THE PUBLIC ACCOUNTANTS EXAMINATIONS BOARD

A Committee of the Council of ICPAU

CPA (U) EXAMINATIONS

LEVEL ONE

COST AND MANAGEMENT ACCOUNTING – PAPER 7

FRIDAY 24 AUGUST, 2018

INSTRUCTIONS TO CANDIDATES:

1. Time allowed: 3 hours 15 minutes.

The first 15 minutes of this examination have been designated for reading
time. You may not start to write your answer during this time.
2. This examination contains Sections A and B.
3. Section A is bound separately from Section B.
4. Attempt all the 20 multiple-choice questions in Section A. Each question
carries 1 mark.
5. Attempt four of the five questions in Section B. Each question carries 20
marks.
6. Write your answer to each question on a fresh page in your answer
booklet.
7. Please, read further instructions on the answer booklet, before attempting
any question.

 2018 Public Accountants Examinations Board

 Cost and Management Accounting - Paper 7

SECTION B
Attempt four of the five questions in this section
Question 2
(a) (i) Distinguish between management accounting and financial
accounting. (4 marks)
(ii) Explain any two ethical challenges faced by management
accountants.
(2 marks)
(b) Discuss any two merits and two demerits of the following stores
management systems:
(i) Centralised stores. (4 marks)
(ii) Decentralised stores. (4 marks)
(c) Describe how the weighted average cost (WAC) method is used in
inventory valuation.
(2 marks)
(d) Explain any four principles of a good incentive scheme.
(4 marks)
(Total 20 marks)
Question 3
(a) Distinguish between the following costs:
(i) opportunity cost and replacement cost. (2 marks)
(ii) product cost and period cost. (2 marks)
(b) Explain any two merits of an integrated accounting system.
(2 marks)
(c) Fresh Bakery Ltd (FBL) produces and sells delicious cakes and bread at Shs
3,000 and Shs 4,500 per unit respectively. FBL’s standard production cost
card for the month of September 2018 is as follows:
Item Cakes Bread
Shs ‘000’ Shs ’000’
Direct materials per unit 1,000 1,200
Direct labour (Shs 500 per hour) per unit 625 1,250
Variable overheads per unit 500 800
FBL has only 100,000 direct labour hours and expects to sell 30,000 units
of cakes and 30,000 units of bread during the month. Normally FBL incurs
monthly fixed costs of Shs 38,750,000 and does not maintain inventory.

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 Cost and Management Accounting - Paper 7

Required:
Determine, for the month of September 2018, the:
(i) production mix. (10 marks)
(ii) expected net profit. (4 marks)
(Total 20 marks)
Question 4
(a) (i) Describe any four features of process costing. (4 marks)
(ii) Identify two industries that use process costing. (2 marks)
(b) Tubonge Furniture Workshop (TFW) was awarded a contract to supply 150
office chairs and 80 office tables. The following cost data relates to the
contract:
Tables Chairs
Shs ‘000’ Shs ‘000’
Direct labor 20,000 32,000
Direct materials 35,000 68,000
Production overheads are charged at 30% on labour costs and information
relating to other overheads is given below:
Tables Chairs
Budgeted overheads (Shs ‘000’) 6,000 7,500
Budgeted labour hours 2,000 3,000
Actual labour hours 2,000 1,800
The cost of adding special designs was 10% and 20% of the prime costs
for chairs and tables respectively. Selling expenses were Shs 60,000 per
chair and Shs 80,000 per table. TFW prices its products using full cost
plus mark-up and the mark-up on chairs was 5% and tables was 10%.
Required:
Determine the selling price for the chairs and tables.
(7 marks)
(c) Magala Enterprises Ltd (MEL) produces millet flour and has been using
absorption costing in the previous years. MEL’s board recently resolved to
adopt the marginal costing method that it provides more analysed
information for decision making. The following data was extracted from
MEL’s books of account for the 4th quarter ended 30 June, 2018:

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 Cost and Management Accounting - Paper 7

Details kg
Sales 100,000
Opening inventory 300,000
Closing inventory 400,000
MEL produces a single product based on a normal activity level of 250,000
kg per quarter. During the quarter under review, total direct material
costs amounted to Shs 145 million and Shs 350 million related to direct
labour. Fixed administrative overheads amounted to Shs 20 million while
production overheads were Shs 330 million of which a third were fixed.
MEL sells the flour at Shs 4,500 per kg.
Required:
Prepare, for MEL for the quarter ended 30 June, 2018 a profit statement
using the marginal costing method.
(7 marks)
(Total 20 marks)
Question 5
(a) Explain any two advantages and two disadvantages of standard costing.
(4 marks)
(b) Axel Publishers Ltd (APL) publishes Chika Magazine which is released on a
monthly basis. APL planned to sell all the published copies of the
magazine at Shs 20,000 during the month of July 2018. The following
information relates to the month of July 2018:
Details Budgeted Actual
Copies of magazines 3,000 2,850
Costs Shs ‘000’ Shs ‘000’
Direct materials 21,000 20,640
Direct wages 10,500 9,452
Indirect labour costs (60% variable) 5,500 6,350
Other Overheads (70%fixed) 2,620 2,540
Selling price per copy 20,000 19,600

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 Cost and Management Accounting - Paper 7

Required:
(i) Prepare APL’s flexed budget for the month of July 2018.
(11 marks)
(ii) Compute the sales “price” and “volume” variances.
(5 marks)
(Total 20 marks)
Question 6
(a) Explain the steps involved in the activity-based costing (ABC) system.
(4 marks)
(b) Gomba Farmers Ltd deals in livestock and has three service departments,
i.e. Dips, Feeds and Finance and three production departments i.e.
Breeding, Bull Fattening and Diary. Total overhead costs for the year
ended 30 June, 2018 was as follows:
Production departments Service departments
Breeding Bull Fattening Diary Dips Feeds Finance
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
25,000 32,000 60,000 15,000 38,000 30,000
Overheads apportionment proposal was as follows:
Feeds Finance Breeding Bull Fattening Diary
Dips 20% 10% 20% 20% 30%
Feeds - 20% 30% 15% 35%
Finance - - 50% 25% 25%
Other information relating to these departments was:
Production departments Service departments
Breeding Bull Diary Dips Feeds Finance
Fattening
No. of cows 100 150 150
No. of stores requisitions
for feeds 15 10 15 10
No. of dip visits 10 70 100 100 20

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 Cost and Management Accounting - Paper 7

Required:
(i) Using the elimination method, apportion service department
overheads to production departments.
(9 marks)
(ii) Using the step method and appropriate bases of apportionment,
apportion service departments to production departments.
(7 marks)
(Total 20 marks)

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