Cost & Management Accounting – Paper 6

CPA 6 – COST & MANAGEMENT ACCOUNTING

Solution 2
(a) Saving in employment costs for the year 2023 after adopting time rate system:
Current employment costs;
Monthly remuneration = basic salary + allowances
Annual pay
Department Officers Monthly pay (Shs) (Shs)
Finance:
Finance manager 1 9,000,000 x 1.25 135,000,000
Senior accountants 5 3,500,000 x 1.12 235,200,000
Accounts assistants 12 1,500,000 x 1.10 237,600,000
607,800,000
Human Resource:
HR manager 1 9,000,000 x 1.25 135,000,000
Assistant HR officers 7 1,500,000 x 1.10 138,600,000
273,600,000
Stores:
Store manager 1 9,000,000 x 1.25 135,000,000
Store supervisors 4 3,500,000 x 1.12 188,160,000
Stores assistants 7 1,500,000 x 1.10 138,600,000
461,760,000
Sales & marketing:
= 10% x 812,500
Commission on sales x 8,000 650,000,000
Commission on = 4% x 40% x
collections 812,500 x 8,000 104,000,000
754,000,000

Production and ,
Quality Assurance = x 870,000 761,250,000
,

Total 2,858,410,000
Employee cost using time rate system;
Departments: Officers Daily hours Days Rate (Shs) Amount (Shs)
Production 75 12 300 3,650 985,500,000
Quality assurance 12 10 300 4,300 154,800,000
Finance 18 8 250 5,850 210,600,000
Sales & Marketing 45 9 300 6,100 741,150,000
Human Resource 8 8 250 5,850 93,600,000
Stores 12 12 300 4,600 198,720,000
Total 2,384,370,000
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 Cost & Management Accounting – Paper 6

Saving in employment costs for the year 2023

Amount (Shs)
Current employment cost 2,858,410,000
Employment cost as per time rate system 2,384,370,000
Saving in employment costs 474,040,000
(b) Differences between services and goods:
 Services do not result in the transfer of property like goods. The purchase of a
service only confers on the customer access to or a right to use a facility and
not to own it as it is for the goods.
 Intangibility – Services lack physical substance such as taste, feel, and visible
presence unlike goods which have physical substance.
 Inseparability or simultaneity – Services are created at the same time as they
are consumed such as medical treatment hence no service exists until it is
actually being consumed by the customer, which is not the case with goods.
 Heterogeneity – Services are hard to maintain consistency in the standard of
output unlike goods which are usually standardised as they are always
produced in mass quantities.
 Perishability – Services are more perishable than goods for example the service
of watching a football match is purchased for a small period of time say 90
minutes.
Solution 3
(a) FPL’s statement reconciling financial and costing profits for 2022

Shs ‘000’
Costing profit 3,279,800
Add: Financial incomes
Dividends received 744,000
Interest income received 175,600
Discount received 276,000
Less: Financial expenses:
Discount allowed (257,600)
Finance costs (475,300)
Add: Overstatement in opening stock (3,850m - 3,700m) 150,000
Add: Understatement in closing stock (4,250m - 4,300m) 50,000
Less: Under absorption of production overheads (3,200m - 3,475m) (275,000)
Less: Under absorption of distribution overheads (4,750m - 4,770m) (20,000)
Add: Overabsorption of administrative o/heads (3,562.5m - 3,510.4m) 52,100
Financial profit 3,699,600

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 Cost & Management Accounting – Paper 6

Workings:
W1 – Absorption of overheads;
Selling & distribution = 10% x 47,500m = 4,750 million
Administrative overheads = 7.5% x 47,500m = 3,562.5 million
(b) – Proposal to close super gloss production line:
If production / sale of super gloss pain ceased; Shs ‘000’
Lost contribution (2,900,000)
Saving in fixed costs (80% x 3,215 million) 2,572,000
Lost complementary contribution (30% x 2,385 million) (715,500)
Gained substitution contribution (40% x 2,044 million) 817,600
Net loss of the decision (225,900)
Advice:
FPL’s board should accept the proposal to close super gloss paint production line
because the net loss of Shs 315 million will be reduced to Shs 225.9 million resulting
into increase in net profit by Shs 89.1 million to the company as a whole.
(c) Qualitative factors considered before closing super gloss paint production line:
 The impact that the decision may have on the morale of employees who remain
with the organization.
 The signal of the decision to the competitors, public among other stakeholders
and how they are likely to react to the decision.
 Possibility of losing customer confidence among the remaining products and
whether the decision will attract new customers and retain existing customers.
 The effect on suppliers because if one supplier suffers disproportionately there
may be loss of goodwill and damage to future relations.
 The effect on existing non-current assets which will be rendered redundant
upon closure of the production line. Whereas some assets may have
recoverable amounts, others may be hard to sell off given their uniqueness.
 The effect on staff that is whether staff are likely to be made redundant,
transferred to other product lines or offered early retirement.
Solution 4
(a) Determining bottleneck resource;
Required machine hours = (0.25 x 40,000) + (0.2 x 55,000) + (0.5 x 37,500)
= 39,750 hours
Available machine hours = 38,000 hours
Shortfall = 1,750 hours
Therefore, machine hours is a bottleneck resource.

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 Cost & Management Accounting – Paper 6

Determining throughput per unit and bottleneck;

Pawns Rooks Bishops
Selling price 5,000 4,000 7,500
Direct material (2,250) (1,750) (3,500)
Throughput per piece 2,750 2,250 4,000
Machine hours per piece 0.25 0.2 0.5
Throughput per mach. hour 11,000 11,250 8,000
Rank 2nd 1st 3rd
Determining weekly optimum product mix;
Products Output Unit hours Total hours Remaining hours
Rooks 55,000 0.2 11,000 27,000
Pawns 40,000 0.25 10,000 17,000
Bishops 34,000 0.5 17,000 Nil
Output for bishops = 17,000 / 0.5 hours = 34,000 units
Determining resultant weekly profit;
Pawns Rooks Bishops Total
Optimum product mix 55,000 40,000 34,000
(Shs ‘000’) (Shs ‘000’) (Shs ‘000’) (Shs ‘000’)
Throughput per piece 2.75 2.25 4
Total throughput 151,250 90,000 136,000 377,250
Non material costs
Direct labour cost (82,500) (50,000) (46,875) (179,375)
Operating costs (100,000)
Weekly profit 98,875
Direct labour cost for bishops = 37,500 x 1,250 = Shs 46,875,000
(b) Cost per peace using life cycle costing;
Shs
Research & dev't (225,000 + 37,400) 262,400,000
Sales promotion (37,500 + 32,000 + 22,500 + 15,000) 107,000,000
Production cost (97,500 + 262,500 + 360,000 + 306,000) 1,026,000,000
After sales service (1,200 + 3,000 + 3,600 + 3,600) 11,400,000
Disposal costs 1,250,000
Total life cycle costs 1,408,050,000
Total output (30,000 + 75,000 + 120,000 + 90,000) pieces 315,000
Cost per piece = 1,408,050,000 / 315,000 4,470
Selling price 5,000
Net profit 530

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 Cost & Management Accounting – Paper 6

(c) Steps in implementing target costing:

 Determine a product specification of which an adequate sales volume is
estimated.
 Decide a target selling price at which the organisation will be able to sell the
product successfully and achieve a desired market share.
 Estimate the required profit, based on required profit margin and determine
the target cost by deducting the target profit from the target selling price.
 Prepare an estimated cost sheet for the product, based on the initial design
specification and current cost levels and calculate the target cost gap by
deducting target cost from the estimated cost.
 Devise efforts to close the target cost gap most especially efforts intended to
design out costs prior to production.
Solution 5
(a) ZUL – Operating statement reconciling budgeted and actual profit for the third
quarter of 2022:
Shs ‘000’ Shs ‘000’
Budget profit (W1) 2,000,000
Sales variances:
Sales price variance (W2) 247,500F
Sales volume variance (W3) 20,000A 227,500F
Direct material cost variances:
Material price (W4) 12,750F
Material usage (W5) 3,500F 16,250F
Direct labour cost variances:
Labour rate (W6) 60,000A
Labour efficiency (W7) 15,000F
Labour idle time (W8) 30,000A 75,000A
Manufacturing overhead variances:
Variable overheads 24,000F
Fixed overheads 4,500A 19,500F
Actual profit (W11) 2,188,250
Workings:
W1 – Budgeted profit = Shs 10,000 x 0.4 x 500 x 1,000 = Shs 2,000,000,000
W2 – Sales price variance = (Actual price – standard price) x Actual units sold
= (14,500 – 14,000) x 495 x 1,000
= Shs.247.5 million Favourable
W3 – Sales volume variance = (Actual volume – standard volume) x standard profit
= (495 x 1,000 – 500 x 1,000) x 4,000
= Shs.20 million Adverse

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 Cost & Management Accounting – Paper 6

W4 – Material price variance = (Standard price – Actual price) x Qty purchased

Material X = (10,000 – 9,500) x 124,000 litres = Shs.62 million Favourable
Material Y = (12,000 – 12,500) x 98,500 kgs = Shs.49.25 million Adverse
Material price variance = Shs.12.75 million Fav
W5 – Material usage variance = (Standard usage – actual usage) x standard price
Material X = (0.25 x 495,000 – 124,000) x 10,000 = Shs.2.5 million Adverse
Material Y = (0.2 x 495,000 – 98,500) x 12,000 = Shs.6 million Favourable
Material usage variance = Shs.3.5 million Fav
W6 – Labour rate variance = (Standard rate – Actual rate) x Actual hours paid
= (5,000 – 1,560m / 300,000) x 300,000
= Shs 60 million Adverse
W7 – Labour efficiency variance = (Standard productive hrs – Actual productive hrs)
x standard labour rate = (0.6 x 495,000 – 98% x 300,000 hrs) x 5,000
= Shs.15 million Favourable
W8 – Labour idle time variance = (Standard idle time – Actual idle time) x standard
labour rate = (0 – 2% x 300,000) x 5,000
= Shs.30 million Adverse
W9 – Variable overhead cost variance = Standard variable overheads – Actual variable
overheads = 1,200 x 495,000 – 570 million = Shs.24 million Favourable
W10 – Fixed overhead cost variance = Budgeted fixed overheads – Actual fixed
overheads = 900 x 495,000 – 450 million –= Shs.4.5 million Adverse
W11 – Actual profit
Quantity Rate (Shs) Amount
Sales 495,000 14,500 7,177,500,000
Acids 124,000 9,500 (1,178,000,000)
Mineral salts 98,500 12,500 (1,231,250,000)
Direct labour 300,000 5,200 (1,560,000,000)
Variable overheads (570,000,000)
Fixed overheads (450,000,000)
Profit 2,188,250,000
(b) Pre-requisites for successful budgeting:
 Support and involvement of top management – The budget should get a
blessing from top management. Failure to be supported by top management,
the budgeting system will not yield any results to organization.
 Clear and realistic goals – The objectives should be clearly and unambiguously
established. Budgeting cannot succeed if the goals to be set are not clear.
 Assignment of authority and responsibility - Successful budgeting pre-supposes
a clear allocation of authority, duties and responsibilities in the organization.
 Full participation – Full participation of managers and their subordinates is
crucial for successful budgeting because if employees have effectively
participated in developing the budget goals and targets, they will make special
efforts to see that the budgeting process succeeds.

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 Cost & Management Accounting – Paper 6

 Effective communication – Successful budgeting requires effective

communication of an organisation’s objectives and budget goals.
 Continuous budget education – Individuals who participate in budgeting should
understand the technicalities of budgeting. They should know how to prepare
budgets and readjust them when the circumstances change.
 Timeliness – The time period covered by the budget should be related to the
necessity for and the responsibility of effective management action.
 Reasonably attainable targets – The targets laid down in the budget should be
reasonable enough to be attained by the implementers. Ideal targets will be
frustrating and basic targets will encourage complacency.
 Flexibility – The budgeting system should be flexible enough to take advantage
of all opportunities that rise from time to time. Inflexibility impairs the initiative
and freedom of managers and subordinates in making decisions.
Solution 6
(a)
(i) Statement of equivalent production
Equivalent production
Input Output Material Labour Overheads
Item Units Item Units % Units % Units % Units
Work to
Opening complete
WIP 30,000 WIP 30,000 100% 30,000 100% 30,000 100% 30,000
Introduced
Introduced &
units 100,000 completed 75,000 100% 75,000 100% 75,000 100% 75,000
Closing
WIP 25,000 80% 20,000 60% 15,000 40% 10,000

130,000 130,000 125,000 120,000 115,000

(ii) Statement of cost per unit
Cost Opening Current Total Equivalent Cost per
element WIP costs costs units unit
Shs ‘000’
Material 96,000 280,000 376,000 125,000 3,008
Labour 62,400 168,000 230,400 120,000 1,920
Overheads 37,105 67,200 104,305 115,000 907
5,835
(iii) Statement of closing work in progress
Cost element Equivalent units Cost per unit Amount (Shs.)
Material 20,000 3,008 60,160,000
Labour 15,000 1,920 28,800,000
Overheads 10,000 907 9,070,000
98,030,000

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 Cost & Management Accounting – Paper 6

(iv) Process Account

Dr Cr
Details Qty Amount (Shs ‘000’) Details Qty Amount (Shs ‘000’)
Opening WIP 30,000 195,505 Output 105,000 612,675
Additional
material 100,000 280,000 Closing WIP 25,000 98,030
Labour 168,000
Overheads 67,200
130,000 710,705 130,000 710,705

Advantages of implementing job costing:

 More accurate costing is possible because all costs are compiled and specifically
identified with specific order or product.
 Job costing helps in identifying profitable and un-profitable jobs since each job
is specific.
 Job costing provides a basis for comparing one job cost to another or for
comparing a job cost estimate.
 Job costing helps in preparation of estimates when submitting quotations for
similar jobs.
 Job cost sheets can be used to control costs efficiency and estimate future
work.
Disadvantages of implementing job costing:
 Job costing requires a detailed record of a document and accounts because
each job requires a separate weapon.
 The record keeping for different jobs may prove to be more complicated.
 Job costing may not give valid information to be used in comparison of jobs
because different jobs have different features.
 Job costing is essentially historical in nature.

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CPA 6 - COST AND MANAGEMENT ACCOUNTING

Solution 2
(a) (i) Cost per kilometre

Driver’s pay per trip 400,000

Conductor’s pay per trip (60,000 x 3) 180,000
Depreciation (30,000,000/20) 1,500,000
Repairs and maintenance (2,500,000/20) 125,000
Fuel (5,580,000/20) 279,000
Insurance, licenses and taxes (2,955,000/20) 147,750
Operational trading licence (720,000/12)/20 3,000
Total 2,634,750
Cost per kilometre = 2,634,750
465
= Shs 5,666 per kilometre
(ii) Amount to be charged per passenger
Cost per passenger = 2,634,750
60
= Shs 43,912
Amount to charge = 43,912 x 1.2 = Shs 52,694 per passenger
(b) (i) Economic order quantity
Annual demand for palm oil = 4 x 0.5 x 368,750 = 737,500 litres
Holding cost = 0.1 x 5,600 = Shs 560 per litre
Ordering cost = Shs 826 per order

=
= 1,475 kgs
(ii) Number of orders to minimise inventory costs
= Annual demand
EOQ
= 368,750 x 4 x 0.5
1,475
= 500 orders
(iii) Cost of managing inventory
= Ordering costs + Holding costs
Ordering cost = Cost per order x Number of orders
= 826 x 500
= Shs 413,000

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Holding costs = Holding cost per unit per annum x (EOQ/2)
= (10% x 5,600 x (1,475/2)
= Shs 413,000
Cost of managing inventory = 413,000 + 413,000 = Shs 826,000
(iv) Total inventory cost
Total cost of inventory = Purchase cost + Cost of managing inventory
= (368,750 x 1,300 x 0.5 x 4) + 826,000
= Shs 959,576,000
(c) Ways of reducing labour turnover in an organisation
 Introduction of non-monetary benefits, for example monthly
recognition of the best employee which makes employees feel
appreciated and valued.
 Establishing an employee grievances procedure where employees can
provide their pressing issues which management can solve.
 Establishing fair rates of pay so that the payment is commensurate to
the effort and knowledge/experience possessed by each employee.
 Providing better working conditions in order for employees to have a
sense of belonging that motivates them to work better.
 Promotions should be done on fair terms so that the rightful people are
promoted.
 Introducing a suitable personnel policy that fosters employing the right
people for the right job.
Solution 3
(a) Kibiito Grain Millers’ Cost statement for June 2023
Shs ‘000’ Shs ‘000’
Direct Materials
Opening stock 96,000
Add: Purchases of maize grain 288,000
Add: Carriage inwards of maize grain 36,000
Less: Closing stock of maize grain (57,600)
Materials consumed in production 362,400
Direct costs
Direct wages (55% x 70,000,000) 38,500
Other direct expenses 12,250 50,750
Prime cost 413,150
Factory overheads:
Depreciation:
Milling machine 40,000
Factory building 75,000
Wages for cleaners, machine 11,620
operator and supervisor
Factory salaries (10% x 70,000,000) 7,000
Rent (60% x 15,000,000) 9,000
Insurance (50% x 2,500,000) 1,250
Lighting (70% x 30,000,000) 21,000 164,870
Production cost of maize flour under 578,020

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process
Add: Opening work in progress 72,000
Less: Closing work in progress (43,200) 28,800
Production cost of maize flour 606,820
Office and administrative costs
Office expenses 4,500
Rent (40% x 15,000) 6,000
Lighting (30% x 30,000) 9,000
Insurance (30% x 2,500) 750
Office salaries (20% x 70,0000,000) 14,000 34,250
Selling and distribution costs
Depreciation of delivery vans 65,000
Insurance (20% x 2,500) 500
Discount allowed 18,250
Salaries and wages
(15% x 70,000,000) 10,500 94,250
Total cost 735,320
(b) Profit reconciliation statement for the year ended 31 December 2022
Shs ‘000’ Shs ‘000’
Profit as per cost accounts 1,530,462
Add:
Gain on disposal 10,120
Notional rent 300,000
Discount received 22,200
Difference in opening stock (539,200 – 527,200) 12,000
Difference in closing stock (205,600 – 199,432) 6,168 350,488
Less:
Dividend paid 55,507
Difference in depreciation (123,200 – 92,400) 30,800
Interest paid 9,520 (95,827)
Profit as per financial accounts 1,785,123
Alternatively:
Profit reconciliation statement for the year ended 31 December 2022
Shs ‘000’
Profit as per cost accounts 1,785,123
Add:
Dividend paid 55,507
Difference in depreciation (123,200 – 92,400) 30,800
Interest paid 9,520 95,827
Less:
Gain on disposal 10,120
Notional rent 300,000
Discount received 22,200
Difference in opening stock (539,200 – 527,200) 12,000
Difference in closing stock (205,600 – 199,432) 6,168 (350,488)
Profit as per financial accounts 1,530,462

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(c) Steps in decision making
 Problem identification. This involves clearly defining the nature of the problem
for which a decision is to be made.
 Gather relevant information. Here some information must be sought through
a process of self-assessment.
 Identify alternative courses of action. This involves coming up with possible
and desirable alternatives of how to deal with the situation.
 Evaluation and selection of a course of action. This deals with placing
alternatives in order of priority and selection of the alternative which is best
suited to deal with the situation.
 Implementation of the decision. Here there is implementation of the course of
action that is chosen.
 Monitor the results and review the decision and consequences. This is aimed
at ensuring that the intended objectives.
Solution 4
(a) Determining the cost per product using ABC system
Cup Plate Bucket
Shs Shs Shs
Direct materials 12,500,000 14,300,000 6,000,000
Direct labour 3,400,000 3,960,000 816,000
Set up costs 9,271,080 11,331,,300 5,150,600
Material handling 13,980,200 12,508,600 6,622,200
Inspection costs 5,886,400 5,886,400 2,943,200
Total production costs 45,037,680 47,986,320 21,532,000
Production volume (pieces) 100,000 110,000 8,000
Cost per piece 450.38 436.24 2,691.5
Workings:
Determine the total overhead costs
Ratio Cost
Setup costs 7 0.35 x 73,580,000 25,753,000
Material handling costs 9 0.45 x 73,580,000 33,111,000
Inspection costs 4 0.2 x 73,580,000 14,716,000
Total 20 73,580,000
Determine the cost driver rate
Setup costs = 25,753,000
Set up costs per production run = 25,753,000/(9 + 11 + 5)
= Shs 1,030,200 per run
Cups Plates Buckets
Production runs 9 11 5
Setup costs per run (Shs) 1,030,200 1,030,200 1,030,200
Setup costs (Shs) 9,271,080 11,33,320 5,150,600

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Materials handling costs = 33,111,000
Material handling costs per order = 33,111,000/(19 + 17 + 9)
= Shs 735,800
Cups Plates Buckets
Number of material orders 19 17 9
Material handling costs per 735,800 735,800 735,800
order (Shs)
Materials handling costs 13,980,200 12,508,600 6,622,200
(Shs)
Inspection costs = 14,716,000
Cost per inspection = 14,716,000/(8 + 8 +4) = 735,800
Cups Plates Buckets
Number of inspections 8 8 4
Cost per inspection (Shs) 735,800 735,800 735,800
Materials handling costs (Shs) 5,886,400 5,886,400 2,943,200
(b) Profit statement for Shine Limited for the last quarter of 2022 using marginal
costing
October November December
Sales 98,437,500 108,281,250 138,281,250
Less: Cost of sales
Opening stock 12,751,000 16,257,525 21,039,150
Production 48,198,780 64,392,550 73,955,800
Closing stock (7,395,580) (12,878,510) (11,603,410)
53,554,200 63,117,450 78,099,875
Gross profit 44,883,300 45,163,800 60,181,375
Selling and distribution (7,798,140) (10,418,150) (11,965,400)
Fixed manufacturing costs (19,680,000) (19,680,000) (19,680,000)
Net profit 17,405,160 15,065,650 28,535,975
Workings:
Determining the unit variable cost

Direct materials 4,688

Direct labour 2,813
Variable production costs 5,250
Total 12,751
Selling price per tin = 18,750 x 1.25 = 23,437.5
Determining closing stock
October November December
Opening stock 1,000 580 1,010
Production units 3,780 5,050 5,800
Sales (4,200) (4,620) (5,900)
Closing stock 580 1,010 910
Unit cost 12,751 12,751 12,751
Total 7,395,580 12,878,510 11,603,410

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 (c) Principles of total quality management
 Customer focus. Organisations need to understand the current and future
needs of the organisation and work towards exceeding the customers’
expectations.
 Strategic quality planning. This is the process that quality managers and
quality departments undertake to identify the right quality initiatives to match
the quality requirements in the current and future period.
 Employee involvements. This can be achieved through using work teams and
sharing of experiences between the teams. It also includes focusing on
employee motivation and loyalty.
 Process management. When resources are efficiently and effectively
managed, the entity will achieve the desired outcome. This is achieved by
identifying activities needed to achieve desired results, measuring output, and
identifying communication channels of main business activities.
 Continuous improvement. This ensures that the organisation finds new ways
and techniques of producing better quality products, being more competitive
and exceeding customer expectations.
 Supplier management. Here the organisation should ensure that product
quality is part of the criterion for selecting suppliers.
 Leadership. This establishes a clear vision for the organisation and
development of common values and moral principles at all levels.
Solution 5
(a) Flexed budget versus actual performance for July 2023
Flexed budget Actual Variance
Sales revenue 850 x 80,000 68,000,000 63,750,000 4,250,000A
Direct materials 188.25 x 80,000 (15,060,000) (13,177,500) 1,882,500F
Direct labour 127.5 x 80,000 (10,200,000) (11,300,000) 1,100,000A
Variable production overheads 93.5 x 80,000 (7,480,000) (6,732,000) 748,000F
General expenses (1,700,000) (1,275,000) 425,000F
Rent (4,160,000) (3,900,000) 260,000F
Depreciation (7,041,250) (6,405,000) 636,250F
Utilities 4.2 x 80,000 + (2,016,000) (1,785,000) 231,000F
1,680,000
Other expenses 10.4125 x 80,000 + (3,956,750) (3,831,800) 124,950F
3,123.750
Profit 16,386,000 15,343,700 1,042,300F
Workings:
Level of activity = 80,000/100,000 = 80%
Utilities
Total budgeted amount = 2,100,000
Fixed budgeted amount = 80% x 2,100,000 = 1,680,000
Variable amount = 20% x 2,100,000 = 420,000
Flexed budget = Fixed budgeted amount + (80% x Variable component)
= 1,680,000 + (80% x 420,000) = 2,016,000
Other expenses
Total budgeted amount = 4,165,000
Fixed budgeted amount = 75% x 4,165,000 = 3,123,750

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Variable amount = 25% x 4,165,000 = 1,041,250
Flexed budget = Fixed budgeted amount + (80% x Variable component)
= 3,123,750 + (80% x 1,041,250) = 3,956,750
(b) Operating cost statement reconciling budgeted and actual profit

Budgeted profit 52,200,000

Sales variances:
Sales volume contribution (4,500 – 5,000) x 19,940) 9,970,000A
Sales price variance 4,500 x (63,000 – 62,000) 4,500,000F 5,470,000A
Cost variances:
Direct material price variance
122,000 x (1,232 – 1,276) 5,368,000A
Direct material usage variance
(4,500 x 25 – 122,000) x 1,232 11,704,000A
Direct labour rate variance
22,500 x (1,600 – 1,300) 6,750,000F
Labour efficiency variance
(4,500 x 4 – 22,500) x 1,600 7,200,000A
Variable overhead expenditure variance
(22,500 x 1,215 – 23,085,000) 4,252,500F
Variable overhead efficiency variance
(4,500 x 4 – 22,500) x 1,215 5,467,500A
Fixed overhead expenditure variance
(5,000 x 9,500 – 46,550,000) 950,000F 17,887,000A
Actual profit 28,943,000
Budgeted profit = Budgeted contribution – Fixed costs
5,000 x (62,000 – [30,800 + 6,400 + 4,860+9,500) = 52,200,000
Actual profit
= 4,500 x 63,000 – (122,000 x 1,276 + 22,500 x 1,300+ 23,085,000+ 46,550,000)
= Shs 28,943,000
(c) Factors that should be considered before investigating and reporting
variances.
 Materiality/significance of the variance. If the variance is so small, it will be
meaningless to investigate into the causal factors of the variance and make
an adverse report on it. Management might set control limits (upper and
lower) for variances. If a recorded variance falls outside these control limits,
then it is deemed worthy of investigation.
 Type of standard used. Some types of standards will always show adverse
variances especially the ideal standards. Such variances need not to be
investigated.
 Cost-benefit analysis. Some variances may require more costs of investigation
relative to the benefit derived there from. If that is the case, then it should
not be investigated.
 Interdependence of variances. At times, one variance has an influence over
the other and normally reversing the directions. One variance might be

Page 7 of 10
 interrelated with another, and much of it might have occurred only because
the other, interrelated variance occurred too.
 Controllability. Some variances arise from external factors which cannot be
controlled by management, thus, investigating and reporting on such
variances is meaningless. Examples of such variances are; material price,
labour rate variance and sales contribution price variance.
 Variance trends. The trend indicates that the process is in control and the
standard has been wrongly set. In such a situation, there will be no need to
act immediately.
Solution 6
(a) (i) Allocation and apportionment (Primary distribution) Shs ‘000’
Item Allocation Cleaning Gristing Milling Inspection Quality Total
base assurance
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Indirect Allocation 195,000 227,500 227,500 - - 650,000
materials
Indirect Allocation 54,000 135,000 162,000 108,000 81,000 540,000
labour
Rent Floor 36,000 54,000 27,000 18,000 45,000 180,000
area
Lighting Kilowatts 76,460 67,965 80,708 6,372 8,495 240,000
Depreciation Machine 21,782 27,228 43,564 9,802 7,624 110,000
value
Canteen Number 1,176 1,882 2,353 353 236 6,000
charges of staff
Total 384,418 513,575 543,125 142,527 142,355 1,726,000
(ii) Secondary distribution using simultaneous equations
Let X and Y represent overheads under inspection and quality assurance
departments respectively. Therefore,
X = 142,527 + 0.1Y………(i)
Y = 142,355 + 0.05X………(i)
Substitute (ii) in (i)
X = 142,527 + 0.1(142,355 + 0.05X)
X = 142,527 + 14,235.5 + 0.005X
0.995X = 156,762.5
X = 157,550
Therefore Y = 142,355 + 0.05(157,550)
Y = 150,233
Cleaning Gristing Milling Inspection Quality assurance Total
Overheads 384,418 513,575 543,125 142,527 142,355 1,726,000
Apportion X costs 39,381.75 47,265 63,020 (157,550) 7,877.5 -
Apportion Y costs 45,069.0 60,093.2 30,046.6 15,023.3 (150,233) -
Total 468,869 620,933 636,192 - - 1,726,000

Page 8 of 10
(b) Determining the cost of each door
Shs
10 bars x 38,000 380,000
16 rollers x 5,000 80,000
1 lock x 100,000 100,000
Red oxide 40,000
8 flats x 13,000 104,000
14 hollow sections x 68,000 952,000
Labour 5 hours x 30,000 150,000
Total 1,806,000
Selling price = cost + profit of 20%
Door = 1,806,000 x 1.2 = 2,167,200
Determining the cost of each window
Door: Shs
2 bars x 38,000 76,000
6 hollow sections x 30,000 180,000
3 flats x 13,000 39,000
1 roller x 5,000 5,000
Red oxide 20,000
Labour 4 hours x 25,000 100,000
Total 420,000
Selling price = cost + profit of 20%
Window = 420,000 x 1.2 = 504,000
(c) Methods of accounting for by products
 Replacement cost method. This method is used in firms whose by products
are consumed within the factory as raw materials. The replacement cost
method values the by-product inventory at its opportunity cost of purchasing
or replacing the by-products.
 Standard price method. Here the standard cost is set for each by-product
produced and credit is given to the process account at this value. The
standard may be at a past average price.
 Joint cost proration method. Under this method the accounting treatment is
to charge each product for costs after the split off point and to apportion the
joint cost between the main products and the by -products. This method is
appropriate where the value of the by product is large and also requires
additional processing after separation from the main product.
 Other income method. By product receipts are treated as incidental or to
other income. Other income realised from the sale of by products is
transferred to profit or loss account as miscellaneous income.
 By product revenue deducted from main product cost. The net sales of by
products will be treated as a deduction from the cost of the main product.
Here, the sales revenue received from the sale of by product is credited to the
total production costs manufacturing.
 Reverse cost method. The estimated profit from the sales of the by-product,
selling and distribution expenses and further processing costs after the split-
off point are deducted from sales value of by-products and the net amount is
credited to the main product.

Page 9 of 10
 By-product sales added to the main product sales. All costs incurred on main
and by-products are deducted from the combined sales of the main product.

Page 10 of 10
CPA 6 – COST AND MANAGEMENT ACCOUNTING

Solution 2
(a) Mark-up per patient for the year 2022
FSH’s Cost sheet for the year 2022
Quantity Rate Amount
Shs Shs ‘000’
Variable costs
Doctor’s consultancy fees 15,000 patients 45,000 675,000
Medicine 15,000 patients 12,000 180,000
Meals 15,000 patients 7,500 112,500
Cleaning 15,000 patients 7,200 108,000
Other variable overheads 15,000 patients 3,600 54,000
Extra beds 600 beds 57,000 34,200
Subtotal 1,163,700
Fixed costs
Supervisors’ salary 2 people 4.5 million x 12 108,000
Nurses’ salary 4 people 3.6 million x 12 172,800
Warders’ 4 people 0.9 million x 12 43,200
Rent 12 months 13.5 million 162,000
Repairs 15,900
Administration costs 180,000
Other fixed overheads 194,400
Subtotal 876,300
Total costs 2,040,000
Cost per patient =
= Shs 136,000
Mark-up per patient = Shs 136,000 x 0.4125 = Shs 56,100
Number of patients
Number of patients
Occupancy of 42 beds 42 x 275 11,550
Occupancy of 30 beds 30 x 95 2,850
Occupancy of extra 600 beds 600 x 1 600
Total 15,000

Page 1 of 10
(b)(i) Meaning of idle time and how its related costs will be treated in KML’s books of
accounts.
Meaning of idle time:
Idle time refers to time for which payment is made but no direct production/benefit is
obtained by the employer, which implies there is no production during idle time. Idle
time arises only when the payment is made on time basis. It is categorized into normal
idle time (the wasted time that cannot be avoided) and abnormal idle time (the wasted
time that can be avoided by taking proper precautions).
Treatment of idle time cost:
The cost of normal idle time should be charged to the cost of production since normal
idle time is uncontrollable by inflating the wage rate. It may also be charged to
manufacturing overheads.
The cost of abnormal idle time should be charged to costing profit or loss account since
abnormal idle time is controllable.
(ii) Compute KML’s total manufacturing cost for the last week of July 2023.
Total manufacturing cost = direct labour cost + idle time cost + overtime premium
Direct labour cost = 8 x 7 x 3,000 = Shs 168,000

Idle time during the last = = 3.5 hours

week
Idle time cost = Shs 3,000 x 3.5 = Shs 10,500

Overtime premium during the = 6 x 0.6 x 3,000 = Shs 10,800

last week

Total manufacturing cost = 168,000 + 10,500 + 10,800 = Shs 189,300

(b) The needs of any five users of managerial accounting information

 Shareholders- To keep track of the financial performance, economic position and
changes in financial position of their organization.
 Managers- To make day-to-day and longer-term strategic decisions.
 Employees- Track ongoing information about everything from regional sales to
materials waste and can monitor changes and improvements in areas where they
contribute.
 Bankers and investors- To provide background information in a business plan or
loan package.
 Suppliers- To determine whether the organization is capable of meeting its
obligations to pay for the supplies it receives either in the short- or long-run.

Page 2 of 10
 Government- To confirm that organisation has declared and paid the correct taxes
to the tax authorities.
Solution 3
(a) Using accounting analysis method, determine the expected total cost of production
for the month of July 2023:
Classification of costs for June 2023 Shs ‘000’
Variable costs
Raw materials used 72,000
Carriage inwards of raw materials 2,500
Direct wages 22,350
Variable overheads 5,400
Total variable costs 102,250
Fixed costs
Electricity and water 8,900
Depreciation of plant and machinery 12,840
Repairs and maintenance 9,130
Production staff salaries 15,680
Factory rent 3,000
Other fixed production overheads 13,200
Total fixed costs 62,750
Cost function (Y) = a + bX, where a and b represent fixed costs and variable cost
per unit respectively.
Mr. Kayola Kimba produced 5,000kg during the month of June 2023.
b= = Shs 20,450 per kg
Y = 62,750,000 + 20,450X
Expected production quantity for July 2023 = 5,000 x 1.6 = 8,000kg.
Y = 62,750,000 + 20,450 x 8,000
Y = Shs 226,350,000
Therefore, the expected cost of production for July 2023 is Shs 226,350,000.

Page 3 of 10
Prepare the costing profit or loss statement for the month of June 2023.
K.K. Tannery’s Costing profit or loss statement for the month of June 2023
Shs ‘000’
Sales (4,800 x 35,000) 168,000
Cost of goods sold Working 1 (124,300)
Selling and administrative overheads (16,000)
Net profit 27,700
Working 1: Cost of goods sold
Shs ‘000’ Shs ‘000’
Opening raw materials stock 14,000
Raw materials purchases 75,000
Carriage inwards of raw materials 3,200
Raw materials returned to suppliers (1,200)
Closing raw materials stock (12,800)
Raw materials used 78,200
Direct wages 16,000
Prime cost 94,200
Indirect wages 10,000
Factory overheads 20,000
Opening work-in-progress stock 15,300
Closing work-in-progress stock (14,000) 31,300
Cost of finished goods produced 125,500
Opening finished goods stock 10,000
Closing finished goods stock (11,200)
Cost of goods sold 124,300
(b) Explain any five factors that affect the process of decision making.
 State of the organisation- this basic relates to the size of the organisation which
implies that decision making in small organisations may be easier compared to
larger ones.
 Availability of information- the existence of adequate and accurate information
about the problem and the likely consequences of the decision to be taken has
influence on decision making.
 Extraneous factors- how will the external environment may be supportive to the
decision makers.
 The personality of the decision maker- the individual biases and perceptions may
cause ineffective decision making or otherwise. For instance, highly subjective
perceptions may lead information to distortion in order to be consistent with our
pre-established beliefs, attitudes, and values.
 Past experiences can impact future decision making. It stands to reason that
when something positive results from a decision, people are more likely to decide
in a similar way, given a similar situation. On the other hand, people tend to avoid
repeating past mistakes.

Page 4 of 10
 Age and education are only one individual difference that influences decision
making.
Solution 4
(a) Determine the throughput profit for the month of August 2023.
500ml 600ml 1,500ml Total
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Throughput margin 30,240 21,120 82,560 133,920
Operating expenses
Direct labour cost (8,820) (6,000) (13,920) (28,740)
Overhead costs (13,140) (8,880) (20,160) (42,180)
Throughput profit 63,000
500ml 600ml 1,500ml
Selling price per carton (Shs) 10,800 12,960 16,800
Direct material cost per carton (Shs) 9,120 11,040 13,360
Throughput margin per carton (Shs) 1,680 1,920 3,440
Machine hours 0.2 0.3 0.4
Return per factory hour 8,400 6,400 8,600
Ranking 2 3 1
Optimal production/sales output 18,000 11,000 24,000
Budget throughput margin (Shs ‘000’) 30,240 21,120 82,560

Operating expenses as per original production 18,000 12,000 24,000

Direct labour cost per carton (Shs) 490 500 580
Direct labour cost (Shs ‘000’) 8,820 6,000 13,920
Overhead costs per carton (Shs) 730 740 840
Overhead cost (Shs ‘000’) 13,140 8,880 20,160

Production/sales quantity for 600ml = = 11,000 cartons

Machine hours required = 0.2 x 18,000 + 0.3 x 12,000 + 0.4 x 24,000
= 16,800
Available machine hours = 16,500
Thus, machine hours, is a bottleneck resource with 300 scarce hours.

Page 5 of 10
(b) Compute the bid price for the construction project BID/KPS/08/2023.
Shs ‘000’
Direct labour cost (12,500 x Shs 5,000) 62,500
Direct materials cost 116,360
Variable overheads 75,640
Supervision and inspection (Shs 480,000 x 85) 40,800
Stationery and printing (Shs 125 x 57,600) 7,200
Transport (Shs 587.5 x 40,000) 23,500
Total cost 326,000
Bid price (Shs 326,000,000 x 1.25) 407,500
Cost driver rates
Shs ‘000’ Driver Driver rate (Shs)
Supervision and inspection 122,400 255 visits 480,000 per visit
Stationery and printing 35,400 283,200 pages 125 per page
Transport 75,200 128,000 kilometres 587.5 per kilometre
(b) Discuss any six merits of absorption costing.
Merits
 Consideration of Fixed Costs: Absorption costing rightly recognizes the importance
of including fixed production costs in product cost determination and in
determining a suitable pricing policy.
 Seasonal Sales: In a situation where production is done to have sales in future
(e.g., seasonal sales), absorption costing will show correct profit calculation than
the variable costing. Absorption costing, fixed manufacturing overheads are
included in closing stock valuation and are deferred and recorded as an expense
only in the period in which goods are sold.
 Conformity with Accrual and Matching Concepts: Absorption costing conforms to
accrual and matching accounting concepts which requires matching costs with
revenue for a particular accounting period.
 No Need to Separate Costs as Fixed and Variable: Absorption costing avoids the
separation of costs into fixed and variable elements which cannot be easily and
accurately done.
 Relevance of Under-absorption and Over-absorption: The presentation of under-
absorption and over-absorption of factory overheads in absorption costing
discloses inefficient or efficient utilization of production resources which is not
possible in variable costing.
 Accountability of Departmental Managers: The allocation and apportionment of
fixed factory overheads to cost centres or departments makes managers more
aware and responsible for the costs and services provided to their
centres/departments.

Page 6 of 10
Solution 5
(a) Compute the following:
(i) Material price and usage variances
Material price variance = Actual Quantity x (Standard Price -Actual Price)
= 25,000 x (2,000 – 1,890)
= Shs 2,750,000F

Material usage variance = Standard Price x (Standard Quantity – Actual Quantity)

= 2,000 x (8 x 3,000 – 24,000)
= Shs 2,000,000A
(ii) Labour rate and efficiency variances
Labour rate variance = Actual Hours x (Standard Rate -Actual Rate)
= 4,000 x (9,500 – 8,000)
= Shs 6,000,000F

Labour efficiency variance= Standard Rate x (Standard Hour – Actual Hours)

= 9,500 x (2 x 3,000 – 4000)
= Shs 19,000,000F
(iii) Fixed overhead expenditure and volume variances
Fixed overhead = Budgeted Fixed Overheads – Actual Fixed Overheads
expenditure variance
= 24,159,800 – 21,587,500
= Shs 2,572,300F

Fixed overhead = Budgeted fixed overheads absorption rate x (Actual

volume variance Planned Volume – Budgeted Planned Volume)
= 6,902.8 x (3,000 – 3,500)
= Shs 3,451,400A
Budgeted fixed overheads absorption rate (BFOAR);
BFOAR =
= Shs 6,902.8 per jumper
(iv) Variable overhead expenditure and efficiency variances
Variable overhead expenditure = Budgeted Fixed Variable Overheads – Actual
variance Variable Overheads
= 4,700 x 4,000 – 19,856,000
= Shs 1,056,000A

Variable overhead efficiency = Standard Variable Overhead Rate x (Standard

variance Hours – Actual Hours)
= 4,700 x (2 x 3,000 – 4,000)
= Shs 9,400,000F

Page 7 of 10
(b) Briefly explain;
(i) The relevance of motivation in performance management
 Increases productivity: Motivators like promotions create a drive for employees to
work to the best of their capabilities. As such, motivation in an organization will
lead to an increase in the productivity of an employee, who will contribute more
compared to a disheartened employee.
 Ensures organizational efficiency: Motivators can also help in changing the work
culture of an organization. With better rewards to look forward to, employees will
be more dedicated to their work and more motivated to reach their targets. This
can increase overall work efficiency and the attitude of an entire organisation.
 Promotes loyalty among the employees: Motivating your employees to do their
best and rewarding their hard work can also be beneficial in igniting a sense of
loyalty towards the company. A well-motivated workforce is loyal and has higher
levels of morale, being more committed to the organisation and its goals. Ensuring
your staff are motivated can also reduce employee turnover and therefore the
company costs of hiring new people.
 Facilitates direction: Direction is an important aspect of any business. It involves
the creation and implementation of specific plans and strategies, contributing to
the organization’s main goals. A motivated workforce will be enthusiastic about
helping to develop and innovate the company. They will also be more likely to
suggest strategies or direction that can help the company expand further.
 Ensures a proactive workforce: For any business to be successful, it requires its
employees to adapt to dynamic changes in the work environment. You cannot
take a financially prudential decision that could harm employee interests without
them being completely committed to the company’s goals and visions. As such,
motivation among employees reduces the resistance to difficult organizational
decisions.
(ii) any two causes of variances
 Poor quality of materials; change in material mix, product or production methods;
careless handling; excessive waste or scrap; incorrect setting of standards
 Change in market price, delivery costs; purchase of non-standard materials,
emergency purchases, incorrect shipping instruction, loss of discount, etc.
 Under or over utilization of a service; seasonal conditions; inefficiency in the use
of a service (e.g. electricity in lieu of gas).
 Calendar variations, abnormal idle time such as strikes, breakdowns absenteeism,
labour shortage, etc.
 Poor working conditions, abnormal idle time i.e., power failure, breakdown, go-
slow technique, quality of supervision, non-standard grade of material, or
employees’ non-co-operation in service departments.

Page 8 of 10
Solution 6
(a) Prepare the contract account for the construction of the dispensary
Dr Cr
Shs Shs
Raw materials 15,365,000 Raw materials stolen on 1,025,000
purchased site
Wages 4,256,000 Materials on site 8,604,000
General expenses 3,755,490 Plant and machinery (W1) 1,057,500
Depreciation (W1) 117,500 Work-in-progress (W2) 18,131,875
Notional profit c/f 5,324,385
28,818,375 28,818,375
Notional profit b/f 5,324,385
Profit or loss A/C (W3) 2,839,672
Work-in-progress 2,484,713
5,324,385 5,324,385
Working 1: Depreciation expense = 10% x 1,175,000 = Shs 117,500
Plant and machinery on hand = 90% x 1,175,000 = Shs 1,057,500
Working 2: Work-in-progress A/C
Value of work certified = = Shs 18,131,875

Working 3: Notional profit to profit or loss account

Profit or loss account = 5,324,385 x 2/3 x 80% =Shs 2,839,672
Note: W3 The percentage of work certified is 50% i.e. Work Certified/Contract Price
(18,131,875/36,263,750). Because the value of work certified is equal to half of the
contract price but less than 90% of the contract price so profit (which is to be
transferred to the P & L a/c)
(b) Compute the:
(i) expected output of Breeze Gin
100% of ENA’s alcoholic content is available during production process.
One litre of ENA with 100% alcohol content, results into 2.5 litres (1/0.4) of Breeze Gin
with 40% alcohol content
Thus, 450 litres of ENA results into 1,125 litres (2.5 x 450) of Breeze Gin
4% of ENA’s alcoholic content is lost normally during production process.
One litre of ENA with 4% alcohol content, results into lost 0.1 litres (0.04/0.4) of Breeze
Gin with 40% alcohol content
Thus, 450 litres of ENA results into lost 45 litres (0.1 x 450) of Breeze Gin
96% of ENA’s alcoholic content results into the actual production output for Breeze Gin
One litre of ENA with 96% alcohol content, results into 2.4 litres (0.96/0.4) of Breeze
Gin with 40% alcohol content
Thus, 450 litres of ENA results into expected normal production of

Page 9 of 10
1,080 litres (2.4 x 450) of Breeze Gin
OR
Thus, raw materials available for normal production = 0.96 x 450 = 432 litres
Thus 432 litres of ENA, results into expected normal production of
1,080 litres (432/0.4) of Breeze Gin
Expected output of Breeze Gin = 1,080 litres
(ii) processing cost per litre
Cost per litre =
= Shs 115,000
(iii) abnormal loss/gain in shillings if the actual output of the Breeze Gin is either
1,040 litres or 1,100 litres.
When actual production is 1,040 litres
Abnormal loss = Shs 115,000 x (1,080 – 1,040)
= Shs 4,600,000
When actual production is 1,100 litres
Abnormal gain = Shs 115,000 x (1,100 – 1,080)
= Shs 2,300,000
(c) Briefly explain the methods of overhead recovery.
 Direct material cost method: Under this method, the rate is calculated by
expressing the overhead cost as a percentage of direct materials for the same
period.
 Direct labour cost method: Under this method, the rate is calculated by expressing
the overhead cost as a percentage of cost of direct labour for the same period.
 Prime cost method: This method is the combination of both percentage of direct
material cost method and percentage of direct labour cost method. The following
formula is used to calculate the rate.
 Direct labour hour rate method: Generally, time is the key factor, which
determines the amount of indirect expenses. Hence, any recovery rate calculated
on the basis of the hours of work shall give accurate result. In a manufacturing
process, if handwork is the rule, the rate of overhead per direct labour hour is
worked out and applied suitably. The following formula is used to calculate the
rate.
 Machine hour rate method: If automatic and semi-automatic machines are used in
the manufacturing process, machine hour rate is applied in the case of overhead
absorption.
 Sales price method. The sales value is taken into consideration for the calculation
of machine hour rate. The budgeted or actual overhead is divided by sales realised
or to be realised.
 Production unit or cost unit method. The absorption rate is calculated by dividing
the overhead by the number of units produced.

Page 10 of 10
CPA 6 - COST & MANAGEMENT ACCOUNTING
Solution 2
(a) Ethical requirements of a management accountant
 Integrity
A management accountant should refrain from any activity that would
prejudice their ability to carry out their duties ethically and also refuse any
gift, favor or hospitality that would influence their actions and decisions.
 Confidentiality
A management accountant should avoid disclosing confidential
information acquired in the course of their work except when they are
authorized or legally obliged to do so.
 Professional competence
A management accountant should perform their professional duties in
accordance with the relevant laws, regulations and technical standards.
They should maintain an appropriate level of competence by undergoing
continuous development of their knowledge and skills.
 Independence/Objectivity
A management accountant should be impartial in their judgment and do
their work based on technical grounds and not based on any biases. They
should avoid any undue influence from other employees in their decision
making.
(b) Determine weekly road user fees to be charged per vehicle
Cost items Shs ‘000’ Shs ‘000’
Capital investment (19,500,000 +2%x19,500,000x5) x1/52 412,500
Cashiers’ wages (3 x 4 x 6 x 8500) x 7 4,284
Supervisors’ wages (1 x 4/2 x 150,000) x 7 2,100
Manager’s salary (6,500,000 x 12) x1/52 1,500
Security 72,800,000 x1/52 1,400
Utilities (26,000,000 x 4) x1/52 2,000
Telephone (11,648,000 x 4) x1/52 896
Maintenance (9,100,000 x 4) x1/52 700
Interest expense (2% x 19,500,000) x1/52 7,500
Total cost 432,880
Target profit (25% x 432,880,000) 108,220
Weekly road user fees 541,100

Number of vehicles per week = = 10,822 vehicles

Weekly road user fees per vehicle = = Shs 50,000

Page 1 of 10
(b) Stores Ledger card using the weighted average cost method
Date Receipts Issues Balance
Qty Rate Amount Qty Rate Amount Qty Rate Amount
Jan
(Bags) (Shs) (Shs) (Bags) (Shs) (Shs) (Bags) (Shs) (Shs)
1 200 28,850 5,770,000
5 300 28,990 8,697,000 500 28,934 14,467,000
7 250 28,934 7,233,500 250 28,934 7,233,500
10 170 28,800 4,896,000 420 28,880 12,129,600
13 200 28,950 5,790,000 620 28,902 17,919,240
15 50 28,934 1,446,700 670 28,905 19,366,350
17 400 28,905 11,562,000 270 28,904 7,804,080
19 200 28,904 5,780,800 70 28,906 2,023,420
22 150 29,050 4,357,500 220 29,004 6,380,880
23 40 29,004 1,160,160 180 29,004 5,220,720
25 100 29,980 2,998,000 280 29,353 8,218,840
27 100 29,353 2,935,300 180 29,353 5,283,540
Solution 3
(a) (i) Distinguish between a cost unit and a cost centre
A cost unit refers to a unit of quantity of a product, service or time in relation to which
costs may be ascertained or expressed.
Whereas
A cost centre refers to a location, person or item of equipment for which costs may be
ascertained and used for the purpose of cost control.
(a) (ii) Limiting factor
A limiting factor is anything that restricts an entity’s ability to maximize its sales due to
constraints in demand or the availability of production resources. In other words, it is
an element that restricts the output and earning capacity of a firm. Examples of limiting
factors include shortage of labour hours, shortage of machine hours, and shortage of
materials, limited factory space among others.
(b) Determining the optimum product mix
Amount of raw materials required to meet the demand.
Washing soap (0.8 x 24,000) = 19,200 kg
Bathing soap (0.25 x 20,000) = 5,000 kg
Detergent (0.5 x 18,000) = 9,000 kg
Total 33,200 kg
Shortfall in materials = 33,200 – 32,000 = 1,200 kg

Page 2 of 10
 Determine the contribution per unit and per limiting factor
Washing Bathing Detergent
soap soap
Shs Shs Shs
Selling price 5,500 3,500 6,000
Less: Variable costs
Direct materials 1,760 1,120 1,920
Direct labour 1,320 840 1,440
Variable production overheads (10% x SP) 550 350 600
Contribution per box 1,870 1,190 2,040
Materials required per box (kg) 0.8 0.25 0.5
Contribution per box per limiting factor kilograms 2,337.5 4,760 4,080
Ranking 3rd 1st 2nd
Optimum product mix
Expected Material required Materials Available
demand (box) per box (kg) required (kg) materials (kg)
Available 32,000
Bathing soap 20,000 0.25 5,000 27,000
Detergent 18,000 0.5 9,000 18,000
Washing soap 22,500 0.8 18,000 -
(c) STL reconciliation of financial accounting and cost accounting profit for the year
ended 30 June 2022
Shs ‘000’ Shs ‘000’
Profit as per cost accounts 832,838
Add: Difference in closing stock (497,250 – 482,332) 14,918
Add: Gain on disposal of equipment 2,500
Add: Difference in Office and Administrative costs
(2,261,744 - 2,216,509) 45,235 62,653
Less: Difference in opening stock (427,500 – 414,675) (12,825)
Less: Difference in Depreciation (40,500 – 38,475) (2,025)
Less: Difference in selling expenses (288,000 – 273,600) (14,400) (29,250)
Profit as per financial accounts 866,241

Page 3 of 10
Alternatively:
Shs ‘000’ Shs ‘000’
Profit as per financial accounts 866,241
Add: Difference in opening stock (427,500 – 414,675) 12,825
Add: Difference in Depreciation (40,500 – 38,475) 2,025
Add: Difference in selling expenses (288,000 – 273,600) 14,400 29,250

Less: Difference in closing stock (497,250 – 482,332) (14,918)

Less: Gain on disposal of equipment (2,500)
Less: Difference in Office and Administrative costs
(2,261,744- 2,216,509) (45,235) (62,653)
Profit as per cost accounts 832,838
Solution 4
(a) Distinguish between economist and accountants’ model
Economist Model
This explains that the relationship between output and total cost is curve- linear. The
total revenue curve is curve linear indicating that more units of output can only be sold
if the price is reduced. Thus, the total revenue does not increase proportionately
without price reduction.

There model has two break even points and losses in the short run and very long run.
While
Accountants Model
Under this, the output level that maximizes profits is the maximum practical capacity
and this can only be achieved by operating within the relevant range. The model is
based on a number of assumptions including; all units produced are sold, total revenue
and total costs are linearly related and costs are categorized as fixed or variable.

Page 4 of 10
(b) (i) Uses of marginal costing system
 Provides relevant information about costs to enhance the process of decision
making and control since it makes a distinction between fixed costs and variable
costs.
 The use of marginal costing matches with the current out of pocket expenditure
necessary to produce and sell products and services and can therefore be used
more readily in incremental analysis than absorption costing.
 The profit calculated using marginal costing is more easily related to sales than it
is in absorption costing. Managers can easily anticipate income and take viable
decisions based on contribution analysis.
 Avoids fixed manufacturing overheads being capitalized in un-saleable stocks.
Stock is valued on the basis of unit variable costs which is always lower than
absorption costing stock figure.
 Internal reports produced on the basis of marginal costing may be used as a
basis for measuring managerial performance since most of the costs involved are
controllable.
(ii) Impact of marginal and absorption costing on profit
When production equals sales
The two techniques here give the same profit. Since production matches sales,
every unit produced is sold and hence there are no changes in opening and
closing stock valuations which lead to profit variance.
When production exceeds sales
Under this, absorption costing system will show a higher profit than marginal
costing system. The variance in profits is as a result of differences in opening
and closing stock valuation. Under absorption costing the closing stock includes
part of fixed manufacturing overheads carried forward to the next period and
hence are not be charged against income in the same period. With marginal
costing, all fixed manufacturing overheads are expensed in the same period.
When production is less than sales
Under this, marginal costing provides more profit than absorption costing system
since only the current fixed manufacturing overheads are expensed under
marginal costing. Under absorption costing, the value of opening stock will be
overstated which leads to overstatement in cost of sales and hence reducing the
profit by the same value.

Page 5 of 10
(c) BML Profit statement for the quarter ended 30 June 2022 using marginal costing
Jan Feb Mar
Shs ‘000’ Shs ‘000’ Shs ‘000’
Sales 156,200 171,600 198,660
Less: Cost of sales
Opening stock 5,544 15,092 20,636
Production costs 97,020 101,640 106,260
Closing stock (15,092) (20,636) (15,646.4)
Gross profit 68,728 67,588 87,410.4
Less:
Fixed production overheads (34,650) (36,300) (37,950)
Office & administration costs (5,467) (5,467) (5,467)
Selling and distribution costs (4,500) (4,500) (4,500)
Net profit 24,111 21,321 39,493.4
Workings:
Unit marginal cost of each tin
Direct materials 1,760
Direct labour 880
Variable production overheads (0.25 x 1,760) 440
Total 3,080
Determining selling price per tin
Selling price = Unit marginal cost + fixed markup of Shs 2,420
= 3,080 + 2,420
= Shs 5,500 per tin
Determining sales Shs’000’
Jan Feb Mar
Sales (tins) 28,400 31,200 36,120
Selling price per tin 5,500 5,500 5,500
Total sales 156,200 171,600 198,660
Determining opening stock Shs’000’
Jan Feb Mar
Opening stock (tins) 1,800 4,900 6,700
Unit variable cost 3,080 3,080 3,080
Total 5,544 15,092 20,636

Page 6 of 10
 Determining the production cost Shs ‘000’
Jan Feb Mar
Budgeted output 30,000 30,000 30,000
Percentage 105% 110% 115%
Production (tins) 31,500 33,000 34,500
Unit variable 3,080 3,080 3,080
cost
Production costs 97,020 101,640 106,260
Determining closing stock Shs’000’
Jan Feb Mar
Opening stock (tins) 1,800 4,900 6,700
Production (tins) 31,500 33,000 34,500
Sales (tins) (28,400) (31,200) (36,120)
Closing stock (tins) 4,900 6,700 5,080
Unit variable cost 3,080 3,080 3,080
Closing stock value 15,092 20,636 15,646.4
Solution 5
(a) Types of cost standards
 Basic costs standards
These are long term standards which remain unchanged for an indefinite
period of time. They are operated without a revision for a number of
years.
 Ideal cost standards
These standards represent what business operations would be under ideal
set of circumstances where everything is running at the optimum level.
They are theoretical standards that are rather impracticable to attain.
 Currently attainable cost standards
These are standards that are based on current conditions and
circumstances. They represent what can be attained with the present
setup in place if the current conditions prevail.
 Expected standards
These are standards that are expected to apply during the period under
review. They are obtained by adjusting the current standard.
(b) Computation of activity, capacity and efficiency ratios
Standard budgeted hours
Chairs = 50 x 2 = 100 hours
Desks = 14 x 3 = 42 hours
142 hours
Standard hours for actual production
Chairs = 35 x 2 = 70 hours
Desks = 17 x 3 = 51 hours

Page 7 of 10
 121 hours
Activity ratio
= Standard hours for actual production x 100%
Budgeted hours
= 121 X 100%
142
= 85.2%
Capacity ratio
= Actual hours worked X 100%
Budgeted hours
= 130 X 100
142
= 91.5%
Efficiency ratio
= Standard hours for actual production X 100
Actual hours
= 121 X 100
130
= 93.1%
(c) Tasty Diaries Limited flexed budget for the month of July 2022
Flexed budget Actual performance
Qty Rate Qty Rate Actual Variance
Tin Shs Shs ‘000’ Tin Shs Shs ‘000’ Shs ‘000’
Sales 31,500 30,500 960,750 31,500 30,000 945,000 15,750A
Direct materials 31,500 9,760 307,440 31,500 9,600 302,400 5,040F
Direct labour 31,500 7,320 230,580 31,500 7,200 226,800 3,780F
Variable overheads 31,500 2,440 76,860 31,500 2,400 75,600 1,260F
Contribution 345,80 340,200 5,670A
Fixed costs
Rent 74,725 79,208 4,483A
Depreciation 40,700 41,920 1,220A
Salaries 106,750 94,153 12,597F
Utilities 80,500 82,400 1,900A
Net profit 43,195 42,519 676A

Page 8 of 10
Solution 6
(a) Capacity levels that influence the overhead rate
 Idle capacity
This refers to the temporary idleness of available resources due to irregular
interruptions like machine breakdown, power outages.
 Excess capacity
This refers to the portion of practical capacity which is available but no attempt is made
for its utilization. It results from either managerial decision to retain larger production
capacity or from unbalanced equipment or machinery within departments.
 Practical capacity
This refers to the maximum theoretical capacity with minor unavoidable interruptions.
The unavoidable interruptions are based mostly on internal influences and do not
consider external factors.
 Maximum capacity
This is the capacity for which plant is designed to operate. It does not give allowance
for waiting, delays and shutdown.
 Normal capacity
This refers to the production capacity that is achieved or that is achievable under
normal circumstances and considers the expected losses in output.
(a) (i) Process accounts for the first quarter of 2023
Process B
Dr Cr
Qty (kg) Shs ‘000’ Qty (kg) Shs ‘000’
Sunflower seeds 8,000 16,000 Normal loss 800 -
Other materials 1,250 Abnormal loss 800 3,000
Direct labour 7,690 Output to C 6,400 24,000
Overhead costs 2,060
8,000 27,000 8,000 27,000
Process C
Dr Cr
Qty (kg) Shs ‘000’ Qty (kg) Shs ‘000’
Other materials 750 Normal loss 640 2,880
Direct labour 7,825 Abnormal loss
Overhead costs 3,425 Output to D 5,800 33,350
Transfer from B 6,400 24,000
Abnormal gain 40 230
6,440 36,230 6,440 36,230

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 Process D
Dr Cr
Qty (kg) Shs ‘000’ Qty (kg) Shs ‘000’
Other materials 4,580 Normal loss 580 4,060
Direct labour 5,625 Abnormal loss
Overhead costs 2,265 Output 5,600 44,800
Transfer from C 5,800 33,350
Abnormal gain 380 3,040
6,180 48,860 6,180 48,860
Working
B C D
Input (kg) 8,000 6,400 5,800
Normal loss (10%) (kg) (800) (640) (580)
Notional output (kg) 7,200 5,760 5,220
Actual output (kg) (6,400) (5,800) (5,600)
Abnormal loss/gain (kg) 800 (40) (380)
Rate (kg) 3,750 5,750 8,000
Abnormal loss/gain (Shs ‘000’) 3,800 230 3,040
Rate for B = 27,000,000 ÷ 7,200 = Shs 3,750 per kg
Rate for C = (36,000,000 – 2,880,000) ÷ 5,760 = Shs 5,750 per kg
Rate for D = (45,820,000 – 4,060,000) ÷ 5,220 = Shs 8,000 per kg
(ii) Determine the total production for the second quarter 2023
Year Quarter Output (kg) Production costs (Shs)
2022 1 4,800 39,600,000
2 4,500 36,000,000
3 6,750 52,650,000
4 8,000 59,800,000
2023 1 5,600 44,800,000
Y = a + bX
b= = Shs 6,800 per kg
36,000,000 = a + 6,800 x 4,500
a = Shs 5,400,000
Y = 5,400,000 + 6,800X
Production cost for second quarter;
Expected output = 12,000 + 8,000 = 20,000 kg
Y = 5,400,000 + 6,800 x 20,000 = Shs 141,400,000

Page 10 of 10
CPA 7 - COST AND MANAGEMENT ACCOUNTING
Solution 2
(a) Determining PFUL’s closing stock using FIFO method
Receipts Issues Balance
Qty Rate Qty Rate Qty Amount
August Bags Shs '000' Bags Shs '000' Bags Shs '000'
1 1,450 70 1,450 101,500
1 1,150 70 300 21,000
2 1,500 72 1,800 129,000
3 300 70
650 72 850 61,200
4 500 73 1,350 97,700
6 850 72 500 36,500
7 50 73 450 32,850
9 1,000 69 1,450 101,850
11 450 73
350 69 650 44,850
13 750 74 1,400 100,350
16 1,250 71 2,650 189,100
650 69
17 750 74
350 71 900 63,900
20 720 70 1,620 114,300
23 900 71 720 50,400
26 480 71 1,200 84,480
720 70
31 80 71 400 28,400
Closing stock as at 31 August 2022 is 400 bags of maize bran valued at Shs 28.4
million.

(b) (i) Explain the concepts of idle time and overtime

Idle time- This is the period for which a worker is paid without giving any production
to the employer. Therefore, it represents unproductive time caused by, machine
breakdown, power shortage and shortages of material among others.
While
Over time- This is time which an employee works over and above his/her normal
working time.
(b) (ii) Accounting treatment of idle time and overtime costs
Accounting treatment for idle time costs
 If idle time is due to normal causes that cannot be controlled by an entity,
then its cost is a factory overhead that constitutes part of the cost of the
product

Page 1 of 8
 If idle time is caused by avoidable factors such as power shortage and
shortage of raw-materials, then its cost is treated as operating loss and
reported direct to the statement of profit and loss.
Accounting treatment for overtime costs
 If overtime is a regular feature undertaken to increase production, then the
cost of overtime should constitute part of labour costs;
 If overtime is a direct result of a customer’s urgent request for the completion
of the order, then the cost of overtime should be charged directly to that
specific job;
 If overtime work is caused by loss of time which was avoidable, then the cost
of overtime should be treated as a loss and charged to the statement of profit
and loss;
 If overtime is caused by interruptions during the normal work time which are
beyond the control of management, then the cost of overtime should be
accounted for as factory overheads.
(c) Differences between management accounting and financial accounting:
 Primary users of information – The users of financial accounting information
are mainly external to the business e.g. shareholders, suppliers, lenders, while
the users of management accounting information are within the organisation
e.g management;
 Financial accounting reports on the past events while management
accounting focuses on the future by providing predetermined information
such as budgets that can aid management functions;
 Reporting frequency – Financial accounts are usually prepared annually or
semi-annually while management reports are more routine;
 Financial accounting is a statutory requirement for all public limited companies
at the end of every financial year while management accounting is optional.
 Audit requirement – Financial accounts must be subjected to an external audit
since they are needed by external users while it is not mandatory to audit
management accounts.
 Accounting system – Financial accounting follows the double-entry system for
recording, classifying and summarizing business transactions while
management accounting is not based on double-entry system.
 Level of standardization – Financial accounting is highly standardized because
there are specific report formats, IFRS and IAS that must be followed whereas
there is no standardization when it comes to management accounting reports.
Solution 3
(a) Principal bases for classification of costs in organisations:
 Natural classification of costs – This refers to the basic physical characteristics of
the cost. Under this principal base, costs can be classified as direct material,
direct labour, direct expenses or factory overheads;
 Cost behaviour – Under this base, costs are classified as fixed, variable, semi-
variable and semi-fixed;

Page 2 of 8
 Functional classification – Under this base, costs are classified based on the
managerial functions which are performed in a given period. This base classifies
costs as administrative costs, distribution costs and finance costs;
 Degree of traceability to the product – Under this base, classification of costs is
based on the ability of attaching costs to specific products. This base therefore
classifies costs as direct costs and indirect costs.
 Decision making – For purpose of decision making, costs can be classified as
relevant costs such as future costs and irrelevant costs such as sunk costs.
(b) Prepare a statement that reconciles the costing profit with the financial profit for
the quarter ending 30 September 2022
Shs (000)
Reported costing profit (2,250,000 + 464,582) 2,714,582
Add: Unrecognised financial income in cost accounts:
Dividends received 85,215
Interest income received 57,400
Discounts received 36,000
Add: Over absorbed overheads in cost accounts
Production overheads (780,000 – 776,000) 4,000
Administration costs (15.75% x 9,475,360 – 1,429,800) 62,569.2
Distribution cost (1,871,688.8 – 1,830,996) 40,692.8
Less: Unrecognised financial expenses:
Finance cost (592,459)
Less: Understatement in opening stock (1,800m – 1,650m) (150,000)
Less: Overstatement in closing stock (1,240m – 1,232m) (8,000)
Financial profit 2,250,000
Alternatively

Shs (000)
Reported financial profit 2,250,000
Add: Non costing expenses:
Finance cost 592,459
Add: Understatement in opening stock (1,800m – 1,650m) 150,000
Add: Overstatement in closing stock (1,240m – 1,232m) 8,000
Less: Non costing income:
Dividends received (85,215)
Interest income received (57,400)
Discounts received (36,000)
Less: Over absorbed overheads in cost accounts
Production overheads (780,000 – 776,000) (4,000)
Administration costs (15.75% x 9,475,360 – 1,429,800) (62,569.2)
Distribution cost (1,871,688.8 – 1,830,996) (40,692.8)
Reported costing profit (2,250,000 + 464,582) 2,714,582

Page 3 of 8
 (c) With computations, advise KML on the viability of discontinuing production of
Yeast.
Lost contribution if yeast is discontinued = Unit contribution x sales units
= (10,500 – 5,750) x 125,400
= 595,650,000
Saving in fixed costs = 80% x 5,300 x 125,400
= 531,696,000
Net cost of the decision = 531,696,000 – 595,650,000
= (63,954,000)
Advice:
KML should not discontinue production of yeast as the savings in directly attributable
fixed costs (Shs 531.696m) are not enough to cover the lost contribution (Shs
595.65m).
Solution 4
(a) Using weighted average cost (WAC) method to prepare PPL’s
Completed output= Opening WIP + Introduced units – Closing WIP
= 20,000 + (650,000 /20) – 8,000 = 44,500 Jerrycans
(i) Statement of equivalent production
Equivalent production
Input Output Material Labour Overheads
Item Jerrycans Item Jerrycans % Jerrycans % Jerrycans % Jerrycans
Completed
Opening WIP 20,000 WIP 20,000 100% 20,000 100% 20,000 100% 20,000
Introduced Introduced
material 32,500 & completed 24,500 100% 24,500 100% 24,500 100% 24,500
Closing WIP 8,000 90% 7,200 80% 6,400 60% 4,800
52,500 52,500 51,700 50,900 49,300
(ii) Statement of cost per Jerrycan
Cost per jerrycan = Costs of opening WIP + Current costs
Equivalent production
Current material cost = 650,000 litres x 650 = 422.5m
Current direct labour cost = 80% x 422.5m = 338m
Overheads = 25% x 338m = 84.5m
Costs of Equivalent Cost
Cost element opening WIP Current costs Total cost units per unit
Shs ‘000’ Shs ‘000’ Shs ‘000’ jerrycans Shs
Material 314,742 422,500 737,242 51,700 14,260
Labour 244,805 338,000 582,805 50,900 11,450
Overheads 140,801 84,500 225,301 49,300 4,570
Cost per unit 30,280

Page 4 of 8
(iii) Statement of closing work in progress:
Cost element Effective units in closing WIP Cost per unit Amount
Jerrycans Shs Shs ‘000’
Material 8,000 x 90% = 7,200 14,260 102,672
Labour 8,000 x 80% = 6,400 11,450 73,280
Overheads 8,000 x 60% = 4,800 4,570 21,936
197,888

(iv) Process account

Item Units CPU Amount Item Units CPU Amount
Jerrycans Shs Shs ‘000’ Jerrycans Shs Shs ‘000’
Opening WIP
cost 20,000 700,348 Output 44,500 30,280 1,347,460
Additional
material 32,500 13,000 422,500 Closing WIP 8,000 197,888
Current labour 338,000
Current
overheads 84,500

52,500 1,545,348 52,500 1,545,348

(b) Determining the profit from the sales order of Nezikokolima Girls Primary
School
Amount
Shs ‘000’
Revenue (1,000 x 25,000) 25,000
Costs
Material 1.5 metres x 1,000 uniforms x 8,000 (12,000)
Labour:
Cutting department 0.5 hours x 1,000 uniforms x 3,500 (1,750)
Sewing department 0.75 hours x 1,000 uniforms x 4,000 (3,000)
Finishing department 1 hour x 1,000 uniforms x 2,500 (2,500)
Production overheads:
Cutting department 10% x 7,250,000 (725)
Sewing department 2% x 12,000,000 (240)
Finishing department 20% x 2,500,000 (500)
Total cost of the order (20,715)
Profit 4,285
(ii) Advantages of using batch costing method:
 The accounting work is considerably reduced as a group of homogeneous
jobs constitute a batch;
 Repeated jobs are done fast in batch systems without user interaction;
 The variations in the costs arising under job costing is smoothened by means
of averaging such costs and spreading over the batch of output;

Page 5 of 8
 The loss of time due to inter job transfer of materials, labourers and tools is
minimised under batch costing;
 Supervision becomes very easy and effective. So idle time is eliminated.
Solution 5
(a) Computation of variances for July 2022:
(i) Material price variance = (Actual price – standard price) x Quantity purchased
Shs
Lemon fragrance (5,200 – 5,000) x 63,000 = 12,600,000 Adv
Coconut oils (7,500 – 8,000) x 57,000 = 28,500,000 Fav
Vodka (7,600 – 7,500) x 99,000 = 9,900,000 Adv
6,000,000 Fav
(ii) Materia usage variance = (Actual usage – standard usage) x standard price
Shs
Lemon fragrance (63,000 – 0.5 x 9,850 x 12) x 5,000 = 19,500,000 Adv
Coconut oils (57,000 – 0.5 x 9,850 x 12) x 8,000 = 16,800,000 Fav
Vodka (99,000 – 0.82 x 9,850 x 12) x 7,500 = 15,570,000 Adv
18,270,000 Adv
(iii) Sales price variance = (Actual price – standard price) x Actual quantity sold=
Standard selling price = 19,400 x 1.18 = 22,500 per tin
Sales price variance = (23,000 – 22,892) x 9,850 x 12 = 12,765,600 Fav
(iv) Labour rate variance = (Actual labour rate – standard labour rate) x Actual
hours paid
LRV = (3,250 – 3,500) x 175,000 hrs = 43,750,000 Fav
(v) Labour efficiency variance = (Actual productive hrs – standard productive
hrs) x standard labour rate
LEV = (95% x 175,000 hrs – 1.5 hrs x 9,850 x 12) x 3,500
= 38,675,000 Fav
(b) Causes of the labour variances
The labour rate variance computed above is favourable, and the possible causes of
this variance are;
 Payment of a low wage rate of Shs 3,250 per hour lower than the Shs 3,500 per
hour initially budgeted for;
 Employing workers of grades different from standard grades specified;
 New or fresh workers not being paid at full rates.
(ii) The labour efficiency variance computed above is adverse and the possible
causes of this variance are;
 Hiring of more high skilled labour.
 Training of work force in improved production techniques and methodologies.
 Use of better-quality raw materials which are easier to handle.
 Higher learning curve than anticipated in the standard.

Page 6 of 8
 (c) Explain any three merits and demerits of budgets to organisations
Merits of budgets
 The use of budgeting in an organization develops an attitude of cost
consciousness, stimulates the effective use of resources, and creates an
environment of profit-mindedness throughout the organization;
 Budgeting compels all members of the organization to participate in goal setting
process which enable employees to understand more the organization’s
intentions;
 Budgeting encourages productive competition, provides incentive to perform
efficiently and gives a sense of purpose to each individual in the organization;
 Budgeting provides a tool through which managerial policies and goals are
periodically evaluated, tested and established as guidelines for the entire
organization.
 Budgeting compels all functional managers to make plans in harmony with plans
of other functions, a process referred to as goal congruence;
 Budgeting compels and motivates management to make early and timely study
of its problems before decisions are made;
Demerits of budgets
 The budgeting process is built around existing organization structures which may
be inappropriate for current conditions.
 The existence of well documented plans may cause inertia and lack of flexibility
in adapting to changes therefore, budgeting promotes rigidity;
 The budgeting process takes a lot of time and if badly handled may cause
antagonism and lower morale;
 Excessive emphasis on budgeting may result in attempts by lower-level
management and employees to manipulate and provide misleading results about
costs and revenues.
Solution 6
(a) Overheads’ analysis using elimination method
Determining primary overheads
Amounts in Shs
Apportionment Quality
Overheads base Machining Assembly Finishing assurance
Consumable materials 7,875,000 9,843,750 13,781,250 7,875,000
Indirect labour
Indirect wages hours 3,937,500 7,875,000 9,187,500 5,250,000
Rent and rates Floor area (m )
2
11,484,375 9,843,750 8,203,125 3,281,250
Power and lighting Power usage (%) 4,725,000 1,575,000 3,675,000 525,000
Buildings insurance Floor area (m2) 2,296,875 1,968,750 1,640,625 656,250
Machine depreciation Machine usage (hrs) 7,875,000 3,150,000 4,725,000 -
Primary overheads 38,193,750 34,256,250 41,212,500 17,587,500

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Secondary analysis:
Production depts Service depts
Machining Assembly Finishing Quality assurance
Primary overheads 38,193,750 34,256,250 41,212,500 17,587,500
Finishing overheads 18,545,625 14,424,375 (41,212,500) 8,242,500
Quality assurance overheads 12,054,000 13,776,000 - (25,830,000)
Secondary overheads 68,793,375 62,456,625 -
(b) Methods of overheads recovery:
 Units of output method – Under this method, recovery/absorption of overheads is
based on the units of output of each production department. The units of output
can be kilogram, litre, ton. Therefore, the overhead recovery rate is calculated
as;
Recovery rate = Overheads of the cost centre
Units of output of the cost centre
 Machine Hours Method – Under this method, overheads are absorbed to cost
units or products using machine hours of each production department. Therefore,
the overhead recovery rate is calculated as;
Recovery rate = Overheads of the cost centre
Machine hours of the cost centre
 Direct labour hours method – Under this method, recovery of overheads is based
on direct labour hours of each production department hence the recovery rate is
calculated as;
Recovery rate = Overheads of the cost center
Total direct labour hours
(c) Determining WUL’s total cost using high-low method:
Variable cost per unit = Highest cost – lowest cost
Highest output – lowest output
= 39.1m – 33.7m = 450,000
62 – 50
Using output level of September to determine fixed costs;
Fixed costs = Total costs – variable costs
= 35.95m – (0.45m x 55) = 11.2m
Determining total cost for March 2022;
Total cost = variable cost + fixed cost
= (0.45m x 65 sofa sets) + 11.2m = 40.45m

Page 8 of 8
CPA 7 COST AND MANAGEMENT ACCOUNTING

Solution 2
(a) Objectives of a costing system
 Determination of the cost of a product or service. This is achieved through cost
accumulation of the different cost elements; material costs, labour costs and
overhead costs.
 Aid management in decision making. This is by comparing different alternatives
and making the appropriate choice based on the cost information.
 Cost control. The budgeted costs and the actual costs are compared in order to
monitor costs performance.
 Determining the selling price of a product. Cost information is one of the bases
on which the selling price of a product is determined.
 Ascertainment of profit. This is obtained by comparing the costs and the revenue
to establish whether a company has made a profit or loss.
(b) Techniques used in inventory control
 Economic order quantity (EOQ)
This looks at the number of units a company should order for at any one time
that minimizes both ordering and carrying costs.
 Just in time (JIT)
This is a production strategy concerned with reducing production costs by
eliminating inventory and production delays by reducing in-process inventory and
associated carrying costs. It involves having materials at the time that they are
needed to execute an order.
 ABC analysis
This is based on grading items according to the importance of the materials.
Materials are grouped into; high value, medium value and low value.
 Inventory turnover ratio
This signifies the value of materials consumed during a given period of time to
the average level of inventory held during that period. This indicates how quickly
stock is converted into sales. It enables management to avoid capital being
locked up in undesirable stock.

Page 1 of 14
(c) Determine the following:
(i) Number of orders he will make to minimize inventory costs

EOQ =
D is demand= 28,000 cartons
O is ordering cost per order=
Shs
Stationery and printing 1,500
Airtime for telephone calls 800
Internet data 500
Total 2,800
H is holding cost per carton =
Shs
Warehouse rent 1,000
Warehouse security 450
Wages for storekeeper 550
Total 2,000

EOQ =

EOQ = 280 cartons

Number of cartons =
= 100 orders
(ii) The minimum total inventory cost
Total cost = +

Total cost = +
= Shs 560,000

(iii) Reorder, minimum and maximum stock levels

Lead time 4 – 12 days
Usage 60 – 80 cartons per day
Average usage 75 cartons per day
EOQ 280 cartons
Reorder level = maximum usage x maximum lead time
= 80 x 12
= 960 cartons

Page 2 of 14
Minimum stock level = Reorder level – (average usage x average lead time)

= 960 – 75 x

= 360 cartons
Maximum stock level = Reorder level + EOQ – (minimum usage x minimum lead time)
= 960 + 280 – 60 x 4
= 1,000 cartons
(d) Forms of fraud in the payroll
 Overstating the hours worked leading to over payment of wages
 Inclusion on the payroll fictitious or ghost employees
 Paying an employee at a rate higher than the approved rate
 Indicating absent workers as present
 Paying workers when no work was done
 Failure to make some deductions
 Payment of leave wages, holiday wages to workers who are not entitled
How to overcome payroll fraud
 Payroll changes should be approved by two designated individuals
 Establishing internal controls requiring separation of payroll duties
 People who compute pay rates and accumulated hours should not be allowed to
write payroll cheques
 Requiring approval of significant work hours exceeding an employee’s normal
schedule including overtime
 Personnel who create payroll data should not be allowed to make changes or add
employees without management approval
 Regular reconciliation of the payroll with copies of appointment letters and
results of time booking to ensure workers who are paid are genuine payees.

Page 3 of 14
Solution 3
(a) A cost unit is a unit of a quantity of a product, or service in relation to which
costs may be ascertained or expressed for example, a litre, km or kg
Whereas
A cost center is a production or service location, function, activity or item of
equipment for which costs may be ascertained and used for the purposes of cost
control.
(b) Advantages of interlocking accounts
 If cost accounts and financial accounts are maintained by different independent
accountants, it minimizes the possibility of fraud.
 It becomes easier to access cost information for stock valuation and profit
measurement. This is because cost books are separate from financial books.
 If cost accounts and financial accounts are maintained by different independent
accountants, it minimizes the possibility of errors since the two sets can be
compared and thereafter reconciled.
 When cost books are maintained separately, it is easy to ensure confidentiality of
the cost data.
(c) Statement of reconciliation between the profit under cost accounts and financial
accounts
APPROACH 1 (Starting with the profit from Cost accounts)
Shs Shs
Profit as per cost accounts 1,192,283,928
ADD:
Difference in opening stock of finished goods 13,440,000
Difference in closing stock of finished goods 11,961,600
Interest income 66,009,000 91,410,600
LESS:
Difference in opening stock of raw materials 23,742,600
Difference in closing stock of raw materials 13,794,228
Difference in depreciation 5,887,500
Dividends paid 48,364,200
Loss on disposal 14,406,000 (106,194,528)
Profit as per financial accounts 1,177,500,000

Page 4 of 14
APPROACH 2 (Starting with the profit from financial accounts)
Shs Shs
Profit as per financial accounts 1,177,500,000
ADD:
Difference in opening stock of raw materials 23,742,600
Difference in closing stock of raw materials 13,794,228
Difference in depreciation 5,887,500
Dividends paid 48,364,200
Loss on disposal 14,406,000 106,194,528

LESS:
Difference in opening stock of finished goods 13,440,000
Difference in closing stock of finished goods 11,961,600
Interest income 66,009,000 (91,410,600)
Profit as per cost accounts 1,192,283,928
(c) Accept or reject the special order
Details Shs Shs
Incremental revenue 60,000,000
Less:
Incremental costs
Variable costs:
Direct materials (6,000x3,000) 18,900,000
Direct labour 15,660,000
Variable overheads 9,180,000
Additional labour costs 3,160,000
Hiring of machines 7,500,000 (54,400,000)
Contribution 5,600,000

NTL’s management should accept the order from CCU of supplying 3,000 sweaters at
Shs 20,000 each since the incremental revenues exceed the incremental costs leading
to additional contribution of Shs 5,600,000.

Page 5 of 14
 Solution 4
(a) Advantages of absorption costing system
 It incorporates all costs incurred in providing goods and services and therefore
does not understate the cost of the product.
 It avoids fictitious losses being reported. Fixed costs in an absorption costing
system are deferred and included in the closing inventory value and recorded as
an expense only in the periods when stock is being built up.
 The costing system does not understate the importance of fixed manufacturing
costs. Production of goods is not possible without incurring fixed manufacturing
costs.
 It is consistent with external reporting requirements. Management prefer an
internal profit reporting system that is consistent with the external financial
accounting system.
 The absorption costing system is supported by tax authorities since it does not
under declare profits and therefore tax liability.
(b) Determining normal loss and abnormal loss
Shs
Opening work in progress 18,000
Transferred to process 2 123,000
Closing work in progress (24,000)
Production output 117,000
Normal loss = 10% x 117,000 = 11,700 liters
Scrapped litres 12,000 liters
Abnormal loss = 300 liters
Statement of equivalent production
INPUT OUTPUT Equivalent production
Item Units Item Units Materials Labour Overheads
Units % Units % Units %
Opening 18,000 Work to 18,000 18,000 100% 18,000 100% 18,000 100%
WIP Complete
Opening
WIP
Materials 123,000 Introduced 105,000 105,000 100% 105,000 100% 105,000 100%
introduced &
completed
Normal loss 11,700
Abnormal 300 300 100% 120 40% 90 30%
loss
Closing 24,000 24,000 100% 12,000 50% 9,600 40%
WIP
Total 129,300 117,120 114,690

Page 6 of 14
 Statement of cost per unit
Cost element Opening WIP Current Total costs Equivalent units Cost per liter
period costs
Materials 86,400,000 624,000,000 710,400,000 129,300 5,494
Direct labour 40,800,000 264,000,000 304,800,000 117,120 2,602
Overheads 32,400,000 228,000,000 260,400,000 114,690 2,270
Total 10,366

Process 2 Account
Item Litre Cost Shs Item Litre Cost Shs
Per litre Per
litre
Opening 18,000 886.67 159,600,000 Normal 11,700 11.389 133,260
WIP loss
Material 123,000 5,073.17 624,000,000 Output 105,000 10,366 1,088,430,000
costs
Direct 264,000,000 Abnormal 300 7,215.8 2,164,740
labour loss
costs
Overhead 228,000,000 Closing 24,000 7,703 184,872,000
costs WIP
Total 141,000 1,275,600,000 141,000 1,275,600,000

Workings:
Determining closing work in progress
Statement of value of closing WIP
Cost element Effective units Cost Amount
in closing WIP Per litre
Material costs 24,000 5,494 131,856,000
Labour costs 12,000 2,602 31,224,000
Overhead costs 9,600 2,270 21,792,000
Total 184,872,000
Determining completed units
Cost of completed units = 105,000 x 10,366
= 1,088,430,000

Page 7 of 14
Determining the value of abnormal loss
Statement of abnormal loss
Cost element Equivalent Cost Amount
units Per litre
Material costs 300 5,494 1,648,200
Direct labour 120 2,602 312,240
Overheads 90 2,270 204,300
Total 2,164,740
(c) Total batch costs
Direct material cost
A Ethanol 350 liters x 3,800 1,330,000

B Isopropyl 100 liters x 3,200 320,000

C Glycerin 50 liters x 2,400 120,000

Total 1,770,000

Direct labour cost

A 85 hours x 10,500 = 892,500

B 142 hours x 12,500 = 1,775,000

C 220 hours x 15,500 = 3,410,000

Total 6,077,500

Variable overhead costs

A 85 hours x 20,000 = 1,700,000

B 142 hours x 20,000 = 2,840,000

C 220 hours x 20,000 = 4,400,000

Total 8,940,000

Fixed manufacturing overheads = 11,212,500

Total batch costs = 1,770,000 + 6,077,500 + 8,940,000 + 11,212,500

= 28,000,000

Page 8 of 14
(ii) Selling price per bottle of 500ml
Cost per bottle = 28,000,000
1,000
= Shs 28,000ⱱ
Selling price per bottle = 28,000 x 1.25
= Shs 35,000

Solution 5
(a) Steps involved in budgeting process
 Communication of details of the budget policy and guidelines
This is where management communicates the long-term strategic plan and the
consequences of this plan to those responsible for preparing annual budgets.
 Identify the limiting factor
This is a factor that stops the operation or growth of a business for example
demand, labour, materials.
 Preparation of a sales budget
This determines the level of the company’s operations and thus many of its costs
and capital commitments. Estimates need to be made on sales volume, sales mix
and sales price.
 Preparation of first draft for departmental budgets
This involves each department or cost centre preparing their own budget based
on the activity level agreed in the sales budget, the limiting factors identified and
guidelines set out in the first three stages.
 Budget negotiation
In the preparation of budgets there should be negotiation procedure. At each
stage the budget will be negotiated between the manager who submits and the
direct superior.
 Co-ordination and review of budgets
The co-ordination of budgets ensures that each budget agreed is likely to ensure
the annual target is achievable and that it fits in with the overall strategic plan.
 Final acceptance of budget
When all budgets are prepared, agreed and revised if necessary, they are
summarized into the master budget which consists of a budgeted profit and loss
account, balance sheet and cash flow statement.
 Ongoing review of budgets
This is when the actual results are compared with the budgeted results on
periodical basis. This enables management to identify budget variances and
investigate their causes.

Page 9 of 14
(b) Standard budgeted hours

Armed chairs = 9,000 x 4

100
= 360 hrs
Armless chairs = 6,000 x 5
100
= 300 hours
Total budgeted hours = 360 + 300
= 660 hours
Standard hours for actual production:
Armed chairs = 8,100 x 4
100
= 324 hours
Armless chairs = 5,400 x 5
100
= 270 hours
Total standard hours for actual production
= 324 + 270
= 594 hours
(i) Capacity ratio = Actual hours worked x 100%
Budgeted hours
= 690 x 100%
660
= 104.5%
(ii) Activity ratio = Standard hours for actual production x 100%
Budgeted hours
= 594 x 100%
660
= 90%
(iii) Efficiency ratio = Standard hours for actual production x 100%

Actual hours
= 594 x 100%
690
= 86%

Page 10 of 14
(c) Computation of variances
(i) Determine all relevant variances for the month of July 2022.
Materials price variance = (Standard price – Actual price) x Actual quantity
= (17,000 – 15,300) x 11,000
= 18,700,000 F
Materials usage variance = (Standard quantity – Actual quantity) x Standard price
= (9,900 – 11,000) x 17,000
= 18,700,000 A
Labour rate variance = (Standard rate – Actual rate) x Actual hours
= (4,500 – 4,200) x 34,000
= 10,200,000 F
Labour efficiency variance = (Standard hours – Actual hours) x Standard rate
= (33,000 – 34,000) x 4,500
= 4,500,000 A
(ii) Prepare a profitability statement reconciling the budgeted profit to actual profit for
the month of July 2022.
Profitability statement reconciling the budgeted profit to actual profit for the month of
July 2022.
Favourable Adverse
Budgeted profit 112,000,000
Sales margin variances:
Sales price variance 11,000,000
Sales quantity variance 17,600,000 6,600,000

Cost variances:
Material price variance 18,700,000
Material usage variance 18,700,000
Labour rate variance 10,200,000
Labour efficiency variance 4,500,000
Variable overhead expenditure variance 5,760,000
Variable overhead efficiency variance 9,600,000
Fixed overhead expenditure variance 4,940,000
Total 38,500,000 33,900,000 4,600,000
Actual profit as per actual statement 123,200,000

Page 11 of 14
Solution 6
(a) Types of cost drivers
 Transactions cost drivers: These consider the number of times an activity is
performed. Examples of transaction cost drivers may include production runs,
set-up activities, number of break downs, number of inspections, and number of
purchase orders. They assume that the same amount of resources are consumed
or required whenever an activity is performed.
 Duration cost drivers: These represent the amount of time required to perform
the activity. Examples of duration cost drivers may include labour hours, machine
hours. They are used when significant variations exist in the amount of activity
required for different output.
 Intensity cost drivers: These consider the resources used each time an activity is
performed. Examples of intensity cost drivers may include hourly rates, manhour
rates, wages, and salaries. They are used when significant variations exist in the
amount of resources required for different activities.
(b) Allocation of service department overheads to production departments
Let A represent all overhead costs under materials handling department…. (i)
Let B represent all overhead costs under maintenance department………… (ii)
Thus, A = 484,230,000 + 15% B
B = 328,220,000 + 10% A
Substitute for B
A = 484,230,000 + 0.15(328,220,000 + 0.1A)
A = 484,230,000 + 49,233,000 + 0.015A
A – 0.015A = 533,463,000
A = 533,463,000
0.985
A = 541,586,802
B = 328,220,000 + 0.1(541,586,802)
B = 382,378,680

Page 12 of 14
 Foam Quilting Tailoring
Materials Maintenance Total
cutting handling Shs ‘000’
Total overheads 618,750,000 742,500,000 301,300,000 484,230,000 328,220,000 2,475,000

Apportionment 189,555,381 135,396,701 162,476,041 (541,586,802) 54,158,680 -

of materials
handling costs
Apportionment 95,594,670 114,713,604 114,713,680 57,356,802 (382,378,680) -
of maintenance
costs
Total 903,900,051 992,610,305 578,489,721 - -

(b) Determining cost driver rate

Cost driver rate = Overheads
Quantity of cost driver
Delivery costs = 36,618,750
Number of deliveries = 16 + 15 + 14
= 45 deliveries
Cost per delivery = 36,618,750
45
= 813,750 per delivery
Procurement costs = 58,590,000
Number of purchase orders = 20 + 16 + 14
=50 orders
Cost per order = 58,590,000
50
= 1,171,800 per order
Set up costs = 51,266,250
Number of production runs = 15 + 15 + 10
= 40
Cost per set up = 51,266,200
40
= 1,281,655 per production run

Page 13 of 14
(c) Determining unit cost of each product

Milk bread Chocolate bread Coconut bread

Shs Shs Shs
Direct material cost 49,740,000 54,714,000 47,736,000
Direct labour cost 8,844,000 14,058,000 16,988,400
Delivery costs 13,020,000 12,206,250 11,392,500
Procurement costs 23,436,000 18,748,800 16,405,200
Set up costs 19,224,825 19,224,825 12,816,550
Total costs 114,264,825 118,951,875 105,338,650
Cost per unit 3,809 3,605 3,901
(ii) Determining the selling price of each bread
Selling price = Cost + markup of 20%
Sweet bread
= 3,809 x 1.2
= 4,571
Yellow bread
= 3,605 x 1.2
= 4,326
Coconut bread
= 3,901 x 1.2
= 4,681

Page 14 of 14
CPA 7 - COST AND MANAGEMENT ACCOUNTING

Solution 2

Determination of Value and volume of cement as at 28 May 2022;

Date Receipt Issue Balance

May Qty Rate Shs '000' Qty Rate Shs '000' Qty Shs '000'
1 5,000 27,000 135,000 - 5,000 135,000
1 1,500 25,500 38,250 - 6,500 173,250
4 - 2,200 27,000 59,400 4,300 113,850
6 2,000 26,000 52,000 - 6,300 165,850
8 - 1,700 27,000 45,900 4,600 119,950
10 - 1,100 27,000 29,700 3,500 90,250
10 - 100 25,500 2,550 3,400 87,700
13 1,350 25,000 33,750 - 4,750 121,450
16 1,100 25,700 28,270 - 5,850 149,720
19 - 1,400 25,500 35,700 4,450 114,020
19 - 2,000 26,000 52,000 2,450 62,020
19 - 300 25,000 7,500 2,150 54,520
20 1,450 25,000 36,250 - 3,600 90,770
21 - 700 25,000 17,500 2,900 73,270
22 - 50 25,000 1,250 2,850 72,020
25 - 300 25,000 7,500 2,550 64,520
25 - 950 25,700 24,415 1,600 40,105
28 2,200 25,800 56,760 - 3,800 96,865
28 30 25,700 771 3,770 96,094
Thus,
Value of cement = Shs. 96,094,000
Volume of cement = 3,770 bags.
(b) Users of management accounting information
 Management – This may comprise of the executive committee entrusted with
powers to run the affairs of a firm. Management is interested in the financial
performance, gearing and liquidity positions of a firm as these form basis of
their performance evaluations and decision making.
 Employees – These run the day to day operations of a firm. Employees are
interested in the financial performance of a firm so that they can demand for
salary increments, promotions and be assured to their jobs security.
 Lenders – These provide finance/ capital to organisations in form of debt
(both long and short term credit). They are interested in the profitability and
liquidity levels of an organisation to be guaranteed of their loan repayments.
 Shareholders – These are the equity owners of an entity. They are interested
in information about the long term survival of an entity and its ability to pay
them dividends.

Page 1 of 8
 Suppliers – These provide material and other inputs to an organisation on
credit. Suppliers are interested in the organisation’s ability to settle its
obligations for material and other inputs purchased on credit.
(b) (i) Merit rating
Is the process of rating/evaluating an employee’s performance to assist in
determining whether that particular employee should receive a merit award,
promotion or demotion.
(b) (ii) Advantages and disadvantages of merit rating
Advantages of merit rating
 It provides a scientific basis for judging the worth of employees. They try to
improve upon their performance if it is not up to the satisfaction of the
employer.
 It provides a basis for decisions like promotion, demotion, transfer or
termination of employees. Better persons are selected for promotion. The
systematic evaluation of employees is also kept as a permanent record.
 It helps in distinguishing between efficient and inefficient workers. In this
way, it reveals the defects in the selection procedure. Those employees who
are misfits may be spotted and appropriate action taken against them.
 It helps in creating a congenial working environment in which employer-
employee relations are improved. Subordinates get motivated and work hard
for getting favourable rating.
 It helps in stimulating and developing of an employee as it points out the
weakness of the employees. The training needs of employees can be known
and training programmes can be designed accordingly.
Disadvantages of merit rating:
 Halo effect- a tendency to rate the employee on the basis of one factor only.
If the rater finds that the employee is good in one factor, the rater may award
such employee good in all other factors.
 Clarity in standards- each rater may apply his own standards with the result
that final ratings simply cannot be compared for example a rater may think
that satisfactory rating is better than excellent.
 Leniency or strictness- lenient raters give high ratings whereas strict raters
always give low ratings. Hence, there is a big difference of ratings between
two raters. A supervisor may feel that low ratings may reflect his own
weakness in dealing with workers.
 Central tendency- generally the raters evaluate employees by keeping
employees by keeping them in the average category though some may be
falling in the extreme ends of the scale visa-vis excellent or poor.
 Influence of higher paid jobs- usually there is a tendency to give high rating
to a person who is the highly paid job. Merit rating has nothing to do with the
worth of the job (which is the subject matter of the job).

Page 2 of 8
Solution 3
(a) Furniture product to be outsourced
Sofa set Dining table Bed
Shs Shs Shs
Material cost 255,700 215,000 100,500
Labour cost 225,000 187,500 112,500
Variable overheads 76,710 43,000 25,125
Marginal cost of making 557,410 445,500 238,125
Marginal cost of outsourcing 575,000 420,000 270,000
Variance (17,590) 25,500 (31,875)
Advice: FWL should continue making sofa sets and beds while outsourcing dinning
tables.
(a) (ii) Total contribution for each product for the year ending 31 December
2022
Contribution = Revenue – variable costs
Determining unit selling prices;
Sofa set = 557,410 x 1.4 = 780,374
Dining tables = 420,000 x 1.4 = 588,000
Beds = 238,125 x 1.3 = 309,562.5
Total Contribution;
Sofa sets = (780,374 x 670) – (557,410 x 670) = Shs 149,385,880
Dining tables = (588,000 x 470) – (420,000 x 470) = Shs 78,960,000
Beds = (309,562.5 x 510) – (238,125 x 510) = Shs 36,433,125
(b) (i) interlocking and integrated accounting systems
Interlocking accounting system is where the cost accounting system is run/ kept
independently from the financial accounting system although the two systems may
use the same data to generate management reports with the costing system
generating a costing profit and financial system generating a financial profit.
WHILE
Integrated accounting system is where the cost and financial accounting system are
interlinked with each other and no reconciliation of profits is required since the two
systems generate similar profit figures.
(c) (ii) Causes of the differences between costing and financial profits;
 Valuation of inventory – In cost accounting, inventory is valued using FIFO,
LIFO or weighted average cost methods while in financial accounting
inventory is valued at the lower of cost or net realisable value (IAS 2). This
difference in stock valuation causes a difference in costing and financial
profits as well;
 Valuation of overhead costs – In cost accounting, overheads are simply
absorbed to products based on budgeted activity levels while in financial

Page 3 of 8
 accounting, overheads are reported at the actual amount of overheads
spent/incurred hence resulting into profit differences;
 Incomes – Some items such as dividend received, interest received, reduction
in provisions etc are reported in financial accounting as income yet these do
not qualify as income in cost accounting. This eventually results into profit
differences.
 Expenses – Some expenses such as discount allowed, interest expense,
increase in provisions are reported as expenses in financial accounting yet
these are not treated as expenses in costs accounting hence resulting into
profit differences.
(d) Classification of costs by behaviour and by function;
Classification of costs by behaviour involves categorising costs into variable and fixed
costs. Variable costs are costs that change with change in the levels of output such
as direct labour cost, direct material cost, and variable overheads costs.
Fixed costs are costs that remain the same at all levels of output such as salaries
and wages, depreciation etc.
WHILE
Classification of costs by function involves grouping/categorising costs depending on
the purpose they serve. This classification groups costs into administrative costs,
selling and distribution costs and finance costs.
Solution 4
(a) Preparation of contract account;
PBL Contract A/c in Shs'000'
Material purchases 187,000 Material returns to suppliers 14,200
Direct wages 142,500 Material on site 42,500
Material issued from stores 74,700 Equipment c/d 67,360
Equipment at cost 84,200 Prepayments c/d 1,450
Sub- contractors charges 23,400 Material transfers 18,700
Contract overheads 47,500 Cost incurred to date c/d 420,490
Accrued wages 5,400
564,700 564,700
Cost incurred to date b/d 420,490 Work completed and certified 435,700
Notion profit c/d 39,210 Completed work pending certification 24,000
459,700 459,700
Realised profit 22,522.3 Notion profit b/d 39,210
Un realised profit 16,687.7
39,210 39,210
Realised profit = 2/3 x Notion profit x cash received/Work certified
Realised profit = 2/3 x 39,210 x 375,400/435,700 = 22,522.3

Page 4 of 8
(b) (i) Contract costing and batch costing;
Contract costing is a costing method for works that are constructional in nature,
substantially takes longer periods to get completed, are site based and undertaken
to customer’s special requirements
WHILE
Batch costing is a form of costing which applies where a quantity of identical articles
are manufactured as a batch/group at ago.
(b) (ii) Circumstances under which batch costing can be applied;
 Batch costing is relevant and cost saving in situations where a customer
orders a quantity of identical items.
 It is also relevant where an internal manufacturing order is raised for a group
of identical parts or products to replenish stocks.
(c) Profitability statement using absorption costing technique;

January February March

Shs '000' Shs '000' Shs '000'
Revenue 6,500,000 6,175,000 7,750,000
Less Cost of sales
Opening stock 700,000 1,200,000 1,360,000
Production costs 5,700,000 5,100,000 6,400,000
Closing stock 1,200,000 1,360,000 1,560,000
5,200,000 4,940,000 6,200,000
Gross profit 1,300,000 1,235,000 1,550,000
Less operating costs
Administrative costs 350,000 350,000 350,000
Net profit 950,000 885,000 1,200,000

Workings
Cost of production
Selling price 2,500
Mark-up 25%
Cost of production 2,500/1.25 2,000

Closing stock quantity

January February March

Opening stock quantity 350 600 680
Production quantity 2,850 2,550 3,200
Sales quantity 2,600 2,470 3,100
600 680 780

Page 5 of 8
Solution 5
(a) Computation of variances;
Standard production cost = 24,000 + 18,750 + 750 + 15,000 + (25% x 15,000)
= Shs 62,250
Standard selling price = total cost + margin
= 62,250 + 0.25SP
SP = Shs 83,000
Sales price variance = (ASP - SSP) x AQ sold
SPV = (83,400 - 83,000) x 90% x 2,700 cartons = Shs 972,000 Fav
Sales volume variance = (ASV - SSV) x SM
SVV = (90% x 2,700 boxes - 2,800 cartons) x 20,750 = Shs 7,677,500 Adv
Material price variance = (AMP - SMP) x AQ purchased
Lemon flavour = (12,200 - 12,000) x 5,250 kg = Shs 1,050,000 Adv
Vanilla flavour = (12,450 - 12,500) x 4,100 kg = Shs 205,000 Fav
Sugar = (3,200 - 3,000) x 680 kg = Shs 136,000 Adv
MPV = Shs 981,000 Adv
Material usage variance = (AMU - SMU) x SMP
Lemon flavour = (5,250 kg - 2 x 2,800) x 12,000 = Shs 4,200,000 Fav
Vanilla flavour = (4,100 kg - 1.5 x 2,800) x 12,500 = Shs 1,250,000 Fav
Sugar = (680 kg - 0.25 x 2,800) x 3,000 = Shs 60,000 Fav
MUV = Shs 5,510,000 Fav
Labour rate variance = (ALR - SLR) x Actual hour paid
LRV = (2,950 - 3,000) x 13,700hrs = Shs.685,000 Fav
Labour efficiency variance = (APH - SPH) x SLR
LEV = (13,700 x 90% - 5hrs x 2,700) x 3,000 = Shs 222,000 Fav
Labour idle time variance = (AIT - SIT) x SLR
LITV = (2% x 13,700hrs - 0) x 3,000 = Shs 822,000 Adv
Variable overheads cost variance = Actual overheads cost - budgeted overheads cost
VOCV = (10.5m - 25% x 15,000 x 2,700) = Shs 375,000 Adv
(b) Causes of material and labour cost variances;
 Paying higher prices for lemon flavour and sugar and paying a lower price for
vanilla flavour than those budgeted for;
 HUL might have obtained quantity discounts on purchase of vanilla flavour
hence ending up paying a lower price than budget price;
 HUL might have bought higher quality for lemon flavour and sugar resulting
into paying higher prices for the material or might have purchased low quality
vanilla flavour resulting into paying a lower price than those budgeted for.

Page 6 of 8
 HUL might have realised greater yields from all material items and this could
be on account of experienced staff since material usage variance reconciles
with the favourable labour efficiency variance;
 HUL paid a lower wage rate of Shs.2,950 per hour than the budgeted rate of
Shs.3,000 per hour which resulted into a favourable labour rate variance.
(c) Limitations of standard costing;
 It may be expensive and time consuming for HUL to install and keep an up to
date standard costing system;
 In volatile conditions with rapidly changing methods, rates and prices,
standards quickly become out of date and thus lose their control and
motivational effects;
 Standard costing concentrates only on a narrow range of financial factors and
ignores qualitative factors such as quality, lead times and customer
satisfaction;
 Standard costs are subjected to employee manipulation as management may
set basic standards to portray a good picture during performance evaluations.
Solution 6
(a) Total production cost for the budgeted output ABC technique;
Soccer Bridal Economic focus
Output (magazine books) 12,500 20,000 11,000
Direct material 21,875,000 45,000,000 41,250,000
Direct labour 18,750,000 35,000,000 13,750,000
Direct expenses 4,375,000 18,000,000 10,312,500
Prime costs 45,000,000 98,000,000 65,312,500
Overheads:
Set up cost (w1) 5,500,000 6,600,000 4,400,000
Inspection cost (w2) 1,200,000 2,880,000 1,920,000
Material movement cost (w3) 3,000,000 4,800,000 3,600,000
Production running cost (w4) 4,440,000 3,330,000 3,330,000
59,140,000 115,610,000 78,562,500
Total production cost = 253,312,500
Workings;
W1 - Set up costs = Shs.16,500,000
Soccer magazine = 5/15 x 16,500,000 = Shs 5,500,000
Bridal magazine = 6/15 x 16,500,000 = Shs 6,600,000
Economic focus = 4/15 x 16,500,000 = Shs 4,400,000
Determining Number of batches;
Soccer magazine = 12,500/500 = 25 batches
Bridal magazine = 20,000/1,000 = 20 batches
Economic focus magazine = 11,000/550 = 20 batches

Page 7 of 8
W2 - Inspection costs = Shs.6,000,000
Total inspections = (1 x 25) + (3 x 20) + (2 x 20) = 125
Soccer = 25/125 x 6,000,000 = Shs 1,200,000
Bridal = 60/125 x 6,000,000 = Shs 2,880,000
Economic focus = 40/125 x 6,000,000 = Shs 1,920,000
W3 - Material movements cost = Shs.11,400,000
Total material movements = (2 x 25) + (4 x 20) + (3 x 20) = 190
Soccer = 50/190 x 11,400,000 = Shs 3,000,000
Bridal = 80/190 x 11,400,000 = Shs 4,800,000
Economic focus = 60/190 x 11,400,000 = Shs 3,600,000
W4 - Production running cost = Shs 11,100,000
Soccer = 52/130 x 11,100,000 = Shs 4,440,000
Bridal = 39/130 x 11,100,000 = Shs 3,330,000
Economic focus = 39/130 x 11,100,000 = Shs 3,330,000

(b) Steps in developing an activity based costing system;

 Identify the major activities undertaken by the organisation (HUL);
 Identify the factors which most closely influence cost of the activities
identified above. These factors are called cost drivers since they are a direct
indication of how the associated activity demands cost;
 Create a cost pool for each activity and trace costs to cost pools. At this
stage, HUL should try to associate costs with the main activities, a process
called cost pooling;
 Determine the cost diver rate for each activity cost. The cost driver rate is
calculated as total overhead cost divided by the number of units of the cost
driver (number of times the activity occurs);
 Allocate overhead costs to products using the cost driver rate calculated
above.
(c) Causes of over and under absorption
 Seasoned fluctuations in the amount of overhead costs that were anticipated
at the planning stage.
 Poor or wrong estimates that could have been made at the planning stage in
respect to units of production and the associated overhead costs.
 Unexpected change in production technique say from labour intensive to
capital intensive thus leading to changes in the amount of overheads.
 Un expected changes in the firm’s production capacity which was not
anticipated at the planning stage.

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CPA 7 COST & MANAGEMENT ACCOUNTING

Solution 2

(a) PWL’s store ledger card for January 2020 using WAC method
Receipts Issues Balance
Date Rate Amount Rate Amount Amount
January Qty Shs '000' Shs ‘000’ Qty Shs '000' Shs ‘000’ Qty Shs'000'
1 600 180 108,000 600 108,000
1 - - 160 180 28,800 440 79,200
3 350 185 64,750 - - 790 143,950
5 160 190 30,400 - - 950 174,350
6 - - 340 183.526 62,399 610 111,951
11 80 185 14,800 - - 690 126,751
14 - - 240 183.697 44,087 450 82,664
20 210 182 38,220 - - 660 120,884
25 - - 410 183.158 75,095 250 45,789
28 - - 110 183.156 20,147 140 25,642
29 120 184 22,080 - - 260 47,722
30 - - 75 183.546 13,766 185 33,956
Value of Paint as at 30 April 2020 = Shs 33,956,000
(b) Documents used in the purchasing process.
Purchase requisition – This is a written request by the user department to the
purchases department that contain a description of goods required, quantities required
and time when required.
Letter of Inquiry – This is sent by the purchasing department to various suppliers
requesting suppliers to provide information about the availability of goods required,
their respective prices and quality.
Quotation (proforma invoice) – This is prepared by the supplier to the buyer/purchaser
in response to the letter of inquiry. It shows the terms and conditions, discounts
offered, quantities available and the price at which the supplier is willing to offer goods
to the purchaser.
Purchase order – This is prepared by the buyer and sent to the supplier authorizing the
supplier to supply goods at the agreed upon terms. It indicates the description of
goods, and quantity needed and therefore it forms the basis of a contract between the
buyer and supplier.
Delivery note – This is prepared by the supplier to the buyer to accompany the goods
supplied and it shows the quantities of goods supplied. The buyer uses this document
to verify the goods supplied.
Goods received note – Document used to verify goods supplied and a copy sent to
supplier.
 Cost & Management Accounting - paper 7

Invoice – This is sent by the supplier to the buyer after delivering the goods. It shows
the quantity supplied, respective prices, discounts offered and the total claim of the
supplier. It is therefore the basis of payment by the buyer/purchaser.
Receipt – Document used to validate goods purchased and paid for.
(c) Accounting treatment;
Idle time – This represents time paid but without giving any production to the
employer.
If caused by normal factors, the cost of idle time will constitute part of the cost of the
product and if more than one product is produced it will be treated as a production
overhead cost.
If caused by abnormal factors like power shortage, shortage of raw materials etc, the
cost of idle time will be treated as an operating loss and hence debited to the profit or
loss account.
Idle capacity – This happens when plant and machinery is available for utilization but is
not fully used. If caused by normal factors, the cost of idle capacity is charged as an
overhead expense but if it is due to abnormal reasons, idle capacity cost is charged to
the profit or loss account as an expense.
Overtime – This represents the time worked over and above the normal working time.
If overtime is as a result of a customer urgent request to complete the job, the cost of
overtime should be charged directly to the job.
If overtime is as a result of loss of time which was avoidable, overtime cost should be
treated as a loss and charged to profit or loss account.
If overtime is a regular feature undertaken to increase production, overtime cost
becomes part of the labour cost.

Page 2 of 10
 Cost & Management Accounting - paper 7

Solution 3
(a)
Reconciliation of Costing and Financial Profit for PSUL for Quarter ended 31 December
2020
Shs.'000'
Costing profit 792,000
Add: Income not credited to cost accounts:
Interest received 27,200
Dividends received 8,600
Discounts received 11,210
Add: Difference in opening inventory 10,000
Add: Administration costs over absorbed (w1) 237,794
Add: Selling and distribution cost over absorbed (w2) 166,050
Less: Expenses not reported in cost accounts:
Finance cost (116,854)
Less: Difference in closing stock (6,000)
Less: Production overheads under absorbed (w3) (140,000)
Financial profit 990,000
Workings:
W1- Administration cost Shs.’000’
Absorbed in Cost A/cs =10% x 16.4 billion = 1,640,000
Reported in Financial A/cs 1,402,206
237,794
W2- Selling & distribution cost Shs.’000’
Absorbed in Cost A/cs =60% x 1.64 billion = 984,000
Reported in Financial A/cs 817,950
166,050
W3- Production overhead cost Shs.’000
Absorbed in Cost A/cs =15% x 16.4 billion = 2,460,000
Reported in Financial A/cs 2,600,000
140,000

Page 3 of 10
 Cost & Management Accounting - paper 7

(b) Advantages of operating an integrated accounting system;

 Duplication of effort is minimized since all information is in one set of accounts.

 There is no need of profit reconciliation since the costing and financial profits
reported will be the same.
 The system is economical and easy to understand.
 Integrated accounting system help to widen the outlook of the accountant hence
appreciating the entire accounting system.
 All accounts are maintained in an objective form hence the process of cost
ascertainment and control is facilitated.

(c) Evaluating the viability of outsourcing;

Standard cost/marginal cost of making a plate of food:
Shs.
Inputs 4,000
Labour 80% x 4,000 3,200
Overheads 10% x 3,200 320
Standard cost 7,520

Shs.
Marginal cost of buying 7,500
Marginal cost of making 7,520
Saving due to buying 20

Advice: PSUL should outsource staff meals from HFL as it will be able to save Shs.20
per plate of food.

Page 4 of 10
 Cost & Management Accounting - paper 7

Solution 4

PBL Contract Account as at 31 January 2021

DR CR
Shs ‘000’ Shs ‘000’
Direct material 59,500 Plant as at 31 January 2021 41,200
Labour cost: Material as at 31 January 2021 5,200
Paid 41,650
Accrued 3,500
Contract overheads 7,200
Specialised equipment 8,420 Cost incurred to date c/d 120,270
Plant as at 1 January 2021 44,700
Contract supervision cost 1,700
166,670 166,670
Cost incurred to date b/d 120,270 Value of certified work 130,000
Completed work pending
Notional profit c/d 29,730 certification 20,000
150,000 150,000
Recognized profit 16,771 Notional profit b/d 29,730
Provisional profit 12,959
29,730 29,730

Workings:

W1 – Recognized profit = 2/3 x Notional profit x Cash received

Certified work
= 2/3 x 29,730,000 x 110 million
130million
= Shs16,770,769
W2 – Work in progress
Shs ‘000’
Cost incurred to date 120,270
Add: Recognised profit 16,771
Less: Cash received (110,000)
Work in progress 27,041

Page 5 of 10
 Cost & Management Accounting - paper 7

(ii) PBL’s extract of the statement of financial position as at 31 January 2021

Shs ‘000’
Plant c/d 41,200

Current Assets:
Material on site 5,200
Work in progress (w2) 27,041

Current liabilities:
Accrued wages 3,500

(b) Number of trips that TTL should make in order to break even.

Annual fixed cost = 2.4 million x 52 weeks = Shs.124.8 million

BeQ = Annual fixed costs
(Selling price per trip – variable cost per trip)
124.8 million
(70,000 – 61,250)
= 14,262.8 = 14,263 trips
Selling price per trip = 2,000 x 35 passengers = 70,000
Variable cost per trip = 1,750 x 35 passengers = 61,250

(ii) Margin of safety in revenue:

= (Budget trips – Beq) x selling price per trip
= (14,300 – 14,263) x 70,000
=Shs 2,590,000

(iii) Setting selling prices using absorption costing technique:

 An organization starts with determining the full cost of production that includes both
variable and fixed product costs.

 A standard markup is then added to the full cost of production to determine the
selling prices.

Page 6 of 10
 Cost & Management Accounting - paper 7

Solution 5

(a) Computation of variances:

(i) Sales price variance

= (Actual selling price – Standard selling price) x Actual quantity sold
= (94,000 – 94,200) x 2,000
= Shs 400,000 Adverse
Standard selling price = standard cost + 20% markup
= 78,500 + (20% x 78,500) = 94,200
(ii) Material price variance
MPV= (Actual material price – standard material price) x Actual quantity purchased
Timber = (10,500 – 10,000) x 11,000 pcs = Shs 5,500,000 Adverse
Vanish = (7,500 – 8,000) x 1,200 litres = Shs.600,000 Fav
Nails = (5,100 – 5,000) x 980 kgs = Shs 98,000 Adverse
Shs 4,998,000 Adverse
(iii) Material usage variance
MUV= (Actual usage – standard usage) x standard material price
Timber = (11,000 – 6 x 2,000) x 10,000 = Shs 10,000,000 Favourable
Vanish = (1,200 – 0.5 x 2,000) x 8,000 = Shs 1,600,000 Adv
Nails = (980 – 0.5 x 2,000) x 5,000 = Shs 100,000 Favourable
Shs 8,500,000 Favourable
(iv) Labour rate variance
LRV= (Actual wage rate – standard wage rate) x Actual hours paid
= (2,400 – 2,500) x 8,250 hours
= Shs.825,000 Favourable
(v) Labour efficiency variance
LEV= (Actual productive hours – standard productive hours) x standard labour rate
Actual productive hours = 80% x 8,250 hours = 6,600 hours
Standard productive hours = 4 hours x 2,000 desks x 75%
= 6,000 hours
LEV = (6,600 – 6,000) x 2,500
= Shs 1,500,000 Adverse

(vi) Production overheads expenditure variance

PoEV= Actual overheads expenditure – Budgeted overheads expenditure

=(25% x 8,250 x 2,400) – (20% x 4 x 2,000 x 2,500)
= Shs.950,000 Adverse
Page 7 of 10
 Cost & Management Accounting - paper 7

5 (b) Factors explaining variances in material price and usage above:

 Increase in the prices Timber and Nails from the prices at which they were initially
anticipated thus leading to an adverse material price variance.
 Failure to purchase the standard quality and quantity of materials thus resulting into
different prices being charged.
 Rush purchases which could have resulted into failure to purchase in time so as to
avoid rise in prices.
 Changes in quality control requirements or changes in the methods of production
which might have resulted into different material usage levels.
 Use of material mix which is different from the standard mix.
 Greater yields or lower quantity of scrap as compared to anticipated yields and
wastage levels respectively.

Solutions 6

(a) Secondary analysis using simultaneous equations method;

Amount in Shs. 000
Quality
Machining Cutting Finishing Assurance Marketing
Departments Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Primary overheads 64,000 40,500 72,000 12,400 16,000
Apportionment of
marketing costs 3,465.4 4,332 8,663.5 866.3 (17,327)
Apportionment of quality
assurance costs 3,979.9 2,653.3 5,306.6 (13,266.3) 1,326.6
Secondary overheads 71,445.3 47,485.3 85,970.1 - -
Workings
W1-
Let Marketing = M
Let Quality assurance = Q
Cost of marketing = 16,000,000 + 10%Q
Cost of Quality assurance = 12,400,000 + 5%M
Thus,
M = 16,000,000 + 10%Q …….. (1)
Q = 12,400,000 + 5%M ……….. (2)
Solve for M and Q;
Substituting (1) in (2),
Q = 12,400,000 + 0.05 (16,000,000 +0.1Q)
= 12,400,000 + 800,000 + 0.005Q
= 13,200,000 + 0.005Q
Collecting equal terms and solving for Q,
Page 8 of 10
 Cost & Management Accounting - paper 7

Q-0.005Q = 13,200,000
0.995Q =13,200,000
Q = 13,200,000/0.995
= 13,266,332
Substituting Q in (1),
M = 16,000,000 + 0.1 X13,266,332
= 17,326,633
(b) Computation of control ratios;
(i) Activity ratio = Standard time for actual production x 100
Budgeted time
= 0.25 hours x 987,500 x 100
0.25 hours x 1,000,000
= 98.75%
(ii) Capacity ratio = Actual time x 100
Budgeted time
= 247,250 hours x 100
250,000 hours
= 98.9%
(iii) Efficiency ratio = Standard time for actual production x 100
Actual time
= 0.25 hours x 987,500 x 100 = 99.8%
247,250 hours

Page 9 of 10
 Cost & Management Accounting - paper 7

(c) Overhead costs and cost drivers using the principles of ABC technique:
Quality control costs – These are costs incurred in verifying whether the units produced
are as per the standard i.e costs incurred to inspect output and even the production
processes. The most appropriate activity that drives such costs is inspection.
Set up costs – These are costs of laying out the production machinery. The appropriate
activity that drives such cots is setting up activities.
Material handling costs – These are cost incurred to move material from one location to
another ie from store to production and vice versa. These costs are driven by material
movements as an activity.

Page 10 of 10
 CPA 7 COST AND MANAGEMENT ACCOUNTING

Solution 2

FWL store ledger card for September 2021

Date Particular Receipts Issues Balance
Sep Qty Rate Amt Qty Rate Amt Qty Amt
tins Shs Shs tins Shs Shs tins Shs
1 Opening 200 6,000,000
stock
2 Purchased 800 31,000 24,800,000 1,000 30,800,000
4 Issued to 600 30,800 18,480,000 400 12,320,000
prodn
6 Purchased 250 29,500 7,375,000 650 19,695,000
10 Returns - 50 30,800 1,540,000 - - 700 21,235,000
prodn
12 Issued to - - 200 30,336 6,067,200 500 15,167,800
prodn
17 Purchased 350 30,000 10,500,000 - - 850 25,667,800
18 Issued to - - 300 30,197 9,059,100 550 16,608,700
prodn
23 Purchased 100 30,200 3,020,000 - - 650 19,628,700
23 Returns- - - 10 30,200 302,000 640 19,326,700
26 Issued to - - 80 30,198 2,415,840 560 16,910,860
prodn
29 Returns - 5 30,198 150,990 - - 565 17,061,850
prodn
30 Issued to - - 360 30,198 10,871,200 205 6,190,570
prodn
Closing inventory as at 30 September is Shs 6,190,565

2(a) (ii) Advantages of using JIT

 JIT reduces the working capital requirements because cash is not tied up in
inventory
 JIT minimises the probability of inventory becoming obsolete or expired as what
is purchased ie what is required for use in production.
 JIT synchronise supply quantities with demand requirements hence an optimum
level of inventory is maintained at any point in time.
 It reduces storage costs and other inventory carrying costs because inventory is
not purchased for storage instead for immediate use in production.
2 (b) Benefits of having a cost accounting function

The cost accounting function produce cost information which helps an organisation
in performing the following roles:
 Preparation of budgets
Cost information helps in formulation and execution of budgets which act as
control tools against which future performance is measured.
 Evaluating product profitability
Cost information provides a basis for assessing profitability of products by
comparing the expected/actual selling price with expected/actual product cost.
 Cost control
Cost information helps an organisation to compare targets with actual results so
that variances can be investigated.
 Stock valuation
Cost information helps in valuing inventory which is crucial in preparation and
presentation of financial statements.
 Decision making
Information provided by cost accounting systems helps in evaluating available
alternatives so that enhances its value. This is done through carrying out a cost
benefit analysis.

Solution 3

Classification of costs by behaviour

Fixed costs
These are costs that remain constant at all levels of output. Such costs do not
change no matter the level of activity. Examples include rent, insurance.

Total
fixed cost

a FC

0 Q1 Q2 Output level
At output level 0 a firm incurs total fixed cost equivalent to 0a. Even if output
increases to Q1 and Q2, the firm still incurs total fixed costs amounting to 0a

Page 2 of 11
Variable costs
These are costs that change with a change in the level of output. Such costs
increase when output and reduce when output reduces. Examples include material
costs, direct labour costs
VC
Total variable cost

C2
C1

0 Q1 Q2 Output level

At Zero output, a firm incurs zero costs. When output increases to Q1 and Q2, a firm
incurs total variable cost equivalent to C1 and C2 respectively
Semi-variable costs

These are mixed costs which are neither wholly variable nor wholly fixed. Such costs
have attributes of both fixed and variable costs where the fixed component is
incurred to make the goods and services available.

Total cost SVC

C2

C1

0 Q1 Q2 Output level
Up to output level Q1, the firm incurs a fixed cost equivalent to C1. When output
increases to Q2 the total cost incurred increases to C2
Step/semi- fixed costs

These costs are constant for a certain range of output but change when the output
is adjusted. Examples include transport fees based on kilometres (distance covered)
Total cost SFC

C2

C1

0 Q1 Q2 Output level
For output 0- Q1, a firm incurs total cost equivalent to C1. When output range
changes to Q1- Q2, a firm incurs a total cost equivalent to C2

Page 3 of 11
3 (b) TPL cost sheet using ABC technique
Build today Bridal magazine Soccer world
Direct material 2,500√ 2,000√ 1,500√
Direct labour 3,000√ 3,750√ 2,250√
Direct expenses 900√ 937.5√ 585√
Variable cost per unit 6,400 6,687.5 4,335
Overheads
Set up costs (W1) 470√ 235√ 235√
Machine running costs (W2) 387√ 645√ 215√
Material handling costs (W4) 225√ 168.75√ 150√
Scheduling costs (W3) 100√ 93.75√ 125√
Total cost per unit 7,582√ 7,830√ 5,060√
Each tick is 0.5= 12 marks
W1 set up cost = 7,990,000
Cost driver rate = 7,990,000
((2x10, 000) + (1 x 8,000) + (1 x 6,000)
= 235 per set up
Build today = 2 x 235 = 470
Bridal magazine = 1 x 235= 235
Soccer world = 1 x 235= 235
W2 Machine running cost =10,320,000
10,320,000= 1,290,000
(4+3+1)
Build today = 1,290,000 x 3 = 387 per copy
10,000
Bridal magazine = 1,290,000 x 4 = 645 per copy
8,000
Soccer world = 1,290,000 x 1 = 215 per copy
6,000
W3 Scheduling costs = 2,500,000
2,500,000 = 250,000 per production schedule
(4+3+3)
Build today = 250,000 x 4 = 100 per copy
10,000
Bridal magazine = 250,000 x 3 = 93.75 per copy
8,000
Soccer world = 250,000 x 3 = 125 per copy
6,000

Page 4 of 11
W4 Material handling costs = 4,500,000

4,500,000 = 450,000 per material movement

(5+3+2)
Build today = 450,000 x 5 = 225 per copy
10,000
Bridal magazine = 450,000 x 3 = 168.75 per copy
8,000
Soccer world = 450,000 x 2 = 150 per copy
6,000

Alternatively;
Particulars Build today Bridal Magazine Soccer world
Direct materials(W1) 25,000,000 16,000,000 9,000,000
Direct labour(W2) 30,000,000 30,000,000 13,500,000
Direct expenses (%) 9,000,000 7,500,000 3,510,000
Total variable costs 64,000,000 53,500,000 26,010,000
Set up costs(W3) 4,700,000 1,880,000 1,410,000
Machine running costs 3,870,000 5,160,000 1,290,000
Material handling costs 2,250,000 1,350,000 900,000
Scheduling costs 1,000,000 750,000 750,000
Total costs 75,820,000 62,640,000 30,360,000
Total units 10,000 8,000 6,000
Cost per unit 7,582 7,830 5,060
Workings
1. Build today = (2500x10, 000) = 25,000,000, Bridal = (2,000 x8, 000) =
16,000,000, soccer world = (1,500 x 6000) = 9,000,000
2. Build today = (2x10,000x1500) = 30,000,000. Bridal = (2.5x8,000x1,500) =
30,000,000, soccer world= (2x6000x1,500)=13,500,000
3. Set up costs; (2x10,000) + (1x8,000) + (1x6,000) = 34,000
BT= 20,000/34,000 x 7,990,000 = 4,700,000
BR=8,000/34,000 x 7,990,000 = 1,880,000
Sw=6,000/34,000 x 7,990,000 = 1,410,000
NB: set ups were per copy and therefore the reason we multiply by the number of
copies before allocating the overheads. The other overheads are not per copy and
therefore no need of multiplying by the number of copies.

Page 5 of 11
3 (c) Estimating production cost for November 2019
Using high low method
Variable cost = Highest cost – Lowest cost
Highest output – Lowest output
75,500,000 – 58,000,000
10,000 – 7,500
= Shs 7,000
Fixed cost = Total cost – variable cost

65,000,000 – (7,000 x 8,500)

= Shs 5,500,000
At output of 11,500 copies
Total cost = fixed cost + variable cost
= 5,500,000 + (7,000 x 11,500)
= Shs 86,000,000
Solution 4

Statement of equivalent production

INPUT OUTPUT EQUIVALENT PRODUCTION
Material Labour Overheads
Item Qty Item Qty % Qty % Qty % Qty
Opening 24,000 Opening 24,000 100 24,000 100 24,000 100 24,000
WIP WIP
Introduced 100,000 completed 90,000 100 90,000 100 90,000 100 90,000
material
Closing 10,000 100 10,000 80 8,000 40 4,000
WIP
124,000 124,000 124,000 122,000 118,000

Completed units = opening WIP + introduced units – closing WIP

24,000 + 100,000 – (10% x 100,000)
= 114,000
(ii) Statement of cost per unit

Cost element Amount Equivalent production CPU

Material 210,800,000 124,000 1,700
Labour 97,600,000 122,000 800
Production overheads 20,060,000 118,000 170
2,670

Page 6 of 11
Note: Amount = opening WIP cost + current cost
(iii) Statement of closing WIP
Cost element Equivalent production CPU Total cost
Material 10,000 1,700 17,000,000
Labour 8,000 800 6,400,000
Production overheads 4,000 170 680,000
24,080,000

(iv)

Process 3 A/c
Qty Amount Qty Amount
Opening WIP 24,000 81,660 Completed units 114,000 304,380
Current cost Closing WIP 10,000 24,080
Material 100,000 150,800
Labour 80,000
overheads 16,000
328,460 328,460

4 (b) Differences between job and process costing

 Processing involves continuous production while in job costing, the production is
not continuous.
 The final output of process costing is transferred to finished stock i.e. production
is meant for stocking pending future sale while Job costing, the production is not
for stock but for immediate consumption.
 In process costing, output of one process becomes input of another process
while in job costing, each job is a final product.
 In Job costing, jobs are customised to meet customer orders/ specifications while
in process costing, the products produced are homogeneous.
4 (c) Impact of marginal and absorption costing on profit

 When production equals sales

The two techniques result into the same profit since there is no opening and closing
stock which would have led to profit variances
 When production is less than sales
The net profit reported by absorption costing will be less than that reported under
marginal costing on account of reduced closing stock which results into an increase
in cost of sales hence reducing the overall profit.
 When production exceeds sales
The net profit reported by absorption costing will be more than that reported by
marginal costing on account of the increase in closing stock which reduces cost of
sales thus leading to increase in profits.

Page 7 of 11
Solution 5

(i) Sales budget

July August September
Quantity 50,000 65,000 84,000
Selling price (Shs) 12,600 13,230 13,891.5
Revenue (Shs ‘000’) 630,000 859,950 1,166,886
(ii) Production cost budget

July August October

Sales units 50,000 65,000 84,000
Add closing stock 3,250 4,200 4,000
Less opening stock (3,500) (3,250) (4,200)
Production in spades 49,750 65,950 83,800
Cost per spade (W1) (Shs) 9,600 9,600 9,600
Total variable cost (Shs ‘000’) 477,600 633,120 804,480
Fixed production overheads (Shs) 20,000 20,000 20,000
Total production cost (Shs) 497,600 653,120 824,480

W1 cost per spade = material + labour + overheads

5,000 + (1.5 x 1500) + (0.47x 5,000)
= 9,600

(iii) Raw material cost budget

July August September
Raw material required 59,700 79,140 100,560
Cost of material per spade 5,000 5,000 5,000
Purchase cost (Shs ‘000’) 298,500 395,700 502,800

5 (b)
(i) Capacity ratio = Actual hours x 100
Budgeted hours
(33,750 + 100,000) x 100
(93,750 x 1.25) + (50,000 x 0.5)
= 94.07%
Budgeted production
Spade = 75,000 = 93,750
0.8
Hoes = 45,000 = 50,000
0.9

Page 8 of 11
 (ii) Activity ratio = Standard time for actualproduction x 100
Budgeted hours
(1.25 x 75,000 + 0.5 x 45,000) x 100
(93,750 x 1.25) + (50,000 x 0.5)
= 116,250 x 100
142,187.5
= 81.7%
(iii) Efficiency ratio = Standard time for actualproduction x 100
Actual hours
(1.25 x 75,000 + 0.5 x 45,000) x 100
(33,750 + 100,000)
= 86.9%
5 c) Advantages of zero based budgeting (ZBB)
 ZBB promotes operational efficiency since it requires managers to review and
justify their activities and funds requested.
 ZBB eliminates errors that would have accrued from previous budgets in case
increase incremental budgeting was earlier used.
 ZBB encourages staff participation at all levels which may enhance their
motivation.
 ZBB focuses attention on value for money and makes explicit the relationship
between input and output of benefits.

Disadvantages of Zero based budgeting (ZBB)

 The approach is tire some because defining the decision units and package is
very difficult.
 The cost of preparing various budgets may be very high in large firms involving
large number of decision packages.
 ZBB is time consuming since it involves preparing budgets from scratch.

Page 9 of 11
Solution 6

(i) FWL secondary overhead analysis sheet

Department Cutting Sewing Finishing Quality assurance Canteen
Primary overheads 15,000,000 32,600,000 47,400,000 10,200,000 14,400,000
Quality assurance 2,339,699 3,509,548 5,264,321 (11,698,493) 584,925
Canteen 2,247,738 5,993,970 5,244,724 1,498,493 (14,984,925)
Total 19,587,437 42,103,518 57,909,045 - -

W1 = Let Quality assurance be X

Canteen be Y
X= 10,200,000 + 10% Y
Y = 14,400,000 + 5% X
X- 0.1Y = 10,200,000
- 0.05X + Y = 14,400,000
X = 11,698,492.5
Y = 14,984,924.6

i) Difference between apportionment and absorption of over heads

Apportionment of overheads refers to charging of cost centre with a fair sum of the
overheads using appropriate bases e.g floor area, number of staff

While
Absorption of overheads is the charging of overheads to cost centres using pre-
determined overhead rates which can be based on labour hours, machine hours etc.

6 (a) (iii) Causes of over and under absorption

 Seasoned fluctuations in the amount of overhead costs that were anticipated at
the planning stage.
 Poor or wrong estimates that could have been made at the planning stage in
respect to units of production and the associated overhead costs.
 Unexpected change in production technique say from labour intensive to capital
intensive thus leading to changes in the amount of overheads.
 Un expected changes in the firm’s production capacity which was not anticipated
at the planning stage.
6(b)(i)
If production of golden wine stopped
Contribution lost (38,000)
Saving in fixed costs (40% x 40,000) 16,000
Net cost of the decision (22,000)
Advice: PDL should continue producing Golden wine because dropping the product
results into losing much contribution than the savings in fixed costs.

Page 10 of 11
Alternatively;
Total profit with Golden wine;
Particulars Star beer Classic beer Golden wine Total
Profit/loss 272,000 88,000 (2,000) 358,000

Total profit without Golden wine;

Particulars Star beer Classic beer Total

Revenue 960,000 720,000 1,680,000

Variable costs (640,000) (580,000) 1,220,000

Contribution 320,000 140,000 460,000

Fixed costs (48,000) (52,000) (100,000)

Attributable to Golden wine (60%x40,000) (24,000)

Profit 336,000

(358,000 – 336,000) = 22,000.

The company should continue producing golden wine.

6 (b) (ii)

Golden wine and star beer

Complimentary effect = 20% x 320,000 = 64,000
Therefore contribution lost =64,000

Golden wine and Classic beer

Substitution effect = 10% x 140,000 = 14,000
Therefore contribution gained =14,000

Overall effect:
Net cost decision in 6(b) (i) (22,000)
Additional contribution lost on star beer (64,000)
Contribution gained on classic beer 14,000
Net cost decision (72,000)
Advice: The decision in 6 b(i) would remain since dropping Golden wine would result
into a net cost of Shs 72 million.

Page 11 of 11
CPA 7 COST & MANAGEMENT ACCOUNTING

Solution 2

(a) PWL’s store ledger card for January 2020 using WAC method
Receipts Issues Balance
Date Rate Amount Rate Amount Amount
January Qty Shs '000' Shs ‘000’ Qty Shs '000' Shs ‘000’ Qty Shs'000'
1 600 180 108,000 600 108,000
1 - - 160 180 28,800 440 79,200
3 350 185 64,750 - - 790 143,950
5 160 190 30,400 - - 950 174,350
6 - - 340 183.526 62,399 610 111,951
11 80 185 14,800 - - 690 126,751
14 - - 240 183.697 44,087 450 82,664
20 210 182 38,220 - - 660 120,884
25 - - 410 183.158 75,095 250 45,789
28 - - 110 183.156 20,147 140 25,642
29 120 184 22,080 - - 260 47,722
30 - - 75 183.546 13,766 185 33,956
Value of Paint as at 30 April 2020 = Shs 33,956,000
(b) Documents used in the purchasing process.
Purchase requisition – This is a written request by the user department to the
purchases department that contain a description of goods required, quantities required
and time when required.
Letter of Inquiry – This is sent by the purchasing department to various suppliers
requesting suppliers to provide information about the availability of goods required,
their respective prices and quality.
Quotation (proforma invoice) – This is prepared by the supplier to the buyer/purchaser
in response to the letter of inquiry. It shows the terms and conditions, discounts
offered, quantities available and the price at which the supplier is willing to offer goods
to the purchaser.
Purchase order – This is prepared by the buyer and sent to the supplier authorizing the
supplier to supply goods at the agreed upon terms. It indicates the description of
goods, and quantity needed and therefore it forms the basis of a contract between the
buyer and supplier.
Delivery note – This is prepared by the supplier to the buyer to accompany the goods
supplied and it shows the quantities of goods supplied. The buyer uses this document
to verify the goods supplied.
Goods received note – Document used to verify goods supplied and a copy sent to
supplier.
 Cost & Management Accounting - paper 7

Invoice – This is sent by the supplier to the buyer after delivering the goods. It shows
the quantity supplied, respective prices, discounts offered and the total claim of the
supplier. It is therefore the basis of payment by the buyer/purchaser.
Receipt – Document used to validate goods purchased and paid for.
(c) Accounting treatment;
Idle time – This represents time paid but without giving any production to the
employer.
If caused by normal factors, the cost of idle time will constitute part of the cost of the
product and if more than one product is produced it will be treated as a production
overhead cost.
If caused by abnormal factors like power shortage, shortage of raw materials etc, the
cost of idle time will be treated as an operating loss and hence debited to the profit or
loss account.
Idle capacity – This happens when plant and machinery is available for utilization but is
not fully used. If caused by normal factors, the cost of idle capacity is charged as an
overhead expense but if it is due to abnormal reasons, idle capacity cost is charged to
the profit or loss account as an expense.
Overtime – This represents the time worked over and above the normal working time.
If overtime is as a result of a customer urgent request to complete the job, the cost of
overtime should be charged directly to the job.
If overtime is as a result of loss of time which was avoidable, overtime cost should be
treated as a loss and charged to profit or loss account.
If overtime is a regular feature undertaken to increase production, overtime cost
becomes part of the labour cost.

Page 2 of 10
 Cost & Management Accounting - paper 7

Solution 3
(a)
Reconciliation of Costing and Financial Profit for PSUL for Quarter ended 31 December
2020
Shs.'000'
Costing profit 792,000
Add: Income not credited to cost accounts:
Interest received 27,200
Dividends received 8,600
Discounts received 11,210
Add: Difference in opening inventory 10,000
Add: Administration costs over absorbed (w1) 237,794
Add: Selling and distribution cost over absorbed (w2) 166,050
Less: Expenses not reported in cost accounts:
Finance cost (116,854)
Less: Difference in closing stock (6,000)
Less: Production overheads under absorbed (w3) (140,000)
Financial profit 990,000
Workings:
W1- Administration cost Shs.’000’
Absorbed in Cost A/cs =10% x 16.4 billion = 1,640,000
Reported in Financial A/cs 1,402,206
237,794
W2- Selling & distribution cost Shs.’000’
Absorbed in Cost A/cs =60% x 1.64 billion = 984,000
Reported in Financial A/cs 817,950
166,050
W3- Production overhead cost Shs.’000
Absorbed in Cost A/cs =15% x 16.4 billion = 2,460,000
Reported in Financial A/cs 2,600,000
140,000

Page 3 of 10
 Cost & Management Accounting - paper 7

(b) Advantages of operating an integrated accounting system;

 Duplication of effort is minimized since all information is in one set of accounts.

 There is no need of profit reconciliation since the costing and financial profits
reported will be the same.
 The system is economical and easy to understand.
 Integrated accounting system help to widen the outlook of the accountant hence
appreciating the entire accounting system.
 All accounts are maintained in an objective form hence the process of cost
ascertainment and control is facilitated.

(c) Evaluating the viability of outsourcing;

Standard cost/marginal cost of making a plate of food:
Shs.
Inputs 4,000
Labour 80% x 4,000 3,200
Overheads 10% x 3,200 320
Standard cost 7,520

Shs.
Marginal cost of buying 7,500
Marginal cost of making 7,520
Saving due to buying 20

Advice: PSUL should outsource staff meals from HFL as it will be able to save Shs.20
per plate of food.

Page 4 of 10
 Cost & Management Accounting - paper 7

Solution 4

PBL Contract Account as at 31 January 2021

DR CR
Shs ‘000’ Shs ‘000’
Direct material 59,500 Plant as at 31 January 2021 41,200
Labour cost: Material as at 31 January 2021 5,200
Paid 41,650
Accrued 3,500
Contract overheads 7,200
Specialised equipment 8,420 Cost incurred to date c/d 120,270
Plant as at 1 January 2021 44,700
Contract supervision cost 1,700
166,670 166,670
Cost incurred to date b/d 120,270 Value of certified work 130,000
Completed work pending
Notional profit c/d 29,730 certification 20,000
150,000 150,000
Recognized profit 16,771 Notional profit b/d 29,730
Provisional profit 12,959
29,730 29,730

Workings:

W1 – Recognized profit = 2/3 x Notional profit x Cash received

Certified work
= 2/3 x 29,730,000 x 110 million
130million
= Shs16,770,769
W2 – Work in progress
Shs ‘000’
Cost incurred to date 120,270
Add: Recognised profit 16,771
Less: Cash received (110,000)
Work in progress 27,041

Page 5 of 10
 Cost & Management Accounting - paper 7

(ii) PBL’s extract of the statement of financial position as at 31 January 2021

Shs ‘000’
Plant c/d 41,200

Current Assets:
Material on site 5,200
Work in progress (w2) 27,041

Current liabilities:
Accrued wages 3,500

(b) Number of trips that TTL should make in order to break even.

Annual fixed cost = 2.4 million x 52 weeks = Shs.124.8 million

BeQ = Annual fixed costs
(Selling price per trip – variable cost per trip)
124.8 million
(70,000 – 61,250)
= 14,262.8 = 14,263 trips
Selling price per trip = 2,000 x 35 passengers = 70,000
Variable cost per trip = 1,750 x 35 passengers = 61,250

(ii) Margin of safety in revenue:

= (Budget trips – Beq) x selling price per trip
= (14,300 – 14,263) x 70,000
=Shs 2,590,000

(iii) Setting selling prices using absorption costing technique:

 An organization starts with determining the full cost of production that includes both
variable and fixed product costs.

 A standard markup is then added to the full cost of production to determine the
selling prices.

Page 6 of 10
 Cost & Management Accounting - paper 7

Solution 5

(a) Computation of variances:

(i) Sales price variance

= (Actual selling price – Standard selling price) x Actual quantity sold
= (94,000 – 94,200) x 2,000
= Shs 400,000 Adverse
Standard selling price = standard cost + 20% markup
= 78,500 + (20% x 78,500) = 94,200
(ii) Material price variance
MPV= (Actual material price – standard material price) x Actual quantity purchased
Timber = (10,500 – 10,000) x 11,000 pcs = Shs 5,500,000 Adverse
Vanish = (7,500 – 8,000) x 1,200 litres = Shs.600,000 Fav
Nails = (5,100 – 5,000) x 980 kgs = Shs 98,000 Adverse
Shs 4,998,000 Adverse
(iii) Material usage variance
MUV= (Actual usage – standard usage) x standard material price
Timber = (11,000 – 6 x 2,000) x 10,000 = Shs 10,000,000 Favourable
Vanish = (1,200 – 0.5 x 2,000) x 8,000 = Shs 1,600,000 Adv
Nails = (980 – 0.5 x 2,000) x 5,000 = Shs 100,000 Favourable
Shs 8,500,000 Favourable
(iv) Labour rate variance
LRV= (Actual wage rate – standard wage rate) x Actual hours paid
= (2,400 – 2,500) x 8,250 hours
= Shs.825,000 Favourable
(v) Labour efficiency variance
LEV= (Actual productive hours – standard productive hours) x standard labour rate
Actual productive hours = 80% x 8,250 hours = 6,600 hours
Standard productive hours = 4 hours x 2,000 desks x 75%
= 6,000 hours
LEV = (6,600 – 6,000) x 2,500
= Shs 1,500,000 Adverse

(vi) Production overheads expenditure variance

PoEV= Actual overheads expenditure – Budgeted overheads expenditure

=(25% x 8,250 x 2,400) – (20% x 4 x 2,000 x 2,500)
= Shs.950,000 Adverse
Page 7 of 10
 Cost & Management Accounting - paper 7

5 (b) Factors explaining variances in material price and usage above:

 Increase in the prices Timber and Nails from the prices at which they were initially
anticipated thus leading to an adverse material price variance.
 Failure to purchase the standard quality and quantity of materials thus resulting into
different prices being charged.
 Rush purchases which could have resulted into failure to purchase in time so as to
avoid rise in prices.
 Changes in quality control requirements or changes in the methods of production
which might have resulted into different material usage levels.
 Use of material mix which is different from the standard mix.
 Greater yields or lower quantity of scrap as compared to anticipated yields and
wastage levels respectively.

Solutions 6

(a) Secondary analysis using simultaneous equations method;

Amount in Shs. 000
Quality
Machining Cutting Finishing Assurance Marketing
Departments Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Primary overheads 64,000 40,500 72,000 12,400 16,000
Apportionment of
marketing costs 3,465.4 4,332 8,663.5 866.3 (17,327)
Apportionment of quality
assurance costs 3,979.9 2,653.3 5,306.6 (13,266.3) 1,326.6
Secondary overheads 71,445.3 47,485.3 85,970.1 - -
Workings
W1-
Let Marketing = M
Let Quality assurance = Q
Cost of marketing = 16,000,000 + 10%Q
Cost of Quality assurance = 12,400,000 + 5%M
Thus,
M = 16,000,000 + 10%Q …….. (1)
Q = 12,400,000 + 5%M ……….. (2)
Solve for M and Q;
Substituting (1) in (2),
Q = 12,400,000 + 0.05 (16,000,000 +0.1Q)
= 12,400,000 + 800,000 + 0.005Q
= 13,200,000 + 0.005Q
Collecting equal terms and solving for Q,
Page 8 of 10
 Cost & Management Accounting - paper 7

Q-0.005Q = 13,200,000
0.995Q =13,200,000
Q = 13,200,000/0.995
= 13,266,332
Substituting Q in (1),
M = 16,000,000 + 0.1 X13,266,332
= 17,326,633
(b) Computation of control ratios;
(i) Activity ratio = Standard time for actual production x 100
Budgeted time
= 0.25 hours x 987,500 x 100
0.25 hours x 1,000,000
= 98.75%
(ii) Capacity ratio = Actual time x 100
Budgeted time
= 247,250 hours x 100
250,000 hours
= 98.9%
(iii) Efficiency ratio = Standard time for actual production x 100
Actual time
= 0.25 hours x 987,500 x 100 = 99.8%
247,250 hours

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 Cost & Management Accounting - paper 7

(c) Overhead costs and cost drivers using the principles of ABC technique:
Quality control costs – These are costs incurred in verifying whether the units produced
are as per the standard i.e costs incurred to inspect output and even the production
processes. The most appropriate activity that drives such costs is inspection.
Set up costs – These are costs of laying out the production machinery. The appropriate
activity that drives such cots is setting up activities.
Material handling costs – These are cost incurred to move material from one location to
another ie from store to production and vice versa. These costs are driven by material
movements as an activity.

Page 10 of 10
 COST AND MANAGEMENT ACCOUNTING-CPA PAPER 7

SOLUTIONS

SECTION B
Solution 2
(a) Users of accounting information and their information needs:
 Management: They use accounting information to analyze the organizations’
performance and position and take appropriate measures to improve the
company’s results.
 Investors: These assess the company’s potential success in order to decide
whether to invest or not.
 Lenders (banks and other financial institutions): They are interested in
assessing the company’s ability to pay for amounts borrowed.
 Employees: They are interested in assessing the company’s ability to pay
salaries and determining whether the job is sustainable or not.
 Trade creditors: They are interested in assessing the company’s ability to pay
for goods supplied on credit.
 Government: Government bodies especially tax authorities are interested in
an entity’s financial information for taxation and regulatory purposes.
 Customers: They are interested in the company’s ability to continue in
existence and stability of operations.
 Shareholders: These are interested in evaluating management’s performance
and also the possibility of dividend payment.

(b) Duties of a Purchasing Manager:

 To organize and direct the purchasing function effectively.
 To advise the procurement committee on the right source of supply.
 To follow up on purchase orders and to ensure timely delivery of goods.
 To execute agreement and placing orders on supplies.
 To ensure that materials received are conforming to the required
specifications.
 To give suggestions to top management for important purchasing decision
making.
 The purchasing manager is responsible for confirmation and authorization of
bills of payment.

1
 (c) Stores Ledger card using FIFO

Date Receipts Issues Balance

Qty Rate Amount Qty Rate Amount Qty Amount
Feb 1st 105 1,905,750
Feb 5th 100 18,050 1,805,000 205 3,710,750
Feb 10th 105 18,150 1,905,750
7 18,050 126,350
112 2,032,100 93 1,678,650
Feb 12th
150 18,500 2,775,000 243 4,453,650
Feb 15th 130 18,255 2,373,150 373 6,826,800
Feb 17th 5 18,050 90,250 368 6,736,550
Feb 20th 88 18,050 1,588,400
65 18,500 1,202,500
153 2,790,900 215 3,945,650
Feb 22nd 80 19,000 1,520,000 295 5,465,650
Feb 24th 50 18,500 925,000 245 4,540,650
Feb 28th 35 18,500 647,500
30 18,255 547,650
65 180 3,345,500

Solution 3
(a) Bases for classifying costs:
 Degree of traceability: Costs are classified based on the ability of attaching or
tracing costs to specific products. They include direct costs and indirect costs.
 Behavior: Costs are classified according to how they change when there is a
change in output for example fixed and variable costs.
 Association with the product: Costs are classified based on whether they
constitute the cost of the product (product costs) or whether they relate to
the period (period costs).
 Function: Costs under this category are based on organizational functional
activities like selling and distribution, administration, production, finance, etc,
which are performed in a given period.
 Controllability: Costs are classified according to whether or not they are
influenced by actions of managers.
 Time: Costs can be classified as historical costs and pre-determined costs.
 Normality: Costs may be classified according to whether they are normally
incurred at a given level of output in the conditions in which that level of
output is normally attained. They include normal costs and abnormal costs.

2
 (b) SIL Profit Statement for the year ended 31st December 2019

Layers Kroilers Broilers Total

Details
Shs ‘million’ Shs ‘million’ Shs ‘million’ Shs ‘million’
Sales output (‘000’) 1,200 1,050 1,300
Selling price 0.2 0.185 0.18
Total Sales 240,000 194,25 234,000 668,250
Direct Costs:
Materials (108,000) (105,000) (104,000) (317,000)
Labour (72,000) (52,500) (58,500) (183,000)
Contribution 60,000 36,750 71,500 168,250
Fixed production
(33,600) (25,200) (39,000) (97,800)
costs
Selling costs (8,400) (7,350) (9,100) (24,850)
Administrative costs (6,000) (5,250) (7,800) (19,050)
Profit/Loss 12,000 (1,050) 15,600 26,550

If operations for feed concentrate for Kroilers are shut down

Details Amount Shs ‘million’
Fixed cost savings 28,340
Contribution lost (36,750)
Additional contribution lost (8,410)

Total fixed cost =141,700,000,000

Saving on fixed costs =0.2 x 141,700,000,000√
= 28,340,000,000
Analysis of effect on profit
Details Layers Broilers Total
Shs ‘million’ Shs ‘million’ Shs ‘million’
Contribution 60,000 71,500 131,500
Remaining fixed costs (113,360)
Profit 18,140

OR

Details Total
Profit 26,550
Contribution lost (8,410)
Profit 18,140

3
Production line of feed concentrate for Kroilers should not be shut down. This is
because if it is shut down, its contribution of Shs 36.75 billion will be lost and
consequently profits will reduce from Shs. 26.55 billion to Shs. 18.14 billion.

(c) Units to maximize profits

Quantity of iron ore required to meet the demand
Y12 2 x 650,000 = 1,300,000 Kgs
Y10 1.5 x 400,000 = 600,000 Kgs
Total = 1,900,000kgs of Iron ore needed
Shortfall = 1,900,000kg – 1,520,000 Kg
= 380,000 Kgs

Determine variable cost per unit

Direct Materials + Direct Labour + Variable overheads
Y12 = 13,000 + 11,000 +2,000
= Shs. 26,000
Y10 = 9,000 + 7,000 + 1,500
= Shs. 17,500

Determine contribution per unit

Details Y12 Y10
Selling price per iron bar 35,000 25,000
Variable cost per iron bar (26,000) (17,500)
Contribution per iron bar 9,000 7,500
Kgs of Iron ore required 2 1.5
Contribution per kg 4,500 5,000
Ranking 2nd 1st

Determine units to produce and sale to maximize profits

Product Output Iron ore Iron ore Iron ore Iron bars to be
(iron per iron required (kg) available Produced and Sold
bars) bar (Kg) (Kg)
Y10 400,000 1.5 600,000 920,000 400,000
Y12 460,000 2 920,000 - 460,000
Total 1,520,000 860,000

DSL should produce and sell 460,000 and 400,000 iron bars of Y12 and Y10 respectively
during the month of March 2020.

4
Solution 4

(a) Features of marginal costing system

 It only treats variable costs as product costs.
 It treats fixed production costs as period costs.
 Involves separation of fixed costs and variable costs

(b) Arguments against marginal costing

 Selling prices that are set basing on marginal costing do not cover all
operating costs since it excludes the fixed costs in determining product costs.
 The system may fail to separate certain production costs into their fixed and
variable elements.
 Marginal costing is not acceptable for external reporting because it violates
IAS 2 regarding inventory valuation.
 Tax authorities do not allow application of marginal costing because it leads
to understatement of profits and consequently the tax liability.
 Marginal costing excludes fixed manufacturing overheads from production
costs hence leading to understatement of unit cost and inventory values.
 The system is only useful for short run profit planning and decision making
and yet one needs more information for long term decision making.

(c) Cost for the manufacture of the sofa set

Timber:
Section A 15 pieces X 10,000 = Shs 150,000
Labour:
Section A 100 x 3,000 = Shs 300,000
Section B 30 x 5,000 = Shs 150,000
Leather fabric:
Section B 6 meters X 15,000 = Shs 90,000
Cotton:
Section B = Shs 100,000
Electricity:
Section A Shs 100,000
Section B Shs 150,000
Rent:
Section A Shs 60,000
Section B Shs 50,000
Total Cost of Sofa set 1,150,000

(i) Selling Price of sofa set = Cost + Markup

= 1.2 x 1,150,000
= Shs 1,380,000

5
 (ii) Profit = Selling Price – Cost Price
1,380,000 – 1,150,000
Shs. 230,000

(d)
(i) Apportionment of joint costs to Cheese, Butter and Ice Cream

Product Output Selling Total sales Costs beyond Net realizable

(tins) Price/tin Shs ‘000’ split off point value at split off
Shs ‘000’ point Shs ‘000’
Cheese 550,000 25,000 13,750,000 (2,062,500) 11,687,500
Butter 640,000 20,000 12,800,000 (1,920,000) 10,880,000
Ice 950,000 4,000 3,800,000 (570,000) 3,230,000
cream
Total 30,350,000 4,552,500 25,797,500

Joint costs = 30% x 30,350,000

= Shs 9,105,000
Product Proportion of total NRV Shs ‘000’ Joint costs allocated
Cheese 11,687,500 X 100% 45.3% X 9,105,000
25,797,500= 45.3% = 4,124,565
Butter 10,880,000 X 100% 42.2% X 9,105,000
25,797,500 = 42.2% =3,842,310
Ice cream 3,230,000 X 100% 12.5% X 9,105,000
25,797,000 = 12.5% =1,138,125
Total 100% 9,105,000

(ii) Estimated Profit

Product Estimated NRV Shs ‘000’ Joint Costs Shs’000’ Profit Shs ‘000’
Cheese 11,687,500 (4,124,565) 7,562,935
Butter 10,880,000 (3,842,310) 7,037,690
Ice cream 3,230,000 (1,138,125) 2,091,875
Total 25,797,500 9,105,000 16,692,500

6
Solution 5

(a) Steps in setting standards for costs:

 Establishment of cost centers. Cost centre is necessary for the determination
of standard costs for each product and comparison of actual cost with the
predetermined standards.
 Classification of accounts and codification of different items of expenses and
incomes. This helps in quick ascertainment and analysis of cost information.
 Determining the types of standards to be applied. These include; basic cost
standards, ideal cost standards and currently attainable cost standards.
 Establishing standard costs and preparing standard cost card/ cost sheet.
Standard costs are established for each elements of cost (material, labour
and overhead) separately. Standard cost card or cost sheet is also prepared
separately for product wise or process wise.
 Organization for standard costing: The Standard Committee responsible for
setting standards is formed to set standards for each element (direct
material, direct labour and overheads) so as to achieve the objectives of the
standard costing system.

(b) Limitations of standard costing:

 Standard costing is costly in terms of setting up systems.
 It requires high professional skills.
 It may be difficult attach responsibility for certain variances due to failure to
ascertain whether they are controllable or uncontrollable.
 Standard costing is not appropriate for non-standardized products.
 It is only applicable in the short run.
 It may affect performance if opposed by employees when not involved in
formulation.
(c) ZCL Flexed budget for the month of January 2020.

Details Budgeted Flexed budget Actual Budget

Shs ‘000’ Shs ‘000’ Shs ‘000’ variance
Shs ‘000’
Revenue 11,000,000 9,900,000 10,080,000 180,000F
Direct materials 4,250,000 3,825,000 3,825,000 0
Direct labour 3,750,000 3,375,000 3,375,000 0
Variable 1,000,000 900,000 1,057,500
overhead 157,500A
Electricity 6,200 6,200 6,500 300A
Rent 4,900 4,900 5,000 100A
Depreciation of 1,450 1,450 1,500
machines 50A
Maintenance 3,500 3,500 3,750 250A

7
 Selling and 8,500 8,500 8,500
distribution 0
Profit 1,975,450 1,775,450 1,797,250 21,800F

Solution 6

(a)
(i) Under absorption of overheads

This is where overheads absorbed are lower than the overheads actually
incurred. This means that the firm has charged lower overhead costs to
production than it has actually incurred.
Accounting treatment of under absorption:
The amount of under absorbed overheads is written off in the profit and
loss account as an expense.
(ii) Causes of over and under absorption of overheads
 Wrong estimation of overhead expenses. The actual overhead
expenses may be substantially less or more than the estimated
amount.
 Errors in using the method of absorption whereby sometimes the
method of absorption used may not be suitable.
 Seasonal fluctuations in overheads. Due to the seasonal nature of
work, overheads may fluctuate from one period to another.
 Under or over utilization of capacity. There may be under or over
absorption of overheads due to under or over utilization of productive
capacity.
 Wrong estimation of output. When actual output substantially differs
from the anticipated output, it leads to under or over absorption of
overheads.
(b) Allocation and apportionment
Items Allotment Mixing Fermenting Baking Maintenance Labelling
base
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Overheads Allocation 168,750 135,000 101,250 30,750 81,000
Electricity Kilowatts 18,000 15,000 10,200 7,800 9,000
Rent Floor area 12,960 17,280 9,720 7,560 6,480
Depreciation Machine 6,150 4,920 2,870 820 3,690√
value
Cleaning Floor area 7,200 9,600 5,400 4,200 3,600
Canteen Number 2,080 1,920 1,760√ 640√ 1,600
of staff
Total 215,140 183,720 131,200 51,770 105,370

8
 Overhead absorption rate (OAR)
Overheads Base Amount Total value of base OAR
Shs ‘000’ Shs
Canteen Number of 8,000 53,333.33
workers 150
Electricity Kilowatts 60,000 280,0000 214.2857
Rent Floor area 54,000 25,000 2,160
Cleaning Floor area 30,000 25,000 1,200
Depreciation Machine value 18,450 Shs 225,000,000 0.082

(c) Determining the cost of each product using ABC

Cost driver rate = Overheads
Quantity of cost driver

Setup cost (Production runs)

=18,250,000
20
= Shs.912, 500 per set up

Inspection (number of inspections)

=12,300,000
15
=Shs. 820,000 per inspection

Procurement (number of orders)

=22,400,000
64
= Shs.350, 000 per order
Determining unit cost
Costs Baby Cream (100 Smooth Jelly (250 Pure Jelly (150 ml)
ml) Shs ml) Shs Shs
Direct 240,000,000 360,000,000 300,000,000
materials
Direct labour 45,000,000 120,000,000 60,000,000
Setup costs 4,562,500 10,037,500 3,650,000
Inspection 3,280,000 5,740,000 3,280,000
costs
Procurement 7,000,000 6,300,000 9,100,000
costs
Production
costs 299,842,500 502,077,500 376,030,000
Tins 150,000 120,000 150,000

9
 produced
Cost per
product 1,999 4,184 2,507

Workings
Cost per product = Production costs
No. of units
Baby Cream = 299,842,500/150,000
= Shs. 1,999

Smooth jelly = 502,077,500/120,000

= Shs. 4,184

Pure jelly = 376,030,000/150,000

= Shs. 2,507
Overhead cost item Amount Base value Cost driver rate
Shs ‘000’ Shs ‘000’
Setup costs 18,250 20 912.50
Procurement costs 22,400 64 350.00
Inspection costs 12,300 15 820.00

10
COST AND MANAGEMENT ACCOUNTING PAPER 7 SOLUTIONS
Question 2
(a) Advantages of merit rating
 It provides a scientific basis of judging the worth of employees. Workers who
are not doing well relative to the job requirements may improve upon getting
feedback on their performance.
 It provides a basis for decision making since the results from the process are
used for determining employees to be promoted, transferred, dismissed and
demoted.
 It helps in stimulating and developing employees as it highlights their
weaknesses which results in improved productivity.
 It may promote competition among employees and hence increasing output.
 Employees may be given a salary increment if their performance is
established to be good.
Disadvantages of merit rating
 Halo effect. If the rater likes an employee because of one factor, he may rate
a worker highly even in other areas.
 Some managers are naturally lenient while others are very strict. Therefore,
two different managers may rate two workers differently even when
performance of workers is more or less the same.
 Rates may be influenced by rater’s own attitude and self-made rating factors
which are not consistent with the merit rating process.
 Differing perceptions of raters may result in differing marks.

(b) (i) Rowan Premium scheme

Total Earnings = Basic Pay + Bonus
Basic Pay = Shs. 60,000
Bonus = x Time taken x Time rate

,
Hourly rate = = Shs. 10,000 per hour

( )
= x 4 x 10,000
= Shs. 13,333
Total earnings = 60,000 + 13,333
= Shs. 73,333
 Cost & Management Accounting – Paper 7

Halsey Premium Scheme

Total Earnings = Basic Pay + Bonus
Bonus = 50% x (Time saved x Time rate)
= 50% x ((6-4) x 10,000)
= Shs. 10,000
Total Earnings = 60,000 + 10,000
= Shs. 70,000

(b) (i) KEL should use Halsey Premium Scheme since the bonus payment will
be Shs. 10,000 as compared to Rowan Premium Scheme where they bonus
payment is Shs. 13,333.
2XAnnual demandXCost per order
(c) (i) Economic Order Quantity (EOQ) =
carrying cost per unit per annum
Annual demand = 100,000 x 0.05 x 12
= 60,000 kg
2 𝑋 60,000 𝑋 30,000
EOQ =
2,500
EOQ =√1,440,000

EOQ=1,200 kg
(ii) Ordering costs = Cost per order x Number of orders
Number of orders =
,
=
,
=50 orders
Ordering Costs = 30,000 x 50
= Shs. 1,500,000
(iii) Re-order level = Maximum usage x maximum leadtime
Maximum usage = 250 x 1.52
= 380 kg
= 380 x 3
= 1,140 kg
(iv) Maximum stock level = Re-order level + EOQ –(Minimum usage x Minimum
lead time)
Minimum usage = 250 x 0.6
= 150 kg

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 Cost & Management Accounting – Paper 7

Maximum stock level = 1,140 + 1,200 – (150 x 1)

= 2,190 kg

(v) Minimum stock level = Re-order level – (Normal usage x Average lead time)
Average lead time =
=2
=1,140 – (250 x 2)
= 640 kg
Question 3
(a) Advantages of interlocking accounts
 If cost accounts and financial accounts are maintained by different
independent accountants, it minimizes the possibility of fraud.
 It becomes easier to access cost information for stock valuation and profit
measurement since there is a separation of cost books and financial books.
 If cost accounts and financial accounts are separated, it minimizes the
possibility of errors since the two can be compared and reconciled.
 When cost books are maintained separately, it may be easy to ensure
confidentiality of cost data.
Disadvantages of interlocking accounts
 It may be costly to maintain two sets of accounts, that is financial and cost
accounts since different staff will be maintaining the two sets of accounts.
 When costing profits are different from financial profits, the users of the
information may be confused.
 There is duplication of effort since some transactions appear in both sets of
books.
(b) Relevant costs of making iron bars
Manufacture Outsource
Details Amount Amount
Original cost 20,000
Purchase cost 22,000
Incremental
Inspection costs (25% x 12,000) 3,000
Additional workers 1,500
Additional materials (20% x 12,000) 2,400
Senior procurement officer salary 500

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 Cost & Management Accounting – Paper 7

Total 29,900 22,500

PSL should buy the iron bars since the cost of out souring from the supplier of
Shs. 22,500 is lower than the cost of continuing to manufacture of Shs. 26,900.

(b) (ii) Qualitative factors that PSL should consider

 Reliability of the supplier in terms of being able to deliver the required items
whenever an order is made.
 Lead time. This is the duration between the time the order is made and the
time the items are finally delivered.
 Morale of the existing employees since buying will imply that some workers
will be rendered idle.
 Quality of components supplied. This means delivering quality that is
expected so that the company does not lose customers due to compromised
quality.
(c) Determination of the amount of special material required for each
product
Amount of special material required to meet the demand
Pure water = 20,000 x 0.5 = 10,000 kg
Sweat cola = 32,000 x 0.5 = 16,000 kg
Orange cola = 40,000 x 0.35 = 14,000 kg
Total amount of special material required = 40,000 kg

Shortfall = 40,000 – 35,000

= 5,000 kg

Unit variable cost = Direct materials + direct labour + variable overheads

Special material per kg = 15,750,000/35,000
= Shs. 450 per kg

Pure water = 450 x 0.5

= Shs. 225

Sweat cola = 450 x 0.5

= Shs. 225

Orange cola = 450 x 0.35

= Shs. 158

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 Cost & Management Accounting – Paper 7

Direct labour
Pure water = 1,000 x 0.8
= Shs. 800

Sweat cola = 1,000 x 1.5

= Shs. 1,500

Orange cola = 1,000 x 1

= Shs. 1,000

Variable overheads
Pure water = 35% x 225
= Shs. 79
Sweat coal = 35% x 225
= Shs. 79
Orange cola = 35% X 158
= Shs. 55

Total unit variable cost

Pure water = 225 + 800 + 79

= Shs. 1,104
Sweat cola = 225 + 1,500 + 79
= Shs. 1,804
Orange cola = 158 + 1,000 + 55
= 1,213
Determining contribution per limiting factor
Details Pure Sweet Orange
water cola cola
Selling price per bottle 2,000 2,600 2,500
Variable cost per bottle (1,104) (1,804) (1,213)
Contribution per bottle 896 796 1,287
Special material per bottle (kg) 0.5 0.5 0.35
Contribution per kg of special 1,792 1,592 2,574
material
Ranking 2nd 3rd 1st

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 Cost & Management Accounting – Paper 7

Optimum product/sales mix

Product Bottles Special material required (kg)
Orange cola 40,000 14,000
Pure water 20,000 10,000
Sweat cola 22,000 11,000

PBL should produce and sell 40,000 bottles of Orange-cola, 20,000 bottles of
Pure water and 22,000 bottles of Sweet-Cola.

Question 4

(a) Advantages of job order costing

 Profitability assessment. Job costing system is essential in assigning costs
separately to individual operations hence it is possible to ascertain the profit
to be generated on each job.
 Job order costing enables a firm to assess the performance of employees and
hence it is possible to identify employees who fail to meet their expectations.
 Accessibility. The system provides access to the expenses incurred on each
job and this information can be used to develop specific strategies to control
costs in future.
 Accuracy. Job order costing allocates specific costs to appropriate accounts.
 Flexibility. Job order costing is flexible enough to aid in calculation of indirect
costs.
Disadvantages of job order costing
 Job order costing needs great deal of clerical work in recording transactions
related to it.
 Job order costing is less accurate since overheads are allocated on estimation
and hence this method may not yield 100 percent accurate results.
 Job order costing requires documentation of each job
 Complexity of work. The record keeping for different jobs may prove to be
more complicated.

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 Cost & Management Accounting – Paper 7

(b)
Contract account
Details Shs ‘000’ Details Shs ‘000’
Materials at site b/d 80,050 Plant book value 40,660
Materials issued from stores 65,300 Work uncertified 84,175
Wages expense 56,440 Work certified 252,525
Plant cost 90,400 Materials returned 3,505
General overheads 30,012 Materials destroyed 10,008
Architect fees 4,000
Subcontract charges 25,450
Head office expenses 7,550
Notional Profit c/d 31,671
390,873 390,873
To Profit/Loss account 15,202.08 Notional Profit b/d 31,671
Reserves 16,468.92

Workings
W.1Prepaid wages = x 70,550,000
= 14,110,000
Wages relating to the current year = 70,550,000 – 14,110,000
= 56,440,000

W.2 Amounts charged to the contract

General overheads = x 50,020,000
= 30,012,000
Head office expenses = x 30,200,000
= 7,550,000
W.3 Amount transferred to Profit/Loss account
Stage of completion = x 100%
, ,
= x 100%
, ,
= 75%0.5marks
Profit transferred to Profit/Loss account
= x Notional Profit x
Cash received = 54% of 336,700,000
= 181,818,000

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 Cost & Management Accounting – Paper 7

, ,
= x 31,671,000 x
, ,
= 15,202,0801 mark

(c) ZUL Profit statement for May and June 2019 using Marginal
costingShs‘000’
Details May June
Sales (bags) 18,600 24,900
Selling price per bag 32,000 32,000
Total sales 595,200 796,800
Less: Cost of sales
Opening stock - 33,600
Production costs 480,000 564,000
Closing stock (33,600) -
Cost of sales (446,400) (597,600)
Contribution 148,800 199,200
Selling and admin costs (93,000) (124,500)
Net contribution 55,800 74,700
Fixed manufacturing overheads (40,000) (47,000)
Net profit 15,800 27,700

Workings
Determining cost per bag
Unit cost= Direct Materials + Direct labor + Variable overheads
= 10,000 + 8,500 + 5,500
= 24,000
Selling price per bag
Margin = 25% or 1/4
Convert margin to Markup =33% or 1/3
Selling price = 24,000 + x24,000= 32,000

Production Cost:
May 20,000 x 24,000 = 480,000,000
June 23,500 x 24,000 = 564,000,000

Closing stock in May = (Units produced – units sold) x unit selling price
= (20,000 – 18,600) x 24,000
= 33,600,000
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 Cost & Management Accounting – Paper 7

Question 5

(a) Distinction between activity based and zero based budgeting

ABB system is an approach based on the philosophy of ABC system, in that it
involves recording, researching, and analyzing activities that lead to costs for an
organization. Every activity in an organization that causes a cost is scrutinized for
potential ways to create efficiencies.

While
Zero based budgeting refers to the planning and budgeting process which
requires each manager to justify the entire budget request in detail from
scratchfor every new period by analyzing the needs and costs and shifts the
burden of proof to each manager to identify why he should spend any money at
all.
(a) (ii) Advantages of activity based budgeting

 The budget setting will be more rational as it will be based on demand side
rather than just the supply side.
 The attribution of overhead costs to products will no longer be independent of
their consumption of overhead resources.
 Efficiency of use of resources is enhanced because each service consumed
will attract a consumption related cost. Therefore the issue of common or
overhead cost evaluation will also be handled.
 Economy of service provision within the organization will be encouraged, as
there will be a link between budgeted and actual consumption and spent.
(b)
(i) Materials Price Variance = Actual quantity x (Standard Price – Actual Price)
= 3,240 x (3,400-3,500)
= 324,000 Adverse
(ii) Materials usage variance = Standard Price (Standard quantity – Actual
quantity)
=3,400 x (3,750 – 3,240)
= 1,734,000 Favorable

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 Cost & Management Accounting – Paper 7

(iii) Labour rate variance = Actual Hours x (Standard Labour Rate – Actual
Labour Rate)
Actual Hours = 2 hours x 1,200
= 2,400
Actual Labour Rate = 4,800,000
2 x 1,200
=2,000 per hour

Labour rate Variance = 2,400 x (1,500 – 2,000)

= 1,200,000 Adverse

(iv) Labour efficiency variance = standard rate x (standard hours for actual
output – actual hours worked
Standard Hours = 1.5 x 1,500
= 2,250
Labour Efficiency Variance = 1,500 x (2,250 – 2,400)
1,500 x 150
=225,000 Adverse

(v) Variable Overhead Expenditure Variance= BFVO - AVO

SVOAR = 1,000 x 1,500/2,250
= 666.6667 x 2,400 = 1,600,000
= 1,600,000 – 1,440,000
= 160,000 Favourable
(vi) Variable Overhead Efficiency Variance = SVOAR X (Standard Hours – Actual
Hours
=666.66666 x (2,250 – 2,400)
=100,000 Adverse

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 Cost & Management Accounting – Paper 7

Question 6

(a) Limitations of Cost Volume Profit Analysis

 It can only apply to a single product or a single mix of a group of products
 A break even chart may be time consuming to prepare
 It assumes fixed costs are constant at all levels of output but fixed costs
remain constant over the relevant range.
 It assumes that variable costs are the same per unit at all levels of output but
variable costs per unit may not be constant.
 It assumes that sales prices are constant at all levels of output but prices vary
 It assumes production and sales are the same and yet there normally closing
stock
 It’s difficult to classify fixed and variable costs accurately.

(b) Break even crates =

( , , , )
=
, ,

, ,
=
,
= 900 crates

(ii) Margin of safety = budgeted sales – Breakeven sales

= 1,000 – 900
= 100 crates
Crates to achieve a target profit =
, , , ,
=
, ,
= 4,650 crates

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 Cost & Management Accounting – Paper 7

(c) Profit statement using absorption costing

Details July August Sept Oct

Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Sales(Jericans) 25,000 18,000 20,000 24,000
Unit selling price 10,000 10,000 10,000 10,000
Total sales 250,000 180,000 200,000 240,000
Less: Cost of Sales
Opening Stock 27,000 - 37,800 21,600
Production costs 108,000 135,000 91,800 108,000
Closing Stock - (37,800) (21,600) -
Cost of sales (135,000) (97,200) (108,000) (129,600)
Gross Profit 115,000 82,800 92,000 110,400
Over/Under absorption - (5,000) 3,000 -
Less: Fixed selling & (55,000) (55,000) (55,000) (55,000)
distribution costs
Less: Fixed office & (50,000) (50,000) (50,000) (50,000)
Administrative expenses
Net Profit/Loss 10,000 (27,200) (10,000) 5,400

Workings
Full unit cost = Direct materials + Direct Labour + variable overheads + Fixed
production overheads
Fixed production overheads cost per unit= 20,000,000/20,000
= Shs. 1,000
Full unit cost = 1,400 + 2,000 + 1,000 + 1,000
= Shs. 5,400
Selling price = full unit cost + 4,600
= 5,400 + 4,600
= Shs. 10,000
Determining production cost ‘Shs’ 000
July August Sept Oct
Production (units) 20,000 25,000 17,000 20,000
Full unit cost 5,400 5,400 5,400 5,400
Production cost 108,000 135,000 91,800 108,000

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 Cost & Management Accounting – Paper 7

Determining closing stock

July August Sept Oct
Opening inventory 5,000 0 7,000 4,000
Production 20,000 25,000 17,000 20,000
Less: Units sold (25,000) (18,000) (20,000) (24,000)
Closing units - 7,000 4,000 -
Full unit cost 5,400 5,400 5,400 5,400
Closing Inventory 0 37,800 21,600 -

July August Sept Oct

Budgeted
Production (units) 20,000 25,000 17,000 20,000
Full unit cost 5,400 5,400 5,400 5,400
Production cost 108,000 135,000 91,800 108,000
Actual
Direct cost 88,000 110,000 74,800 88,000
Fixed overhead production costs 20,000 20,000 20,000 20,000
Total production cost 108,000 130,000 94,800 108,000
Over/under absorption - (5,000) 3,000 -

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CPA 7 COST AND MANAGEMENT ACCOUNTING SOLUTIONS

Question 2

(a) The causes of labour turnover in modern organizations include;

 Poor working relationships within an organization. Poor working relationships

more especially between supervisors and subordinates force workers to look
for jobs elsewhere
 Poor remuneration. Poor pay in comparison with workers in other
organizations as well as delayed pay forces workers to leave the
organizations.
 Lack of career development. Employment in organizations that doesn’t create
room for career growth forces workers to search for new jobs.
 Poor working conditions. These may involve harassment, lack of protection
gear as well as lack of respect among others forces workers to look for new
jobs
 Family attachment and related factors. Movement of the family from one area
to another forces employees to leave jobs in order to stay with their families
 Health complications. Health problems make workers who can no longer
manage to execute their duties leave the jobs
 Poor management. Poor management that does not appreciate the
contribution of workers to organization growth leads to labour turn over.

(b) The replacement costs of labour turnover include;

 The cost of recruitment and selection of new workers. This involves

advertising, arranging for interviews among others.
 The cost of training new workers. New workers always have to be trained to
appreciate the company culture and systems
 The cost of damages to tools and equipment because of inexperience. This
occurs during the learning process
 The loss of output due to interruption of production and inefficiency of new
workers
 Cost & Management Accounting Paper 7

(b) Determination of total labour cost for new Financial Year 2019

Particulars Shs Shs Shs

Horticulturist
Basic Salary ((500,000x12)x1.05)2 12,600,000
Overtime bonus (10,000x102days)2 2,040,000 14,640,000
General
Manager
Basic salary (600,000x12)x1.05 7,560,000
Bonus 15,000x52weeks 780,000 8,340,000
Accountants
Basic salary ((450,000 x 12)x1.05)2 11,340,000
Marketing
officers
Basic salary ((200,000x12)x1.05)3 7,560,000
Commission (12,000,000x12)x2.5% 3,600,000
(14,000,000x12)x2.5% 4,200,000
(10,000,000x12)x2.5% 3,000,000 18,360,000
Drivers
Basic pay 3,780,000
(150,000x12)x1.05)2
Casual workers
Basic pay ((125,000x12)x1.05)15 23,625,000
daily pay (2,000x26x12)x15 9,360,000
Bonus (6,000 x 12) 5 360,0000 33,345,000
Total labour 89,805,000
expense
Halsey bonus = ½ x time saved x time rate

0.5 x 4 x 3000 = 6000

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Question 3
Nyongera’s profit on cost accounts
Costs; Shs ‘000’ Shs ‘000’
Materials:
Opening 150,000
Add purchases 900,000
Less discount (45000)
Less closing (120,000)
Cost of raw material consumed 885,000
Labour 518,000
Prime cost 1403,000
Factory overheads 60% prime cost 841,800
Total production cost 2,244,800
Add opening work in progress 165,000
Less closing work in progress (110,000)
Cost of goods manufactured 2,299,800
Add purchase of finished goods 60,000
Add opening inventory finished goods 260,000
Less closing inventory finished goods (220,000)
Cost of sales (B) 2,399,800
Sales (400 x 8000) (A) 3,200,000
Gross profit (A –B) 800,200
Administration expenses 20% prime costs 280,600
Net profit 519,600

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Nyonjera’s Profit and loss account

Shs ‘000’ Shs ‘000’
Sales 3,200,000
Cost of sales
Materials 885,000
Labour 518,000
Factory overheads 820,000
Add opening WIP 165,000
Less closing WIP (110,000)
Cost of production 2,278,000
Add purchases Finished goods 60,000
Add opening stock finished goods 260,000
Less closing stock finished goods (220,000) 2,378,000
Gross profit 822,000
Administration expenses (290,500)
Profit 531,500

(iii) Reconciliation statement

Shs ‘000’
Profit as per cost statement 519,600
Add over recovery of overheads 11,900
Profit on financial accounts 531,500

(b) Reasons why profit as per cost accounts differs significantly from profit as
per the financial accounts.

 Items shown only by one set of accounts: There are some items which appear
in financial accounts but do not appear in cost accounts and vice versa. For
example fines, interest on loans, losses on disposal of assets, dividends
received appear only in financial accounts while notional interest and national
rent only appear in cost accounts.
 Different bases of inventory valuation: In financial accounting, inventory is
valued at the lower of cost or net realizable value (IAS 2) while in cost
accounting, inventory is valued using a number of methods like First in First
out (FIFO), Last in First out (LIFO) and Weighted Average Cost. This impacts
on cost of sales/production cost hence resulting into different profits reported.
 Overheads: In financial accounting, the actual overhead expenses are
charged to the profit or loss account while in cost accounting; the overheads

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 Cost & Management Accounting Paper 7

are absorbed at predetermined rates. The differences in overheads amounts

reported results into different profit figures.
 Difference in depreciation methods: in financial account, depreciation may be
calculated on straight line or diminishing balance method but in cost account,
depreciation is calculated on the basis of asset usage for example machine
hours.
 Abnormal gains and losses like goods lost by fire, theft, accident or costs of
abnormal idle time are shown in financial account but completely excluded
from cost account.
Question 4
(a) (i) Determination of the total cost of a batch and the selling price per candle.
Details Amount(Shs)
Direct Materials
Candle wax 20 kg X15,000 300,000
Candle wicks 50 meters X 4,000 200,000
Molds 20 dozens X 20,000 400,000
Direct labour
Heating 3 hours X 8,500 25,500
Molding 5 hours X 10,000 50,000
Packing 10 hours X 15,000 150,000
Hire of a table 350,000
Prime costs 1,475,500
Production overheads
Heating 3 hours X 8,000 24,000
Molding 5 hours X 9,000 45,000
Packing 10 hours X 12,000 120,000
Other factory overheads 5% X1,475,500 73,775
Total Batch cost 1,738,275
Cost per candle 1,738,275/240 7,243
Mark-up 30% 30% X7,243 2,173
Selling price per candle 9,416

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 Cost & Management Accounting Paper 7

Workings:
Determining the overhead absorption rates
Production overheads
Heating 5,760,000/720 Shs 8,000 per hour
Molding 2,700,000/300 Shs 9,000 per hour
Packing 21,600,000/1800 Shs 12,000 per hour
(b) (i) DUL profit statement for year ended 31 December 2017 under absorption
costing
Shs ‘000’
Sales revenue (18,000X5,800) 104,400
Cost of sales
Opening stock (200 X 12,480) 2,496
Add Production (5,850 X 12,480) 73,008
Less Closing stock (250X 12,480) (3,120) (72,384)
Gross profit 32,016
Over absorption 1,080 X(5,850-4,200) 1,782
Adjusted gross profit 33,798
Less administrative expenses
Variable expenses (1,020 X 5800) 5,916
Fixed expenses 1,200 (7,116)
Profit for the period 26,682
Working:
Quantity sold
Opening stock 200
Production 5,850
Closing stock (250) 5,800

Production cost
Direct materials 7,200
Direct labour 2,400
Variable manufacturing OH 1,800
OH absorption rate (4,536,000 ÷ 4,200) 1,080 12,480

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 Cost & Management Accounting Paper 7

(ii) Meaning and treatment of over/under absorption of fixed manufacturing

overheads under absorption costing technique
Over absorption occurs when the fixed manufacturing overheads absorbed are
more than the budgeted fixed overheads as result of actual production units
being greater than the budgeted / normal production units

Treatment – credited to the income statement

While:

Underabsorption occurs when the fixed manufacturing overheads absorbed are

less than the budgeted fixed overheads as result of budgeted / normal
production units being greater than the actual production units

Treatment – debited to the income statement

Question 5
(a) Explain the following terms:
(i) Controllable variances are variances which can be identified as a primary
responsibility of a specific person or department. They are caused by internal
factors which can be controlled by management.
(ii) Un -controllable variances. These are variances for which no particular person
or department can be held responsible. They are caused by external factors for
which management has no power.
(iii) Responsibility center for variances. This is a segment for which a person or
department has accepted authority or accountability of a variance
(b) Differences between budgetary control and standard costing.
Budgetary control Standard costing
 Is applied to the operations of the  Only applied to costs for control
whole business
 Projects for financial accounting  Its projection are for only cost
accounting
 Applies to both cost and revenues  Applies to only cost elements

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 Cost & Management Accounting Paper 7

(c) Prepare a master budget

Cash budget
Receipts Shs ‘000’ Shs ‘000’
Cash sale (80% x 57,000) 45,600
Debt recovered 1,200
46,800
Less payments
Rent 8,400
wages 13,500
Salaries 9,600
Utilities 3,600
Sundary expenses 5,700 40,800
Net income 6,000
Balance b/d 8,000
14,000

Budgeted income statement for the period ended 31 December 2019

Revenue; Shs ‘000’ Shs ‘000’
Normal car wash (4000 X 10000) 40,000
Comprehensive (60 X 50,000) 3,000
Night parking (7,000 X 2000) 14,000 57,000
Expenses;
Wages (40,000,000* 0.3 +0.5 *3,000,000) 13,500
Salaries (400,000 X 2 X12) 9,600
Rent (700,000 X 12) 8,400
Depreciation (10%* 14,500,000) 1,450
3,600
Utilities
5,700
Sundry expenses (10% * 57,000,000) (42,250)
Budgeted profit 14,750

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 Cost & Management Accounting Paper 7

Budgeted Balance sheet as at 31 December 2019

Property, plant and equipment Shs ‘000’ Shs ‘000’
Non-current assets 14,500
Less depreciation 1450 13,050
Current assets
Accounts receivable 11,400
Prepaid rent 700
Cash 14,000 26,100
Total Assets 39,150
Equities & liabilities
Equities
Capital 22,060
Retained earnings 1,540
Budgeted profit 14,750

Liabilities
Accrued salaries 800
Total equities and liabilities 39,150

Question 6

Merits and demerits of activity based costing

Merits Demerits
Provides product cost information Very few cost are truly variable and so
necessary for decision making the assumption of direct or linear
relationship between the usage of a cost
driver and the amount of overheads is
not viable.
Used for managing and controlling the Cost driver selection is difficult as it
activities that drive costs more effectively remains simplistic
Focuses attention on real nature of cost It is often difficult to attribute costs to
behaviour and identifying activities which single activities, some costs support
do not add value to products several activities
Uses multiple cost drivers, many of which Multiple cost drivers are more expensive
are transaction-based. to administer
Provides useful financial and nonfinancial It is not always apparent which product
cost driver measures should carry the traced overheads.
Applied across a wide range of service Use of ABC in high technology structures
and manufacturing industries has been questioned

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 Cost & Management Accounting Paper 7

(ii)

Wine Mubisi
Production/Sales output (litres) 5,000 7,500
Shs ‘000’ Shs ‘000’
Direct material cost 22,500 7,500
Direct labour cost 7,500 3,750
Other variable costs 15,000 1,875
Fixed production overheads
Supervision 5,670 1,080
Machine maintenance costs 5,625 1,875
Other production overheads 7,345 6,780
Total cost 63,640 22,860
Total cost per litre 12.728 3.048
Unit selling price(unit cost x1.25) 15.91 3.81
Profit per unit 3.182 o.762

Workings
Wine Mubisi Total
Production/Sales output (litres) 5,000 7,500
Machine hours per litre 13 8
Total machine hours 65,000 60,000 125,000
Frequency of inspection in percentage 84 16 100
Number of machine breakdowns 3 1 4

Cost driver rates

Fixed production overheads Amount Driver Driver rates

Shs Shs
Supervision 6,750,000 100 67,500 per inspection
frequency
Machine maintenance costs 7,500,000 4 1,875,000 per machine
breakdown
Other production overheads 14,125,000 125,000 113 per machine hours

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(b) Forecast the scan hours for the month of July if the maintenance costs are
Shs 2,226,000.
Let Y = Maintenance overhead costs
X = Machine hours
Least squares equation: Y = a + b X
Y X X2 XY
1,900 20 400 38000

1,970 29 841 57130

1,980 30 900 59400

2,160 48 2304 103680

2,050 40 1600 82000

2,120 50 2500 106000

∑Y =12,180 ∑X =217 ∑ X2= 8,545 ∑ XY =44,6210

Unit Variable Cost nΣxy – (Σx)(Σy)
(b) = nΣx2 – (Σx)2
=6 x 446,210-217 x 12,180

6 x 8,545 –(217)2

=34200
4181
= Shs 8.17986
=8.2
Σy − bΣx
Total Fixed Cost (a) =
n
=12180 – 8.2 x 217
6
= Shs 1734
Thus, Y =1734+ 8.2 X
Therefore machine hours =2,226=1734 + 8.2 x.
2,226-1734 = 8.2 x
X = 492/8.2 = 60

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COST AND MANAGEMENT ACCOUNTING PAPER 7 SOLUTIONS

Question 2

(a) Ethical requirements of a management accountant include:

1. Competence.
A management accountant is required to execute his duties competently in
accordance with relevant laws and regulations and technical standards.

2. Confidentiality.
A management accountant should refrain from disclosing confidential
information acquired in the course of their work except when authorized or
unless legally obligated to.

3. Integrity
A management accountant is expected to refrain from engaging in any
activity that would comprise this ability to carry out his duties ethically. He
should avoid actual or apparent conflicts of interest.

4. Independence.
Management accountants ought to make decisions using their judgment
and professional skepticism other than relying on other employee’s
decisions when compiling reports and advising management.

Page 1 of 14
 b) Tasty Ltd’s stores ledger for the month of November 2018

Details Reciept Issue Balance

Qty Rate Amount Qty Rate Amount Qty Amount
Kg Shs Shs Kg Shs Shs Kg Shs
Opening
stock 350 1,575,000
2 300 4,600 1,380,000 650 2,955,000
8 350 4,500 1,575,000
50 4,600 230,000
250 1,150,000
13 500 4,700 2,350,000 750 3,500,000
14 250 4,600 1,150,000
100 4,700 470,000
400 1,880,000
20 400 4,650 1,860,000 800 3,740,000
22 400 4,700 1,880,000
250 4,650 1,162,500
150 697,500
24 360 4,800 1,728,000 510 2,425,500
25 150 4,650 697,500
110 4,800 528,000
250 1,200,000
26 100 4,800 480,000 150 720,000
27 320 4,650 1,488,000 470 2,208,000
28 200 4,920 984,000 670 3,192,000
30 150 4,800 720,000
150 4,650 697,500
370 1,774,500

The value of closing stock is Shs 1,774,500

(ii) The direct material cost charged to production

Total issues=
(1,575,000+230,000+1,150,000+470,000+1,880,000+1,162,500+697,500+5
28,000+480,000+720,000+697,500) = Shs 9,586,500

Page 2 of 14
c) Merits of the piece rate scheme.
 It provides incentive to increase output in a bid to earn more.
 Increased output leads to decrease in overhead costs per unit.
 The exact cost of labour per unit is known and facilitates budgeting.
 Requires less supervision since and employees are self-driven to earn
more.
 The company can easily attain its objectives since all the employees
work towards achieving more output thus increased productivity.

Question 3
(a) Distinguishing between Relevant costs and irrelevant costs
Relevant cost
 Relevant cost is a future cost.
 Refers to a cost that only relates to a specific management decision, and
which will change in the future as a result of that decision.
 Relevant cost is a future cash flow arising as a direct consequence of a
decision taken
 Refers to the incremental and avoidable cost of implementing a business
decision.

While

Irrelevant costs
 Irrelevant cost to represent a business cost that does not impact a
management decision.
 An irrelevant cost is a cost that will not change as the result of a
management decision
 Irrelevant costs are those that are not tied to a particular management
decision.

Page 3 of 14
b (i) MYHYGIEN MANUFATURERS LTDPROFIT AND LOSS STATEMENT
FOR THE YEAR ENDED 31st DECEMBER 2018

Scrub
Details Toilet Brush Squeezers Total
Brushes
Sales (Units) 76,000 85,000 61,000 222,000
Selling price (Shs) 5,400 7,500 13,800
Shs ‘000’ Shs ‘000’ Shs ‘000’
Sales 410,400 637,500 841,800 1,889,700
Less variable costs:
Raw materials 193,800 357,000 475,800 1,026,600
wages 68,400 140,250 109,800 318,450
Directly chargeable
68,400 76,500 88,450 233,350
expenses
Variable Costs 330,600 573,750 674,050 1,578,400
Contribution 79,800 63,750 167,750 311,300
Less:
Selling and
20,520 31,875 42,090 94,485
distribution expenses
Fixed Costs 28,500 57,375 66,795 152,670
Total costs 49,020 89,250 108,885 247,155
Profit / Loss 30,780 (25,500) 58,865 64,145
If Squeezer is
dropped
Contribution 79,800 0 167,750 247,550
Less:
Selling and
20,520 0 42,090 62,610
distribution expenses
Fixed Costs 28,500 0 66,795 95,295
Closure costs 27,000 27,000
Net profit 62,645

Do not drop the squeezer product

The squeezer makes a contribution of Shs 63,750,000 which will be lost when
it’s dropped. Given the costs involved in dropping and closing production line,
its dropping will cost the Company Shs. 1,500,000 (from Profit of
Shs.64,145,000 to 62,645,000)

Page 4 of 14
b) Qualitative factors to be considered when making a decision
 External reputation Managers should consider the effects of a decision to
be taken on external reputation of the firm.
 Labour relations any decision taken to consider what effect it has to labour
force.
 Alternative use of the capacity created.
 Implicit costs (Redundancy costs)
 Quality decision taken should be considerate of the quality output.
 Creditors effect organizations with
 Competitors consider other players in the economy
 Legal environment
 Resource envelope in terms of raw materials
 Technological changes which lenders some goods or services absolute.

Question 4

(a) Procedures for batch costing include:

 Each batch is treated as an individual job or a separate unit

 Each batch consists of identical items
 Costs identified against each batch number
 Unit cost of individual items = Total batch cost divided by the number of
items in the batch.
 Selling price of each batch calculated by adding a profit to the cost of
batch

(b) Process 2 account for the month of February 2019.

Fully completed output:

Units (kg)
Material input 5,000
Less: Closing WIP (1,000)
Completed output 4,000

Page 5 of 14
Statement of equivalent units
Total Process 1 Materials Materials Addition Conversion costs
units

Units % Complete Units % Complete Units % Complete

Kg Kg kg

Output to 4,000 4,000 100 4,000 100 4,000 100

Process 2

Closing 1,000 1,000 100 600 60 400 40

WIP

5,000 5,000 4,600 4,400

Statement of cost per equivalent units

Cost element Total costs Equivalent Cost per
units equivalent unit
Shs ‘000’
Shs
Process 1 16,000 5,000 3,200
Materials
Materials added 7,000 4,600 1,522
Conversion costs 5,000 4,400 1,136
5,858

Page 6 of 14
Statement of equivalent output
Output Total
units
Finished Goods 4,000 4,000x 5,858 23,432,000
Closing WIP 1,000
Process 1 Materials 1,000x 3,200 3,200,000
Materials added 600x1,522 913,200
Conversion 400x 1,136 454,400 4,567,600
Total 27,999,600

Dr. Process 2 A/C Cr.

Units Shs ‘000’ Units Shs ‘000’
Material 5,000 16,000 Finished 4,000 23,432
input Gds
Materials 7,000 Closing 1,000 4,568
added WIP
Conversion 5,000
5,000 28,000 5,000 28,000

Break-even Point (BEP) Sales = Fixed costs/ PV Ratio

But PV ratio = Change in profit/Change in sales (%)
= 90,000 – 70,000/650,000 -600,000
= 20,000/50,000 (%)
= 40%
Also Fixed costs = Contribution – Profit
But Contribution = Sales X PV ratio
Thus Fixed costs = Sales x PV ratio –Profit
= (600,000 x 40%) – 70,000
=240,000 -70,000
= Shs.170,000,000

Page 7 of 14
Thus BEP = Shs 170,000,000/40%
=Shs 425,000,000
(ii) Margin of safety = Total sales – Sales at BEP
= 600,000,000 – 425,000,000
=Shs 175,000,000
(d) Assumptions of cost volume profit analysis.

 All costs can be resolved into variable and fixed

 Fixed costs remain constant and variable costs vary with activity level
 Costs and revenues are linear over the activity levels
 The only factor affecting costs and revenues is volume
 Technology remains unchanged
 Only one product is produced
 Stocks levels are constant
Question 5
(a) (i) Definition of limiting factor as applied in preparation of
budgets:
A limiting factor is a variable which hinders the achievement of the
organisation’s set objectives. Examples include Sales demand, Materials,
labour, working capital, Plant and machinery and managerial expertise.
(a) (ii) Disadvantages of budgeting include:
 Inaccurate

Budgetary controls are based on assumptions which may not be accurate

for the operating conditions under which the budgets are formulated.

 Rigidity in decision making

The budget process involves setting targets and management may focus
on those targets without considering market changes during the period.

 Costly and time consuming

Preparation of budgets is at times expensive to small organizations and

also creation and revision of budgets consumes a lot of time.

Page 8 of 14
 Need for continuous review

When business environment conditions change, the budget estimates

become useless and therefore the effectiveness of the budget will depend
on how those estimates are revised to suit the changes.

 Quantitative in nature

Budgeting tends to focus management attention to quantitative aspects of

business disregarding the qualitative factors which may also be important
for the business.

b) Computing the variances

Workings
Budgeted Actual
Production units 8,000 9,500
Shs Shs
Total overheads 10,800,000 11,500,000
Variable overheads costs 80% 8,640,000 9,200,000
Fixed overheads 20% 2,160,000 2,300,000
2,200
Hours used (1/5 * units) 1,600 hrs hrs
Variable overhead absorption
rate (VOAR)= variable
overheads/Hours used 5,400 4,182
Fixed overhead absorption rate
(FOAR) = Fixed
overheads/Hours used 1,350 1,045

Standard variable overhead absorption rate (SVOAR)

Actual variable overhead absorption rate (AVOAR)
Standard Fixed overhead absorption rate (SVOAR)
Variable overhead cost variance =

(SVOAR x standard hours for actual production) - AVOAR x Actual labour

hours

=(5400 x 1900)– (4182 x 2200)

= 1,059,600 Favorable

Page 9 of 14
Fixed overhead cost variance
= (Standard hours for actual production X SFOAR) – Actual fixed costs
= (1,900 x 1,350) – 2,300,000
=265,000 Favorable
Variable overhead expenditure variance

=(SVOAR - AVOAR) X Actual hours

=(5400 – 4182)* 2200

= 2,679,600 Favorable
Variable overhead efficiency variance

=(Standard hours for actual production – Actual hours) X SVOAR

= (0.2 X 9500 -2200) X5400

= 1,620,000 Adverse
Fixed overhead efficiency variance

= (Standard hours – Actual hours) x SFOAR

=(1900 – 2200) x 1350

= 405,000 Adverse
Fixed overhead capacity variance

= (Actual hours – Budgeted hours) x SFOAR

=(2200- 1600) x 1350

= 810,000 favorable
Fixed overhead volume variance

= (Standard hours for actual pdn- budgeted hours) * SFOAR

=(1900 -1600) x 1350

= 405,000 Favorable

Page 10 of 14
Question 6
 Let Y = Extra-load overhead costs
X = Labour hours
Least squares equation: Y = a + b X

Y X X2 XY
3,500 200 40,000 700,000
4,100 240 57,600 984,000
4,400 260 67,600 1,144,000
5,000 300 90,000 1,500,000
5,300 320 102,400 1,696,000

∑Y =22,300 ∑X =1,320 ∑ X2= 357,600 ∑ XY =6,024,000

Unit Variable Cost nΣxy – (Σx)(Σy)

(b) = nΣx2 – (Σx)2
=5 x 6,024,000 -1,320 x 22,300
5 x 357,600 –(1,320)2
=684,000
45,600
= Shs 15,000

Σy − bΣx
Total Fixed Cost (a) =
n
=22,300,000 – 15,000 x 1,320
5
= Shs 500,000
Thus, Y =500,000+ 15,000X
When 350 hours are tought.
Overhead cost = -500,000 + 15,000 X 350
= Shs 5,750,000

Page 11 of 14
(b) (i) Causes of under or over absorption of overheads
 Wrong estimation of overhead expenses
 Wrong estimation of hours worked or output
 Seasonal fluctuations in the level of production
 Under or over-utilisation of production capacity
 Changes in the methods and techniques of production

(b) (ii) The accounting treatment of over and under recovery of

overheads.

 Where the amount of under or over absorbed overheads is considerable,

the cost is adjusted by means of a supplementary rate.
 Where the difference between actual and absorbed overheads is negligible,
write off to the P&L A/c.
 The balance of under or over absorption is carried forward to the next
year’s account for absorption

Page 12 of 14
(b) Prepare a job cost sheet showing the price Global Furniture Ltd should
quote to MOFPED.
Particulars Shs Shs ‘000’ Amount
‘Shs ‘000’

Raw materials Timber 150,000

Paint and accessories 55,000

Direct Labour 2,500 normal hours @ Shs. 25,000

10,000

1,000 overtime hours @ 20,000 45,000

Shs. 20,000

Prime cost 250,000

Add: 3,500 hours @Shs. 10,000 35,000

per hour
Factory overheads

285,000

Less: Realizable scrap 5,000

value

Works cost 280,000

Add: Selling and 30,0000

distribution expenses

Total cost 310,000

Add: Profit 98,572

Sales (W1) 408,572

Selling price = 408,572,000/10,000 = 40,857.2

Page 13 of 14
Working 1:
Let Sales revenue = x
Sales revenue = Cost + Profit
X = Cost + 25% of capital employed

= 280,000,000 + 25% (Fixed capital + Working capital)

= 280,000,000 + ¼ (310,000,000 + x/2)

= 280,000,000 +77,500,000 +x/8

=357,500,000 + x/8
X -x/8 = 357,500,000
7x/8 = 357,500,000
X = 357,500,000x8/7
X = 408,572,000

Page 14 of 14
CPA 7 COST AND MANAGEMENT ACCOUNTING SOLUTIONS
Question 2
(a) Users of management accounting information and their needs
Management
Management’s interest is to analyze the organization’s performance and position
so as to take appropriate measures to improve the company results.
Government
Governing bodies of the state especially the tax Authorities are interested in an
entity’s management information for taxation and regulatory purposes.
Employees
These are interested in the company’s profitability and stability. They are after
the ability of the company to pay salaries and provide employee benefits. They
are also interested in the company’s financial position and performance so as to
assess the going concern status of the organization.
Financial Institutions
Financial institutions such as banks and others are interested in the company’s
ability to pay liabilities upon maturity. Their interest is on short and long term
solvency of the organization.

Owners and Investors

These need the information to help them make decisions on what to do with
their investment that is whether to sell; hold or buy more shares in the company.
Prospective investors also need information to assess the company’s potential for
success and profitability.
General Public
This consists of researchers, analysts, students and politicians who could be
interested in using the company’s management information for research and
decision making.
 Cost and Management Accounting – Paper 7

(b) (i) Distinction between labour cost accounting and payroll

accounting:
Labour Cost Accounting and Payroll Accounting

Labour Cost Accounting is a means of ascertaining the cost of labour that should
be charged to products and services.
While
Pay roll Accounting involves computations of the gross pay for each employee
and payments to be done to employees, government, social security funds, etc.
(b) (i) Distinction between preventive costs and replacement costs of
labour turnover:
Preventive costs are the expenses incurred to prevent workers from leaving the
organization and keeping them satisfied.
While
Replacement costs are the expenses incurred for the recruitment and training of
new workers that is they are incurred as a consequence of workers leaving the
organization.

c)
2 x Co x D
√
Ch
EOQ = 2*15,000*840
400
= 250.9
= 251litres
Where Co = Shs.15,000
D=20*42=840 litres
CH=8%*5,000= 400
(ii) Number of orders=Total Annual Demand
Economic Order Quantity
=840
251
= 3.35
3 orders
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 Cost and Management Accounting – Paper 7

(iii) Total Costs= Total Ordering Costs + Total Holding Costs

D * Co + EOQ* CH
EOQ 2
= 840*15,000 + 251* 400
251 2
= 50199.2 + 50200
= Shs 100399
(iv) Minimum Stock Level and Maximum Stock Level
Minimum Stock Level= Re-order Level- (Normal rate of usage* Average lead time)
Average lead time= 2+4 = 3 weeks
2
Minimum Stock Level= 140-(20*3)
= 80 litres

Maximum Stock Level=Re-order level+ Re-order quantity – (minimum

usage*minimum re-order period)
= 140+251-(30*2)
= 331 litres

(v) Average Stock = Minimum stock level + Maximum stock level

2
= 80 + 331
2
= 205.5 litres
Approx. 206 litres
(d) Assumptions of using economic order quantity
 The same fixed quantity is ordered at each reorder point. In other words that
quantity ordered for remains constant.
 Demand, ordering costs, carrying costs and the order lead time are certain. It
assumes that for every order made, the carrying costs, ordering costs and
lead time are known to the organization.
 It assumes constant holding costs and ordering costs
 It assumes a constant purchase cost per unit for every order placed.
3
 Cost and Management Accounting – Paper 7

 It assumes that no stock outs occur. This assumes that EOQ ensures that
stock is always available and stock out costs are not incurred since stock
purchased is always sufficient to keep the organization running. This is
because the model assumes instantaneous replenishment of stock.
 EOQ assumes that the only costs considered in its determination are the
costs related to carrying and ordering costs.

Question 3
(a) (i) Distinction between cost object and cost centre
Cost object
 It’s any item for which you are separately measuring costs.
 It’s an activity / item to which costs are assigned.
 It’s an item to which cost is compiled.
Whereas
Cost centre
 It’s a department with in a business to which costs can be allocated.
 It’s a department in business unit to which costs can be allocated and that is
only responsible for the costs incurred.

(a) (ii) Distinction between integrated cost accounting system and

interlocking / nonintegrated accounting system

 It is accounting system where cost and financial accounting records are

integrated into single accounting system.
 It is a method of accounting for financial and costing transactions in which
self-integrated accounts are maintained.
Whereas
Interlocking / nonintegrated accounting system
 It is accounting system where the costs and financial accounts are
maintained independently of each other in the cost accounts no attempt is
kept to keep a separate record of financial accounting transactions.
 It is a system in which the cost accounts are distinct from financial accounts,
the two sets of accounts being kept continuously in agreement by the use of
control account or made readily reconcilable by other means.

(b) (i) KAF’s production plan for the month of December 2018.
4
 Cost and Management Accounting – Paper 7

Contribution per limiting factor

Details Western Northern Central
Contribution per limiting factor 12,000 18,000 36,000
(Shs per hour) 20 15 16
= 600 = 1,200 = 2,250
Ranks 3rd 2nd 1st
Production Plan
Production Bags to be Hours Total Cumulative Balance
plants produced per bag Hours Hours (Hours)
Available 3,370
Central 70 16 1,120 1,120 2,250
Northern 30 15 450 1,570 1,800
Western 90 (1,800/20) 20 1,800 3,370 0

(b) (i) KAF’s profit statement for the month of December 2018
Shs
Revenue (190 x 125,000) 23,750,000
Variable Costs (75,000*190) (14,250,000)
Contribution 9,500,000
Fixed Costs (5,000,000)
Profit 4,500,000

Working
Total Bags to be produced in the presence of the limiting factor
= 70+30+90=190 bags

5
 Cost and Management Accounting – Paper 7

R&A’s cost statement relating to the contract.

c) R&A’S COST STATEMENT FOR THE CONTRACT

Details Shs’000’
Direct Labour(30,000x80x10) 24,000
Materials (Stationery)(2,000,000x5) 10,000
Hire of special printer(2%x 12,000,000 x 5) 1,200
Prime Costs 35,200
Overheads:
Finance costs(5%*35,200) 1,760
Fixed overheads 2,000
Absorbed overheads(W3) 2,000
Total Costs 40,960

Workings(shs)
1. Overhead Absorption Rate = Total Budgeted Overheads
Budgeted Labour Hours
=5,000,000
200
=Shs 25,000 per labour hour
Overhead costs absorbed=25,000 x 80=Shs 2,000,000

Question 4
(a) (i) How by-products are classified
 The by-product can be classified into two groups and classification is made
according to the marketable condition at the split off point:
 Sold as it is originally produced for example maize bran.
 Sold only after undergoing further processing.
(a) (ii) Distinction between marginal costing and absorption costing.
 Under marginal costing, variable costs are exclusively apportioned to the
products while under absorption costing all costs are absorbed and
apportioned to the products.
 Under marginal costing, product related costs include only variable costs
whereas under absorption costing fixed costs are also included in product
related costs.

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 Cost and Management Accounting – Paper 7

 Marginal costing splits overheads into fixed and variable whereas absorption
costing classifies overheads into production, administration and selling &
distribution.
 Profit can be ascertained through help of profit volume ratio under marginal
costing which is not possible under absorption costing.
 Variances in the opening and closing stock do not influence the per unit cost
under marginal costing whereas under absorption costing, the variances in
the opening and closing stock will show their effect by increasing/decreasing
per unit cost.
(b) Profit or loss to be credited on the profit and loss account.
Shs ‘000’
Contract price 500,000
Less estimated expenditure 190,000
Estimated total profit 310,000
Working:
Total expenditure up to 30/06/2018 90,000
Additional estimated expenditure 100,000
Estimated expenditure 190,000

𝑃𝑟𝑜𝑓𝑖𝑡 𝑡𝑜 𝑏𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑒𝑑 𝑡𝑜 𝑃&𝐿 𝐴? 𝐶

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 × 𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
= ×
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑣𝑎𝑙𝑢𝑒 𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

310,000 × 300,000 120,000

𝑃𝑟𝑜𝑓𝑖𝑡 𝑡𝑜 𝑏𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑒𝑑 𝑡𝑜 𝑃&𝐿 𝐴? 𝐶 = ×
500,000 300,000
= Shs. 74,400,000

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 Cost and Management Accounting – Paper 7

(c) Kandge Manufacturers Ltd

Income Statement for the year ending 30 September 2018 (Marginal costing)
Shs ‘000’ Shs ‘000’
Sales 6,000,000
Opening Inventory -
Variable costs 5,000,000
Less Closing inventory 1,000,000
Cost of sales 4,000,000
Contribution 2,000,000
Fixed costs 1,750,000
Net Profit 250,000
Working
Shs ‘000’
Sales (Shs 75,000 per tin) 75,000 x 100,000 x 0.8 6,000,000
Variable costs (Shs 2,500 per tin) 2,500 x 20 x 100,000 5,000,000
Closing inventory @ 2500 2,500 x 20 x 100,000 x 0.2 1,000,000

Income Statement for the year ending 30 September 2018 (Absorption costing)
Shs ‘000’ Shs ‘000’
Sales 6,000,000
Opening Inventory -
Variable costs 5,000,000
Fixed production overheads 1,050,000
Less closing inventory 1,210,000
Cost of sales 4,840,000
Gross profit 1,160,000
Other fixed overheads 40% 700,000
Net Profit 460,000

8
 Cost and Management Accounting – Paper 7

Working
Shs ‘000’
Sales (Shs. 75,000 per tin) 75,000 x 100,000 x 0.8 6,000,000
Variable costs (Shs 2,500 per tin) 2,500 x 20 x 100,000 5,000,000
Fixed production overheads 10,500 x 100,000 1,050,000
Closing inventory @ 60,500 60,500 x 100,000 x 0.2 1,210,000
Other fixed overheads 40% 0.4 x 1,750,000,000 700,000
% , , ,
Production overhead absorption rate per tin =
,
= Shs 10,500
Factory cost per tin 50,000 + 10,500 = Shs 60,500

Question 5
(a) Distinction between capacity and activity ratios as used in and budgetary
control.
Capacity ratio is control ratio which indicates the extent to which budgeted hours
of activity is actually utilized during the period. It measures the number of hours
actually worked as a percentage of the total available hours for work (budgeted).
While
Activity ratio is a ratio that measures the level of activity attained during the
budget period. It compares the number of hours expected to be worked to
produce actual output with total hours available for work.
(b) Compute the following control ratios:
(i) Activity ratio
Activity ratio = Standard Hours for Actual Production x 100
Budgeted Hours
Standard hours in actual production (2hours X 48 + 4hours X 36) =240 hours
Budgeted hours (2hours X 40 + 4hours X 25) =180 hours
Ratio = (240/180)* 100 =133.3%

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 Cost and Management Accounting – Paper 7

(ii) Capacity ratios

Capacity ratio =Actual Hours Worked × 100
Budgeted Hours
= 220* 100
180
=122.2%
(iii) Efficiency ratios
Efficiency ratio = Standard Hours for Actual Production x 100
Actual Hours
=240* 100
220
= 109%

(c) HCL’s budgeted and actual variance profit statement for the month
of October 2018.
Budget Flexed budget Actual Variance
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
(15,000 x 87,000) (13,500x87000) (13,500 x 85,500)
Sales revenue = 1,305,000 = 1,174,500 = 1,154,250 20,250 A
(3x15,000x7,500) (3x13,500x7,500) (3.35x13,500x7,800)
Material cost = 337,500 = 303,750 = 352,755 49,005 A
(2x15,000x20,000) (2x13,500x20,000) (2x13,500x20,000)
Labour costs = 600,000 = 540,000 = 540,000 0
(26,400 x 13,500
15,000)
Variable OHs 26,400 = 23,760 27,200 3,440 A
Fixed OHs 3,500 3,500 3,620 120 A
Profit 337,600 303,490 230,675 72,815 A

10
 Cost and Management Accounting – Paper 7

Question 6
(a) Differences between traditional costing and activity based costing
(ABC) systems.
Traditional Approach ABC system Approach
One or few indirect-cost pools for each Many homogeneous indirect-cost
department, usually with little pools since there are many activity
homogeneity of cost pools areas to be identified and used
Indirect cost-allocation bases may or Indirect cost-allocation bases are
may not be cost drivers more likely to be cost drivers
Indirect cost-allocation bases are often Indirect cost-allocation bases are
financial variables often nonfinancial variables
Managers manage costs by overseeing Managers manage costs by
products and services overseeing activities
Loading of indirect costs heavily on Pooling of costs by activities helps
high-volume products and too lightly on better planning and control
low-volume products
(b) Classification of overheads:
 Function wise classification: Overheads can be classified on the basis of
function for example administration overheads, production overheads, selling
overheads, research and development overheads, distribution overheads, etc.
 Behaviour wise classification: Overheads can be classified on the basis of
behavior for example fixed overheads, variable overheads, semi-variable
overheads, etc.
 Element wise classification: Overheads can be classified on the basis of
element for example indirect material, indirect labour and indirect expenses.
 Control wise classification: The overheads can be classified on the basis of
control for example controllable overhead and uncontrollable overheads.

11
 Cost and Management Accounting – Paper 7

(c) Using least squares method, determine maintenance costs that will be
incurred during the month of December 2018 when 3,500 machine hours are
expected to be available.
Let Y = Maintenance costs and X= Machine hours
Equation: Y = a + bX
a = intercept (Fixed costs)
b = slope (Variable costs)
Equation: Y = a + bX
Y X X2 XY
4,800 2,000 4,000,000 9,600,000
4,200 1,800 3,240,000 7,560,000
4,400 2,000 4,000,000 8,800,000
6,000 2,400 5,760,000 12,000,000
4,500 1,500 2,250,000 6,750,000
5,000 1,400 1,960,000 8,400,000
∑Y= 28,900 ∑X = 11,100 ∑ X2= 21,210,000 ∑ XY =54,110,000
b = n∑XY -∑X∑Y
n∑ X2 –(∑X)2
× , , ( , × , )
=
, , ,
=-0.95
a =∑Y- b∑X
n n
, . ,
=

= 3,059.16
Y = 5,790 – 0.95X
If X = 3,500hrs
Y = 5,790 – 0.95 x 3500
Y = Shs 6,384
Therefore Maintenance costs = Shs 6,384,000

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 Cost and Management Accounting – Paper 7

COST AND MANAGEMENT ACCOUNTING PAPER 7 AUGUST 2018

SOLUTIONS
Question 2

(a) (i) Distinction between Management Accounting and Financial

Accounting.
Management accounting Financial Accounting
Purpose of Helps managers to make To communicate an organizations
information decisions for achievement of financial position and performance
organisations goals over a given time period.
Users Internal users e.g External users e.g financial
management, employees institutions, regulatory authories
Focus Future oriented Past oriented
Format This is determined entirely by Financial statements must be
management of an prepared in accordance with GAAP
organization
Audit Reports from management Financial statements must be
requiremen accounting information need subjected to external audit
t not be subjected to audit
Reporting Varies depending onAnnually or semi-annually
frequency requirements of managers depending on the statutory
requirements
Segments Reports focus on small parts Financial accounting reports
of the organization describe the whole organization
(ii) Ethical Challenges faced by management accountants:
Lack of integrity: for example when a management accountant bribes from
clients or suppliers. This implies he/she will not make an objective decision.
Lack of Credibility: This may involve taking a decision that is not based on
facts and is likely to affect the organization.
Lack of independence: failure to make decisions independently without top
management’s interference which may affect the organizations activities.
Lack of confidentiality: When the management accountant leaks company
information to unauthorized persons or using confidential information for
personal or illegal advantage e.g. competitors as regards new product
development.

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 Cost and Management Accounting – Paper 7

(b) (i) merits of the centralized stores

 Cheaper rate and favourable trade discounts are possible because of
bulk purchasing.
 It ensures the right quality and quantity because of specialized
personnel.
 There is minimum investment in stocks, since the requirements of all
departments can be pooled for determining the stock levels to be held.
 Carrying and buying costs can be reduced since the stock is purchased
in bulk.
 A smaller skilled overall storekeeping staff is required, as opposed to
having many purchase departments.
 Better supervision of store is possible.
Demerits of the centralized store
 High costs of transporting heavy and bulky materials to the user
departments.
 Material issue may be delayed because of many formalities required for
example a requisition has to go through many hands at head office.
 There is lack of good housekeeping and material handling because of
overcrowding.
 It is risky to keep all materials in one store in case of losses by fire,
floods and theft.
Merits of the decentralized store
 Transportation costs are minimized because departments purchase
directly from the supplier or local market who deliver directly.
 Material issue flows faster because formalities required when issuing
materials are very minimal e.g. a requisition goes through a head of
department only.
 There is flexibility in procuring items because of fewer processes to
follow.
 The risk arising from congestion; such as material theft, fire explore
among others are avoided because of fewer items in the store.
Demerits of the decentralized system
 The organization pays a higher rate and loses out on trade discounts
because of purchasing small items routinely.
 Buying and carrying costs will increase due to purchasing of few items
regularly.

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 Cost and Management Accounting – Paper 7

 More and unnecessary store keeping staff is required because of having

many purchase departments.
(c) Explanation of the Weighted Average Cost method as a used in
inventory valuation
Under Weighted Average Cost Method, materials are issued to user
departments based on a price which is calculated by dividing total cost of
materials in the stock from which the material to be priced could be drawn
by the total quantity of materials in stock. In this method the issue price
of the materials is the weighted average cost.
The cost or price can be computed using the formula
WAC = Purchase cost of previous units + purchase cost of new units
Number of new units previously purchased + number of units
newly purchased
A new weighted aggregate price is calculated each time materials are
received in stores.
(d) Principles of a good incentive, scheme:
 Employees should be awarded on merit basing on the effort put in.
 The scheme must be beneficial to all the employees.
 The standard of performance should be realistic. An unrealistic standard
demotivates employees and thus rendering the incentive bad.
 The incentive scheme should be agreed upon by both employees and
employers to avoid conflicts.
 The cost of operating scheme should be reasonably low so as not to
exceed the expected benefits.
 The scheme should be clearly communicated and understood by all
parties.
Question 3

(a) Distinguish between the following costs:

(i) Opportunity cost and replacement cost
Opportunity cost is:
 A benefit foregone as a result of choosing one option in preference to
the other.
 the loss of other alternatives when one alternative is chosen
 the cost that measures the opportunity lost or sacrificed when the
choice of one course of action requires that alternative course of action
be given up

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 Cost and Management Accounting – Paper 7

 A benefit, profit, or value of something that must be given up to

acquire or achieve something else.
While
Replacement cost is:
The amount that an entity would have to pay to replace an asset at the
present time, according to its current worth such as inventory, equipment,
buildings.
(ii) Product cost and period cost
Product cost
This is the cost that is incurred to manufacture or acquire a product. For
manufacturing company, such costs consist of direct materials, direct
labour and manufacturing over heads
Period cost
This is the cost that relates to the period in which it is incurred. For
example monthly rent.
Cost that is not incurred in product costs. This cost is not part of the
manufacturing process and it’s normally treated as expenses for the period
it is incurred.
(b) Merits of integrated accounting system.
 There is no need to prepare the reconciliation statement hence saving
on time and effort.
 The system is simple because one set of accounts is maintained.
 There is no duplication since all transactions appear in a single set of
accounts.
 It is economical because fewer resources are required.
(c) (i) Determine the production mix for the month of September
2018.
Variable cost per unit: Cake Bread
Shs Shs
Direct materials 1,000 1,200
Direct labour (Shs 500 per hour) 625 1,250
Variable over heads 500 800
Variable cost per unit 2,125 3250

Page 4 of 11
 Cost and Management Accounting – Paper 7

Determining contribution per unit and contribution per labour

hour
Cake Bread
Selling price 3,000 4,500
Variable cost 2,125 3,250
Unit contribution 875 1,250
Labour hours per unit 1.25 2.5
Contribution per labour hour 700 500
Ranking 1st 2nd

Production mix
Product Demand Hrs Hrs Cumulative Balance
per used
unit
Opening balance 100,000
Cake 30,000 1.25 37,500 37,500 62,500
Bread 25,000 2.5 62,500 100,000 -

Therefore the production mix for September 2018 involves producing

30,000 units of cake and 25,000 units of bread.
(ii) Determine the expected net profit for the month of
September 2018
FRESH BAKERY LTD
PROFIT STATEMENT FOR SEPTEMBER 2018
Cake Bread Total
Shs ‘000’ Shs ‘000’ Shs ‘000’

Sales (30 x 3) = (25 x4.5) = 202,500

90,000 112,500
Variable costs (2,125x30) = (3,25x25) = 145,000
63,750 81,250
Contribution 26,250 31,250 57,500
Less
Fixed costs 38,750
Net Profit 18,750

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 Cost and Management Accounting – Paper 7

Question 4

(a) (i) Describe any four features of process costing.

 Production is of a continuous nature i.e. production is done in two or

more stages or processes.
 The products produced are homogeneous or uniform.
 Output from one process is used as input in the next process.
 Work In Progress is expressed in in terms of equivalent units and
valued at cost per unit as finished goods.
 Each process has its own process account.
 There is always normal loss provided for at the beginning of the
process.

(ii) Categories of industries that use process costing:

Textiles, Sugar, Steel, brewing, Food processing.

(b) Determine selling price for the chairs and tables

Tables Chairs
Units 80 150
Shs ‘000’ Shs ‘000’
Direct labour 20,000 32,000
Direct materials 35,000 68,000
Prime cost 55,000 100,000
Cost of special design (W1) 11,000 10,000
Production overheads (W2) 6,000 9,600
Other overheads (W3) 6,000 4,500
Selling expenses 6,400 9,000
Total costs 84400 133,100
Cost per unit 1055 887.33
Mark-up (W4) 105.5 44.37
Unit selling price (W5) 1,160.5 931.7

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 Cost and Management Accounting – Paper 7

Workings: Shs’000’

1 Special design overheads
2 Production overheads
3 Other overheads
OAR= Budgeted overheads
Budgeted Labour
hours
4 Mark-Up
Tables Chairs
55,000 x 0.2= 11,000 100,000 x 0.1=10,000
20000 X 0.3=6000 32,000 x 0.3= 9,600
6,000,000 = Shs 3000 7,500,000 = Shs 2,500
2,000 3000
3,000 x 2,000= 6,000 2,500 x 1,800=4,500
10% *1055=105.5 5%*887.33= 44.37

Unit Selling price =cost per unit+ markup

(c)
MEL PROFIT STATEMENT FOR THE QUARTER ENDING 30 JUNE 2018
Shs ‘000’
Sales (4,500 x 100,000) 450,000
Variable costs:
Opening stock 2,860 x 300,000 858,000
Production 2,860 x 200,000 572,000
Closing stock 2,860 x 400,000 (1,144,000)
Cost of goods sold 286,000
Contribution 164,000
Fixed costs:
Production overheads 110,000
Administration overheads 20,000
Net profit 34,000

Workings:
Variable cost per unit =D.M Costs+ Direct Labour costs+ Variable production costs
Units of normal activity level
= 145,000,000+350,000,000+220,000,000 =2,860/=per unit
250,000

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 Cost and Management Accounting – Paper 7

Production
Sales = Opening stock + Production – Closing stock
100,000 = 300,000 + Production – 400,000
Production = 200,000 kg

Question 5

Advantages and disadvantages of standard costing

Advantages

 Control of costs; Management uses standard costing in controlling cost

since all operations must be conducted according to the set standards.
 Motivation; Employees would be motivated and direct their efforts towards
achieving the set standards since they serve as targets.
 Performance evaluation; This is through comparison of actual results
against the set standards. It provides a basis for management by exception
as it highlights areas of variances that need management attention
 Inventory valuation; standard cost can be used in valuing inventories of
raw material, work-in progress and finished goods.
 Planning; the set standards can be used to plan for the future of the
organization.

Disadvantages

 Not suitable for small firms; standard setting require high degree of skill
and competence which small firms may not be having
 Not flexible; standard may cause rigidness and thus system may be rejected
by employees.
 Limits innovation and creativity; this is due to the fact that all operations
must be in accordance with t he set standards.
 Skills; standard costing requires high skills that are not always readily
available in organizations.
 It’s a time consuming and costly exercise.

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 Cost and Management Accounting – Paper 7

(b) (i) preparation of flexed budgeted cost statement

Workings
Standard Cost per unit
Direct materials =21,000,000/3,000 = Shs 7,000 per magazine

Direct wages = 10,500,000/ 3000 = Shs 3,500 per magazine

Indirect labour costs

Variable cost = 60% X 5,500,000 = 3,300,000

Indirect labour cost per unit; 3,300,000/3000 = Shs 1,100 per magazine

Fixed cost = 40% X5, 500,000 = 2,200,000

Other Overheads

Fixed over heads= 70% X 2,620,000 = 1,834,000

Variable over heads = 30% X 2,620,000 = 786,000

Over heads per unit = 786,000/ 3000 = Shs 262 per magazine

Details Budgeted Flexed Actual Variance

budget performance
Units (copies) 3000 2850 2850
Cost Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Direct materials 21,000 19,950 20,640 (690) Adverse
Direct wages 10,500 9,975 9,452 523 Favorable
Indirect labour 5,500 5,335 6,350
costs 60%
variable (1015) Adverse
Other 2,620 2,580.7 2,540
Overheads
70%fixed (40.7) Favorable
(ii) Sales price and volume variances

Selling price variance = (Actual selling price – Budgeted selling price) X

Actual units sold
= (19600- 20000) X 2850
1,140,000 Adverse

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 Cost and Management Accounting – Paper 7

Selling volume variance= (Actual units sold – Budgeted units) X Budgeted selling price
(2850 -3000) X 20,000
3,000,000 Adverse

Question 6

Steps in ABC System

 Identify the main activities. Identify both services and production activities so
that they are understandable and easy to manage such as materials handling,
purchasing, reception, dispatch, machining and assembly.
 Determine the cost drivers for each activity. Cost driver is an action that
results in costs being incurred such as maintenance is driven by number of
breakdowns; number of purchase orders; number of set-ups.
 Identify activity cost pools and cost centres. Activity costs with similar cost
drivers are collected together in one activity centre
 Assign activity costs to products and services cost centres. Cost centres
activities are assigned to products and services based on cost drivers
(b) (ii) Elimination method:
Production Department Service Department
Breeding Bull Diary Dips Feeds Finance
Fattening
Shs ‘000’ Shs ‘000’ Shs Shs ‘000’ Shs ‘000’ Shs ‘000’
‘000’
25,000 32,000 60,000 15,000 38,000 30,000
Apportion Dips 3,000 3,000 4,500 (15,000) 3,000 1,500
Service dept. (20%) (20%) (30%) (20%) (10%)
OH
Apportion 12,300 6,150 14,350 - (41,000) 8,200
Feeds Service (30%) (15%) (35) (20%)
dept. OH
Apportion 19,850 9,925 9,925 - - (39,700)
Finance (50%) (25%) (25%)
Service dept.
OH
60,150 51,075 88,775 - - -

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 Cost and Management Accounting – Paper 7

b (ii) Step Method

Appropriate Apportionment bases
Dips: 10:70:120:100 (No. of Dips visits)
Feeds: 15:10:15:10 (No. of requisitions)
Finance: 100:150:150 (No. of cows)

Departments Primary Dips Feeds Finance Total

distribution
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs’000’ Shs ‘000’
Dips 15,000 (15,000)

Feeds 38,000 5,000 (43,000)

Finance 30,000 1,000 8,600 (39,600)
Breeding 25,000 500 12,900 9,900 48,300
Bull 32,000 3,500 8,600 14,850 58,950
Fattening
Diary 60,000 5,000 12,900 14,850 92,750
200,000 200,000

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COST & MANAGEMENT ACCOUNTING – Paper 7

Question 2
(a)
(i) Period costs are those that are not included in the stock valuation and as a
result are treated as expenses in the period in which they are incurred.
All non – manufacturing costs (such as delivery costs) are period costs.
While

Product costs are those costs that are identified with goods purchased or
produced for resale. All costs incurred during manufacturing whether
completed or partly completed until they are sold are product costs.
(ii) Treatment of period costs.
They are recorded as expenses in the profit and loss account in the current
accounting period.
Treatment of product costs
All manufacturing costs are product costs.
When the product or purchases for resale are not yet sold, product costs
are recorded as an asset in the balance sheet and become an expense in
the profit and loss account when the product is sold.
(b)

Dr Generations Construction Co Ltd Contract a/c Cr

Particulars Shs ‘000’ Particulars Shs‘000’
Materials 1,100,000 Work certified 4,000,000
Wages 1,800,000 Work uncertified 350,000
Expenses (W1) 270,000 Materials lost 100,000
Depreciation (W2) 10,000 Materials on site 500,000
Notional Profit 1,770,000
4,950,000 4,950,000
Profit & Loss a/c (W3) 737,500 Notional Profit 1,770,000
Balance c/d (Reserve) 1,032,500
1,770,000 1,770,000

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 Cost & Management Accounting

Dr Profit and Loss A/c adjustment Cr

Shs Shs
Materials lostin fire 100,000 Profit &Loss a/c 737,500
Un-assumed expenses 130,000
(400,000 -270,000)
Depreciation on plant 10,000
240,000
Net profit 497,500
737,500 737,500

Workings
1. Expenses charged = 5% x 1,800,000,000
= Shs. 270,000,000
Depreciation (Plant and Machinery) = 5% x 200,000,000
= Shs.10,000,000
Where more than half of the contract is nearing completion, then 2/3 of the
notional profit is credited to the P&L on the basis of cash received.
Profit = Notional Profit x 2/3 x Amount received
Work certified
 2 2,500,000 
1,770,000   
= 3 4,000,000 
= Shs. 737,500
c)
i) Let X = Total cost per copy
Let Y = Profit per copy
Selling price per copy = Shs. 1,500
Statement showing anticipated total cost per copy
Present cost Increase Expected cost
Material 0.60X 20% 0.12X 0.72X
Direct labour 0.30X 25% 0.075X 0.375X
Overheads 0.10X - 0.10X
Total cost X 0.195X 1.195X

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ii) At the same selling price, profit fall by 20%

X + Y = 1,500 (1)
1.195X +0.80Y =1,500 (2)
Solving equations (1) and (2),
1.195X + 0.80 (1,500-X) = 1,500
1.195X + 1200-0.8X = 1,500
0.395X = 300
X = Shs. 759.5
Y = Shs 741.5
Question 3
(a) Pay roll fraud and how to overcome it.
 Ghost employees: payroll staff can create fake employees in the payroll or
prolong payment of the employee who left the organization and alter
records so that payment is made to them.
Periodic audit of the payroll is needed in order to spot ghost workers.
Pay rate alteration: Employees can collude with the payroll staff to
increase the amount of hourly pay in the pay roll.
This can be detected by matching the pay roll authorization documents
with the pay roll register
 Advance not paid: this happens when staff request for advances and then
never pay it back. This happens when advance is not recorded as an asset
but rather as an expense. It can also be due to none monitoring of the
advance.
This can be overcome by monthly review of advances.
 Pay cheque diversion: this happens when employees take the cheque of a
staff that is absent and cash it for themselves.
This can be prevented by requiring everyone to provide a valid
identification and signing for their pay checks unclaimed for pay check
have to be kept in a safe locker.
 Unauthorized hours: employees join hands with the time keeper to
increase the number of hours worked for. The best control of this type of
fraud is supervisory review.
To prevent fraud in connection with payroll it’s necessary to organize and
distribute work connected with the preparation of the payroll and payment
of wages in such a way that work of one is automatically checked by
another one.

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b)
Sparks Wiring Ltd
Computation of Profit forgone 31 December, 2017
Shs Shs
Contribution forgone (W4) 675,000,000
Recruitment cost 12,040,000
Training cost 7,800,000
Selection cost 3,600,000
Settlement of new staff 60,000,000
83,440,000
Profit lost/forgone 758,440,000

Workings
1 Actual productive = Actual hours worked -unproductive
Hours training hours
= 8000-600
= 7400
2 Sales per productive 18,500,000,000
hour (8,000-600)
= 18,500,000,000
7,400
= 2,500,000
3 Sales foregone = Productive hours lost X sales per
productive hour
= 2,500,000X900
= 2,250,000,000
4 Contribution foregone = PV ratio X sales forgone
= 30% X 2,250,000,000
= 675,000,000

(i) Under Hasely plans

Total = Time taken*Hourly rate Plus Bonus
earnings
Bonus=50% of time saved *hourly rate
Time saved = 15-9
= 6 Hours
Total = (9*25,000)+ (6*25,000*50%)
earnings
= Shs. 300,000

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ii) Under Rowan plans

Total = Time taken*Hourly rate Plus Bonus
earnings
Bonus = (Time saved/standard time)*time taken*hourly
rate
Bonus = 6/15*9*25,000 = 90,000
Total = (9*25,000)+90,000
earnings
= Shs 315,000

(iii) SWCL should adopt the Rowan plan since the workers earn more that’s
Shs 315,000 compared to Shs 300,000 under Hasley plan.
Question 4
a)
Definition
This is a costing method applicable where good or services result from a
sequence of continuous operations or process
Features
 The product of one process becomes the raw material or the input of the other
process
 There is a continuous flow of identical output
 It’s difficult to identify a cost per unit
 In manufacturing the main product, by products may arise
 Waste may arise during processing due to say evaporation
 Joint products may be produced in the process of manufacturing.
b)
 Job costing is a costing system encountered for each and every job while process
costing signifies a costing system encountered for different departments and
processes
 Job costing – the final value of the cost can be calculated before accomplishment
of the job while process costing costs are calculated only at the end of the
completed process
 Job costing is to industries that manufacture customized or customer specified
products while process costing is used by industries manufacturing homogenous
products
 Job costing is used for unique products while process costing is used for
standard products
 Job costing is used for very short production runs while process costing is used
for large production runs.

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 In job costing there is usually no transfer from one job to another unless there is
some surplus work while in process costing output of one process is transferred
to another process as input.
c)
i)Metal and Shaft Ltd
Litres
Opening work in progress 1,000
Finished goods transferred 6,200
Less Closing work in progress (800)
Total output to finished goods 6,400
Therefore started and finished good =Total output less opening work- in-
progress
= 6,400 – 1,000
= 5,400litres

Metal and Shaft Ltd

Statement of equivalent litresand Statement of equivalent cost per litre
Out put Units % Input % Materials % Labour % Overheads
Materials added
litres litres litres litres
Opening WIP 1000 - 0 50 500 40 400 70 700
fully worked 5,400 100 5,400 100 5,400 100 5,400 100 5,400
units
Closing WIP 800 100 800 50 400 50 400 60 480
Total litres 7200 6,200 6,300 6,200 6,580
Shs ‘000’ Shs ‘000’ Shs ‘000’ Shs ‘000’
Total Costs 46,500 10,000 15,500 16,500
Cost per litre 7.5 1.587 2.5 2.508

Valuation of Opening work in progress

Units Cost per unit Shs’000’

Opening values 30,600
Added Materials 500 1.587 793.5
Labour 400 2.5 1,000
Overheads 700 2.508 1,755.6
Total 34,149

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 Cost & Management Accounting

Dr Metal and Shaft LtdProcess 3 account Cr

Litres Litres
Opening work in progress 1,000 Transferred to Finished Goods 6,400
Materials added in process3 6,200 Closing work in progress 800
7,200 7,200
Question 5
(a)
Advantages
 It defines the goals, plans and policies of an organization hence leaving
little for wastage of resources due to clarity of organizational goals
 It’s a control tool as each and every department is fixed a specific target to
work towards hence an effective control of activities
 It’s a coordinating tool among departments through budget coordination to
the master budget
 Performance measurement tool as actual results for every department will
compare with the budget.
 It helps in efficient allocation of resources as all budgets activities are
defended to ensure they are value adding.
 It’s a way of communication within the organization during budget setting
most of the employees are involved and the budget is well communicated.
Disadvantages
 It’s difficult to prepare accurate budget with the inflationary conditions
 Preparation involves heavy expenditure which small business may not have
 Budgets are prepared for the feature period which is always uncertain due
to changing conditions
 The success of the budget control depends upon the support of top
management. If there is lack of support then the budget may not work
 The budget is just a management tool but it may not be replaced to
management for decision making because it not substitute for
management.

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 Cost & Management Accounting

(b)
Cash budget for Umazo Ltd. for the period ended 31/3/2018
Details January February March
Shs ’000’ Shs ‘000’ Shs ‘000’
Opening balance 46,175 255,750
Revenue:
cash sales (Skits) (W4) 320,000 320,000 320,000
Credit sales (Skits) (W5) 77,600
Cash Sales (Skets) (W4) 325,500 325,500 325,500
Credit ales (Skets) (W4) 217,000 217,000
Rental Income 1,575 1,575 1,575
Total Revenue 647075 910,250 1,197,425
Payments:
Retainer fee 400 400 400
Overheads:
Fixed 1,000 1,000 1,000
Variable (W3) 53600 53,600
Variable Costs:
Labour (W2) 268,000 268,000 268,000
Material (W1) 331,500 331,500 331,500
Total payments 600,900 654,500 654,500
Closing Balance 46,175 255,750 542,925

Workings and allocated marks

1. Workings for Material costs:
Skits Skets Total
X 10*200*40,000=80,000,000 12*200*35,000=84,000,000 164,000,000
Y 8*250*40,000=80,000,000 10*250*35,000 = 87,500,000 167,500,000

2. Workings for Labour costs:

Skits 8*400*40,000 = 128,000,000
Skets 10*400*35000 = 140,000,000
Total 268,000,000

3. Workings for Variable Overheads Cost

Skits 20% x 128,000,000 = 25,600,000
Skets 20% x 140,000,000 = 28,000,000
Total 53,600,000

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4. Sales revenue
Sales Cash (60%) Credit (40%)
Skets (35,000 * 15,500) =542,500,000 325,500,000 217,000,000

Cash (80%) Credit (20%)

Skits (40,000 * 10,000) = 400,000,000 320,000,000 80,000,000

5. Cash discount on credit sales = 80,000,000*0.03 = 2,400,000

Therefore amount after discount = (80,000,000 - 2,400,000) = Shs77,600,000 @
month
Question 6
a) Methods of classifying overheads:
 Functional classification:
Over heads are classified with reference to major activity divisions of a concern
or according to the function of concern.
Examples are: manufacturing overheads, administrative overheads, selling and
distribution over heads.
 Behavior wise classification:
Over heads are classified with reference to their tendency to vary with
production/volume or activity level. Some expenses increase with an increase in
production volume. Some remain constant irrespective of changes in the level of
production.
Examples: fixed overheads, Variable overheads, semi fixed and variable
overheads
 Element wise classification:
Classification is according to the nature and source of expenditure and follows
naturally from the definition of overheads
Examples: indirect material, indirect labour, indirect expenses.
(b) Regression analysis
Month X Y XY X2
January 34 6,673,920 226,913,280 1,156
February 24 6,238,667 149,728,008 576
March 36 6,760,972 243,394,992 1,296
April 49 7,326,802 359,013,298 2,401
May 38 6,848,023 260,224,874 1,444
June 22 6,151,616 135,335,552 484
Total ∑X = 203 ∑Y =40,000,000 ∑XY =1,374,610,004 ∑X2 = 7,357

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 Cost & Management Accounting

Y = a +bX
a=∑Y -b∑X
n
b=n∑XY-∑X∑Y/n ∑X2 – (∑X)2
b= (6*1,374,610,004)-( 203)*40,000,000
6*(7,357)- (203)2

b =43525.4088
= 43525

a = 40,000,000 – 43525 * 203

6
= Shs 5,194,071

Prediction Cost function

Y=5,194,071 +43525X
When X =50 suits
Y=5,194,071 + 43525* 50
= Shs.7,370,321
(c) Apportionment of overheads
Item of cost A B C D Totals
Area
Rent (sq meters) 1,364,885 818,931 454,962 341,221 2,980,000
Depreciation
of plant book value 451,505 376,254 250,836 421,405 1,500,000
Insurance
of Plant book value 240,803 200,669 133,77 224,749 800,000
Area
Lighting (sqmeters) 288,550 173,130 96,183 72,137 630,000
Number of
Supervision employees 1,010,526 555,789 454,737 378,947 2,400,000
Staff Number of
welfare employees 505,263 277,895 227,368 189,474 1,200,000
TOTAL 3,861,532 2,402,668 1,617,866 1,627,934 9,510,000

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Workings
A B C D

7500 *2980000 4500 *2980000 2500*2980000 1875*2980000

16375 16375 16375 16375
Rent 1,364,885 818,931 454,962 341,221
4500000*1500000 3750000*1500000 2500000*1500000 4200000*1500000
14950000 14950000 14950000 14950000
Depreciation 451,505 376,254 250,836 421,405

4500000*800000 3750000*800000 2500000*800000 4200000*800000

14950000 14950000 14950000 14950000
Insurance 240,803 200,669 133,779 224,749
7500 *630000 4500 *630000 2500*630000 1875*630000
16375 16375 16375 16375
Lighting 288,550 173,130 96,183 72,137
40 *2400000 22 *2400000 18 *2400000 15 *2400000
95 95 95 95
supervision 1,010,526 555,789 454,737 378,947
40 *1200000 22 *1200000 18 *1200000 15 *1200000
95 95 95 95
staff welfare 505,263 277,895 227,368 189,474

Area 7500+4500 + 2500+1875=16,375

Depreciation 4500000+3750000+2500000+4200000 = 14,950,000
supervision 40+22+18+15 = 95

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