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CPA
Intermediate Leval
Management accounting November 2019
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Management accounting
Revision Kit

QUESTION 1

Q (a) Examine three challenges that young medium-sized organisations might face when introducing cost accounting system into their operations. (6 marks)

(b) (i) The variable cost per unit of product "Delicious" and the total fixed cost per month. (5 marks)

(ii) The current normal sales price per unit, and the contribution per unit at this price. (4 marks)

(iii) Advise the management of Dilica Ltd, on whether the offer from the new customer should be accepted. (5 marks)
A

Solution


(a) Challenges that young medium-sized organisations might face when introducing cost accounting system

(1). Management support
➫ Inadequate backing from the senior executives In order for a system to work effectively, management must support it holistically; otherwise, the system may fail or fail to achieve the desired results.

(2) Uncertainty Regarding Objectives
➫ The staff in charge of cost accounting should understand the system's aims and goals. They ought to be aware of how the information will be used after it has been gathered. If not, they might not gather the right information or might send information that is inaccurate or insufficient.

(3).Lack of employee support
➫ At first, staff members have a tendency to resist new systems, and they might not extend their support if you want the system to work well.

(4) Diverse structures of authority
➫ Although the costing system may be based on a formal authority structure, other authority structures may exist in practice, for instance, if trade unions have more sway over decision-making, then the system may face challenges.

(5).Evolving enviroment
➫ Environment that is constantly changing, including the market, the industrial process, and management principles

(6). Lack of comprehensive system control
➫ The system needs to be constantly monitored. If a component of the system malfunctions, it must be fixed immediately to prevent the system from failing as a whole.

(7). Lack of Trained Personnel
➫ There can be a scarcity of highly skilled and trained employees. Without the availability of trained employees, the task of the costing department, which encompasses cost analysis, cost control, and cost reduction, cannot be managed.

(8). Neglecting to update the system
➫ The needs of business and industry are rapidly evolving due to increased global competition. But in many instances, the system is not kept up to date in order to adapt to the shifting demands of business and industry.

(9). High operational costs for the system
➫ The cost of operating the system could be high if the costing system is not appropriately designed to meet the unique requirements of each situation.

(b) (i) The variable cost per unit of product "Delicious" and the total fixed cost per month.

Total cost @80% = Sh.611,000
Output = 112,000 units
@ 100% = Sh.695,000
high low method
112000 = 80%
? - 100%
(100% x 112,000) / 80 = 140,000
Unit cost = (695,000 - 611,000) / (140,000 - 112,000) = 3 units
At 100% capacity
y = a + bx
695,000 = a + (3 x 140,000)
a = Sh 275,000

(ii) The Current normal sales price per unit, and contribution per unit at this price

CSR = (S.P - V.C) / S.P x 100
60 = (S.P - 3) / S.P x 100
S.p = Sh.7.5

Contribution per unit
S.p - V.c
7.5 - 3 = Sh.4.5 per unit

(iii) Advise the management of Dilica Ltd, on whether the offer from the new customer should be accepted.

Contribution related to the offer
S.p = 80% x 7.5 = sh.6 per unit
V.c = 3
Instalment sales = 6 x 250,000 = 150,000
Total V.c = 3 x 25,000 = 75,000

best contribution = (25,000 / 5 x 1) x 4.5 = 225,000
Total cost = 75,000 + 22,500 = Sh.97,500
Contribution = 150,000 - 97,500 = Sh.52,500

Advice
Accept the offer since itll contribute to profit by Sh.52,500

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QUESTION 2

Q (a) Explain three types of standards as used in standard costing (6 marks)

(b) (i) Stores ledger control account. (3 marks)

(ii) Wages control account. (3 marks)

(iii) Work-in-progress control account. (3 marks)

(iv) Finished goods control account. (2 marks)

(v) Production overhead control account. (3 marks)
A

Solution


(a) Types of standards as used in standard costing

➫ Ideal standards - are the highest standards that can be reached under ideal circumstances. The highest output with the best equipment and layout, the highest efficiency in the use of the production resources, or maximum output at the lowest cost, would be the best possible combination of factors to achieve the level of performance required by ideal standards. Such standards don't take performance into account at all; they merely represent aims or targets.

➫ Attainable standards - These standards are based on normal working circumstances. There is room for typical inefficiencies and waste.The standard must be practical and doable to avoid the same problem as ideal standards.

➫ Current standards - This standard was created for short-term use in order to represent current circumstances (current inefficiencies and waste).

➫ Basic standards - They are long-term standards that haven't altered over the years, and their major goal is to indicate patterns over time for things like material pricing, labor rates, and efficiency, among other things.

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QUESTION 3

Q (a)(i) Cost allocation. (2 marks)

(ii) Cost centre.(2 marks)

(iii) Cost driver.(2 marks)

(iv) Cost pool.(2 marks)

(b) (i) Overheads analysis sheet showing the overhead costs budgeted for each department and the basis of apportionment used. (8 marks)

(ii) The total production cost for each job. (4 marks)
A

Solution


(a) (i). Cost allocation
Is the process of determining and allocating expenses to projects, activities, individuals, or any other expense objects.

(ii). Cost centre
is a division or function inside a business that incurs operating expenditures but has no direct impact on profit.

(iii). Cost driver
is any activity that takes place within an organization and causes costs to be incurred.

(iv). Cost pool
Groupings of accounts that are used to indicate the cost of goods and services that are assignable within a manufacturing or corporate organization.

(b) (i) Overheads analysis sheet showing the overhead costs budgeted for each department and the basis of apportionment used.

Supreme ltd
Overhead analysis sheet
Off Base Amount Unit of base V/Cost A B C X Y
Rent & rates
Machine insurance
Telephone Charges
Depreciation
Production Salary
Heating and lighting
Allocated off 		Area (m²)
Machine value (sh)
Labour rates/hr
Machine value (sh)
Direct labour(hr)
Floor (m2)

 12,800
6,000
3,200
18,000
24,000
6,400

 6,400
480
1,670
480
6,000
6,400

 2/m²
12.5
1.962
37.5
4
1

 6,000
3,000
728.16
9,000
12,800
3,000
2,800		 3,600
1,250
670.67
3,750
7,200
1,800
1,700		 1,200
1,000
651.51
3,000
4,000
600
1,200		 1,200
500
574.86
1,500

600
800		 800
250
574.86
750

400
600
Primary Totals 37,328.18 19,970.60 11,651.15 5,174.86 3,374.86


Overhead apportionment using direct method
A B C X Y
Primary total
Apportion Dep. Y
Apportion Dep X		 37,328.18
674.97
2,587.43		 19,970.67
1,012.46
1,293.72		 11,651.15
1,687.43
1,293.72		 5,174.86
-
(5174.86)		 3,374.86
(3,374.86)
-
2:3:5
5:25:25
Total budgeted 40,590.58 22,276.85 14,632.30 0 0


(ii) The total production cost for each job.

Dept Job 123 Job 124
Materials
Labour A
B
C
Budgeted off A
B

 15,400.00
20 x 380 = 7,600.00
12 x 350 = 4,200.00
10 x 340 = 3,400.00
20,295.28
11,138.42
7,316.33		 10,800.00
16 x 380 = 6,080.00
10 x 350 = 3,500.00
10 x 340 = 4,760.00
20,295.28
11,138.42
7,316.33
Total cost 69,350.03 63,890.03


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QUESTION 4

Q (a) Explain three differences between job costing and process costing (6 marks)

(b) (i) Other income. (8 marks)

(ii) By-product revenue deducted from the main product cost. (6 marks)
A

Solution


(a) Differences between job costing and process costing

➧ Job costing is an accounting technique for keeping track of all the expenses and income connected with a particular project. Process costing is an accounting technique used for producing comparable products in large quantities. It involves gathering and allocating manufacturing expenses to the number of units produced.
➧ Suitable for customised / Unique products Suitable for Standardized (Mass Produced)
➧ Cost is figuring out by the price of each finished project. Cost is influenced by both the production process and the volume of goods.
➧ Cost cannot be transfered Can be transfered accross the processes
➧ Because every work is unique, every product has a unique job cost. Large-scale production eliminates the uniqueness of the product.
➧ Small production units. Large production units.


(b) (i) Other income.

Total joint cost
Quarry
Cutting
Total		 350,000
250,000
600,000


Allocation using physical unit method
Monuments
Granite slabs
Total		 25,000
60,000
80,000


Allocation

Monuments = 25,000 / 85,000 x 600,000 = Sh.176,471
Granite slabs = 60,000 / 85,000 x 600,000 = Sh.423,529

(ii) By-product revenue deducted from the main product cost.

Details Monuments Granite slabs
Joint cost
Separable cost
Total cost
Add by product cost
Less by product cost

Output (tones)
Cost/tonnes(sh)		 176,471
300,000
476,471


476,471
25,000
19.0588		 423,529
400,000
823,529
50,000
(200,000)
673,529
60,000
11.2255

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QUESTION 5

Q (a) Summarise four disadvantages associated with Just-In-Time (JIT) inventory management system. (4 marks)

(b) (i) Production budget in units. (6 marks)

(ii) Cash budget. (10 marks)
A

Solution


(a) Disadvantages associated with Just-In-Time (JIT) inventory management system.

Potential Stock Shortage
➫ JIT inventory management system allows you to carry less inventory. This is because you base your stock decisions on demand predictions, and if those predictions are erroneous, you won't have the appropriate quantity of goods available for your customers.

Supplier Dependence
➫ You run the danger of delaying the delivery of your clients' orders if you are forced to rely on suppliers for each order. Customers might go to a competitor if you can't live up to their expectations.

More Planning Is Necessary
➫ Companies that use JIT inventory management must have a thorough understanding of sales trends and variations. Due to seasonal sales times, many businesses must have more inventory on hand to meet rising consumer demand. As a result, you must prepare in advance for situations like this and make sure that your suppliers can meet the demands.

(b) (i) Production budget in units.

Month Jan Feb Mar Apr May Jun
Sales
Collection		 3,136
-		 2,352
3,136		 2,744
2,352		 3,528
2,744		 3,920
3,528		 3,528
3,920


Production budget
Details
B. Sales(unit)
Add: closing stock
Total requirement Less:
Opening stock
budgeted production units		 Feb
2,940
343
3,283
(294)
2,989		 March
3,430
441
3,871
(343)
5,328		 April
4,410
490
4,900
(441)
4,459


Materials purchased payment schedule
Date
B.Production
Purchase
Payment(sh.M1)
Payment(M2)		 Feb
2,989
3,528

152,880		 March
3,528
4,459

141,120		 April
4,459
4,851




(ii) Cash budget.

Details
Opening balance
Add receipts:
Sales
Total cash available
Less payments
Materials M1
Material M2
Labour
Variable overheads
Fixed overheads
Total payments
Balance		 Feb
2,500,000

3,136,000
5,636,000



209,230
239,120
265,000
713,350
4,922,650		 March
4,922,650

2,352,000
7,274,650

152,880
229,320
246,960
282,240
265,000
1,176,400
6,098,250		 April
6,098,250

2,744,000
8,842,250

119,560
211,680
312,130
356,720
265,000
1,265,090
7,577,160


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