fixed overhead price variance;

(ii)

a favourable fixed overhead volume variance.

(d) Explain the terms attainable standard and ideal standard and discuss which is
most appropriate when setting operational performance standards.

CASE STUDY 5
1)
a) High - R2 640 000 = 9 0, 000 kl
Low - R2 000 000 = 50,000 kl
R 640,000 = 40,0000 kl

R 16 = 1 kl
b) Substitute in High or Low:
Low: R2 000 000 = 50, 000 kl:
5 0, 000 kl x R16/kl = R800 000. (V/C) then
R2,000 000 (TC) R800 000 (V/C) = R1,200,000 is fixed cost.
2)

a) R24/kl x 65,000kl = R1 560 000.

b) Budgeted Overheads Actual Overheads
Actual Expenditure R1,250,000
Budgeted R1,200,000 (calculated above)
Variance R 50,000 Unfavourable
c) Actual kl = 65,000kl

Budgeted kl = 50,000kl. (R1 200 000 budgeted fixed Overheads /R24/kl =

50,000kl)
Variance 15,000kl x R24 = R360 000 Favourable
3)
a) Adverse fixed overhead price variance;

increase in costs of overheads used;

wasteful expenditure;

change in overheads used.

b) a favourable fixed overhead volume variance.

seasonal demand resulting in greater demand for water;

increased capacity due to removal of a possible bottleneck in the process.

4) ATTAINABLE STANDARD AND IDEAL STANDARD

An attainable standard is one which can be attained if a standard unit of output is

carried out efficiently, equipment properly operated or materials such as chemicals
properly used. Allowances would be made for normal losses, waste and
equipment down time. They represent what should be achieved with a reasonable
level of effort under normal operating conditions.

Ideal standards are those which can be achieved under the most favourable
conditions with no allowances for normal losses, waste or equipment downtime.
They are set on the assumption of maximum efficiency and a perfect and ideal
operating environment.
Operational performance standards are best based on attainable standards. An
ideal standard will normally prove to be impossible to attain and result in large
adverse variances, which will give inappropriate signals to management and

possibly damage motivation. An attainable standard is not necessary easy, and

can include a target element to encourage better performance, whilst at the same
time resulting in variances that are useful in controlling costs and income.

Divider 5:

Section 5: Supporting Evidence

1. Witness testimonies to authenticate your evidence

2. Witness status list (personal details of all witnesses)
3. Resource list (Acknowledgement of resources used (Internet sites; Textbooks)

FINAL COMMENT
This may appear to be a lot of work, but it is based on what you should be doing if you wish
to manage your office filing and telephone effectively. Much of this information should be
available. Gather what information you can and then organise it in the manner listed above.
Where you find gaps - address them.

Your POE must be completed and submitted to us by __________________________

If you wish to send us sections as you work on them for comment, please feel free to do so.
We will then be able to assess your progress and give you direction.
Remember, we are here to help you
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