Guaranteed

95.5% Pass Rate

CPA
Intermediate Leval
Management accounting November 2019
Suggested Solutions

Management accounting
Revision Kit

QUESTION 1

Q (a) (i) A store ledger account for the month of January 2020 using firm in first out (FIFO) method of inventory valuation (10 marks)

(ii) The value of the closing stock (2 marks)

(b) Using accounts analysis method, determine a cost estimation equation in the form of Y-a+bX taking the number of blocks to be the only cost driver. (8 marks)
A

Solution


(a)(i) store ledger account for the month of January 2020 using firm in first out (FIFO)

Date Receipts Issues Balance
Quantity Rate Value Quantity Rate Value Quantity Rate Value
1/1/20
1/1/20
3/1/20
7/1/20


8/1/20
9/1/20
13/1/20
17/1/20


19/1/20
20/1/20
23/1/20
25/1/20


27/1/20



31/1/20

12,000
8,000



10,000





600
1,200
7,000
150
160



155





160
140
152.5
1,800,000
1,280,000



1,550,000





96,000
1,680,000
1,067,000


9,500
2,500
12,000

300
5,000
4,500
3,500
8,000



4,500
6,500
11,000
3,500
600
5,900
10,000
200


135
150


155
150
150
160




160
155

155
160
140

140


1,282,500
37,500
1.657,500

46,500
750,000
675,000
560,000
1,235,000



720,000
1,007,500
1,727,500
542,500
96,000
826,000
1,464,500
28,000 		9,500
21,500
29,500


17,500
27,500
27,200
22,200


14,200
14,800
26,800
33,800


22,800



12,800
12,600 		135






















 1,282,500
3,082,500
4,362,500


2,705,000
4,255,000
4,208,500
3,458,500


2,223,500
2,319,500
3,999,500
5,067,000


3,339,500



1,875,000
1,847,000


(ii) The value of the closing stock

1,847,000

(b) Using accounts analysis method, determine a cost estimation equation in the form of Y-a+bX

Cost Variable cost
Sh."000"		 Fixed cost
Sh."000"
Indirect materials
Indirect labour
Rent and rates
Machinery Depreciation
Maintenance
Technical support
Storage cost
Heat and light
Water bill
Transport
Supplies		 5,700
4,100
0
0
3,100
0
4,100
2,100
1,050
2,000
4,000 		0
0
2,800
1,700
2,100
1,620
200
1,000
650
900
0
Total 26,150 10,970


Cost function y = a + bx

Where:
a = Total fixed cost = Sh.10,970,000
b = Variable cost per unit = 26,150,000 / 170,000 = Sh.153.82
x = Units of output

Y = 10,970,000 + 153.82


More info
CPA Premium Portal

Revision Made Easy. 🚀

Get rid of the ads and focus on your success. Download our Professional PDF Revision Kits and study anywhere, even offline.

QUESTION 2

Q (a) Discuss four objectives of budgetary control system in an organisation. (8 marks)

(b) (i) Determine the wages payable to each employee under the two labour remuneration methods (9 marks)

(ii) Advise each employee on the best labour remuneration method to accept based on your computations in b (1) above (3 marks)
A

Solution


(a) Objectives of budgetary control system to an organization

Budgetary control system

➦ Is a system of procedures used to ensure that an organization's actual revenues and expenditures closely match its financial plan.

Objectives of budgetary control system

➫ Planning - Budgeting guarantees good planning.

➫ Communicate & share plans and ideas - A formal procedure is necessary to make sure that everyone who will be impacted by the plans is aware of what they should be doing. There may be one-way communication in which managers give commands to staff members, or there may be two-way communication and an exchange of ideas.

➫ Profitability Accounting and Activity Accounting - Budgetary planning and control systems demand that managers of budget centers be held accountable for the accomplishment of budget objectives for the operations that they personally oversee.

➫ Efficiency and economy - Cost management and cost reduction are the results of effective budgetary control.

➫ To ensure the organizations' success - Objectives are established for both the organization as a whole and for specific departments and operations inside it. These objectives are then expressed quantitatively as targets that must be met within the budget plan's time frame.

➫ Co-ordination - The coordination of company activity is aided by budgets.

➫ Encourage staff to increase their performance - A system of feedback on actual results, which informs people of how well or poorly they are working, can be used to keep employees' interest and commitment. Finding controllable reasons for budget variances and sharing them with managers serves as a motivator for future performance improvement.

➫ Establish a structure for authorization - The budget serves as an authority for each budget holder to incur the costs specified in the budget once it has been approved by the directors and senior management. The budget holder can conduct day-to-day operations as long as the spending is listed in the formalized budget without needing to obtain separate authorisation for each item of expenditure.

➫ Increase in profitability - Budgets are used to limit costs, resulting in the targeted profits.

➫ Develop a control system - A budget serves as a benchmark for actual performance, which is tracked and evaluated. Comparisons of actual results to the budget plan provide one control over real performance. The causes of deviations from the budget can then be divided into elements that are under your control and those that are outside of your control.

(b)(i) Wages payable to each employee under the two labour remuneration methods

➦ Wages payable to Amboga under piece rate with guaranteed time rate

8,000 + (1,800 x 25) + (200 x 10) - (8 / 100 x 25 x 200) = Sh.54,600

➦ Wages payable to Amboga under differential piece rate

(50 x 15) + (200 x 10) (250 x 20) + (500 x 25) + (1,000 x 30) - (8 / 10 x 15 x 200) = Sh.50,010

➦ Wages payable to Banyala under piece rate with guaranteed time rate

8,000 + (1,700 x 25) + (100 x 10) - (8 / 100 x 25 x 100) = Sh.51,300

➦ Wages payable to Banyala under differential piece rate

(150 x 15) + (100 x 10) + (250 x 20) + (500 x 25) + (800 x 30) - (8 / 100 x 100) =Sh.44,630

➦ Wages payable to Charlie under piece rate with guaranteed time rate

8,000 + (1,600 x 25) + (50 x 10) - (8 / 100 x 25 x 50) = Sh.48,400

➦ Wages payable to Charlie under differential piece rate

(200 x 15) + (250 x 20) + (650 x 30) + (50 x 10) - (8 /100 x 15 x 50) = Sh.40,440

(ii) Advise

➫ For Amboga, best remuneration method is the differential piece rate system because it gives highest wage.
➫ For Banyala, best remuneration method is the differential piece rate with guaranteed time rate because it gives the highest pay
➫ For Charlie, best remuneration method is the differential piece rate with guaranteed time rate


More info
CPA Premium Portal

Revision Made Easy. 🚀

Get rid of the ads and focus on your success. Download our Professional PDF Revision Kits and study anywhere, even offline.

QUESTION 3

Q (a) Describe four limitations of management accounting in an organisation. (4 marks)

(b) (i) The current shortfall in labour hours at maximum demand.(4 marks)

(ii) The optimal product mix and the resultant profit.(12 marks)
A

Solution


(a) limitations of management accounting in an organisation.

(i) Limited knowledge - The application of management accounting necessitates an understanding of several related topics. Lack of understanding of relevant topics, such as accounting principles, statistics, economics, and management principles, among others, will restrict the usage of management accounting.

(2). Developmental - The development of management accounting is still ongoing; it has not yet reached its completion. This system's strategies and tools produce a range of unique effects. Internal accounting and/or operational accounting are still used to refer to it.

(3) Personal Bias - The skill of the analyst and interpreter is wholly dependent on the analysis and interpretation of financial accounts. Therefore, a person's own bias and prejudice might compromise the objectivity and efficacy of the results and recommendations.

(4). Based on Financial and Cost Records - Financial accounting and cost accounting supply the facts and information that management accounting is built on. As a result, the accuracy and efficiency of administrative judgments would depend on the quality of data provided by cost and financial accounts, limiting their efficacy to the trustworthiness of their informational sources.

(5). Internal resistance - Installation of a management accounting system necessitates alterations to the way traditional accounting procedures are carried out and organizational structures, necessitating the reorganization of staff members and their duties as well as the creation of new rules and regulations that may be resisted by staff.

(6) Provides only Data - Many solutions to a problem are produced and presented to management under the management accounting system. The management is free to choose any option from the many accessible options or even to reject them all. Consequently, management accounting can only offer facts and cannot suggest a course of action.

(7). Ambiguous variables - In management accounting, historical event that is on record is interpreted and evaluated in terms of money. However, the corporate organization is actually dealing with a number of issues that cannot be measured.

(8). Expensive to implement - Installing a management accounting system is highly expensive. As a result, a small company organization is unable to afford the installation costs. Moreover, only large and complicated businesses may benefit from this approach.

(9). Broad based scope - Since it takes into account both monetary and non-monetary organization transactions, management accounting has a very broad reach. The management accountant's low training and experience may cause them to prepare incorrect statistics.

(10) Preference to Intuitive Decision Making - Using management accounting principles can assist in making scientific decisions. However, the bulk of management accountants and top-level executives prefer to rely on their instincts and prior business expertise when making choices. The explanation is that intuitive decision-making is really straightforward and simple.

(11). Continuity and participation - Management is responsible for making choices. Management accountants are responsible for the implementation. To prevent the collection of fraudulent management accounting system operations, the management accountant's constant efforts and the full participation of all levels of management are required.

(12). Lack of objectivity - Prejudice and manipulation on a personal level are possible. the stage of financial accounting called interpretation Therefore, it becomes less objective and valid.

(b) (1) The current shortfall in labour hours at maximum demand.

Number of hours required to produce
Product
X = 24 / 8 = 3hrs per unit
Y = 44 / 8 = 5.5 hrs per unit
Z = 32 / 8 = 4hrs per unit

Hours required at maximum demand

Product
X = 2,000 x 3.0 = 6,000
Y = 1,800 x 5.5 = 9,900
Z = 3,000 x 4.0 = 12,000
Total 27,900


Shortfall = 27,900 - 25,000 = 2,900 labour hrs

(ii) The optimal product mix and the resultant profit.

Product X Y Z
Selling price
Less: Variabl cost
Raw materials
Labour
Overheads
Contribution
Units of limiting factor
Contribution per unit of limiting factor 		250

(70)
(24)
(56)
100
3
33.33		 460

(155)
(44)
(98)
163
5.5
29.64		 320

(110)
(32)
(75)
103
4
25.75
Rank 1 2 3


Optimal product mix
Available hrs
Less: Hours product X (2,000 x 3)

Less: Hours product Y(1,800 x 5.5)

Less: Hours product Z(8,100 / 4 x 4)

25,000
(6,000)
19,000
9,900
8,100
8,100
0


Profit Statement
X Y Z Total
Contribution
Less: Fixed overheads
Net profit 		2,000 x 100 = 200,000


1,800 x 163 = 293,400


 2,025 x 103 = 208,575


 701,975
400,000
301,975


More info
CPA Premium Portal

Revision Made Easy. 🚀

Get rid of the ads and focus on your success. Download our Professional PDF Revision Kits and study anywhere, even offline.

QUESTION 4

Q (a) Calculate the following cost variances for the month of April 2020:

(i) Total direct materials cost variance. (2 marks)

(ii) Total variable production overheads vanance. (2 marks)

(iii) Direct labour rate variance. (2 marks)

(iv) Direct labour efficiency variance (2 marks)

(b) A reconciliation statement, between actual and badgeted profit or loss for the month of April 2020 (8 marks)

(c) Explain two factors to be taken into account in deciding whether or not to investigate individual variances (4 marks)
A

Solution


(a) (i) Total direct materials cost variance

532,800 - (20 x 26,000) = Ksh 12,800 Adverse

(ii) Total variable production overheads variance

Variable overhead efficiency variable = standard overhead rate per hour (AH-SH)

Standard rate = (24 x 25,000) ÷ (6 x 25,000) = Sh.4

Variable averhead efficiency variance 4(150,000 - 156,000) = Sh 24,000 F

Variable overhead expenditure variable = actual variable overheads - (Actual hours x standard overhead rate/ hour)
614,000 - (150,000 x 4) = 14,000A
Total variable production overheads variance = 24,000F + 14,0004 = 10,000F

(iii) Direct labour rate variance

DLRV = AH(AR-SR)
Where;
AH = Actual hours 150,000
AR = Actual rate 1,221,000 ÷ 150,000 = Sh.8.14
SR = Standard rate = Sh 8
DLRV = 150,000(8.14 - 8) = Sh 21,000 Adverse

(iv) Direct labour efficiency variance

DLEV = SR(AH-SH)
Where; SH = is the hours = 26,000 x 6 = 156,000 hrs
8(150,000-156,000) = Sh. 48,000 Favourable

(b) A reconciliation statement between actual and budgeted profit or loss

Budgeted contribution per unit = Selling price per unit - standard variable cost per unit
120 - 92 = 22 per unit
Actual selling price = Actual sales made / Actual units sold
2,995,000 / 25,000 = 119.20
Sales price variance = Actual sold (Actual price - Standard price)
25,000(119.80 - 120) = Sh 5,000 Adverse

Zaidi merchants budgeted income statement for April 2020

Sales(25,000 x 120)
Less:
Direct materials(26,000 x 20)
Direct labour(26,000 x 48)
Production overhead(26,000 x 24)
Sh


520,000
1,248,000
624,000 		Sh
3,000,000



(2,392,000)
Budgeted contribution 608,000


Zaidi merchants actual income statement for April 2020

Sales
Less
Direct materials
Direct labour
Variable Production overhead
 Sh


532,000
1,221,000
614,000 		Sh
2,995,000



(2,367,800)
Actual contribution 627,200


Sales Variance
3,000,000 - 2,995,000 = 5,000A

Zaidi merchants
Reconciliation statement between actual & Budgeted P/L
Variabce Sh
Budgeted Pofit/Loss

Sales variance
Direct material cost variance
Direct labour rate variance
Direct labour efficiency variance
Variable production overheadvariance
F



48,000
10,000
58,000
A
5,000
12,800
21,000


38,800 		608,000






19,200
Actual profit 627,200


(c) Factors to be taken into accounting deciding whether or not to investigate individual variances

1. Adverse or favourable variances - Negative deviations usually garner the greatest attention since they point to issues.

2. The cost or revenue's inherent volatility - Some costs, like oil prices, are volatile, so variations are to be expected. However, some costs, like labor rates, are much more stable by nature, and even a slight variation could be a sign of an issue.

3. Materiality - The magnitude of the variance may reveal the scope of the issue and the potential advantages of solving it.

4. variances - A chance occurrence could be the cause of one negative variation. Typically, a string of negative variances implies that a process is out of control.

5. Possibility of correction / controllability - There is no sense in determining the cause of a cost or revenue if the manager has no influence over it such as inflation.

6. Correctional expenses and gains - There is no value in investing more if the expense of fixing the issue is likely to outweigh the benefit.

More info
CPA Premium Portal

Revision Made Easy. 🚀

Get rid of the ads and focus on your success. Download our Professional PDF Revision Kits and study anywhere, even offline.

QUESTION 5

Q (a) In the context of costs classification, explain three types of costs based on behaviour (6 marks)

(b) Suggest four reasons that would lead a cost accountant to prefer Just-in-Time (JIT) purchasing over conventional purchasing models (4 marks)

(c) Process 2 account for the period, using the First-in-First-Out (FIFO) method.(10 marks)
A

Solution


(a) Types of costs based on behaviour

➫ Fixed cost - is used to describe a cost associated with a company expense that remains constant regardless of the quantity of goods and services produced or sold.

➫ variable cost - is a business expense that varies with the volume of output.

➫ Semi-variable cost - is a cost composed of a mixture of both fixed and variable components.Also known as a semi-fixed cost or a mixed cost.

(b) Reasons that would lead a cost accountant to prefer Just-in-Time (JIT) purchasing over conventional purchasing models

➫ Reducing wait times and transportation expenses

➫ Avoids excessive production

➫ Reducing costs by streamlining your production processes

➫ Reducing product flaws

➫ Eliminating the requirement for inventory operations

➫ lowering the amount of capital that is invested in inventory.

(c) Process 2 account for the period, using the First-in-First-Out (FIFO) method.

Statement of equivalent production
Input Output Material 1 Material 2 Conversion
Process 112,000
Opening WIP 1,200



113,200		 Opening WIP 1,200
Completed output 104,200
Normal loss 5,660
Abnormal loss 540
Clossing WIP 1,600
113,200
104,200
-
540
1,600

 1,200
104,200

540
1,600

 600
104,200

540
1,600
Equivalent production 106,340 107,540 106,940


Normal loss = 5% x 113,200 = 5,660
Abnormal loss = 6,200 - 5,660 = 540
Actual loss = 6,200

Statement of cost
Details Material 1 Material 2 Conversion
Transfer cost
Less scrap
Estimated cost
Equivalent production
Unit cost		 18,770,400

18,770,400
106,340
176.513 		4,797,200

4,797,200
107,540
44.6025		 6,317,600

6,317,600
106,540
59.2979


Statement of evaluation
Details Material 1 Material 2 Conversion Total
Opening WIP

Abnormal loss
Clossing WIP		 -
18,392,654.6
95,317.02
282,420.8		 53,530.2
4,643.205.7
24,088.54
71,373.6		 35,578.79
6,178,841.18
32,020.866
71,157.48 		89,108.94
29,219,701.4
151,426.46
424,951.88


Determination of cost to be transferred to finish goods
Cost attached to opening WIP + Cost of converting + Cost of opening WIP
300,900 + 89,108.94 + 29,219,701.48 = Sh 29,609,710.42

Process (II) Account
Units Value
Units Value
Process 1
Materials
Conversion
Opening up
112,000


1,200
18,770,400
4,797,200
6,317,600
300,900 		Finished goods
Normal loss
Abnormal loss
Clossing WIP
105,400
5,660
540
1,600 		29,609,710.42
-
151,426.48
424,951.88
30,186,100 113,200 30,186,088.78


More info
CPA Premium Portal

Revision Made Easy. 🚀

Get rid of the ads and focus on your success. Download our Professional PDF Revision Kits and study anywhere, even offline.

Comments on CPA past papers with answers:

New Unlock your potential with focused revision and soar towards success
Pass Kasneb Certification Exams Easily

Comments on:

CPA past papers with answers