Management Accounting December 2023 Past Paper

CPA INTERMEDIATE LEVEL

MANAGEMENT ACCOUNTING
TUESDAY: 5 December 2023. 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) Discuss THREE essential features of a budget. (6 marks)

(b) Godoro Ltd. supplies high quality mattresses. The company outsources these mattresses from a supplier in town. Godoro Ltd. estimates that the total inventory holding cost of one mattress per annum is as follows:

Cost Percentage of purchase price per unit per annum (%)
Opportunity cost 5
Obsolescence cost 4
Storage charges 3
Handling cost 2
Insurance cost 1
15
Additional information:
1. The annual sales demand of the mattresses is 480 mattresses.
2. Each mattress costs Sh.4,000 to purchase from the supplier.
3. The ordering cost is Sh.6,250 per order.
4. The supplier offers a 3% discount for orders of 120 mattresses and a discount of 5% for orders of 180 mattresses.

Required:
(i) The economic order quantity (EOQ) of the mattresses. (2 marks)

(ii) The cost minimising order size from the supplier. (4 marks)

(c) Jeffy Ltd. has been manufacturing and selling three textile products. The following details are available for each of the three products:

Product Cotton
Sh. per unit Linen
Sh. per unit Polyester
Sh. per unit
Direct material 350 365 255
Direct labour 480 240 210
Variable production overheads 150 115 205
Fixed production overheads 300 300 300
Total cost per unit 1,280 1,020 970
Selling price 1,600 1,340 1,300
Net profit 320 320 330

Budgeted annual demand (units) 1,600 2,400 3,000

Additional information:
1. Each direct labour hour is charged at Sh.120 for cotton, Sh.120 for linen and Sh.70 for polyester.
2. The direct labour force is threatening to go on strike for two weeks. This means that only 10,100 hours will be available for production rather than the expected 20,200 hours.

Required:
If the strike goes ahead as planned, advise the management of Jeffy Ltd. on the product(s) that should be produced if profits are to be maximised. (8 marks)

QUESTION TWO
(a) The Management Accountant of Almah Ltd. provided the following profit statement for the year ended 31 October 2023:

Sh.“million”
Revenue 60
Total costs (48)
Net profit 12

The contribution sales ratio is 50%.

Required:
(i) Calculate the break-even sales. (2 marks)

(ii) Calculate the margin of safety. (2 marks)

(b) The management of Almah Ltd. in (a) above is considering two options with a view to increase sales in the year 2024.

These options are:

Option one: Increase sales by 30% and incur a sales promotion campaign worth Sh.5 million.

Option two: Increase sales by 20% and reduce the selling price by 10%.

Required:
Advise the management of Almah Ltd. on the better option to implement. (4 marks)

(c) Dimax College has been using their own van to transport students to and from college. The new principal feels this may be too expensive for the school. He suggests that the college could lease transport services from Gari Ltd. at a cost of Sh.308,000 per month.

The college accountant revealed the following information:

Sh.
Cost of the van 7,000,000
Annual insurance 790,000
Annual repairs 440,000
Driver’s monthly salary 90,000
Annual road licence 100,000
Transport levy per annum 154,000
Scrap value of the van 1,000,000
Tyres and tubes annual cost 126,000
Inspection cost per year 10,000
Petrol cost per kilometre

Additional information: 154
1. The van is estimated to cover 40,000 km per year. It has an estimated useful life of six years.
2. A new traffic rule has been issued requiring all passenger vehicles including college vans to be fitted with speed governors and seat belts. This will cost Sh.40,000 per annum.
3. Gari Ltd.’s monthly cost of Sh.308,000 is attributed as follows:

Sh.
Van hire 220,000
Driver’s salary 50,000
Maintenance fee 38,000
308,000
Required:
(i) Compute the cost per kilometre if the college:
• Uses its own transport. (6 marks)
• Hires transport services. (3 marks)

(ii) Outline THREE other factors that the college might consider in choosing the best alternative.
(3 marks)

QUESTION THREE
(a) Differentiate between “overhead allocation” and “overhead absorption”. (4 marks)

(b) Maono Ltd. has a budgetary activity level of 50,000 direct hours and budgeted production overheads of Sh.10,000,000. The following information was obtained from its three departments namely; A, B and C.

1. Department A: 50,000 direct hours are worked and the actual overheads were Sh.9,400,000.

2. Department B: 43,000 direct hours are worked and the actual overheads were Sh.10,000,000.

3. Department C: 45,000 direct hours are worked and the actual overheads were Sh.9,600,000.

Required:
Determine over or under absorption of overheads of each department. (6 marks)

(c) Tamu Ltd. is a company located in the Eastern part of the country and manufactures juices. The company plans to establish a subsidiary in western part of the country to produce mineral water. Tamu Ltd. estimates that the subsidiary can produce 40,000,000 bottles of water in the next one year.

The cost analysis for the subsidiary yielded the following estimates:

Sh.“000” Percentage of total annual cost that is variable (%)
Material cost 1,936,000 100
Labour cost 900,000 70
Overhead cost 800,000 64
Administrative cost

Additional information: 300,000 30
1. The bottled water produced by the subsidiary will be sold by sales representatives who will receive a commission of 8% of the sales price.
2. The subsidiary will operate independently in terms of costs and revenue.

Required:
(i) Compute the sales price per bottle to enable management realise an estimated 10% profits on sales proceeds in the subsidiary. (6 marks)
(ii) Calculate the break-even point in value for the subsidiary on the assumption that the sales price is Sh.110 per bottle. (4 marks)
(Total: 20 marks)

QUESTION FOUR
(a) Melta Ltd. has just completed its first year in operation. The unit costs and selling price based on absorption costing basis are as follows:

Standard cost and selling price: Sh.
Direct material (2 kilograms at 350 per kilogram) 700
Direct labour (0.5 hours at Sh.1,600 per hour) 800
Production overhead:
Variable overheads
(0.5 hours at Sh.600 per hour)
300
Fixed overheads (0.5 hours at Sh.900 per hour) 450
Standard production cost 2,250
Standard profit margin 2,750
Standard selling price 5,000
Additional information:
1. Other budgeted costs during the period in relation to selling and distribution and administration were as follows:
Variable costs Fixed costs (Sh.)
Selling and distribution 10% of sales 9,000,000
Administration 12,300,000
2. During the year, the company had the following activity levels:
• Actual production was 24,000 units.
• Units sold were 21,300 units.
3. Actual fixed production overheads was Sh.300,000 less than absorbed fixed production overheads.
4. Budgeted fixed selling and distribution overheads were Sh.50,000 less than the actual fixed overheads.
5. Melta Ltd. used an expected activity level of 24,000 direct labour hours to compute the predetermined overhead rates.

Required:
Prepare the following operating statements:

(i) Absorption costing profit or loss statement. (6 marks)

(ii) Marginal costing profit or loss statement. (6 marks)

(iii) A reconciliation statement for absorption and marginal profits. (2 marks)

(b) Motomoto Ltd. operates standard costing system. The following budgeted information relates to its only product:

Quantity Unit price (Sh.) Standard cost per unit (Sh.)
Direct material A 3 kilograms 140 420
Direct material B 2 kilograms 250 500
Direct labour 2 hours 105 110
Fixed overheads 270
Standard cost per unit 1,300

Budgeted production amounted to 800 units at a unit price of Sh.1,300. Actual production data for the month of November 2023:

Actual output amounted to 850 units.

Additional information:
1. Budgeted fixed overheads for its product is based on budgeted output of 800 units per month.
2. Standard selling price was budgeted as Sh.1,600 per unit.
3. There was no opening or closing inventory of direct material.

Required:
Flexible budget profit statement. (6 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Major policy decisions in business are based on cost factor and it is important to distinguish between controllable and non-controllable costs in decision making. However, the classification of cost as controllable and non-controllable depends on the point of reference.

Required:
(i) With reference to the above statement, explain TWO possible uses of cost information to the management. (2 marks)

(ii) By distinguishing between “controllable costs” and “non-controllable costs”, discuss how the classification of cost as controllable and non-controllable depends on a point of reference. (4 marks)

(b) Activity Based Costing (ABC) attempts to relate the incidence of costs to the level of activities undertaken.

Required:
In relation to the above statement, explain the following hierarchy of activities that are used in activity based costing system:

(i) Unit level activities. (2 marks)

(ii) Batch level activities. (2 marks)

(iii) Product level activities. (2 marks)

(c) ABC Ltd. produces and sells a single product Zed whose standard cost is as follows:

Sh.
Direct material (15kgs at Sh.260 per kg) 3,900
Direct wages (5 hours at Sh.60 per hour) 300
Fixed production overheads 500
4,700
Additional information:
1. The fixed overheads included in the standard cost is based on an expected monthly output of 1,000 units.
2. Fixed production overheads are absorbed on the basis of direct labour hours.
3. During the month of November 2023, the actual results were as follows: Production 890 units
Material 12,100 units costing Sh.1,835,500
Direct wages 4,200 hours worked for Sh.241,500
Fixed production overheads Sh.470,000

Required:
(i) Material price variance and material wage variance. (4 marks)

(ii) Labour rate variance and labour efficiency variance. (4 marks)
(Total: 20 marks)
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