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CPA
Intermediate Leval
Management accounting November 2017
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Management accounting
Revision Kit

QUESTION 1(a)

Q Explain four purposes of cost accounting.
A

Solution


Purposes of Cost Accounting


Cost accounting serves several important purposes within an organization, helping management make informed decisions and control costs effectively. Below are the primary purposes of cost accounting:

  1. Cost Ascertainment: The determination and recording of costs associated with production.
  2. Cost Control: Systematic methods for controlling costs and improving cost efficiency.
  3. Profit Planning and Decision Making: Using cost data for informed decision-making and profit planning.
  4. Performance Evaluation: Assessing the performance of departments, products, or individuals.
  5. Budgeting: Setting realistic budgets based on accurate cost information.
  6. Inventory Valuation: Determining the value of inventories for financial reporting.
  7. Resource Allocation: Efficient allocation of resources based on cost considerations.
  8. Benchmarking: Comparing performance with industry benchmarks or competitors.
  9. Contract Costing: Determining costs associated with specific contracts or projects.

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QUESTION 1(b)

Q Required:
The total overheads chargeable to the production departments using

(i) Continuous allotment method.

(ii) Simultaneous equation method.

(iii) Overhead cost per unit for each department.
A

Solution


(i) Continuous allotment method.


Department

 X
Sh."000"		 Y
Sh."000"		 Z
Sh."000"		 A
Sh."000"		 B
Sh."000"
Allocated overheads
Distribution of A
Distribution of B
Distribution of A
Distribution of B
Distribution of A
Total allocation		 2,500
300
392
29.4
7.84
0.588
3,229.828		 2,000
300
294
29.4
5.88
0.588
2629.868		 1,500
200
196
19.6
3.92
0.392
1,919.912		 1,000
(1,000)
98
(98)
196
(196)
0		 780
200
(980)
19.6
(19.6)

0


(ii) Simultaneous equation method.


Let the total overheads of service department A → X

Let the total overheads of service department B → Y

X = 1,000 + 0.1Y.........(i)

Y = 780 + 0.2X..........(ii)

Y = 780 + 0.2(1,000 + 0.1Y)

Y = 780 + 200 + 0.02Y

Y = 0.02Y + 980

0.98Y = 980

Y = 980 / 0.98 = 1,000

Then, X = 1,000 + (0.1 × 1,000)

1,000 + 100

X = 1,100

Allocation schedule

Department X
Sh."000"		 Y
Sh."000"		 Z
Sh."000"		 A
Sh."000"		 B
Sh."000"
Allocated overheads
Distribution of A
Distribution of B
Total allocation		 2,500
330
400
3,230		 2,000
330
300
2,630		 1,500
220
200
1,920		 1,000
(1,100)
100
0		 780
220
(1,000)
0


(iii) Overhead cost per unit for each department.


Overhead cost per unit = Total overheads / Number of units

X = 3,230,000 / 200,000 = Sh. 16.15 per unit

Y = 2,630,000 / 100,000 = Sh. 26.3 per unit

Z = 1,920,000 / 50,000 = Sh. 38.4 per unit

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QUESTION 2(a)

Q Required:
(i) Calculate the Break-Even-Point (BEP) of sales as the current selling price for 1,000 units.

(ii) The marketing manager intends to reduce the selling price by either 10% or 20% for the 1,000 units without affecting the total profit.

Advise the marketing manager on the required sales volumes under the two options.
A

Solution


(i) Calculate the Break-Even-Point (BEP) of sales as the current selling price for 1,000 units.


Contribution = Selling price - Materials - Labour - Variable cost

400 - 120 - 40 - 40 = Sh. 200

Contribution margin ratio(CMR) = Contribution / Selling price

200 / 400 = 0.5

BEP sales = Fixed cost / CMR

(100 x 1,000) / 0.5 = Sh.200,000

(ii). Advise the marketing manager on the required sales volumes under the two options.



Sales (1000 × 400)
Less: Materials 120 × 1000
Less: Labour 40 × 1000
Less: Variable overheads 40 × 1000
Contribution
Less: Fixed cost
Profit		 Sh.
400,000
(120,000)
(40,000)
(40,000)
200,000
(100,000)
100,000


Option 1: Reduce selling price by 10%


New selling price 90 / 100 * 400 = sh.360

Total variable cost per unit = Materials + Labour + Variable overheads

120 + 40 + 40 = sh.200

Contribution per unit(CPU) = Sh.360 - sh.200 = sh.160

BEP units = (FC + Profit) / CPU

(100,000 + 100,000) / 160 = 1,250 units

Option 2: Reduce the selling price by 20%


New selling price 80 / 100 × 400 = sh.320

CPU = Sh.320 - sh.200 = Sh.120

BEP units = (Fixed costs + profit) / CPU

(100,000 + 100,000) / 120 = 1,666.667 units

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QUESTION 2(b)

Q Required
(i) The economic Order Quantity (EOQ) for material "Exe"

(ii) The number of orders to be placed per year

(iii) The production manager has proposed to increase the current Economic Order Quantity (EOQ) to 100,000 units. Justify how this would increase the total cost of inventory thus not profitable
A

Solution


(i) The economic Order Quantity (EOQ) for material "Exe"


EOQ
=
√
2DCo
Ch

Where:


D = Annual Demand(units)
Co = Ordering cost
Ch = holding cost per unit

EOQ
=
√
2 x 200,000 x 18,750
3
= 50,000(units)


(ii) The number of orders to be placed per year


D / Q = 200,000 / 50,000 = 4(Orders)

(iii) The production manager has proposed to increase the current Economic Order Quantity (EOQ) to 100,000 units. Justify how this would increase the total cost of inventory thus not profitable


Total cost = (D / Q)Co + (Q / 2)Ch

The previous overall cost incurred when a purchase order was placed for 50,000 units.

(200,000 / 50,000) x 18,750 + (50,000 / 2) x 3

75,000 + 75,000 = Sh. 150,000

The overall cost when the Economic Order Quantity (EOQ) was raised to 100,000 units.

(200,000 / 100,000) x 187,500 + (100,000 / 2) x 3

37,500 + 150,000 = Sh.187,500

Advice:

The marketing manager's proposal should be declined as it would result in a rise in the total cost by Shs.37,500.
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QUESTION 3(a)

Q Mitambani Manufacturers Ltd. are in the initial process of adopting a Just-in-Time (JIT) inventory control system:

Required:
(i) Highlight four objectives of a JIT inventory control systent.

(ii) Describe four benefits that would accrue to the company from using JIT inventory control system.
A

Solution


(i). Objectives of a JIT Inventory Control System:


  1. Minimize Inventory Levels: Reduce or eliminate excess inventory to minimize carrying costs.
  2. Improve Efficiency: Streamline production processes and enhance operational efficiency.
  3. Reduce Waste: Minimize waste in raw materials, work-in-progress, and finished goods.
  4. Enhance Flexibility: Allow rapid adjustments to production schedules in response to changes in demand.
  5. Quality Improvement: Produce high-quality products by identifying and addressing issues promptly.
  6. Minimize Stockouts: Ensure necessary materials are available when needed to avoid disruptions.
  7. Shorten Lead Times: Reduce the time between order placement and receiving finished products.
  8. Improve Communication: Foster better communication and collaboration between departments.

(ii). Benefits of Adopting a JIT Inventory Control System:


  1. Cost Savings: Reduce carrying costs and achieve significant cost savings.
  2. Improved Cash Flow: Free up cash by lowering inventory levels and carrying costs.
  3. Increased Efficiency: Optimize production processes for higher productivity and lower costs.
  4. Enhanced Quality: Improve overall product quality by addressing issues promptly.
  5. Better Customer Responsiveness: Respond more quickly to changes in customer demand.
  6. Space Utilization: Efficiently utilize available space with lower inventory requirements.
  7. Supplier Relationships: Build strong relationships with suppliers for reliable deliveries.
  8. Employee Involvement: Foster employee involvement in problem-solving and improvement initiatives.
  9. Environmental Impact: Contribute to environmental sustainability by minimizing waste.
  10. Competitive Advantage: Gain a competitive edge with responsiveness, lower costs, and high-quality products.


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QUESTION 3(b)

Q Summarise three limitations of accounts analysis as a method of cost estimation.
A

Solution


Limitations of Accounts Analysis as a Method of Cost Estimation


  1. Historical Nature: Accounts analysis relies on historical data, which may not accurately reflect future costs.
  2. Inaccurate Allocation: The method may involve arbitrary cost allocation criteria, leading to inaccuracies.
  3. Limited Detail: Financial statements lack the detailed breakdown necessary for a thorough understanding of cost components.
  4. Non-Cost Factors Ignored: Accounts analysis often ignores non-financial factors influencing costs.
  5. Assumes Stable Cost Relationships: Assumes that the relationships between costs and financial items remain constant over time.
  6. Difficulty in Identifying Variable and Fixed Costs: Distinguishing between variable and fixed costs based solely on financial statements can be challenging.
  7. Dependence on Historical Costing Methods: Relies on historical costing methods that may not reflect the current economic reality.
  8. Limited Predictive Value: May have limited predictive value, especially in the face of significant changes in the business environment.
  9. Not Suitable for New Products or Services: May not be suitable for estimating costs of new products or services with limited historical data.
    10.

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QUESTION 3(c)

Q Jundi Ltd. maintains separate cost and financial ledgers. The Accountant has provided the following opening trial balance in the cost ledger

Cost ledger opening trial balance

Financial ledger control account
Work-In-Progress (WIP) control account
Finished goods control account
Stores ledger control account

Sh.

125,210
85,150
39,160
249,520		 Sh.
249,520



249,520


Additional information:
1. During the period, total sales amounted to Sh.375,290
2. Total purchases, wages and overheads amounted to Sh.292,860.
3. At the end of the period, the stores ledger and Work-In-Progress (WIP) control accounts had the same values as in the opening trial balance above
4. The closing balance on the financial ledger control account was Sh. 212,420

Required:
(i) The profit for the period.

(ii) Closing trial balance for the period.
A

Solution


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QUESTION 4(a)

Q In the context of management accounting, distinguish between "discrete costs" and "imputed costs".
A

Solution


Discrete Costs vs. Imputed Costs


Discrete Costs


Definition: Discrete costs refer to explicit, easily identifiable, and directly traceable costs that can be specifically attributed to a particular product, service, or activity.

Characteristics:


  • Traceability: These costs can be directly traced to a specific cost object, such as a product or a department.
  • Identifiability: Discrete costs are clearly identifiable as they are incurred for a specific purpose or activity.
  • Direct Measurement: The measurement of discrete costs is straightforward, and they are typically measured in monetary terms.

Examples: Direct materials, direct labor, and other direct expenses directly associated with producing a specific product are examples of discrete costs.


Imputed Costs


Definition: Imputed costs are costs that are not incurred in a cash transaction but are assigned or allocated to reflect the economic cost of resources consumed internally.

Characteristics:


  • Allocation: Imputed costs involve allocating costs that do not have a direct, cash-based transaction associated with them.
  • Internal Use: These costs are often used for internal decision-making and analysis rather than being recorded in financial statements for external reporting.
  • Subjectivity: The process of imputing costs may involve some degree of subjectivity and estimation.

Examples: Depreciation on company-owned assets, the cost of using internal resources, and opportunity costs are examples of imputed costs. For instance, when a company uses its own building, it may impute the cost of using that space for production purposes.



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QUESTION 4(b)

Q Required:
Assuming a 365 day year, evaluate the performance of the two firms using the following financial performance measures:

(i) Profitability
(ii) Liquidity
(iii) Activity
(iv) Gearing
A

Solution


(i) Profitability


Regarding sales

 ABC ltd
Sh."000"		 XYZ ltd
Sh."000"
Gross profit Margin(GPM)
Gross profit / sales x 100		 139,160 / 497,000 x 100
= 28%		 74,200 / 371,000 x 100
= 20%
Net profit margin
Net profit / sales x 100		 49,700 / 497,000 x 100
= 10%		 29,680 / 371,000 x 100
= 8%
Operating profit margin
(GP - Operating exp) / sales x 100		 (139,160 - 70,460) / 497,000 x 100
= 13.82%		 (74,200 - 44,520) / 371,000 x 100
= 8%


Summary: Firm ABC performs better because of higher profit margins

(ii) Liquidity




 ABC ltd
Sh."000"		 XYZ ltd
Sh."000"
Current ratio
Current assets / Current liabilities		 186,000 / 98,000
= 1.9 : 1		 173,000 / 108,000
= 1.6 : 1
Acid test / Quic ratio
(Current assets - Inventory) / Current liabilities		 (186,000 - 100,000) / 98,000
= 0.88 : 1		 (173,000 - 87,000) / 108,000
= 0.8 : 1


Summary: ABC Ltd is more capable of fulfilling its short-term commitments when compared to XYZ Ltd.

(iii) Activity




 ABC ltd
Sh."000"		 XYZ ltd
Sh."000"
Inventory holding period
Average inventory / Cost of sale x 365		 100,000 / 357,840 x 365
= 102 days		 87,000 / 296,800 x 365
= 107 days
Fixed asset turnover ratio
Total sales / Fixed assets		 497,000 / 142,000
= 3.5		 371,000 / 92,000
= 4.03
Asset turnover ratio
Total assets / Total assets		 497,000 / 328,000
1.52		 371,000 / 265,000
1.4


Summary: ABC ltd is more efficient

(iv) Gearing




 ABC ltd
Sh."000"		 XYZ ltd
Sh."000"
Debt ratio
Total liability / Total assets		 (980,000 + 330,000) / 328,000 x 100
= 3.994		 108,000 / 265,000 x 100
= 0.4075
Equity ratio
Equity / Capital employed x 100		 197,000 / (197,000 + 33,000)
= 85.65%		 157,000 / 157,000 x 100
= 100%
Interest coverage ratio
Operating profit / Interest paid		 (139,160 - 70,460) / 19,000
= 3.62		 (74,000 - 44,520) / 0
= ∞


Summary: XYZ ltd is more levered



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QUESTION 5(a)

Q Required: A flexed budget for the month of October 2017 for the actual sales of 58,000 units
A

Solution


Common ratio = Actual units / Budgeted units

58,000 / 60,000 = 0.967

Megspa Ltd.
Flexed budget for the month of October 207


Sales
Direct materials
Direct labour
Fixed overheads
Net income		 Budget
Sh.
840,000 x 0.967
240,000 x 0.967
300,000 x 0.9667
135,000 × 1

 Flexed
Sh.
812,280
(232,080)
(290,100)
(135,000)
155,100




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QUESTION 5(b)

Q Required:

(i) Process 1 account.
(ii) Process 2 account.
(iii) Income statement for the joint products
A

Solution


(i) Process 1 account.



Output to process 2
Normal loss (10%*30,000)
Abnormal loss (balancing figure)

 Total units
26,000
3,000
1,000
30,000		 Equivalent units
26,000

1,000
27,000


Process 1 costs
Direct materials
Conversion cost

Less: Scrap value of normal (3,000 × 5)

Sh.
600,000
765,000
1,365,000
(15,000)
1,350,000


Cost per equivalent unit = 1,350,000 / 27,000 = Sh.50

Process 1 account
Units

Price
Sh		 Amount
Sh		 Units

Price

Amount
Sh
Direct materials
Conversion cost


30,000


30,000		 20



600,000
765,000

1,365,000		 Process 2
Normal loss
Abnormal loss

26,000
3,000
1,000
30,000		 50
5
50

1,300,000
15,000
50,000
1,365,000


(ii) Process 2 account.


Statement of equivalent process 2

Units produced:
H
N
T
Normal loss 10% x 26,000
Abnormal loss(balancing figure)

Total Units
10,000
7,000
6,000
2,600
400
26,000		 Equivalent units
10,000
7,000
6,000
-
400
23,400


Costs


Transfer cost(process 1)
Conversion

Less: scrap(normal loss)2,600 x 20

Sh
1,300,000
2,262,000
3,562,000
(52,000)
3,510,000


Cost per equivalent unit
3,510,000 / 23,400 = Sh.150

Cost of goods produced
( 10,000 x 150) + (7,000 x 150) + (6,000 x 150) = 3,450,000

Apportionment of process 1 cost on sales value basis

Product
H
N
T
Total		 Sales Amount
10,000 x 180 = 1,800,000
7,000 x 200 = 1,400,000
6,000 x 300 = 1,800,000
5,000,000


Apportionment of process 2 cost on sales value basis

Product
H
N
T 		Apportionment of process 2 cost
1,800,000 / 5,000,000 x 3,450,000 = 1,242,000
1,400,000 / 5,000,000 x 3,450,000 = 966,000
1,800,000 / 5,000,000 x 3,450,000 = 1,242,000


Process 2 account
Units

Price
Sh		 Amount
Sh		 Units

Price

Amount
Sh
Process 1
Conversion cost





26,000





26,000		 50






1,300,000
2,262,000




3,562,000		 To finished goos A/C
H
N
T
Scrap(normal loss)
Abnormal loss


10,000
7,000
6,000
2,600
400
26,000



20


1,242,000
966,000
1,242,000
60,000
52,000

3,562,000


(iii) Income statement for the joint products


H
Sh		 N
Sh		 T
Sh
Sales
Less:Cost
Profit		 1,800,000
(1,242,000)
558,000		 1,400,000
(966,000)
434,000		 1,800,000
(1,242,000)
558,000


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