Tutorial Q1
Cakeza Dairy Pty (Ltd) (hereafter referred to as “Cakeza Dairy” or “ the company”) is a
manufacturer of dairy products which includes milk (fresh milk and long life milk), cream,
cheese and yoghurt. These are the only 4 products that the company manufacturers and the
most profitable product for Cakeza Dairy is Milk.
Residual raw milk remaining that cannot be packed in any of the production lines (i.e fresh
milk line and long life line) due to quality, temperature issues, etc noted or spillage milk that
can no longer be of use to milk, cream, cheese and yoghurt is donated/sold to pig farmers
and other manufacturers for powder milk. Cakeza Dairy’s factory is in Thohoyandou and its
distribution site is located in Louis Trichardt. The company serves approximately 70% of
retail stores in the Limpopo Province. These customers provides Cakeza Dairy their planned
milk supply to consumer for every 3 months, especially on milk, as they are aware that
Cakeza Dairy manufactures their milk based on orders. Cakeza Dairy uses their own trucks
to transport the finished products from its Thohoyandou factory to the distribution centre in
Louis Trichardt where all the products are stored in Chilled Fridges, ready for dispatch to
customers.
It has been gathered that the dairy industry is not doing so well currently, mostly as a result
of the increased competition in the industry and increased prices of raw materials and other
input costs of producing dairy products. The company’s CEO mentioned that perhaps the
company needs to negotiate down the raw materials prices of milk from the farmers to boost
the milk business profit or maybe increase the milk sales price but concerned with losing
middle market to competitors. The Milk business is considered the most profitable for
Cakeza Dairy and milk is also the base material for other products they manufacture which
are cream, cheese and yoghurt.
You are the Management Accountant of Cakeza Dairy and the financial manager has asked
you to prepare a Cost Analysis Report that separates manufacturing costs from non -
manufacturing costs. The report will be presented to the CEO for decision making purposes.
Cakeza Dairy always buys their materials from same suppliers as they want to maintain a
good relationship.
The milk manufacturing process is summarized below:
The Milk is collected by outsourced Milk Tankers from the farmers and it is delivered
to Cakeza Dairy.
On arrival at the factory, the milk is tested for quality requirements such as that for
antibiotics, bacteria, temperature requirements and other quality requirements at a
standard cost of R2 500 per truck which holds 44 000 litres each. If any milk in the
tanks does not meet the quality standards as mentioned, this is rejected and returned
back to the supplier at no cost incurred by Cakeza Dairy. Cakeza Dairy would only
pay the for the return trip cost as invoiced by the supplier (current value is R5000 per
returned truck) and not for the milk lost.
The milk that passes the quality tests is offloaded, and then pumped into the factory’s
milk processing vessels together with input of other ingredients (skim milk powder,
soy, sugar, cholesterol, calcium, vitamins) where it undergoes pasteurization and
further processing. This goes to the pump silos machines where it undergoes
pasterization, separation and further processing. After this process, the machines are
run for cleaning and cooling before another batch of any manufacturing can go in.
The silo machines are also used for manufacturing some cream and yoghurt
ingredients.
In the packaging department, the milk is packed in paper cartons and plastic bottles
which clearly indicate its manufacturing and expiry dates. The finished products are
then transferred to the dispatch section of the factory.
The finished products are then transported to the company’s Distribution Warehouse
in Louis Trichardt where they are stored in refrigerators, ready for dispatch to
customers. The Distribution Warehouse is also used to store the cream, yoghurt and
cheese.
See below budgeted and actual costs relating to manufacturing milk, for
August 2019:
Budgeted Costs
Budgeted machine overhead cost, R1 000 000
Budgeted machine hours, 2 000 000
Actual Costs and inputs
Purchased and processed raw milk for August 2019 manufacturing, was 2 500 000
litres, which may serve customers for about 3 months before they can order again.
Though more milk will be manufactured 1 month from now, especially the Fresh milk
(as this has a short life in shelves), so that there may be emergency stock for any
specials that the customers may want to run. Cakeza Dairy will be using the
machines to manufacture cream and yoghurt as these have the shortest life time
than milk as. Spillage of 150 000 litres was experienced in this month.
In August 2019, the company paid a price of R3.75 per litre for raw milk. This had
increased from R2.50 per litre from the last purchase made in May 2019. Cakeza
Dairy always purchase not less than 2 000 000 litres of milk per quarter.
A total of R3 000 000 was paid to the Milk tankers cost for the delivery of the
2 500 000 litres that was processed in August 2019.
Skim Milk powder, used to balance the thickness and to obtain the right milk
composition, already converted to ‘per litre’ @R1.5
Other ingredients such as soy, sugar, cholesterol, calcium, vitamins costs R650 000
Delivery cost to the Distribution Warehouse totalled R20 000
The packaging cost was R100 000
Distribution warehouse lighting and electricity, budgeted at R70 000.
Other procurement cost for the month amounted to R400 000
The direct labour total cost for the month was R1 200 000
The total number of employees (direct and indirect) is 50 000
The direct labour employees worked a total of 800 000 hours
Actual machine hours, 1 800 000
Actual machine overheard cost incurred, R1 300 000
The actual cost of storage at the Distribution Warehouse was R150 000
The marketing and selling costs amounted to R80 000
EQUIRED Marks
(a) Prepare a cost analysis report that separates manufacturing costs (15)
from non - manufacturing costs for August 2019.
(b) Which costs would you advise the CEO to look at first, to address his (5)
concerns for the company and why?
TOTAL MARKS (20)