EXAMINATION : FOUNDATION LEVEL

SUBJECT : COST ACCOUNTING

CODE : A4

EXAMINATION DATE : TUESDAY, 2ND NOVEMBER, 2021

TIME ALLOWED : THREE HOURS (9:00 A.M. – 12:00 NOON)

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GENERAL INSTRUCTIONS

1. There are FOUR questions in this paper.

2. Answer ALL questions.

3. Marks are shown at the end of each question.

4. Show clearly all your workings in the respective answers where applicable.

5. This question paper comprises 7 printed pages.

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QUESTION 1

(a) For each of the questions given below, choose the most correct answer among the four
given alternatives. Indicate your answer by writing the appropriate letter A, B, C or D in
your answer booklet.

(i) What is the primary difference between a “fixed budget” and a “flexible budget”?
A. A fixed budget contains only fixed costs, while a flexible budget also contains
variable costs.
B. A fixed budget reflects different activity levels, while a flexible budget is
prepared for a single level of activity.
C. A fixed budget is prepared for a single level of activity, while a flexible budget
is prepared for different activity levels.
D. A fixed budget cannot be flexed to an actual level of activity, while a flexible
can.

(ii) Which of the following statements is true?

A. The master budget only includes the Statement of Financial Position.
B. Under or over absorbed overhead is calculated when using variable costing.
C. The contribution to sales ratio measures the percentage contribution earned on
the selling price of one extra unit.
D. A flexible budget is static and not used for control purposes.

(iii) Which of the following statements is NOT an assumption underlying Cost-Volume-

Profit (CVP) analysis?
A. Profits are calculated on a variable costing basis.
B. CVP analysis may be applied to any time horizon.
C. CVP assumes a single product or a constant sales mix.
D. Costs may be accurately divided into their fixed and variable elements.

The following information extracted from the books relates to questions (iv), (v)
and (vi):
MEM Limited is considering undertaking a short-term contract to produce and
supply special key rings for a conference organizer. In producing the key ring, three
materials are required, and the company has these materials in inventory as shown
in the table below:
Material Units in Cost price per Scrap value Current
inventory Kg. (TZS.) per Kg. purchase price
(Kgs.) (TZS.) per Kg. (TZS.)
AB 1,000 10,000 7,500 10,625
CD 250 6,875 3,000 8,000
EF 3,000 3,750 NIL 7,375

(iv) Assume material AB is in regular use by MEM Limited and the company requires
1,750 Kgs of this material to make the key rings. The relevant cost of this material
to be included in the short-term contract price is:
A. TZS.17,500,000
B. TZS.18,593,750
C. TZS.17,968,750
D. TZS.7,968,750

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 (v) Assume material CD is no longer used by MEM Limited and the company requires
500 Kgs of this material to make the key rings. The relevant cost of this material to
be included in the short-term contract price is:
A. TZS.4,000,000
B. TZS.3,718,750
C. TZS.2,000,000
D. TZS.2,750,000
(vi) Assume material EF is no longer used by MEM Limited and the company requires
2,500 Kgs of this material to make the key rings. The relevant cost of this material
to be included in the short-term contract price is:
A. TZS.9,375,000
B. TZS.11,250,000
C. NIL
D. TZS.18,437,500

(vii) Which of the following statements is correct?

A. If production exceeds sales, absorption costing produces higher profits than
marginal costing.
B. If sales exceed production, absorption costing produces higher profits than
marginal costing.
C. If production exceeds sales, variable costing produces higher profits than
absorption costing.
D. If sales exceed production, variable costing produces lower profits than
absorption costing.
(viii) When considering normal and abnormal spoilage, which of the following is
theoretically the best accounting methods for spoilage in process costing system?
A. Both normal and abnormal spoilage cost should be charged to a separate
expense account.
B. Normal spoilage cost should be charged to good units and abnormal
spoilage cost should be charged to a separate expense account.
C. Both normal and abnormal spoilage costs should be charged to good
units.
D. Normal spoilage costs should be charged to a separate expense account
and abnormal spoilage cost should be charged to good units.

(ix) Which one of the following costs should not be classified as a production overhead
cost in a food processing company?
A. The cost of renting the factory building.
B. The salary of the factory manager.
C. The depreciation of equipment located in the materials store.
D. The cost of ingredients.
(x) Which costs are charged to a product using the method of absorption costing?
A. Direct labour costs.
B. Materials costs plus direct labour costs.
C. Total production costs.
D. Production overheads plus direct labour costs.
(20 marks)

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(b) For each of the following statements, state whether the statement is true or false. Indicate
your answer by writing “TRUE” for the correct statement and “FALSE” for the
incorrect statement in your answer booklet.
(i) The correct formula for the labour efficiency variance is standard wage rate less
actual wage rate multiplied by standard hours.
(ii) Opportunity costs plus marginal costs is one of the basis for the price a company
(working at full capacity) should charge for a one-off order.

(iii) Budgeting is an act of determining costing standard.

(iv) Difference between fixed cost and marginal cost is maintained in case of marginal
costing but not in case of absorption costing.

(v) The earnings per share ratio is widely used to measure the profitability of the
shareholder’s investment. (10 marks)

(c) Given the following items, you are required to pair each item from LIST A with the
statement from LIST B appropriately. In paring the items with statements, write the
roman number from LIST A against the corresponding letter from LIST B in your answer
booklet:
LIST A
(i) Cost allocation
(ii) High-low method
(iii) By product
(iv) Cost apportionment
(v) Reciprocal servicing

LIST B
A. The charging of a whole, discrete identifiable item of overheads cost item to a
cost centre/unit.
B. The charging of overheads item incurred by a number of centers amongst the cost
centres on some acceptable basis – for the sake of fairness and equity.
C. Two or more products, arising simultaneously in the course of processing, each
of which has a significant relative sales value.
D. A product that has little sales value when compared with the joint products.
E. Techniques used in cost estimation that consists of selecting the periods of
highest and lowest activity levels and comparing the changes in costs that result
from the two levels.
F. Activities that are performed to enable the production and sale of individual
products (services).
G. Maintaining and updating product specifications and the technical support
provided for individual products and services.
H. A situation that may arise where the service centres provide services for each
other. (10 marks)
(Total: 40 marks)

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QUESTION 2

The following data has been extracted from the budgets and standard profit statements of
Abacus Ltd for the year ended 31st December 2020. The company manufactures and sells a
single product.
Selling price per unit TZS.4,500
Direct material per unit TZS.1,000
Direct wage cost per unit TZS.400
Variable production overhead costs per unit TZS.250
Fixed production overhead per unit TZS.125
Normal production per annum 32,000 units
Actual sales 27,000 units
Actual production 30,000 units
Fixed selling and distribution expenses per annum TZS.18,000,000
Variable selling and distribution expenses per unit TZS.300
Administration cost per annum TZS.22,000,000
There is no inventory on 1st January 2020.

REQUIRED:

(a) Prepare profit statements using:

(i) Marginal costing system (7 marks)
(ii) Absorption costing system (9 marks)

(b) Reconcile the profits obtained in part (a)(i) and (ii) above with brief explanation.
(4 marks)
(Total: 20 marks)

QUESTION 3

(a) How can information technology support a company’s business processes and decision
making and give it a competitive advantage? Give examples to illustrate your answer.
(4 marks)
(b) Describe five (5) technology and business trends that have enhanced the role of
information systems in today’s competitive business environment. (4 marks)

(c) Discuss the difference between “absorption costing” and “variable costing”. Which
method is the most relevant to be used with respect to financial statements reporting?
(4 marks)
(d) A factory uses a particular raw material. There are three processes A, B and C. The data
relating to inputs, outputs and rejections during the month of April are given below:

Process Inputs (in pieces) (Including Rejections (in Output (in pieces)
opening W.I.P) Pieces)
A 18,000 6,000 12,000
B 19,800 1,800 18,000
C 20,400 3,400 17,000

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 REQUIRED:

(i) Determined what should be inputs in process A when final product transferred
from process C is 1,000 pieces. (5 marks)
(ii) Calculate the cost of raw materials to produce one piece of the finished product
when the weight of the finished product is 10 gram and the price of the raw
material is TZS.1,000 per kg . (3 marks)
(Total: 20 marks)

QUESTION 4
(a) Explain why First In First Out (FIFO) is considered to be the best method of inventory
valuation. (4 marks)
(b) Filano Corporation has the following standards for one unit of a product:
TZS.
Direct material: 80 kgs x TZS.6,000 480,000
Direct labour: 3 hours x TZS.16 per hour 48,000
Variable over heads 1.5 hours of machine time x TZS.50,000 per hour 75,000
Fixed overheads: 1.5 hours of machine time x TZS.30,000 per hour 45,000
The predetermined overheads rates were developed using capacity of 6,000 units per
year. Production is assumed to occur evenly throughout the year.

During May 2020, the company produced 525 units. Actual data for May 2020 are as
follows:

Direct material purchased: 45,000 kgs x TZS.5,920 per kg

Direct material used: 43,020 kgs (all from May’s purchase)
Total labour cost: TZS.24,955,000 for 1,550 hours
Variable overheads incurred: TZS.43,750,000 for 800 hours of machine time
Fixed overheads incurred: TZS.22,800,000 for 800 hours of machine time

REQUIRED:
Calculate the following:
(i) Material price variance based on quantity purchased.
(ii) Material quantity variance.
(iii) Labour rate variance.
(iv) Labour efficiency variance.
(v) Variable overhead spending variances.
(vi) Variable overhead efficiency variances.
(vii) Fixed overhead spending.
(viii) Fixed overhead volume variance.
(16 marks)
(Total: 20 marks)

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