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CPA
Intermediate Leval
Management accounting November 2018
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Management accounting
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QUESTION 1

Q (a) "A budgetary control system could prove successful only when certain conditions and essentials exist".
With reference to the above statement, highlight six conditions and essentials for an effective budgetary system (6 marks)

(b)(i) The overheads to be charged to the production departments.(8 marks)

(ii) The amount of under or over absorption in each production department (6 marks)
A

Solution


(a) Budgetary control system

A budgetary control system is a management tool used to plan, monitor, and control an organization's financial activities. It involves the process of creating budgets, comparing actual performance against budgeted targets, and taking corrective actions to ensure financial objectives are met.

An effective budgetary control system requires certain conditions and essentials to be in place.
These include:

  1. Clear organizational goals: The organization must have well-defined and communicated goals that provide a clear direction for the budgetary control system. Without clear goals, it becomes challenging to allocate resources effectively and measure performance against objectives.
  2. Support from top management: Top management support is crucial for the success of a budgetary control system. It ensures that the system is given importance, resources are allocated appropriately, and there is commitment to achieving the budgetary targets.
  3. Sound budgeting policies and procedures: The organization should have well-established budgeting policies and procedures that outline the process for creating, reviewing, and approving budgets. These policies and procedures should be clear, consistent, and aligned with the organization's objectives.
  4. Accurate and reliable information: An effective budgetary control system relies on accurate and reliable information. This includes historical data, financial forecasts, market trends, and any other relevant information needed for budget preparation and performance evaluation.
  5. Reward and retribution: Employees should be fairly compensated for performance in accordance with the budget, but inattentive workers should not escape punishment.
  6. Participation and involvement of relevant stakeholders: The involvement of relevant stakeholders, such as department heads, managers, and employees, is essential for an effective budgetary control system. It helps in gathering diverse perspectives, improving accuracy in budgeting, and increasing acceptance and commitment to the budget targets.
  7. Impose timeliness: Budgets must be created in advance of the period to which they pertain, and ample time must be given for their creation in order for them to be effective
  8. Effective coordination: To successfully budget, you need a solid organizational framework. Responsibility centers, a set budget controller, and a budget committee are all necessary.
  9. Flexibility and adaptability: A budgetary control system should be flexible enough to accommodate changes in the business environment. It should allow for adjustments to the budget when unforeseen circumstances arise or when new opportunities emerge.
  10. Monitoring and feedback mechanisms: Regular monitoring and feedback mechanisms are essential to track budgetary performance, identify variances, and take corrective actions if necessary. These mechanisms can include regular reporting, performance reviews, and analysis of actual results against budgeted targets.
  11. Performance evaluation and accountability: An effective budgetary control system should establish mechanisms for evaluating performance and holding individuals and departments accountable for their budget responsibilities. This promotes transparency, responsibility, and a culture of performance improvement.
  12. Continuous improvement: The budgetary control system should be subject to continuous improvement. Feedback from budget users should be collected, and the system should be reviewed and updated regularly to ensure its effectiveness in supporting organizational goals.


(b)(i) The overheads to be charged to the production departments.

Production Service Total
Base MM
Sh		 NN
Sh		 PP
Sh		 QQ
Sh
1
2
3		 Direct overheads allocated
Apportionment of overhead of PP
Apportionment of overheads of AA		 Direct
50:20:30
40:40		 43,200
5,400
5,220		 52,200
2,160
5,220		 10,800
(10,800)
-
 7,200
3,240
(10,440)		 113,400
0
0
Total 53,820 59,580 0 0 113,400


(ii) The amount of under or over absorption in each production department

Overhead absorption rate = budgeted overhead / budgeted base

Production departments
MM
NN		 OAR
45,000 / 1,800 = 25
54,000 / 5,400 = 10


Department Budgeted / Absorbed overheads Actual overheads Over / Under
MM
NN		 1,980 x 25 = 49,500
6,120 x 10 = 61,200		 53,820
59,580		 (4,320)
1,620


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QUESTION 2

Q (a) Explain four assumptions of break-even analysis. (8 marks)

(b)(i) Determine the break-even point of "meko" and "130" in both units and shillings (6 marks)

(ii) Given that customers refill "meko" three times for every two times they refill "130", compute the composite unit contribution margin. (4 marks)

(iii) Determine the break-even sales in shillings assuming that "meko" and "130" are normally purchased in the ratio of one to one (2 marks)
A

Solution


(a) Assumptions of break-even analysis.

➦ Break - even analysis is a financial tool used by businesses to determine the point at which their total revenue equals their total costs, resulting in neither profit nor loss. This analysis helps businesses understand the minimum level of sales they need to achieve in order to cover all their costs and start generating a profit. However, break-even analysis relies on several assumptions, which are important to consider when interpreting the results.
These are some of the key assumptions of break-even analysis:

  1. Fixed and variable costs: Break-even analysis assumes that costs can be divided into two categories: fixed costs and variable costs. Fixed costs remain constant regardless of the level of production or sales, while variable costs vary in direct proportion to production or sales volume. The analysis assumes that these cost classifications are accurate and do not change over the relevant time period.
  2. Cost behavior: The analysis assumes that costs behave in a linear manner, meaning that the relationship between cost and volume is constant. In reality, cost behavior can be more complex, with costs sometimes exhibiting economies of scale (costs decrease per unit as volume increases) or diseconomies of scale (costs increase per unit as volume increases).
  3. Single product or service: Break-even analysis assumes that the business sells only one product or service. This simplification allows for easier calculation of the break-even point. In reality, businesses often offer multiple products or services, each with different cost structures and pricing.
  4. Consistency in sales pricing: The analysis assumes that the selling price per unit remains constant across different sales volumes. However, in practice, businesses may employ various pricing strategies, such as discounts, promotions, or volume-based pricing, which can affect the actual selling price.
  5. Constant productivity and efficiency: Break-even analysis assumes that the level of efficiency and productivity in the production process remains constant. It assumes that there are no significant changes in the cost or time required to produce each unit as the volume of production or sales changes. In reality, efficiency and productivity can vary due to factors like technological advancements, workforce changes, or production process improvements.
  6. Static analysis: The analysis assumes that all other factors influencing costs and revenues remain constant, except for changes in volume. It does not consider external factors such as market conditions, competition, or changes in consumer behavior. These factors can have a significant impact on a business's financial performance but are not accounted for in break-even analysis.
  7. Sold out: Assumes that all units produced will be sold out
  8. Revenue driver: that output is the only cost and revenue driver


(b)(i) Determine the break-even point of "meko" and "130" in both units and shillings

Selling price of meko per unit = 49,056,000 / 43,800 = Sh1,120

Variable cost per unit meko = Total variable cost / Unit sold

29,433,600 / 43,800 = Sh. 672

Breakeven point in units make up = Fixed costs / (Selling price per unit - variable cost per unit)

9,811,200 / (1,120 - 672) = 21,900 units

Breakeven point in sales = (Fixed cost x selling price per unit) / (selling price per unit- variable cost per unit)

(9,811,200 x 1,120) / (1,120 - 672) = Sh. 24,528,000

Selling price per unit product = 142,350,000 / 71,175 = Sh 2,000

Variable cost per unit of product 13c

42,705,000 / 71,175 = Sh.600

BEP(units) = Fixed cost / (Selling price per unit - variable cost per unit) 79,716,000 / (2,000 - 600) = 56,940

BEP(Shillligs) = BEP units x selling price per unit

56,940 x 2,000 = 113,880,000

(ii) Composite unit contribution margin

Weighted Average contribution Margin

(WACM) = W₁ CM₁ + W₂CM₂

Where: W₁ = Weight of Meko = 3/5 = 0.6

CM₁ = Contribution per unit of Meko = 1,120 - 672 = Sh. 448

W₂ = Weight of product 13c = 2/5 = 0.4

CM₂ = contribution per unit of product 13c = 2,000 - 600 = 1,400

WACM = (0.6 x 448) + (0.4 x 1,400)

268.8 + 560 = Sh 828.8

(iii) Break-even sales in shillings assuming that "meko" and "13C" are normally purchased in the ratio of one to one

Contribution Margin ration = Contribution / Selling price per unit

Contribution margin ration meko 448 / 1,120 = 0.4

Contribution margin ration 13c = 1,400 / 2,000 = 0.7

Weighted contribution margin ration (WCMR) = W₁CMR₁ + W₂CMR₂

Where: W₁ Weight of meko = 1/2 = 0.5

CMR₁ = Contribution margin ratio meko = 0.4

W₂ = Weight of 13 c = ½ = 0.5

CMR₂ = Contribution margin ratio 13c = 0.7

WCMR = (0.5 x 0.4) + (0.5 × 0.7)

0.2 + 0.35 = 0.55

BEP(shillings) = Total fixed cost / (Weighted contribution - Contribution margin)

(9,811,200 + 79,716,000) / 0.55 = Sh. 162,776,727.30

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QUESTION 3

Q (a), Direct materials control account. (3 marks)

(b) Work-in-progress control account. (5 marks)

(c) Finished goods control account. (4 marks)

(d) Production overheads control account .(4 marks)

(e) A statement showing profit or loss. (4 marks)
A

Solution




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QUESTION 4

Q (a) (i) Material price variances (4 marks)
(ii) Material mis variances. (4 marks)
(iii) Material yield variances (4 marks)

(b)(i) Batch cost statement (6 marks)
(ii) Profit per 1,000 bricks. (2 marks)
A

Solution


(a) (i) Material price variances

Actual price per ingredient. = Total purchase cost / Material in kgs bought

Actual price x = 146,500 / 300 = Sh. 488.33

y = 12,500 + 100 = Sh. 125.00

Material Price Variance (MPV) = (Price - Actual price) Actually quantity

MPV x = (480 - 488.33)300 = 2500A

MPV y = (130 - 125) 100 = 500F

Total material price variance = 2500A + 500F =200A

(ii) Material mix variance

Material usage = Opening stock + Purchase - Closing stock

Material usage x = 100 + 300 - 110 = 290 kgs

Material usage y = 60 + 100 - 50 = 110 kgs

Standard mix

Material x =70 / 100 x 400 = 280 kgs.

Ingridient Standard
Quantity mix		 Actual
Quantity mix		 Variance
(Kgs)		 S.p
(per kg)		 Variance
(Ksh)
x
y		 280
120		 290
110		 (10)
10
 480
130		 (4,800)
1,300
(3,500)


(iii) Materials yield variance

(standard quantity in standard mix - actual quantity in standard mix) standard price

Where standard quantity = 100 % input

90% of input = 375 kg of castings

100% of input = 100 / 30 x 375 = 417 kgs

Standard quantity in standard mix

Material x standard mix = 30 / 100 x 417 kg = 125

Material y standard mix = 70 / 100 x 417 kg = 292

Material yield variance x = 480 (125 - 120) = Sh. 2,400F

y = 130(292 - 280) = Sh.156F

Total material yield variance = 2,400 + 1,560 = 3,960F

(b)(i) Batch cost statement

Brick mast ltd
Batch cost statement
Material: M
N
Direct labour
Prime cost
Indirect labour
Work overheads
Office overheads
Royalties		 1,800 x 40




(0.25 x 143,200)
0.25 x (14,320 + 35,800)

 72,000
45,640
25,560
143,200
8,640
35,800
35,800
0.50
Total cost per batch 223,440.50


(ii) Profit per 1000 bricks


Sales per batch 1000 x 40
Less cost per batch
Profit per batch		 Sh.
400,000
(223,440.50)
176,559.50

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QUESTION 5

Q (a) Evaluate four benefits that might accrue to an organisation from using computers in cost and management accounting (4 marks)

(b) Summarise four functions of a budget committee. (4 marks)

(c)(i) Explain the term "industrial engineering method" in relation to cost estimation. (3 marks)

(ii) Highlight three circumstances under which the use of industrial engineering method of cost estimation is appropriate. (3 marks)

(d) Production overhead is also known as factory overhead or manufacturing overhead.
With reference to the above statement, outline six examples of production overheads. (6 marks)
A

Solution


(a) Benefits that might accrue to an organisation from using computers in cost and management accounting

Using computers in cost and management accounting can bring several benefits to an organization.
Here are some major advantages:

  1. Improved Accuracy and Efficiency: Computers can perform complex calculations quickly and accurately, reducing the likelihood of human errors in cost and management accounting processes. By automating repetitive tasks such as data entry, calculations, and report generation, computers save time and enable accounting professionals to focus on analysis and decision-making. This leads to increased efficiency in performing cost calculations, budgeting, variance analysis, and other accounting functions.
  2. Enhanced Data Management: Computers enable organizations to store and organize vast amounts of financial and operational data in databases or cloud-based systems. With a computerized accounting system, data can be easily accessed, updated, and analyzed. This facilitates better data management, allows for real-time tracking of costs and performance, and supports timely and accurate decision-making. Additionally, digital storage eliminates the need for physical storage space required for paper documents.
  3. Accurate Cost Allocation: Cost allocation is a critical aspect of cost and management accounting, particularly in complex organizations with multiple departments, products, or projects. Computers can streamline the cost allocation process by using advanced algorithms and automation techniques. By capturing and analyzing data from various sources, computerized systems can allocate costs more accurately, providing insights into the profitability of different products, services, or activities. This helps organizations make informed decisions regarding pricing, resource allocation, and cost reduction strategies.
  4. Advanced Reporting and Analysis: Computers enable sophisticated reporting and analysis capabilities in cost and management accounting. With dedicated accounting software or spreadsheet tools, organizations can generate customized reports, charts, and graphs to present financial and cost information in a meaningful and visually appealing manner. This allows for clearer communication of financial insights to stakeholders, including management, investors, and other decision-makers. Moreover, computerized systems can perform complex financial analysis techniques such as variance analysis, break-even analysis, and activity-based costing, providing deeper insights into cost drivers, profitability, and performance.


(b) Functions of a budget committee.

A budget committee is a group within an organization that plays a crucial role in the budgeting process. Its primary function is to oversee the development, implementation, and monitoring of the organization's budget. Here are the key functions of a budget committee:

  1. Budget Planning and Preparation: The budget committee is responsible for coordinating the budget planning process. It collaborates with various departments and stakeholders to gather input and information needed for budget preparation. The committee sets guidelines and timelines for budget submissions, ensures that the budget aligns with the organization's strategic goals and objectives, and provides guidance on budget assumptions, targets, and constraints.
  2. Budget Review and Approval: The budget committee reviews and evaluates budget proposals submitted by different departments or business units. It assesses the feasibility, reasonableness, and alignment of the proposed budgets with the overall organizational goals. The committee ensures that the budget is balanced, realistic, and supports efficient resource allocation. Once the review is completed, the budget committee approves the final budget for implementation.
  3. Resource Allocation: The budget committee plays a crucial role in determining the allocation of financial resources within the organization. It assesses the funding needs of various departments or projects, prioritizes resource allocation based on strategic priorities, and makes decisions regarding resource reallocation or budget cuts. The committee ensures that resources are allocated efficiently and in a manner that maximizes the organization's overall performance and effectiveness.
  4. Budget Monitoring and Control: After the budget is approved and implemented, the budget committee monitors its execution and ensures compliance with the budgetary guidelines. It tracks actual expenses and revenues, compares them to the budgeted amounts, and analyzes any significant variances. The committee identifies areas of concern or potential budget overruns and takes appropriate actions, such as implementing corrective measures or recommending adjustments to the budget. It also provides regular reports on the budget performance to management and stakeholders.
  5. Communication and Coordination: The budget committee acts as a communication channel between different departments and management. It facilitates communication and coordination among various stakeholders involved in the budgeting process, ensuring that relevant information is shared, and decisions are communicated effectively. The committee also fosters collaboration and consensus-building to address any conflicts or discrepancies related to budgetary matters.
  6. Continuous Improvement: The budget committee promotes continuous improvement in the budgeting process. It reviews the effectiveness and efficiency of the budgeting procedures and identifies areas for enhancement. The committee may propose changes to budgeting policies, procedures, or systems to streamline the process, increase accuracy, and enhance the overall budgeting effectiveness.


(c)(i) Explain the term "industrial engineering method" in relation to cost estimation.

The term "industrial engineering method" in cost estimation refers to a systematic approach used by industrial engineers to determine the costs associated with the production of goods or services. Industrial engineers apply principles of engineering, mathematics, and statistical analysis to analyze and estimate the costs involved in manufacturing processes, resource utilization, and overall production efficiency.

The industrial engineering method focuses on optimizing production systems and processes to achieve cost efficiency while maintaining or improving quality. It involves various techniques and tools to estimate costs accurately.

(ii) Circumstances under which the use of industrial engineering method of cost estimation is appropriate.

  1. Work Measurement: Industrial engineers use work measurement techniques to analyze and measure the time required to perform specific tasks or activities within a production process. This includes methods like time studies, predetermined motion time systems (PMTS), and work sampling. By quantifying the time spent on different tasks, engineers can estimate labor costs and identify opportunities for process improvement.
  2. Process Analysis: Industrial engineers conduct detailed analysis of production processes to identify inefficiencies, bottlenecks, and opportunities for cost reduction. They study the flow of materials, equipment utilization, and sequence of operations to determine the most efficient and cost-effective methods of production. Through process analysis, engineers can estimate the costs associated with different process steps and identify areas where improvements can lead to cost savings.
  3. Standardization and Simplification: The industrial engineering method emphasizes standardization and simplification of production processes to minimize costs. Engineers identify opportunities to standardize components, materials, and methods, which can reduce variation, streamline operations, and lower costs. Simplifying processes by eliminating unnecessary steps or reducing complexity can result in more efficient and cost-effective production.
  4. Cost Data Analysis: Industrial engineers analyze historical cost data and use statistical techniques to develop cost estimation models. They examine past production data, material costs, labor rates, and other relevant factors to identify patterns and relationships. By applying statistical analysis methods such as regression analysis, engineers can develop mathematical models that relate costs to various variables, allowing for more accurate cost estimation for future projects or production scenarios.
  5. Value Engineering: Industrial engineers employ value engineering techniques to identify opportunities for cost reduction without compromising quality or functionality. They analyze the value of different components, materials, and processes to identify alternatives that provide similar or better performance at a lower cost. Value engineering can result in cost savings through the elimination of unnecessary features, substitution of materials, or redesign of processes.


(d) Examples of production overheads.

Production overhead, also known as factory overhead or manufacturing overhead, refers to indirect costs incurred in the manufacturing process that cannot be directly attributed to a specific product or production unit. These costs are essential for the production process to occur but are not directly traceable to a particular product.

Examples of production overheads:

  1. Depreciation: The cost of depreciation of manufacturing equipments, machineries used in the production process are considered production overheads. Over time, the value of these assets decreases due to wear and tear, and their cost is allocated as a portion of the production overhead.
  2. Factory Rent and Utilities: The cost of renting or leasing the factory space, as well as utilities such as electricity, water, and heating, is part of the production overhead. These expenses are necessary to maintain the production facility but are not directly attributable to individual products.
  3. Factory Maintenance and Repairs: Costs associated with maintaining and repairing manufacturing equipment and facilities are considered production overheads. This includes expenses for regular maintenance, repairs, and servicing to ensure the smooth functioning of production operations.
  4. Indirect Labor: Indirect labor costs are wages and benefits paid to employees who support the production process but are not directly involved in the manufacturing of a specific product. i.e. supervisors, quality control personnel, maintenance staff, and warehouse personnel.
  5. Material Handling and Storage: Costs associated with material handling, storage, and inventory management are considered production overheads. This includes expenses for handling equipment, storage facilities, pallets, packaging materials, and warehouse management systems.
  6. Quality Control: The cost of quality control activities, such as inspections, testing, and quality assurance procedures, is classified as production overhead. These costs are necessary to ensure that products meet the required quality standards.
  7. Factory Supplies: The cost of consumable supplies used in the production process, such as lubricants, cleaning agents, tools, and safety equipment, is considered production overhead.
  8. Insurance and Taxes: Costs associated with factory insurance premiums, property taxes, and other regulatory fees specific to the manufacturing facility are part of the production overhead.
  9. Factory Administration: Expenses related to factory administration, such as salaries of administrative staff, office supplies, communication expenses, and office maintenance, are included in the production overhead.


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