10.2.3 PUBLIC SECTOR ACCOUNTING 102 [100]
QUESTION ONE [30]
Read the article below and answer the question that follows:
GDP growth alone not sufficient to stop the rot
Industry representatives and stakeholders were relieved with the announcement by
President Cyril Ramaphosa in his State of the Nation Address that the government will
champion initiatives aimed at replicating the so much lauded motor industry
development programme (MIDP) for key sectors, including the diverse iron, steel and
metal fabrication clusters. The initiatives – which align with interventions aimed at reigniting domestic growth – are consistent with previous suggestions by captains of
industry aimed at boosting demand and supply-side initiatives, increasing efficiency and
strengthening the case for more local content in production processes.
Moreover, the announcement came at a time when the rest of Africa holds promising
trade potential, with the recently launched African Continental Free Trade Area
agreement. Mirroring the MIDP would, therefore, add impetus for an increased volume
of broader manufacturing output, support agro-processing activities and enhance export
competitiveness to the rest of the continent, with positive spill-overs on employment,
poverty and income inequality.
Given the difficult operating environment for local businesses, poor high-frequency data,
confidence, expectations and trade data, the timing of the statement is apt.
Our first-quarter (Q1) 2019 Review of the State of the Metals and Engineering Sector
Report reveals that the sector’s total real exports to the rest of the world contracted by
8.6 percent quarter-on-quarter (Q-o-Q) between Q4, 2018, and Q1, 2019, and by 1.98
percent on a quarterly year-on-year (Y-o-Y) basis.
The overall subdued performance, despite a comparatively weaker rand, was largely
due to well documented challenges, as indicated at the beginning of 2019.
Disconcertingly, the poor performance was further explained by low exports to other
African countries both on a Q-o-Q basis (-14.3 percent) and a Y-o-Y basis (-6.1
percent).
Encouragingly, annual exports to Asia and the US at the end of Q1, 2019 were resilient
(despite existing steel and aluminium tariffs imposed by the US on SA exports),
providing some promising prospects.
The contraction of 8.8 percent in broader manufacturing output and the corresponding
dip in African exports by the important cluster of industries in Q1, 2019, highlight the
need for proactive thinking in order to reverse the negative contribution of 1.1 percent
made by the sector to gross domestic product (GDP), enabling an uptick in economic
growth.
However, although a strong GDP growth is necessary to reinforce the demand side
dynamics of manufacturing and the rest of industrial production, with extended benefits
to the fiscus and economy, the GDP numbers should be interpreted with caution. In fact,
an exclusive focus on the GDP measure alone can be quite misleading – and
industrialists are well aware of this.
Practically, with GDP measured by production, when newly produced stainless, alloy or
carbon steel (an intermediate product) is manufactured, its market value is estimated
and immediately counted as part of GDP in one quarter, irrespective of whether the
product gets sold in the next quarter.
Suppose that the product was manufactured in November 2018, adding R200 000 to
the GDP of Q4, 2018 but is subsequently sold in Q1, of 2019 it is only counted in the
GDP of Q4, 2018 in order to avoid double counting.
Value added is, therefore, counted only when goods are produced rather than when
they are sold.
This is a red flag when interpreting GDP statistics to gauge the health of the economy,
as high GDP may only mean that a lot of intermediate or finished products are being
produced and stored as inventory, and not necessarily that companies are selling the
goods.
GDP can, therefore, be high in one quarter, underpinned by higher production and value
add, but the economy can be about to go into recession in the following quarter
because inventories are piling up and clogging production, and managers are
contemplating cutting back on production in order to get inventories down back to target
levels. Therefore, the dip in GDP for the next quarter will be mainly due to poor
inventory turnover rather than poor productive capacity.
Adapted: https://www.iol.co.za/business-report/opinion/gdp-growth-alone-not-sufficientto-stop-the-rot
Buisness Report, 08 August 2019
Question:
From the above article you are required to discuss the serious performance
management challenges the public sector is facing.
QUESTION TWO [20]
You have been appointed to assist the financial manager for the City of Durban.
Your task is to prepare the 2019 annual budget. Below you have been given the 2019
annual budget as well as additional information that could assist you in the process.
Program budget Actual Budgeted
City of Durban annual budget 2018
R’000
2019
R’000
Net expenditure
Corporate Services 1 500
Education Department 2 400
Transport Department 1 200
Social Services Department 1 290
Police Department 1 050
Government Revenues
Taxes 12 000
Grants 1 050
Donations 900
Total SURPLUS/(LOSS) 6 510
Additional information:
• Spending on corporate services should increase by 30% from 2018;
• The budget for education should increase by R100 000;
• As local municipalities have been given greater responsibility for traffic control,
the budget for police can be increased by half of the 2018 amount;
• Spending on Social Services must match the 2018 budgeted spending on
Education;
• Transport services will be more efficient and thus not require a change in budget;
• The budget for taxation income must increase by 10%;
• Grant income is expected to increase by R50 000;
• The budgeted revenue from donations for 2019 is R70 000.
Required:
Prepare the 2019 City of Durban Annual Budget. (Show your workings)
QUESTION THREE [20]
The Companies Act 2008 requires that public companies are audited by an external firm
of auditors each year. Most public companies employ a number of chartered
accountants; have strong internal audit departments and efficient internal controls which
translate into high standards of corporate governance. It therefore seems to be a waste
of time and money to require such companies to be audited annually.
You are required to discuss the above statement indicating whether or not you agree
with it.
QUESTION FOUR [30]
4.1. List and explain the circumstances where government charges for
services. (12)
4.2. Explain the concept of a cost-volume analysis and its usefulness. (8)
4.3. Discuss the factors that affect an outsourcing decision. (10)