Question 1: Cost Classification

The provision of library services by municipalities is a contentious issue, as it is seen as a partial unfunded mandate. In terms of Sections 35 to 37 and 44 of the Local Government: Municipal Finance Management Act, Act 56 of 2003 (MFMA), it is essential that costs relating to the provision of such a service are properly analysed and classified. In the particular case under investigation, costs relating to a branch library include library staff salaries; equipment such as code scanners, computers and copiers; library materials such as stationery, exhibition materials and some products available for lending not provided by the provincial department; asset maintenance costs; services, including electricity, water and waste services; security services; ICT services; financial services; HR services and services contracted in for projects such as art exhibitions, motivational speakers and reading clubs.

This branch library is part of a civic centre in a sub-region of the municipality and cannot measure consumption services for the library alone. It also shares security services with other users of the complex. The municipal maintenance team provides maintenance and all other support services are also shared with other municipal functions.

Classify each of the following costs both by traceability (direct or indirect) and behaviour (fixed, mixed or variable):

1. Salary of the branch librarian;
2. Salary of the City Manager;
3. Book lending issuing unit costs;
4. Library equipment;
5. Civic centre utility services (electricity, water, waste).

For questions 2 to 7, use the FIRST four digits of your Stellenbosch University student number to replace “wxyz” in each of the Rand values where indicated. For example, if the first four digits of your student number are 6012, the salaries of social and field workers in Question 2 below would be R7 506 012.

Question 2: Area Office Budget

The Area Office of the Department of Social Services provides services to approximately 200 000 people. It has three programmes or services, each functioning as a cost centre, meaning that all direct and indirect costs must be considered in pricing the services. The following services (programmes) will be provided to the community:

1. Program 1 – Payment of social assistance grants
2. Program 2 – Social welfare services
3. Program 3 – Development and indigent support

All costs that cannot be exclusively allocated to a particular programme (indirect costs for that programme) are clustered under office administration. These costs are:

Salaries of social workers other fieldworkers:                                                     R7 50w xyz

Salaries of administrative staff:                                                                       R4 90w xyz

Lease and maintenance of offices                                                                 R1 60w xyz

Municipal services                                                                                          R30w xyz

Telephone                                                                                                        R20w xyz

Office equipment                                                                                             R35w xyz

Stationery                                                                                                         R8w xyz

General transport                                                                                             R22w xyz

Note: The time of social and other field workers not spent in programmes is spent on office administration. HINT: Use time spent per programme by social and field workers as allocation base for all indirect costs.

Programme 1 – Payment of social assistance grants will have the following activities:

12 visits to various payment support points, with a distance of 2 800 km travelled per visit. Fieldworkers are using their own cars and are paid R4.50 per km travel allowance. No visits require staying over.

Social workers and fieldworkers spend approximately 15% of their time on this programme.

Program 2 – Social welfare services will have the following activities:

Prevention of substance abuse campaigns at schools in the area, requiring a total of 22 000 km to be travelled per annum, and a travel allowance of R4.50 per km is payable. These campaigns also require campaign materials to be acquired, costing R30 per learner, with approximately 70 000 learners in the area.

Treatment of substance abuse require intense medical and social care, with 40 000 km to be travelled per annum (travel allowance of R4.50 per km) and materials and equipment to be used to the value of R13 000 per beneficiary, with approximately 200 people expected to be treated.

Services to older persons require social workers to provide support at senior centres in the area, requiring 6 000 km traveling per annum (travel allowance R4.50 per km) and materials and equipment to be used to the value of R4000 per older person per annum, with an expected 2 000 older people participating.

Services to children, women and families require 18 000 km to be travelled per annum, with again travel allowances of R4.50 per km and materials to be used to the value of R4 800 per case per annum, with 600 cases expected.

Social workers and fieldworkers spend approximately 55% of their time on this programme.

Program 3 – Development and indigent support services will have the following activities:

Youth development initiatives, requiring a total of 4 000 km of traveling with travel allowances of R4.50, materials of R1 600 per beneficiary, with 2 000 expected to participate. It also requires rental of halls and buses, costing R16 000 per event, with eight events planned for the year as well as provision of four meals per participant, costing R18 per meal.

Poverty alleviation initiatives, requiring 1 000 km traveling with travel allowances of R4.50 per km, payment to expert facilitators (R39 000 per initiative, with four planned initiatives) and rental of facilities and buses, costing R26 000 per initiative as well as eight meals per participant, with a total planned participation at the initiatives of 400 and a price of R25 per meal.

Social workers and fieldworkers will spend approximately 20% of their time on this programme
Draw up a budget for each of the programmes, covering all direct and indirect costs.

Question 3: Net present value calculation using formula

The branch library needs to replace its copier, as the current copier has reached the end of its lease term. One option is to replace the leased copier by buying a copier at a price of R6w xyz. This will reduce the annual operating cost by R14 900. Use a discount rate of 8 percent, and the discount table on p105 of Burger (2014). What will the NPV be after four years? What will the NPV be after five years?

Question 4: Payback & ARR 

The old copier mentioned in question 2 can either be replaced by a copier (1) costing R6w xyz and lasting five years and costing R7 000 per annum to operate (all operating expenses included). The copier saves R14 900 per annum on the cost of currently leasing a copier. Or (2), it can be replaced by a copier costing R7w xyz and costing R4 000 per annum to operate and lasting seven years, also saving R14 900 per annum on the current cost.What is Payback Period of each option? Which copier should be purchased, using the Payback method?

What is ARR Percentage for each option? Which copier should be purchased, using ARR?

Question 5: Cost Effectiveness Analysis of Gariep YDC using discount table

The Department of Social Development is planning a youth development initiative provided to approximately 500 people in the community of Gamka. The objective is to involve approximately 100 people per annum and continue for five years. They have two options to serve this objective, namely to set up a youth development centre (YDC) in Gamka with adequate accommodation and equipment, as well as development and support staff, or to transport participants to another centre at Beaufort for their activities, where only materials and a smaller provision for staff is required additionally, other costs would be covered by the normal budget of the Beaufort Centre. Do a cost effectiveness investment appraisal, using a discount rate of 8% and the discount table on p105 of Burger (2014).

Further information on each of the two options is as follows:

Option 1: New Gariep YDC:

The lease of suitable accommodation will require an immediate deposit of R3w xyz; In year one, rent of R13w xyz is payable, thereafter escalating at 8% per annum; Equipment requires an immediate outlay of R26w xyz;

Staff remuneration totals R39w xyz in year one, escalating at 7%;

Electricity and telephone costs will amount to R9w xyz in year one, escalating at 8% per annum;

R27w xyz is allowed for maintenance in year one, escalating at 5% per annum; Materials will require R8w xyz in year one, escalating at 6% per annum;

Option 2: Transport to Beaufort YDC:

A contractor to transport the learners to Beaufort and back at a cost of R60w xyz in year one, escalating at 10%;

Materials will require R7w xyz in year one, escalating at 6% per annum;

Staff remuneration of R16w xyz is required in year one, escalating at 7% per annum.

Question 6: Breakeven analysis for youth development initiative 

The Social Development regional office is planning a youth development initiative. The budget allows R8 200 (Unit Selling Price USP) per participant. How many participants must they take to break even if the following costs are to be considered?

Materials		R1 600 per participant (UVC)
Meals and refreshments		R650 per participant (UVC)
Allocation of indirect costs		R1 700 per participant (UVC)
Transport by bus		R1w xyz (FC)
Venue hire		R4w xyz (FC)
Youth Development Facilitator		R1w xyz (FC)
Insurance		Rw xyz (FC)
Allocation of indirect costs		Rw xyz (FC)

Expert Answers on Finance and Cost Accounting Questions

Answer 1:

The classification of these costs on the basis of traceability and behaviour is performed as follows:
1) salary of the branch librarian: It is considered as direct in terms of traceability because it is incurred for the branch library only, whereas in terms of behaviour, it is considered as fixed because it does not change with the number of books issued or customers served.
2) salary of the city manager: It is indirect in terms of traceability because it is not directly linked to the library, however in case of behavioural classification, it is considered as fixed because it does not change with the activities in the library.
3) book lending issuing unit cost: It is direct in terms of traceability as it is directly related to library operations, whereas in terms of behaviour, it is variable because the cost increases with the increase in the number of books issued.
4) library equipment: It is direct as it is directly used by the library, and it is also fixed as it is a type of capital expenditure.
5) civic centre utility services: It is indirect as it cannot be specifically linked to the library, whereas in terms of behaviour, it is variable, as it fluctuates with the level of activity

Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work.

Want Detailed Answers with References?