INSTITUTE OF CHARTERED SECRETARIES AND

ADMINISTRATORS IN ZIMBABWE

SUGGESTED SOLUTIONS
MAY 2017

COST & MANAGEMENT ACCOUNTING

QUESTION 1

(a) Regression analysis

b = n∑ 𝑥𝑦 − ∑ 𝑥 ∑ 𝑦 = {(5 x 23 091) – (129 x 890)}
n∑ 𝑥2 − (∑ 𝑥)2 (5 x 3 433) – (129)2

b = 1 231
a = ∑ 𝑦/𝑛 -b∑ 𝑥/𝑛 = (890/5) − (1 231 x 129/5) = 146

(b) Stock levels

Reorder level = Maximum usage x Maximum lead time
= 800 kg x 14 days
= 11 200 kg

Minimum level = Reorder level – Average usage in average lead time

= 11 200 kg – (600 kg x 12 days)
= 4 000 kg

Average stock = Minimum stock + (EOQ/2)

= 4 000 + (12 000/2)
= 10 000 kg

(c) XYZ Company

(i) Labour efficiency ratio = Expected hours for actual output x 100
Actual hours
= (32/60) x 720 /360 hours
= (192/180)
= 106.7%

(ii) Labour capacity ration = Actual hours x 100

Budget hours

= (360/370) x 100
= 97.3%

(iii) Labour volume ratio = Efficiency + Capacity

= 106.7% x 97.3%
= 103.8%

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(d) (i) Sales margin volume variance (Marginal costing):
(Actual volume – Budgeted volume) x Standard contribution per unit
(9 500 – 10 000) x Standard margin (SM) = $7 500A
500 SM = 7 500
Standard margin = $15

(ii) Sales margin volume variance (Absorption costing):

(Actual volume – Budgeted volume) x Standard profit margin per unit
(9 500 – 10 000) x Standard margin SM = $4 500A
500 SM = $4 500A
Standard profit margin per unit = $9

(iii) Fixed overhead volume variance:

(Actual production – Budgeted production) x Standard rate
(9 700 – 10 000) x Standard rate = $1 800A
Standard fixed overhead rate per unit = $6
Budgeted fixed overheads = 10 000 units x $6 = $60 000
Fixed overhead expenditure variance = $2 500F
Actual fixed overheads ($60 000 - $2 500) = $7 500

e) ((i) Activity based costing (ABC) is an approach to costing and activity

monitoring, which assigns resources consumed to activities and
activities to cost objects (based on estimated consumption).

(ii) Cost drivers are used to apportion activity costs to output. A cost
driver is a factor that causes a change in the cost of an activity. Examples
of cost drivers, which show the causal relationship between cost pools
and costs, include:

Cost pool Cost driver

Production scheduling Batch set ups
Machining Machine hours
Order despatching Despatch order

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 (iii) ABB (Activity based budgeting) is a method of budgeting based on an
activity framework and utilizing cost-driven data in the budget setting and
variance feedback process. At its simplest, ABB involves the use of costs
determined using ABC in budgets.

Advantage: It enables effective measure of costs against capacity and

would highlight over provision rather than pure overspend.

Disadvantage: The choice of cost drivers is arbitrary or a cost pool can

have more than one cost driver, rendering the budgetary process
ineffective.

f) (i) EOQ = (√2 X co X D/ch) = (√2 X 360 X 150,000/3) = 6,000 units

(ii) Total relevant costs = TOC + THC + Purchase price

Purchase price = 150,000 units x $2.00 $300,000
TOC = (co X D)/Eoq = (360 X 150,000)/6,000 $9,000
THC = (ch X Eoq)/2 = (3 X 6,000)/2 $9,000
Total Cost $318,000

(iii) Purchase price = D X price = 150,000 units X $2.00 X 99.25% $297,500

TOC = (co X D)/Roq = (360 X 150,000)/8,000 $6,750
THC = (ch X Roq)/2 = (3 X 8,000)/2 $12,000
Total Cost $316,500
There is a cost saving of $1,500 hence the discount should be
accepted.
[Total: 40 marks]

QUESTION 2

Proposal (a) will increase the sales revenue but the increase in costs will be
greater:
$000
Sales 150,000 X $7 1,050
Variable costs 750
300
Fixed costs plus advertising 164

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Net Profit 136

Proposal (a) is therefore of no value and sales must be increased by a further

7,000 units to maintain net profit:

Advertising cost $14,000/Contribution per unit $2

Additional volume required 7,000 units

Proposal (b)
 Reduces variable costs by $60,000
 But increases fixed costs by $72,000
 It is therefore not to be recommended unless the total volume increases
as a result of the policy (e.g. if the supply of the components were
previously a limiting factor)
 The increase in sales needed to maintain profit at $150,000 (assuming the
price remains at $8) would be as follows:
Reduced profits at 100,000 units $12,000
(20 marks)

QUESTION 3

a) If the transfer price is $20

Company as a
Division A Division B whole
$000 $000 $000
External sales 0 350 350
Inter-divisional
transfers 200 0 0
200 350 350
Costs
Inter-divisional
transfers 0 200 0
Other material costs 80 20 100
Other variable costs 20 30 50
Fixed costs 60 30 90
Total costs 160 280 240
Profit 40 70 110

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b) If the transfer is $25

Company as a
Division A Division B whole
$000 $000 $000
External sales 0 350 350
Inter-divisional
transfers 250 0 0
200 350 350
Costs
Inter-divisional
transfers 0 250 0
Other material costs 80 20 100
Other variable costs 20 30 50
Fixed costs 60 30 90
Total costs 160 280 240
Profit 90 20 110

Conclusions
 The choice of transfer price does not affect the profit of the organization
as a whole, provided that there is agreement on the quantity of transfer.
 However, the choice of transfer price affects the profitability of the
individual profit centres.

c) It is necessary to set a transfer price because if the part finished product

was transferred at no cost Division A would earn no income. The purpose
of setting up a divisional structure in an organization is to allow operating
unit’s autonomy to improve performance. With no income Division A
would make no profit and would effectively become a cost centre.

d) If Division A can sell the part finished product in the external market any
transfer price below this level would have to be imposed by head office.
This would remove divisional autonomy and affect managerial motivation.
An external market price is fair for the purposes of performance
evaluation and will result in goal congruence. Division B may argue that
certain savings can be made by trading internally rather than externally,

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 for example, there may be savings in packaging costs and in after sales
service. An adjusted market price may therefore be agreed.
[Total: 20 marks]

QUESTION 4

a) Initial order
If there is no guarantee of a follow-up order, the setting-up costs must be
recovered on the initial order. Costs are, therefore, as follows:
$
Material (10 X $30) 300
Labour and variable overhead (100 x$3) 300
Setting-up cost 1,000
Total 1,600
Minimum price each ($1,600 / 10) 160

b) Follow-on order
The setting-up costs have been recovered on the initial order. Output is
doubled; therefore, average time for each group of 10 machines is
reduced to 100 X 0.8 = 80 hours.
i.e. cumulative time for 20 machines = 160 hours / Time for second group
of 10 = time for first 20 – time for first 10 = 160 -100 = 60 hours

Costs are therefore:

$
Material (10 X $30) 300
Labour and variable overhead (60 x$3) 180
Total 480
Minimum price each ($480 / 10) 48

c) Both orders together

Total costs are:
$
Material 600
Labour (160 hours) 180
Setting-up cost 1,000
Total 2,080
Minimum price each 104

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 This is, of course, the mean of the two previous prices: cumulative costs
are the same but they are recorded evenly over 20 units instead of most
of the cost being ‘loaded’ onto the first 10 units.

d) Mass production

The time spent on the first 140 mass production models is calculated as
follows:
If a ‘unit’ is a batch of 10 machines, YX = a X b where
A = 100
B = log 2 / log (0.8) = -0.3219
Average time / unit for first 2 units (i.e. first 20 machines)
= 100 X 2 -0.3210 = 80 hours
Total time for first 2 units = 80 X 2 = 160 (as before)
Average time per unit for first 16 units (i.e. first 160 machines)
= 100 X 16 – 0.3129 = 40.96 hours
Total time for first 16 units = 40.96 X 16 = 655.36 hours
Hence total time for units 3 to 16 i.e. the 140 mass-produced units
= (655.36 – 160) hours = 495.36 hours
Cost of first 140 mass-production models

$
Material (140 X $30) 4,200
Labour and variable overhead (100 x$3) 1,486
Setting-up cost __250
Total 5,936
Revenue 6,300
Profit __364

[Total: 20 marks]

QUESTION 4

a) For short-term decision-making, contribution to fixed costs is often

advocated. Contribution is defined as sales less variable costs. It therefore
attempts to include only those costs and revenues that will change as a
result of a decision. Fixed costs are assumed to be unavailable to be
unavoidable and remain unchanged and irrelevant for decision making.
Ignoring fixed costs can only be justified in certain circumstances. For

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 example, the contribution approach can be applied to one time only
special orders where the company has a temporary excess supply of spare
capacity. In this situation a short-term approach can be adopted by
focusing only on the sales revenues and variable costs. The contribution
approach is also advocated for pricing off-peak business and ranking
products where limiting factors apply. In the latter situation a company
may be faced with short-term capacity constraints and profit is maximized
by ranking products by their contributions per limiting factor.

The contribution approach can only be applied when decisions have no

long-term implication. However, most decisions do have long-term
implication and in these circumstances fixed costs cannot be ignored. With
the contribution approach there is a danger that only those direct costs
that are uniquely attributable to individual products will be regarded as
relevant for decision-making. Those fixed costs relating to the joint
resources that fluctuate according to the demand for them will also be
relevant for decision-making. An ideal answer should emphasize, why in
the longer-term, fixed costs are likely to change and be relevant for
decision-making.

b) JIT and TQM in Zimbabwe

JIT is a system whose objective is to produce or procure products or
components as they are required rather than for inventory. Its
requirements include:

(i) High quality and reliability

(ii) Elimination of NVA
(iii) Speed of throughput to match demand
(iv) Flexibility
(v) Lower costs

JIT purchasing and production requires the following:

(i) Smaller lot sizes

(ii) More deliveries at lower quantities
(iii) No incoming inspection
(iv) Long term contractual relationships with key suppliers
(v) Minimal paper work
(vi) Less formal communication
(vii) The buying entity determining the quantity schedule (pull systems)

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 (viii) Supplier innovation being encouraged

Benefits of just in time purchasing and production

(i) More rapid stock turnover

(ii) Increase in ability to meet customer delivery promises
(iii) Decreased delivery lead times
(iv) Reduction in business waste (e.g. reject work)
(v) Improved product/service quality
(vi) Increased productivity

TQM (total quality management)

Evolution of quality systems

1. Inspection Detection approaches to quality

(i.e. finding and fixing problems).
These are reactive quality
mechanisms
2. Quality control

Prevention approaches to quality

3. Quality Assurance
(i.e. stop problems at source).
These are proactive quality
mechanisms

4. Total quality Management

Key Features of TQM

It aims towards an environment of zero defects at minimum cost.

(i) It involves measuring and examining all costs that are quality
related.

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 (ii) It requires awareness by all personnel of the quality requirements
involved in supplying the customer with products that meet the
agreed specification.
(iii) It is a philosophy that involves all parts of the organization and
everyone working in it.
(iv) It aims at the elimination of waste, where waste is defined as
anything other than the minimum essential amount of equipment,
materials, space and worker’s time.
(v) It must embrace all aspects of operations from pre-production to
post-production.
(vi) It involves an emphasis on supply chain thinking.
(vii) It works toward a continuous process of improvement.

Implementing TQM

The organization needs long-term commitment to constant improvement

with constancy of purpose fully supported by senior management.

(i) Adopt the philosophy of zero errors / defects to change the culture
to right first time.
(ii) Train people to understand the customer-supplier relationships.
(iii) Do not buy products and services on price alone – look at the total
cost.
(iv) Recognize that improvement in the systems must be managed.
(v) Adopt modern methods of supervision and training – eliminate
fear.
(vi) Eliminate barriers between departments by managing the process
– improve communications and teamwork.
(vii) Eliminate: arbitrary goals without methods; all standards based on
numbers; barriers to pride of workmanship; fiction – get to the
facts by using the appropriate tools.
(viii) Constantly educate and retrain – develop the ‘experts’ in the
business.
(ix) Develop a systematic approach to manage the implementation of
TQM
[Total: 20 marks]

“End of Suggested Solutions”

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