CPA INTERMEDIATE LEVEL MANAGEMENT ACCOUNTING
TUESDAY: 20 August 2024. Morning Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
(a) With reference to cost classification, distinguish between the following types of costs:
(i) “Semi-variable costs” and “semi-fixed costs”. (2 marks)
(ii) “Prime costs” and “marginal costs”. (2 marks)
(b) Cost Database Management System (DBMS) is a computer based software system that is used in management accounting to manage costs.
Required:
Highlight FOUR benefits of implementing a cost database management system for inventory. (4 marks)
(c) Medico Ltd. is a pharmaceutical company which manufactures three types of medicines namely; Alpha, Beta and Zeta using absorption costing system.
The company has two grades of labour; skilled labour and semi-skilled labour. The following profit statement relates to the operations of Medico Ltd.
Alpha Beta Zeta
Sh. Sh. Sh.
Selling price per unit 595 870 1,095
Cost per unit:
Direct material 115 140 220
Direct labour:
Skilled labour (Sh.80 per hour) 80 160 240
Semi-skilled (Sh.60 per hour) 60 120 110
Fixed overhead cost (see note 1) 100 100 100
Total cost per unit 355 520 670
Net profit per unit 240 350 425
Units Units Units
Expected maximum production and demand 3,000 5,000 6,500
Additional information:
1. Fixed overhead costs are Sh.1,450,000 per annum.
2. Variable overheads are absorbed into production at a rate of 100% for skilled labour and 50% of the semi- skilled labour. These variable overheads have not been absorbed in the profit statement above.
3. There is a maximum of 28,000 skilled labour hours available.
4. Deficit units can be outsourced from chemist suppliers at the following prices:
Medicine Alpha Beta Zeta
Purchase price per unit Sh.425 Sh.650 Sh.895
Required:
(i) Compute the shortfall in skilled labour hours. (2 marks)
(ii) Determine the optimal production mix and the number of units to be outsourced from chemist suppliers.
(6 marks)
(iii) Maximum net profit achievable for the period based on quantities determined in (c) (ii) above. (4 marks)
(Total: 20 marks)
QUESTION TWO
(a) Identify FIVE challenges faced by a business in implementing a cost accounting system. (5 marks)
(b) Maziwa Ltd. is a small company that specialises in buying and selling of powdered milk. The milk tins are packaged in boxes.
The company started its operations on February 2024 with a capital of Sh.4,000,000. During the past period of six months, the following transactions have occurred:
Date of receipt Powdered milk purchases Sale of powdered milk
Quantity (boxes) Total cost Sh. Date of dispatch Quantity (boxes) Total sales Sh.
February 13 200 72,000 March 10 500 250,000
March 8 400 152,000 May 20 600 270,000
April 11 600 240,000 July 25 400 152,000
May 12 400 140,000
July 15 500 140,000
Additional information:
1. The closing inventory counted on 31 July 2024 was 500 boxes.
2. General operating expenses paid during the period amounted to Sh.23,000.
3. The company uses LIFO method of inventory valuation.
Required:
Prepare:
(i) A stores ledger account. (6 marks)
(ii) Income statement for the company for the period ended 31 July 2024. (5 marks)
(c) Konya Ltd. had a weekly minimum and maximum consumption of material Q at 250 and 750 units respectively. The re-order quantity as fixed by the company is 3,000 units. The material is received within a period of 4 to 6 weeks from the date of issue of supply order.
Required:
Calculate the:
(i) Minimum stock level. (2 marks)
(ii) Maximum stock level. (2 marks)
(Total: 20 marks)
QUESTION THREE
(a) (i) Explain the term “budget committee”. (2 marks)
(ii) Outline FOUR roles of a budget committee. (4 marks)
(b) The following cost data has been obtained from the records of Komputa Ltd., an IT company based in industrial area. The firm specialises in assembly of computers.
Month Number of computers assembled Total cost incurred
Sh. ‘000’
January 1,600 164,000
February 900 112,000
March 1,100 100,000
April 820 96,000
May 1,160 120,000
June 1,200 124,000
July 1,300 128,000
August 1,360 130,000
September 1,400 140,000
October 1,500 148,000
November 1,700 180,000
Required:
(i) Using the high-low method, formulate an equation that can be used to estimate the future total cost in the form of y = a + bx. (4 marks)
(ii) Using the least square method, formulate the cost function in the form of y = a + bx. (8 marks)
(iii) Using the equations obtained in (b)(i) and (b) (ii) above, estimate the total cost to be incurred in December if 1,800 computers are expected to be assembled. (2 marks) (Total: 20 marks)
QUESTION FOUR
(a) Highlight FOUR arguments for the use of marginal costing. (4 marks)
(b) Aquatiq Ltd. manufactures water dispensers for both domestic and office use using absorption costing system. There are three models branded “regular”, “medium” and “deluxe”.
Selected data for the three products is as follows:
Model Regular Medium Deluxe
Direct material cost per unit Sh.2,500 Sh.3,250 Sh.5,500
Direct labour hours per unit 0.75hours 1.5 hours 1 hour
Machine hours per unit 1.5 hours 1 hour 3 hours
Production volume 800 units 1,200 units 4,800 units
Additional information:
1. The total cost per unit is loaded a profit markup of 20% to determine the selling price.
2. Direct labour cost is Sh.2,100 per labour hour.
3. Currently, production overheads are absorbed based on a blanket-wise machine hour absorption costing basis. The rate for the period is Sh.1,500 per machine hour.
4. Budgeted annual production overheads for Aquatiq Ltd. amounted to Sh.25,200,000. Further analysis shows that the production overheads can be apportioned according to activity based costing (ABC) approach as follows:
Cost pools Apportionment Cost driver
Set-up costs 40% Number of set-ups
Machine costs 20% Number of machine hours
Material procurement cost 10% Number of orders
Quality control cost 30% Number of inspections
100%
5. The following cost drivers are associated with the models:
Model Regular Medium Deluxe
Number of set-ups 64 120 320
Number of orders 12 21 87
Number of inspections 120 180 456
Number of machine hours 1,200 1,200 14,400
Required:
Calculate for each model, the full cost and selling price per unit under:
(i) Blanket-wise absorption costing approach. (8 marks)
(ii) Activity based costing (ABC) approach. (8 marks)
(Total: 20 marks)
QUESTION FIVE
(a) The table below shows the type of cost classification base and an example of type of cost. By giving one example in each, fill in the missing letters W, X, Y and Z.
Cost classification Example of cost
Example:
Functional classification Production cost, Administrative cost.
(i) On basis of time W (1 mark)
(ii) X Variable cost, fixed cost (1 mark)
(iii) By nature of elements Y (1 mark)
(iv) Z Opportunity cost, sunk cost (1 mark)
(b) Explain THREE benefits of standard costing and variance analysis to an organisation. (6 marks)
(c) Saruji Ltd. manufactures a product branded “GemLime”. The company operates several manufacturing processes. In the process I, joint products “Gem” and “Lime” are produced in the ratio of 5:3 by volume from the raw material input.
The following information relates to process I for the first week of the month of July 2024: Raw material input 60,000 kilograms at a cost of Sh.3,810,000
Abnormal gain 1,000 kilograms
Other costs incurred upto the split off point:
Direct labour cost Sh.1,800,000
Direct expenses Sh.540,000
Production overheads 110% of direct labour cost
Additional information:
1. Normal loss in process I of 5% of the raw material input is expected. Losses have a realisable value of Sh.50 per kilogram.
2. The company holds no work-in-progress.
3. The joint costs are apportioned to the joint products using the physical volume measure basis at split off point.
Required:
(i) Prepare process I account for the first week of the month of July 2024 in which both the output volumes and values for each of the joint products are shown separately. (6 marks)
(ii) Saruji Ltd. can sell product Gem for Sh.20 per kilogram at the end of process I. It is considering a proposal to further process Gem in process II in order to create product “GemLime”. The further processing in process II would cost Sh.4 per kilogram input from process I. In process II, there would be a normal loss in volume of 10% of the input to that process. This loss has no realisable value. Product “GemLime” could then be sold for Sh.26 per kilogram.
Determine based on financial considerations only, whether product Gem should be further processed to create product “GemLime”. (4 marks)
(Total: 20 marks)
