MANAGEMENT ACCOUNTING
CPA INTERMEDIATE LEVEL
TUESDAY: 23 April 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) Cost classification is essential for easier cost ascertainment and cost control.
With reference to the above statement, explain the following bases of cost classification citing one example in each case:
(i) By time. (2 marks)
(ii) By behaviour. (2 marks)
(iii) By function. (2 marks)
(iv) By nature. (2 marks)
(b) OJ Ltd. manufactures and sells mobile phones. The company’s budgeted statement of profit or loss for the month of May 2024 is as follows:
Sh. Sh.
Sales (1,200 units at Sh.18,000 per unit) 21,600,000
Less: Cost of sales:
Production (1,800 units at Sh.10,000 per unit) 18,000,000
Less: Closing inventory (600 units at Sh.10,000 per unit) (6,000,000) (12,000,000)
Gross profit 9,600,000
Less: Variable selling expenses (10% of sales) (2,160,000)
Fixed selling and distribution costs (1,705,000)
Net profit 5,735,000
Additional information:
1. The budget was prepared using absorption costing principle.
2. If the budgeted production in May 2024 had been 2,000 units, then the total production cost would have been Sh.18,800,000.
Required:
Using high-low method, calculate:
(i) The variable production cost per unit. (2 marks)
(ii) The total monthly fixed production cost. (2 marks)
(c) Assuming the budget of OJ Ltd. for the month of May 2024 had been prepared using marginal costing principle, calculate:
(i) The net profit. (5 marks)
(ii) The break-even point (BEP) in sales value. (3 marks)
(Total: 20 marks)
QUESTION TWO
(a) Describe THREE roles of management accounting in an organisation. (6 marks)
(b) Dynamok Ltd., manufactures bicycles. The company uses job costing to allocate costs to individual products provided to its customers. The company has three production departments T, Q and M.
The company has commenced the preparation of its fixed production overhead cost budget for the next financial year and has identified the following costs:
Overhead cost Sh.“million” Basis of apportionment
Depreciation 660 Net book value of equipment
Indirect labour 900 Direct labour hours
Repairs and maintenance 110 30% to T, 50% to Q and 20% to M
Heating and lightning 90 Floor area
Consumable supplies 30 Direct labour hours
General overheads 20% of direct wages cost of each department
The costs are apportioned to the individual production departments; T, Q and M as follows:
Production department T Q M
Direct labour hours 5,000 3,000 2,000
Direct wages cost (Sh. Million) 150 210 100
Number of employees 25 15 10
Floor area in square metres (M2) 5,000 4,000 1,000
Net book value of equipment (Sh. Million) 80 50 90
Required:
(i) The primary allocation of production overhead costs to the three departments. (6 marks)
(ii) Calculate the overhead absorption rate (OAR) for each department based on direct labour hours.
(3 marks)
(iii) A quotation for a job made as batch BQ23 has the following estimated information: Direct material cost Sh.140,000,000
Direct labour hours 550 hours in department T
890 hours in department Q 160 hours in department M
Required:
Using the OAR computed in (b) (ii) above, compute the total cost of job batch BQ23. (5 marks)
(Total: 20 marks)
QUESTION THREE
(a) Management accounting is a discipline that communicates economic information to various parties known as “end-users”.
With reference to the above statement, outline TWO user information needs of the following end-users:
(i) Executives. (2 marks)
(ii) Production managers. (2 marks)
(iii) Management accountants. (2 marks)
(b) Luxury Weekend County Park is an entertainment park that offers individual and family entry tickets. The tickets include a meal, three types of beverages and unlimited use of the swimming pools. Luxury Weekend County Park has the following ticket prices and variable costs for the year 2024:
Ticket class
Individual Family Total
Sh. Sh. Sh.
Selling price per ticket 2,400 3,000
Variable cost per ticket:
Cost of meal (740) (800)
Direct labour (600) (600)
Variable cost of beverages (240) (250)
Swimming cost (220) (250)
Contribution margin 600 1,100
Sh. Sh. Sh.
Apportioned annual fixed costs (Sh.) 3,375,000 4,125,000 7,500,000
Expected tickets to be sold 6,000 4,000 10,000
Additional information:
1. All the assumptions of cost volume profit (CVP) analysis are valid.
2. Total sales mix is currently generated by the two type of tickets in the following proportions:
• Individual 60%
• Family 40%
Required:
(i) Compute the weighted average contribution margin at the current sales mix assumed above. (2 marks)
(ii) Calculate the total number of tickets that Luxury Weekend County Park must sell to break-even. (2 marks)
(iii) The margin of safety in units for Luxury Weekend County Park. (2 marks)
(iv) Calculate the number of individual tickets and the number of family tickets that Luxury Weekend County Park must sell to break-even. (2 marks)
(c) Ufanisi Enterprises outsource one of its raw materials branded “Oxla” externally. The annual sales demand for material “Oxla” is 30,000 units. The company is planning to switch its purchasing system to a just-in-time (JIT) purchasing system to improve efficiency.
The following information is provided:
Current system Proposed system
Purchase cost per unit (Sh.) 400 400
Ordering cost per order (Sh.) 80,000 28,000
Inventory holding cost 12% –
Additional information:
1. Inventory holding cost per annum is given as a percentage of purchases cost per unit.
2. Under the proposed JIT system, the company does not hold any inventory whatsoever.
3. The re-order quantity under the proposed JIT system is 4,000 units per order.
Required:
Advise the management of Ufanisi Enterprises on whether or not to switch to the proposed system. (6 marks)
(Total: 20 marks)
QUESTION FOUR
(a) Summarise FOUR features of process costing. (4 marks)
(b) Vuna Ltd. are the manufacturers of chemicals for use in agricultural farms. One of their products passes through two processes; P and Q before it is completed and taken to a warehouse.
The following data relates to process Q for the month of march 2024:
1. Opening work-in-progress 4,000 units Degree of completion and cost:
Sh.“000”
Materials 100% 240,000
Labour 60% 144,000
Overheads 60% 72,000
2. Units received from process P were 40,000 at a cost of Sh.1,700,550,000
3. Additional cost during the period in process Q:
Sh.“000”
Materials 759,000
Labour 1,355,760
Overheads 640,220
4. Closing work-in-progress was 3,000 units with the following degree of completion: Materials 100%
Labour and overheads 50%
5. Units scrapped were 4,000 having the following degree of completion: Materials 100%
Labour and overheads 80%
6. Normal process loss was 5% of the expected production.
7. Spoiled units realised Sh.15,000 for each unit.
8. The company uses FIFO method of valuation for the opening work-in-progress.
Required:
(i) Determine units abnormally lost in process Q. (2 marks)
(ii) Prepare a statement of equivalent units of production. (4 marks)
(iii) Prepare a statement of cost. (4 marks)
(iv) Prepare process Q account. (4 marks)
(v) Prepare abnormal loss account. (2 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Hawk Ltd. uses a standard absorption costing in its operations. The following information is provided by the cost accountant:
Actual Budgeted
Selling price per unit (Sh.) 2,600 3,100
Variable cost per unit (Sh.) 1,000 1,000
Output and sales (units) 8,200 8,700
Total fixed overheads (Sh.) 4,510,000 5,220,000
Required:
(i) Sales price variance. (2 marks)
(ii) Sales volume profit variance. (2 marks)
(iii) Fixed overhead volume variance. (2 marks)
(b) A flexible budget is known to be more appropriate for control purposes than a fixed budget.
Required:
(i) By distinguishing between a “fixed budget” and a “flexible budget”, explain whether you agree or disagree with the above statement. (3 marks)
(ii) Outline THREE benefits of budgetary control system in an organisation. (3 marks)
(c) The following information relates to the projected activities of Detrix Ltd., a local manufacturing company for the year 2024:
Wages Materials purchased Overhead cost Sales
Sh.“000” Sh.“000” Sh.“000” Sh.“000”
January 18,000 60,000 30,000 90,000
February 24,000 90,000 36,000 120,000
March 30,000 75,000 48,000 180,000
April 27,000 105,000 42,000 150,000
May 36,000 90,000 54,000 210,000
June 30,000 75,000 48,000 180,000
July 27,000 75,000 42,000 150,000
August 27,000 90,000 42,000 150,000
Additional information:
1. It is expected that cash balance on 30 April 2024 will be Sh.66,000,000.
2. Wages are paid within the month they are incurred.
3. Creditors for raw materials are paid three months after receipt.
4. Debtors are expected to pay two months after delivery.
5. Included in the overhead figure is Sh.6,000,000 per month which represents depreciation.
6. There is a one-month delay in paying the overhead expenses.
7. 20% of the monthly sales are on cash basis.
8. A commission of 5% is paid to agents on all the sales on credit, but this is not paid until the month following the sales to which it relates. This expense is not included in the overhead figure.
9. The company intends to repay a loan of Sh.75,000,000 on 31 May 2024.
10. A delivery is expected in the month of June 2024 of a new machine costing Sh.135,000,000 of which Sh.45,000,000 will be paid in each of the following months.
11. The company has an overdraft facility with banks.
Required:
A cash budget for the months of May, June and July 2024. (8 marks)
(Total: 20 marks)
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