Signs-for-Africa (Pty) Ltd ('Signs-for-Africa') manufactures durable, low-cost, plastic road warning signs at its factory situated in Rosslyn, Tshwane. The company has historically exclusively focused on export markets but changed its focus to the South African market in 2006 because of the growth opportunities locally. The South African National Roads Agency Ltd (SANRAL) and local authorities in South Africa decided in 2006 to gradually replace all the existing metal road warning signs with plastic signage. The main reasons for this change are that plastic signs are less likely to be stolen and are safer in the event of collisions.

Signs-for-Africa manufactures two kinds of signs, namely standard road warning signs (SRWS) and electronic road warning signs (ERWS). The only material used to manufacture SRWS is plastic, whereas ERWS are fitted with one solar panel driven warning light, which is purchased from a supplier based in Japan. The warning light is fitted by skilled electricians during the production process. Apart from this, the ERWS are identical to SRWS and manufactured in the same process as SRWS.

Signs-for-Africa has operated a standard costing system for many years. The Manufacturing, Procurement and Sales divisions are all involved in setting standards on an annual basis. Their inputs are collectively incorporated into the company budget for the forthcoming financial years. The Procurement division is responsible for the ordering of materials, negotiating prices with suppliers, logistics relating to the receipt of materials and ongoing liaison with suppliers and potential suppliers. The Manufacturing division is responsible for all production matters including recruiting and managing all labourers involved in the production process.

The budget for the year ended 31 December 2007 was approved by the board of directors of Signs-for-Africa in early January 2007. The budget included the following relevant information and assumptions relating to planned sales and manufacturing volumes, and standard costs:
SIGNS-FOR-AFRICA (PTY) LTD
BUDGET FOR THE YEAR ENDED 31 DECEMBER 2007
Quantity
R
Revenue
SRWS
6 000 units
2 100 000
ERWS
12 000 units
6 600 000
Material costs
Plastic
144 000 kg
(1 872 000)
Solar panel driven warning lights
12 000 units
(1 440 000)
Labour costs
Type A labourers
18 000 hours
(450 000)
Electricians
12 000 clock hours
(420 000)
Variable manufacturing overheads
(270 000)
Fixed manufacturing overheads
(90 000)
Patent costs
(60 000)
Non-manufacturing overheads
(2 600 000)
Budgeted profit
1 498 000 13
Notes

• The standard quantity of plastic used in the manufacturing process is 8 kg for each warning sign manufactured.

• All inventories are accounted for at standard cost.

• Type A labourers were budgeted to be paid a standard rate of R25 per hour, and the manufacturing standard is one hour of type A labour for each manufactured product.

• Electricians were expected to operate at a productivity level of 90% and 54 minutes of electrician time was budgeted for each ERWS product. Electricians were budgeted to be paid R35 per standard clock hour.

• Variable manufacturing overheads were budgeted at R5 per machine hour and every product takes a standard time of three machine hours to complete.

• Fixed manufacturing overheads are allocated to the manufacturing cost of products based on machine hours.

• Signs-for-Africa is required to pay a standard patent fee of R5 per ERWS product sold, to its Japanese supplier.

There was no opening inventory of materials or finished products at the start of the 2007 financial year. No inventories of work-in-progress existed at the start or end of the financial year and none had been budgeted to exist either.

The actual results for the year ended 31 December 2007 are summarised below:
SIGNS-FOR-AFRICA (PTY) LTD
YEAR ENDED 31 DECEMBER 2007
Quantity
R
Revenue
SRWS
5 000 units
1 800 000
ERWS
7 500 units
3 750 000
Manufacturing volumes
SRWS
6 160 units
ERWS
9 240 units
Materials
Plastic purchased
150 000 kg
(1 500 000)
Plastic used in the manufacturing process
138 600 kg
Solar panel driven warning lights
9 240 units
(1 155 000)
Labour
Type A labourers
12 320 hours
(332 640)
Electricians
8662,5 clock hours
(346 500)
Variable manufacturing overheads
(207 900)
Fixed manufacturing overheads
(95 480)
Patent costs
(45 000)
Non-manufacturing overheads
(2 680 000)
14
Notes

• Machine hours amounted to 38 500 in 2007.

• Signs-for-Africa calculates sales volume variances on the gross profit basis.

• Non-manufacturing overheads are fixed in nature.

The divisional managers responsible for the Manufacturing, Procurement and Sales divisions believe that the change of focus to the South African market has adversely affected the profitability of Signs-for-Africa. In their opinion SANRAL and local authorities did not plan the rollout of plastic road warning signs properly and tend to place orders on an ad hoc basis. The ERWS product range has also not taken off because of the higher price of the product compared to the SRWS range, despite the vastly superior visibility of ERWS to motorists.

Additional information

The schedule set out below contains the list of variances which the company normally calculates. The management accountant has already calculated some of these variances. His calculations are correct.

SIGNS-FOR-AFRICA (PTY) LTD
SCHEDULE OF VARIANCES FOR THE YEAR ENDED 31 DECEMBER 2007
Adverse
variances
Favourable
variances
R
R
Revenue
Sales price variance: SRWS
50 000
ERWS
375 000
Sales margin mix variance: SRWS
ERWS
Sales margin quantity variance: SRWS
ERWS
15
SIGNS-FOR-AFRICA (PTY) LTD
SCHEDULE OF VARIANCES FOR THE YEAR ENDED 31 DECEMBER 2007 (continued)
Adverse
variances
Favourable
variances
R
R
Expenses
Material price variance: Plastic material
Solar panels
46 200
Material usage variance: Plastic material
Solar panels
Nil
Labour rate variance: Type A
24 640
Electricians
Labour efficiency variance: Type A
77 000
Electricians
Variable overhead expenditure variance
Variable overhead efficiency variance
Fixed overhead expenditure variance
Fixed overhead volume variance:
Fixed overhead capacity variance
Fixed overhead efficiency variance
Patent expenditure variance
Patent volume variance
Non-manufacturing overheads expenditure variance
80 000

REQUIRED

(a) Calculate all the possible variances for the year ended 31 December 2007 not yet calculated by the management accountant. Using your calculated variances and those of the management accountant, reconcile budgeted profit to actual profit or loss for the year.

(b) Based on the variances calculated in (a) and other information provided -

(i) identify and discuss the key reason(s) for lower than expected profitability of Signs-for-Africa (Pty) Ltd in the 2007 financial year, and

(ii) provide positive feedback, if any, and negative feedback, if any, on the performances of the Manufacturing, Procurement and Sales divisions.

(c) Calculate the number of units of standard road warning signs and electronic road warning signs that Signs-for-Africa (Pty) Ltd needed to sell in 2007 in order to break even based on the actual results for the year ended 31 December 2007. Assume that the actual sales mix by product achieved in 2007 remains constant.