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CPA
Intermediate Leval
Management accounting May 2019
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Management accounting
Revision Kit

QUESTION 1

Q (a) With regard to the above statement, describe four differences between management accounting and financial accounting

(b) (i) Highlight four advantages of regression method of cost estimation

(ii) Using regression analysis method, formulate an equation in the form of Y = a + bx that could be used to estimate the total costs incurred.
A

Solution


Management accounting

➦ Is a type of accounting that generates statements, reports, and documentation that aid management in making better decisions regarding their company's performance.

Financial accounting

➦ Is the process of documenting, compiling, and disclosing a company's financial statements to reflect its business activities.These financial statements include

➫ The statement of comprehensive income
➫ The statement of financial position(balance sheet)
➫ The statement of cash flow
➫ The statement of Changes in equity.
➫ Notes to the financial statement

Difference between management accounting and financial accounting

➧ Financial accounting is created for a set period of time, typically a year, half-year, or quarter. Management accounting reports and statements are prepared anytime when required
➧ Financial accounting follows the dual concept accounting(double entry) of recording classifying and summarizing businesses transactions. Management accounting follows i.e the cost baseline approach in presenenting its data
➧ Financial accounting focuses on an organization’s external financial processes. Management accounting focuses on an organization’s internal financial processes.
➧ Financial accountanting concentrate on long-term financial plans for organizational expansion. Management accountanting concentrate on short-term expansion plans related to economic upkeep i.e make-or-buy analysis to determine the financial soundness of producing .
➧ Preperation of financial accounts is a requirement by the law & IASB There is no legal requirement to prepare management accounts.
➧ Financial accounting format is prescribed by IFRS Management accounting format is as prescribed by the management
➧ Financial accounts of companies can be compared Management accounts of companies cannot be compared
➧ Financial accounting deals with the organization as a whole Management accounting deals only with the specific activities of the organization.
➧ Financial accounting is based on historic information Management accounting is base on present and future information


(b) (i) Advantages of regression method of cost estimation

Regression method cost estimation
The regression method of cost estimation is a statistical technique used to estimate costs based on historical data.

Advantages
  1. Simplicity and Ease of Use: The regression method is relatively straightforward and easy to use compared to other cost estimation techniques. It requires minimal mathematical calculations and can be applied using software or spreadsheet tools. The simplicity of the method makes it accessible to a wide range of users, even those without extensive statistical knowledge.
  2. Utilizes Historical Data: Regression analysis relies on historical data to establish relationships between cost drivers and cost outcomes. By analyzing past cost data, the method can identify patterns, trends, and correlations that can be used to estimate future costs. This makes it particularly useful in industries or projects with readily available historical cost data.
  3. Flexible and Adaptable: The regression method allows for flexibility in incorporating various cost drivers or independent variables. It can accommodate multiple input variables simultaneously, allowing for a more comprehensive analysis of their impact on cost. This flexibility enables the model to capture the complexity of cost relationships in real-world scenarios, making it more accurate in estimating costs.
  4. Statistical Validity and Interpretation: Regression analysis provides statistical measures that assess the validity and reliability of the cost estimation model. It provides metrics such as R-squared (coefficient of determination), p-values, and confidence intervals, which help evaluate the statistical significance of the model and the strength of the relationships between the cost drivers and cost outcomes. These statistical measures allow users to interpret and assess the accuracy and reliability of the cost estimates.

Disadvantages
It's important to note that while the regression method offers advantages, it also has limitations.
➫ For example, it assumes a linear relationship between the cost drivers and cost outcomes
➫ It relies on the availability and quality of historical data.
➫ The accuracy of the cost estimation heavily depends on the appropriateness of the chosen cost drivers and the relevance of the historical data used.

Therefore, careful consideration and validation of the regression model's results are essential.

(ii) Using regression analysis method, formulate an equation in the form of Y = a + bx that could be used to estimate the total costs incurred.

X Y "000" XY "000" X²
90
100
120
150
160
220
300
340 		5,200
6,000
6,200
3,530
3,850
4,300
5,870
7,150		 468,000
600,000
744,000
529,500
616,000
946,000
1,761,000
2,431,000		 8,100
10,000
14,400
22,500
25,600
48,400
90,000
115,600
∑x = 1,480 ∑y = 42,100 ∑xy = 8,095,500 ∑x² = 334,600


b
=
nΣxy - ΣxΣy
nΣx² - (Σx)²


b
=
8 x 8,095,500 - 1,480 x 42,100
2,676,800 - 2,190,400
= 5.05


a
=
Σy
n
-
bΣx
n


a
=
42,100
8
-
5.05 x 1,480
8
= 4,328.25

Therefore;
y = 4,328.25 + 5.05x


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QUESTION 2

Q (a) Advise the management of Baraka Distributors Ltd. on the range of quantities to purchase (8 marks)

(b) Advise the management of Pendo Ltd. on the most profitable mix of the three types of doors.
A

Solution


(a) Advise the management of Baraka Distributors Ltd. on the range of quantities to purchase

Total cost = (Q/2)ch + (D/Q)C0 + Purchase cost

Where :
Q ➧ Quantity ordered
ch ➧ Holding cost per unit
C0 ➧ Ordering cost

Total cost range 1 - 3,000

TC = (3,000 / 2 x 0.2 x 21) + (30,000 / 3,000 x 2,500) + 21 x 30,000 = Sh.661,300

Total Cost range 3001 - 5000
5,000 / 2 x 0.2 × 19 + 30,000 / 5,000 x 2,500 + 19 x 30,000
9,500 + 15,000 + 57000 = Sh 594,500

Total cost range 5001 - 7000
7,000 / 2 x 0.2 x 17 + 30,000 / 7,000 × 2,500 + 17 x 30,000
11,900 + 10,714.29 + 510,000 = Sh 532,614.29

Total cost range 7001-9000
9,000 / 2 × 0.2 x 15.50 + 30,000 / 9,000 x 2,500 + 15.50 × 30,000
13,950 + 8,333.33 + 465,000 = sh 487,283.33

Total cost range 9001 - 10000
10,000 / 2 x 0.2 x 13 + 30,000 / 10,000 x 2,500 + 13 x 30,000
13,000 + 7,500 + 390,000 = Sh 410,500

Advice

Management should order between 90001-10000 units because it has the lowest total cost

(b) Advise the management of Pendo Ltd. on the most profitable mix of the three types of doors.

Pendo ltd income statement
Security House Office
Units selling price
Direct materials:
Steel bars
Iron sheets
Direct labour:
Machinery
Spraying
Contribution
Square metres
Contributions per square metre		 24,500
(3,500)

(10,920)

(2,100)
(980)
7,000
10.92
641.03		 26,040

(1,960)
(11,760)

(1,400)
(560)
10,360
11.76
880.95		 26,600

(4,200)
(10,500)

(2,660)
(840)
8,400
10.50
800
Rank 3 1 2


Square metre per unit Security = 10,920 / 1,000 = 10.92
House =11 x 760 / 1,000 = 11.76
Office = 10,500 / 1,000 = 10.50

Allocation
Door type
House
Office
Security

Square metres
200 x 11.76 = 2,352
160 x 10.50 = 1,680
100 x 10.92 = 1,092
5,124


Advice:

Pendo Ltd management should produce 200 units of house door type: 160 office units of house door type and 100 security door type.


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QUESTION 3

Q (a) The choice of an overhead absorption base is a matter of personal judgement.
Explain the extent to which you agree or disagree with the above statement.

(b) Cost per unit for each product using
(i) Traditional method. (8 marks)
(ii) Activity Based Costing (ABC). (8 marks)
A

Solution


(a) Explain the extent to which you agree or disagree with the above statement.

➦ I partially agree with the statement that the choice of an overhead absorption base can involve some degree of personal judgment. However, it is important to note that the selection of an appropriate overhead absorption base should primarily be driven by objective and logical considerations rather than personal preferences. Here's an explanation of the position:

Agree:

  1. Variability of Overhead Costs: Overhead costs can be allocated using various bases, such as direct labor hours, machine hours, or production units. The choice of an absorption base may depend on the nature of the business and the specific characteristics of its overhead costs. Different managers or accountants may have different interpretations of these factors, leading to some degree of subjectivity in their judgment.
  2. Specific Industry or Company Considerations: Certain industries or companies may have unique cost structures that require tailored approaches to allocate overhead. For example, a service-oriented business may choose to allocate overhead based on the number of employees or customer transactions rather than traditional production measures. The specific circumstances of the industry or company can influence the personal judgment involved in selecting an appropriate absorption base.

Disagree:

  1. Objective Cost Drivers: Ideally, the choice of an absorption base should be based on objective cost drivers that have a strong correlation with overhead costs. The selection should prioritize factors that closely align with the consumption of resources or the generation of overhead costs. This approach reduces subjectivity and ensures that costs are allocated in a logical and rational manner.
  2. Consistency and Comparability: Consistency in the choice of an absorption base is crucial for accurate cost analysis and meaningful comparisons over time. A base chosen purely based on personal judgment without objective reasoning may lead to inconsistency and make it difficult to evaluate cost trends or compare performance across periods or similar entities.
  3. External Standards and Guidelines: In many cases, industry-specific standards or accounting guidelines may recommend or require the use of certain absorption bases. These standards and guidelines are designed to enhance consistency and comparability in financial reporting. Consequently, personal judgment may be limited by the need to comply with these external frameworks.

➧ While personal judgment may play a role in the choice of an absorption base, it should be guided by objective criteria, industry norms, and accounting principles to ensure accuracy, consistency, and comparability in cost allocations. The focus should be on selecting a base that best reflects the consumption of overhead resources and aligns with the specific circumstances of the business.

b (i) Traditional method.

Product A B C
Labour Cost
Machinery
Material Cost
Overhead cost
Total costs
Units
Cost per unit		 2 x 1,500 x 14 = 42,000
3 x 1,500 x 56 = 252,000
1,500 x 45 = 67,500
68,770
430,270
1,500
286.85 		3 x 2,400 × 14 = 100,800
2 × 2,400 × 56 = 268,800
2,400 × 28 = 67,200
68,465
505,265
2,400
210.53		 1 x 11,000 × 14 = 154,000
5 × 11,000 × 56 = 3,080,000
11,000 × 52 = 572,000
582,765
4,388,765
11,000
398.98


Total material cost = 67,500 + 67,200 + 572,000 = 706,700
Apportionment of production overheads
Product A = 67,200 / 706,700 x 720,000 = 68,770
Product B = 67,500 / 706,700 x 720,000 = 68,465
Product c = 572,000 / 706,700 x 720,000 = 582,765

(ii) Cost per unit using Activity Based Costing (ABC)

Setup cost = 20 / 100 x 720,000 = 144,000
Material movement cost = 35 / 100 x 720,000 = 252,000
Inspection cost 45 / 100 x 720,000 = 324,000

Apportionment of production overheads

Overhead
Set up cost
Material movement cost
Inspection cost
Overhead cost

Product
Labour cost
Machining cost
Material cost
Overhead cost
Total cost A
Units B
Cost per unit A/B 		Product A
45 / 100 x 144,000 = 17,280
12 / 115 x 252,000 = 26,296
140 / 950 x 324,000 = 47,747
91,323


42,000
252,000
67,500
91,323
452,823
1,500
301.882 		Product B
112 / 650 x 144,000 = 24,812
21 / 115 x 252,000 = 46,017
170 / 950 x 324,000 = 57,979
128,808


100,800
268,800
67,200
128,808
565,608
2,400
235.67 		Product C
460 / 650 x 444,000 = 101,908
82 / 115 x 252,000 = 179,687
640 / 950 x 324,000 = 218,274
499,869


154,000
3,080,000
572,000
499,869
4,305,869
11,000
391.443


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QUESTION 4

Q (a) Highlight four purposes of costs classification in an organisation.(4 marks)

(b) (i) Statement of equivalent production.(4 marks)
(ii) Statement of apportionment of cost. (6 marks)
(iii) Process 1 account.(6 marks)
A

Solution


(a) Purposes of costs classification in an organisation.

➦ Cost classification in an organization serves several important purposes. Some which include:

  1. Cost Analysis and Control: Classification helps in analyzing and controlling costs by providing a systematic framework to categorize and track expenses. It allows managers to identify the different components of costs, such as materials, labor, overheads, and other expenses, and understand their individual and collective impact on the organization's financial performance. This analysis helps in identifying cost-saving opportunities, optimizing resource allocation, and making informed decisions to control and manage costs effectively.
  2. Decision Making: Cost classification assists in decision-making processes by providing relevant and reliable cost information. By classifying costs into different categories, such as fixed costs, variable costs, direct costs, indirect costs, or relevant costs for a specific decision, managers can assess the financial implications of different alternatives. This information enables more accurate cost estimation, pricing decisions, make-or-buy decisions, product mix decisions, and other strategic choices that impact the organization's profitability and competitiveness.
  3. Financial Reporting: Cost classification is essential for financial reporting purposes, ensuring accurate and meaningful presentation of costs in financial statements. By classifying costs into appropriate categories, such as cost of goods sold, operating expenses, or non-operating expenses, organizations can provide transparency and compliance with accounting standards. This classification also enables internal and external stakeholders, such as investors, lenders, and regulatory bodies, to evaluate the financial performance and health of the organization.
  4. Performance Evaluation: Cost classification aids in evaluating the performance of different segments, products, or departments within an organization. By classifying costs by cost centers or profit centers, managers can assess the efficiency and effectiveness of each unit. It enables comparisons of costs, revenues, and profitability across different segments, facilitating performance evaluation, benchmarking, and identification of areas for improvement.
  5. Budgeting and Planning: Cost classification supports budgeting and planning processes by providing a structured framework to estimate and allocate costs. By categorizing costs into various budgetary components, such as direct costs, indirect costs, or capital expenditures, organizations can develop realistic and comprehensive budgets. This helps in aligning resources, setting targets, and monitoring actual performance against planned expenses.


In summary

➧ Overall, cost classification serves the purpose of enhancing cost analysis, control, decision making, financial reporting, performance evaluation, and budgeting within an organization. It provides a structured approach to organizing and understanding costs, enabling effective management and informed decision-making processes.

(b) (i) Statement of equivalent production.

Statement of equivalent production
Materials Labour Overheads
Units competed & transfered
Closing inventory(W1)
Equivalent units 		150,000
100,000
250,000		 150,000
50,000
200,000 		150,000
40,000
190,000


(ii) Statement of apportionment of cost.

Mambo yote ltd
Apportionment cost statement
Materials Labour Overheads
Operating inventory
Cost incured
Total cost
Number of units B
Cost per units A/B		 250,000
1,000,000
1,250,000
250,000
5.00 		100,000
750,000
850,000
200,000
4.25 		250,000
700,000
950,000
190,000
5.00


(iii) Process 1 account.

Units S.p Sales Details Units S.p Sales
Opening stock(W2)
Materials
Labour
Overheads 		50,000
200,000
250,000

12
5


600,000
1,000,000
750,000
700,000 		Units transferred
Closing Inventory


150,000
100,000


14.25
9.125


2,137,500
912,500


250,000 3,050,000 250,000 3,050,000


Workings

Closing inventory

Materials = 100 / 100 x 100,000 = 100,000 units
Labour = 50 / 100 x 100,000 = 50,000 units
Over heads = 40 / 100 x 100,000 = 40,000 units

Opening inventory
(250,000 + 100,000 + 250,000) / 50,000 = 12

Clossing inventory valuation

Material
Labour
Overhead
Total cost		 100,000 x 5.00
50,000 x 4.25
40,000 x 5.00

500,000
212,500
200,000
912,500

Cost per unit = 912,500 / 100,000 = 9.125


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QUESTION 5

Q (a) (i) Flexible budget based on a 50% level of activity. (7 marks)
(ii) State three problems which might arise from such a change in the level of activity. (3 marks)

(b) Using variance analysis, derive the following:
(i) Standard cost card for the period ended 30 April 2019.(5 marks)
(ii) Budget for the period ended 30 April 2019.(5 marks)
A

Solution


(a) (i) Flexible budget based on a 50% level of activity.

Workings

Margin 20 / 100 = 1 / 5
Markup = 1 / 4


70% = 6,300 units
50% = ?
50 / 70 x 6,300 = 4,500 units

Production overheads are partly fixed and partly variable and take the form

y = a + bx
Where
a = fixed cost
b = variable cost per unit
x = output

At 60% activity level
70% = 6,300 units
60% =?
60 / 70 x 6,300 = 5,400 units

Subtracting equation (i) from equation
164,800 = a + 6,300 b ----(i)
150,400 = a + 5,400 b ----(ii)
14,400 = 900b
b = Sh.16

150,000 = a + 5,400 x 16

150,400 = a + 86,400
a = 150,400 - 86,400 = Sh. 64,000
y = 64,000 + 16x

At 50% activity level
y = 64,000 + 16x = 64,000 + (16 x 4,500)
64,000 + 72,000 = Sh 136,000

Selling and distribution overheads partly variable and partly fixed and they are in the form y = a + bx
Where: y = Total cost
a = fixed cost
b = variable cost per unit
x = output in units
At 60% activity level
70% = 6,300 units
60% = ?
60 / 70 x 6,300 = 5,400 units
176,400 = a + 6,300b
169,200 = a + 5,400b
900b = 7,200
b = 8

176,400 = a + 6,300b
176,400 a + (6,300 x 8)
176,400 = a + 50,400
a = 126,000
y = 126,000 + 8x

At 50% level of activity
y = 126,000 + 8x
126,000 + 8 x 4,500
126,000 + 36,000 = 162,000

Limit processing company flexible budget at 50% activity level

Sh Sh
Direct materials
Direct wages
Production overheads
Admin overheads
Serving & distribution overheads
Total cost
Markup
Selling price		 50 / 70 x 176,400
50 / 70 x 75,600



1 / 4 x 604,000


 126,000
54,400
136,000
126,000
162,000
604,000
151,000
755,000


(ii) Problems which might arise from such a change in the level of activity

➫ The business could fall short of the client's expectations.
➫ The firm's earnings will be impacted by fixed costs because they are constant.
➫ The company can have a lot of unutilized capacity.
➫ Most of the employees of the company would be idle as a result.

(i) Standard cost card for the period ended 30 April 2019

Standard price per kg = (8,450 + 370) / 420 = Sh. 21per kg
Standard usage per unit = 21(420 - x) = 252 = 8,820 - 21x = 252
21x = 8,568
x = 409 kgs
Standard usage per unit produced in kgs = 408 / 7,200 = 0.057kgs
Direct labour rate variance = (Actual rate- standard rate) Actual hrs
1,120 = (35,280 / 9,100 x SR) x 9,100
1,120 = (3.877 - SR)100
1,120 = 35,280 - 9,100SR
SR = Sh. 4,000

Direct labour efficiency variance
LEV = Standard rate (Actual hours - standard hours)
1,040 = 4,000(9,100 - sh)
1,040 = 36,400 - 4,000Sh
4,000Sh = 37,440
Standard hours 9.360 hours

Standard labour hours per unit produced = 9,360 / 720 = 1300 hours per unit
Variable overhead efficiency variance (V. O. E.V)
V.O.E.V Standard variable overhead absorption
Rate (Actual hours - standard hours)
9,100 = VOARC (9,100 - 9,360)
9,100 = 260,000V.O.A.R
Standard rate Sh. 3,500

Biashara Ltd
Standard cost card for the period ended 30 April 2019
Standard cost per unit
Direct materials: 0.057 kg at Sh 21 per kg
Direct labour 1300 hours at Sh 4,000 per hour
Prime cost
Variable overheads 1300 hours at 3,500

 Sh.
1.197
5.200
6.797
4.550
10.947


Biashara Ltd
Budget for period ended 30 April 2019

Direct materials 8,450 + 370 + 252
Labour cost 35,280 + 1,120 + 1,040
Variable overheads 34,200 - 2,350 + 910
Total variable cost
Fixed costs 28,500 - 500
Total costs		 Sh.
9,072
37,440
32,760
79,272
28,000
107,272


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