M 2010 and 2011 June PDF

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS
LICENTIATE LEVEL
L 2: Management Accounting
June 2010
December 2010
June 2011
QUESTION PAPERS AND SUGGESTED SOLUTIONS
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Table of Contents
JUNE 2010 MANAGEMENT ACCOUNTING ................................................................ 3
SUGGESTED SOLUTIONS..................................................................... 19
DECEMBER 2010 MANAGEMENT ACCOUNTING .............................................................. 38
JUNE 2011-09-01: MANAGEMENT ACCOUNTING .............................................................. 66
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CHARTERED ACCOUNTANTS EXAMINATIONS
LICENTIATE LEVEL
L2: MANAGEMENT ACCOUNTING

SERIES: JUNE 2010
TOTAL MARKS – 100
TIME ALLOWED: THREE (3) HOURS
INSTRUCTIONS TO CANDIDATES
1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so that
you understand what to do in each question. You will be told when to start writing.
2. There are SEVEN questions in this paper. You are required to attempt any FIVE questions. ALL
questions carry equal marks.
3. Enter your student number and your National Registration Card number on the front of the answer
booklet. Your name must NOT appear anywhere on your answer booklet.
4. Do NOT write in pencil (except for graphs and diagrams).
5. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and depth of the answer.
6. All workings must be done in the answer booklet.
7. Present legible and tidy work.
8. Graph paper (if required) is provided at the end of the answer booklet.
9. Present Value and Annuity Tables are attached at the end of the question paper.
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Question 1
(a) Linga Electronics are manufacturers of high quality audio amplifiers and loud speakers. The
company has recently been taken over by Mzimba Electronics International Inc. (MEII) a multi-
national company operating on all continents. Manave Wanjema of MEII has been sent to review
the budgeting and reporting systems used by Linga and finds that monthly budgets are prepared
for each department. He asks to see the last budget statement for a typical department and is
shown the statement for the loud speaker department, whose manager is J. J. Rota.
The budget statement for the last period was:-
Budget statement for November 2009
Department: Loud Speaker Department
Actual Results: 12, 500 speakers produced with 35, 350 labour hours
Actual Budget Budget
Results Results Variances
K’000 K’000 K’000
Direct materials 252 240 -12
Director labour 123 120 - 3
Variable Prod. overhead 79 72 - 7
Fixed Prod. overhead 59 56 - 3
Variable Admin. overhead 41 40 - 1
Fixed Admin. Overhead 50 48 - 2
Total costs 604 576 -28
Sales value of production 775 744 +31
Profit 171 168 + 3
Manave found that the budget was based on 12,000 units with a standard labour content of 2.85
hours and went to JJ Rota to find out his reactions to the budget and what use he makes of the
budgeting system.
Required:
(i) Evaluate the way the budget statement has been prepared. (3 marks)
(ii) Redraft the statement in a more informative manner and give an explanation of your
reasoning. (5 marks)
(b) Company Z is preparing budgets for the coming year. It has approached you to
(i) help prepare the budgets for 2010.
(ii) The following information is provided to you:-
(iii) 120, 000 labour hours will be 100% level of expected productive time.
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Budgets are required to be prepared at 90% and 120% so that cost allowances can be set for
these possible levels.
Budget cost details
1. Fixed cost per annum
K’000
Depreciation 22, 000
Staff salaries 43, 000
Insurances 9, 000
Rent and rates 12, 000
2. Variable costs
Power K0.30 per direct labour hour
Consumables K0.05 direct labour hour
Direct labour K3.50 per direct labour hour
3. Analysis of past records show the following:-
Direct labour hours Total semi-variables cost
K
2008 110, 000 330, 000
2007 100, 000 305, 000
2006 90, 000 280, 000
2005 87, 000 272, 500
2004 105, 000 317, 500
2003 80, 000 255, 000
Required:
Prepare a cost budget at 100% and flexed to show cost allowances at 90% and 120% of expected
level (12 marks)
Total: 20 marks
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Question 2
Kambis Limited makes and sells a single product, Mbilo with the following standard specifications for
materials:
Quantity Price per kilogram
Kgs K’000
Direct material R 10 30
Director material S 6 45
It takes 30 direct labour hours to produce one unit of Mbilo with a standard direct labour cost of
K5, 500 per hour.
The annual sales/production budget is 1, 200 units evenly spread throughout the year.
The budgeted production overhead, all fixed, is K252, 000, 000 and expenditure is expected to occur
evenly over the year, which the company divides into twelve calendar months . Absorption is based on
units produced.
For the month of October 2009, the following actual information is provided. The budgeted sales quantity
for the month was sold at the standard selling price.
K’000 K’000
Sales 120, 000
Direct material used 58, 136
Direct wages 17, 325
Fixed production overhead 22, 000
Cost of sales 97, 461
Gross profit 22, 539
Administration costs 6, 000
Selling and distribution costs 11, 000
17, 000
Net profit 5 ,539
Costs of opening stocks, for each material, were at the same price per kilogram as the purchases made
during the month, but there had been changes in the materials inventory levels, viz:
1st October 30th October
Kgs Kgs
Material R 300 375
Material S 460 225
Material R purchases were 1, 100 Kgs for K35, 000, 000.
Material S purchases were 345 Kgs for K15, 180, 000.
The number of direct labour hours worked was 3, 300 and total wages incurred K17, 325, 000.
Work-in-progress stocks and finished goods stocks may be assumed to be the same at the beginning
and end of October.
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Required:
(a) Present a standard product cost for one unit of product Mbilo showing the standard selling price
and standard gross profit per unit. (5 marks)
(b) Calculate appropriate variances for materials, labour and fixed production overhead, noting that it
is company policy to calculate material price variances at time of issue to production.(5 marks)
(c) Present a statement for management reconciling the budgeted gross profit with the actual gross
profit.
(6 marks)
(d) Suggest a possible cause for each of the labour variances you calculated under (b) above, stating
whether you believe each variance was controllable or uncontrollable. (4 marks)
Total: 20 marks
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Question 3
The Board of Directors of Nshimbi Plc, manufacturers of three products A, B and C have asked for
advice on the production mix of the company.
Required:
(a) You are required to prepare a statement to advise the directors on the most profitable mix of the
products to be made and sold.
The statement should show:
(i) The profit expected on the current budgeted production and, (5 marks)
(ii) The profit which could be expected if the most profitable mix was produced.(5 marks)
(b) Direct to the attention of the management those problems that you foresee if the mix in (a) (ii)
above were to be produced. (10 marks)
The following information is available:
Product A Product B Product C
Standard product costs K’000 K’000 K’000
Direct materials 10 30 20
Variable overhead 3 2 5
Direct labour- Dept 1 28 hrs 16 hrs 30 hrs
Dept 2 5 hrs 6 hrs 10 hrs
Dept 3 16 hrs 8 hrs 30 hrs
Direct labour rate per hour:
Dept 1 K 2, 500
Dept 2 K 3, 000
Dept 3 K 2, 500
Data from current budget

Production in 000s
units per year 10 5 6
Selling price per unit K 148, 000 K 128, 000 K 230, 000
Fixed overheads for the year K200, 000, 000
Forecast by the sales director of maximum sales for next year in 000s units
12 7 9
The type of labour required by department 2 is in short supply and it is not possible to increase the
manpower of this department beyond its present level.
(Total: 20 0marks)
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Question 4
The following information relates to BETTER BOOKS LIMITED, a publishing company.

The selling price of a book is K15, 000 and sales are made on credit through a book club and invoiced on
the last day of the month.
Variable costs of production per book are materials (K5, 000), labour (K4,000), and overhead (K2,000).
The sales manager has forecast the following volumes
Nov. Dec. Jan. Feb. Mar. April May June July Aug.
No of books 1,000 1,000 1,000 1, 250 1,500 2,000 1,900 2, 200 2, 200 2,300
Customers are expected to pay as follows:
□ One month after the sale 40%
□ Two months after the sale 60%
The company produces the books two months before they are sold and the creditors for materials are
paid two months after production.
Variable overheads are paid in the month following production and are expected to increase by 25% in
April, 75% of wages are paid in the month of production and 25% in the following month. A wage
increase of 12.5% will take place on 1st March.
The company is going through a restructuring and will sell one of its freehold properties in May for K25,
000, 000, but it is also planning to buy a new printing press in May for K10, 000, 000. Depreciation is
currently K1, 000, 000 per month and will rise to K1, 500 000 after the purchase of the new machine.
The company’s corporation tax (of K10, 0000, 000) is due for payment in March.
The company presently has a cash balance at bank on 31st December 2008 of K1, 500, 000.
Required:
(a) Produce a cash budget for the six months from January to June, 2009. (15 marks)
(b) Differentiate between incremental budgeting and rolling budget system. (5 marks)
(Total: 20 marks)
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Question 5
(a) “Accounting information is often an important input to pricing decisions. Organizations that sell
products or services that are highly customized or differentiated from each other by special
features, or who are market leaders have some discretion in setting selling prices”.
Required:
(i) Outline at least three factors which influence the price of a product and, (3 marks)
(ii) Describe the system of cost-plus pricing and state its limitations. (3 marks)
(b) Fosters enterprises, a small business entity has recently started up in precision engineering, using
expensive machinery to produce components made to specific orders. Prices are being quoted on
the basis of estimated total factory cost for each job plus a mark up of 100% to cover all
administration /selling costs and profit.
The production budget for the current year includes the following data:
Total factory overheads K 500, 000
Direct material usage K1, 000, 000
Direct labour (at K4 per hour) K 200, 000
Machine hours 100, 000
The estimated costs and times for job No 2 are as follows:
Direct material K1, 000
Direct labour hours (at K4.50 per hour) 60
Machine hours 72
Required:
(i) Calculate two (2) possible price quotations for job No. 2, using machine hours and labour
hours as basis for factory overhead absorption. Show details of your calculations. (3 marks)
(ii) State which basis should be used under the circumstances above and give a reason for
your choice. (1 mark)
(c) The owners of a chain of retail petrol stations are considering opening an additional station in the
outskirts of Lusaka. Initially one grade of petrol only would be sold and the normal selling price
would be K4,400 per litre. The variable charges are made of cost of petrol, delivery and excise
duty
− Total K4,000 per litre.
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The fixed costs for a 4-week period are estimated to be:
K’000
Rent 2,000
Rates on business premises 1,000
Wages – 5 people on shifts 3,000
Wage-related costs 400
Electricity for continuous opening (24 hours) 300
Other fixed costs 110
After establishing the site for petrol it is intended at a later stage to develop on the same site a
‘motorist shop’ selling the numerous small sundry items often required by motorists. There would
be no increase in staff and one cash till only would be operated. (Ignore VAT in this question).
Required:
(i) To calculate the breakeven point in number of litres and also in K’000 for a four week period
under the following options:-
(1) The above costs applied,
(2) The rent was increased by 75%,
(3) The rent remained at K2,000,000 but commission of K200 was given to the
employees as a group bonus for every litre sold, and
(4) The selling price was reduced to K4,300 and no commission was paid (with the rent at
K2,000,000) (8 marks)
(ii) To state how many litres would need to be sold per four week period at K4,400 if costs
were as in the original data (that is, with rent at K2,000,000) to achieve a profit of K700,000
per week. (2 marks)
Total: 20 marks
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Question 6
(a) State at least 4 factors upon which long-term future investments decisions are made on.
(2 marks)
(b) AMALORIES Ltd were considering buying an additional lorry but the company had not yet decided
which particular lorry to purchase. The lorries had broadly similar technical specifications and each
was expected to have a working life of five years. The following information was available on the
lorries being considered.
(1) LORRIES
BN FX VR
Sandmaster Rainmaster Speedmaster
Purchase price K40,000,000 K45,000,000 K50,000,000
Estimated scrap value
After 5 years K8,000,000 K9,000,000 K14,000,000
Fixed costs other than depreciation
K’000 K’000 K’000
Year 1 2,000 1,800 1,500
Year 2 2,000 1,800 1,500
Year 3 2,200 1,800 1,400
Year 4 2,400 2,000 1,400
Year 5 2,000 2,200 1,400
Variable cost/road kilometre K0.06 K0.08 K0.07
The company charges K0.25 per kilometre for all journeys irrespective of the length of journey and
the expected annual kilometreage over the five year period are;
Kilometres
Year 1 50,000,000
Year 2 60,000,000
Year 3 80,000,000
Year 4 80,000,000
Year 5 80,000,000
1. The company’s cost of capital is 10% per annum.
2. It should be assumed that all operating costs are paid and revenues received at the end of
year.
Required:
(i) Compute the Net Present Value for each of the lorries under consideration. (9 marks)
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(ii) A report to the director of Amalories Ltd advising them as to which specific lorry should be
purchased. (Include in your report the payback periods). (6 marks)
(iii) Outline the problems encountered in evaluating capital projects. (3 marks)
(Total 20 marks)
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Question 7
(a) “Information produced by a management accounting system should be useful to management; if
not, it has no value”.
Required:
(i) Explain why a company should use a system of management accounts (3 marks)
(ii) List five (5) limitations of financial accounts as an information base to management.
(5 marks)
(b) “Information for decision making should always be relevant”.
Required:
Explain the key features of relevant costs and incomes for decision making. (2 marks)
(c) A firm is considering whether to continue the work on an existing contract or to terminate it now
and pay an agreed penalty of K70, 000, 000 to the client. This is being considered because the
penalty is less than the anticipated contract loss.
The following summary has been prepared:
K’000 K’000
Expenditure to date 130,000
Estimated future costs to completion in one (1) year’s time
Material 60, 000
Staffing 30, 000
Overheads 60 ,000
150 ,000
Estimated total cost 280,000
Contract value 200,000
Estimated loss on contract 80,000
The following information is also available:
Material
Contracts have been exchanged for the purchase of the K60, 000, 000 material. This is special
purpose material which has no alternative use. If not used on this contract it will incur disposal
costs of K10, 000, 000.
Staffing
Two specialists are employed on the contract each at K12, 500, 000 p.a. If the contract was
terminated now they would each receive K7,000, 000 redundancy pay. The other
K5, 000,000 staffing cost is the allocated cost for a supervisor who is also in charge of several
other contracts.
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Overheads
The K60, 000, 000 comprises K20, 000, 000 specific to the contract and K40, 000, 000 general
fixed overheads allocated to the contract.
Required:
Prepare relevant financial information so that the firm can decide whether or not to abandon the
contract. (10 marks)
(Total: 20 marks)
END OF PAPER
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JUNE 2010
SUGGESTED SOLUTIONS
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Solution 1
(a) (i) The budget has been rightly prepared for each department as this will show the department’s
contribution’s towards achieving the overall objectives of the organisation. However, when
preparing the department’s budget, the changes in level of output and how each cost
element behaves have not been considered. The original budget of 12 000 speakers is
being compared to the actual results of 12 500 speakers.
It should be apparent that the accuracy of the budget and consequent variances, is entirely
dependent on the accuracy of the original cost analysis into fixed, semi and variable costs.
(ii) Redrafted Budget Statement (November, 2009)

Department: Lund Speaker Department
Flexed Budget
for 12 500 Actual
speakers results Variance
K’000 K’000 K’000 K’000 K’000

Sales (12 500 x 62) 775 775
Less: Direct Materials 250 252 −2
Direct labour 125 123 +2
Variable Prod. Overhead 75 79 −4
Fixed Prod. Overhead 56 59 −3
Variable Admin. Overhead 42 41 +1
Fixed Admin. Overhead 48 50 −2
Total Production Costs 596 604 −8
Profit 179 171 −8
Assumptions
● Direct materials, direct labour, variable production overhead and variable administration
overheads costs all vary with the level of output.
● Fixed production overhead and fixed administration overhead are all fixed costs.
(b) Workings to find the fixed and variable elements of labour costs using the high/low technique.
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Direct Labour Total cost Variable Fixed
K K K
High 110 000 330 000 275 000 55 000
Low 80 000 255 000 200 000 55 000
Difference 30 000 75 000
Variable element; K2.50 per direct labour hour.
Activity Level Flexible Budgets
90% 100% 120%
K K K
Depreciation 22 000 22 000 22 000
Staff salaries 43 000 43 000 43 000
Insurances 9 000 9 000 9 000
Rent and rates 12 000 12 000 12 000
Power 32 400 36 000 43 200
Consumables 5 400 6 000 7 200
Direct labour 378 000 420 000 504 000
Semi-variable
Fixed element 55 000 55 000 55 000
Variable element 270 000 300 000 360 000
Total 826 800 903 000 1 055 400
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Solution 2
(a) Standard Product Cost/Profit
Product Mbilo
K’000 K’000
Selling price 1 200
Direct materials
R: 10Kg × K30 000 300
S: 6Kg × K45 000 270
Direct labour
30 × K5 500 165
Prime cost 735
 K252,000,000 
Production overhead   210
 1,200 
Total production cost 945
Standard profit 255
(b) Variances
Direct Materials – Material R
K’000 K’000
Actual issues at actual price
1 025Kg × K31 820 32 616 Price
Actual issues at standard price = K1 866 ADV
1 025Kg × K30 000 30 750

Standard usage at std. price Usage
100 × 10Kg × k30,000 30 000 K750 ADV

Direct Materials – Material S
K’000 K’000
Actual issue at actual price
580Kg × K44 000 25 520 price
Actual issue at std. price K580 FAV

580Kg × K45 000 26 100
Standard usage at std. price usage

100 × 6Kg × K45 000 27 000 K900 FAV
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Direct labour
K’000 K’000
Actual wages 17 325 Rate
K825 FAV
Actual hours at std. rate
(3 300 × K5 500) 18 150 Efficiency
Standard hours at std. K1 650 ADV
Rate (100 × 30 × K5 500) 16 500
Fixed Overheads
K’000
Actual cost 22 000 Expenditure
Budgeted cost 21 000 K1 000 ADV
Actual hours at Volume Capacity
OAR (3 300 X K7 000) 23 100 K2 100 FAV
Standard hours of production @ Efficiency
OAR (100 x 30 x K7 000) 21 000 K2 100 ADV
(c) Statement of Reconciliation

K’000 K’000 K’000
Budgeted gross profit 25 500
Operating variances: (F) (A)
Material price R 1 866
Material price S 580
Material usage R 750
Material usage S 900
Direct labour rate 825
Efficiency 1 650
Fixed overheads
Expenditure 1 000
Efficiency 2 100
Volume Capacity 2 100
4 405 7 366 2 961 A
Actual gross profit 22 539
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(d) Labour Variances
Rate K825 000 (F) − Controllable
− Possibly caused by reduced bonus
Efficiency K1 650 000 (F) − 300 hrs (A)
− Controllable
− Possibly caused by poor training
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Solution 3
(a) (i) Present situation
A B C Total
K’000 K’000 K’000
Direct material 10 30 20
Variable overhead 3 2 5
Direct labour – Dept 1 (28) 70 (16) 40 (30) 75
Dept 2 ( 5) 15 ( 6) 18 (10) 30
Dept 3 (16) 40 ( 8) 20 (30) 75
Total variable cost 138 110 205
Selling price 148 128 230
Contribution 10 18 25
Rank (3) (2) (1)
Quantity 10 000 5 000 6 000
Total contribution K100 000 K90 000 K150 000 K340 000
Less; fixed costs K200 000
Profit K140 000
(ii) Expected Mixture Profit
A B C Total
Present Department 2 hours 10 000 5 000 6 000
× 5 × 6 × 10
= 50 000 30 000 60 000 140 000
Maximum demand 12 000 7 000 9 000
× 5 × 6 × 10
Required hours = 60 000 42 000 90 000 192 000
Contribution per department 2 hours
K’000 K’000 K’000 Total
10 18 25
÷5 ÷6 ÷10
K2 K3 K2.5
Rank (3) (1) (2)
Balance
∴Allocated hours 8 000 42 000 90 000
Output 1 600 7 000 9 000
Total contribution K16 000 K126 000 K225 000 K367 000
Less fixed costs K200 000
Profit K167 000
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(b) Possible problems:
(i) Long-term versus short-term considerations:
− Are products A, B, and C interdependent? This will cause such problems as customers
of A going elsewhere hence taking potential orders for B and C with them.
− If products A, B and C are completely interdependent, will sales demand hold up for B
and C if A is not produced in sufficient quantities.
(ii) Effect on labour (check this)

Present Proposed
Dept 1 K’000 K’000
A 10 000 × 28 =280 000 1 600 × 28 = 44 800
B 5 000 × 16 = 80 000 7 000 × 16 = 112 000
C 6 000 × 30 =180 000 9 000 × 30 = 270 000
540 000 426 800
Reduction (540,000 – 426,000) 113 200
Dept 3
A 10 000 × 16 =160 000 1 600 × 16 = 25 600
B 5 000 × 8 = 40 000 7 000 × 8 = 56 000
C 6 000 × 30 =180 000 9 000 × 30 = 270 000
380 000 351 600
Reduction (380,000 – 351,600) 28 400
Could the redundant labour from dept 1 and 3 be retrained for use in dept 2? If they
cannot, be retained, they will have to be paid and the costs will reduce the profit shown
in part (a) (ii).
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Solution 4
(a) Cash Budget for the Six Months
January – June 2009
Jan. Feb. March April May June
Income K’000 K’000 K’000 K’000 K’000 K’000
Freehold property 25 000
Sales (W1) 15 000 15 000 16 500 20 250 25 500 29 400
15 000 15 000 16 500 20 250 50 500 29 400
Payments
Tax 10 000
Printing 10 000
Materials 5 000 6 250 7 500 10 000 9 500 11 000
Labour 5 750 7 500 8 412 9 563 9 900 10 237
Overheads 2 500 3 000 4 000 3 800 5 500 5 500
13 250 16 750 29 912 23 363 34 900 26 737
Opening bal. 1 500 3 250 1 500 (11 912) (15 025) 575
Closing bal. 3 250 1 500 (11 912) (15 025) 575 3 238
Workings 1
Sales
Nov. Dec. Jan. Feb. March April May June July
K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000
15 000 15 000 15 000 18 750 22 500 30 000 28 500 33 000
● Sales (Units × k15 000) per month
i.e. Nov. − 1 000 × 15 000 = 15 000 000
Dec. − 1 000 × 15 000 = 15 000 000
Jan. − 1 000 × 15 000 = 15 000 000
Feb. − 1 250 × 15000 = 18 750 000 etc.
.: Receipts from customers
Jan. (K’000)
40% (15 000) Dec. sales 6 000
60% (15 000) Nov. sales 9 000
15 000
Feb. (K’000)
40% (Jan. Sales) 6 000
60% (Dec. Sales) 9 000
15 000
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March (K’000)
40% (Feb. Sales) 7 500
60% (Jan. Sales) 9 000
16 500
April (K’000)
40% (March Sales) 9 000
60% (Feb. Sales) 11 250
20 250
May (K’000)
40% (April Sales) 12 000
60% (March Sales) 13 500
25 500
June (K’000)
40% (May Sales) 11 400
60% (April Sales) 18 000
29 400
Workings 2
Production is as follows:
Nov. Dec. Jan. Feb. March April May June
Units 1 000 1 250 1 500 2 000 1 900 2 200 2 200 2 300
(Note sales are after 2 months after production)
Costs
Material K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000
(Units × K5 000)
5 000 6 250 7 500 10 000 9 500 11 000 11 000 11 50
.: Payments are:
K’000
November costs are paid in January (K 5 000)
December costs paid in February (K 6 250)
January costs paid in March (K 7 500)
Labour costs (Units x K4 500)
Incurred in Nov. Dec. Jan. Feb. March April May June
K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000
are 4 000 5 000 6 000 8 000 8 550 9 900 9 900 10 350
.: Payments are:
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(75% paid in month of production) and
(25% paid the following month)
January (K’000) March (K’000)
75% of Jan. (K6 000) = 4 500 75% (of March) 6 412.5
25% of Dec. (K5 000) = 1 250 25% (Feb.) 2 000
5 750 8 412.5
Feb. K’000 April K’000
75% of Feb. (8 000) 6 000 75% (April) 7 425
25% of Jan. (6 000) 1 500 25% (March) 2 137.5
7 500 9 562
May K’000 June K’000
75% (May) 7 425 75% (June) 7 762.5
25% (April) 2 475 25%(May) 2 475
9 900 10 237.6
(Note an increase of 12.5% in March)
Variable Overheads (Units × K2 500)
Nov. Dec. Jan. Feb. March April May June July
K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000 K’000
2 000 2 500 3 000 4 000 3 800 5 500 5 500 5 750
(Note an increase of 25% in April)
∴ Payments are as follows:
K’000
November overheads = payable in December 2 000
December overheads = payable in January 2 500
January overheads = payable in February 3 000 etc
(b) Increamental budgeting is a traditional approach widely used in commercial organisations and
public sector. It bases the next year’s budget on the current year’s results plus extra amount for
estimated growth or inflation allowing for specific changes while a rolling budget is a budget which
is continuously updated by adding a further period say a month or a quarter and deducting the
earliest period. It attempts to prepare targets and plans which are more realistic and certain
particularly with regard to price levels by shortening the period between preparing budgets.
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Solution 5
(a) (i) Factors which influence the price of a product are:-
● Organisational goals – like any other decision making process, consideration of the
organization objectives is the first step in setting suitable prices.
● Price/demand relationship – for most products, at higher prices the demand for the
product is low and as the price is reduced, the quantity demanded increases.
Knowledge of this is important for setting the price for the product.
● Competitors and markets – it is important to consider the possible reaction from
competitors when setting prices.
● Product life cycle
● Costs
● Marketing strategy etc. (Any 3 of the above)
(ii) Cost plus pricing system – is a method of determining the sales price by calculating the full
cost of the product and adding a percentage mark-up for profit.
The full cost may be a fully absorbed production cost only or it may include some absorbed
administration, selling and distribution overhead.
The method is common in industries that carry out contract or jobbing work for which
quotations are regularly prepared for individual jobs or contracts.
Limitations of cost-plus pricing
1 Demand is ignored
The price is set by adding a mark-up to cost, and this may bear no relationship to the
price demand relationship.
2 It is often claimed that cost – based pricing formulae serve as a pricing ‘floor’ shielding
the seller from a loss, however, this argument is incorrect since it is quite possible for a
firm to lose money even though every product is priced higher than the estimated unit
cost (when sales demand falls below the activity level that was used to calculate the
fixed cost per unit, the sales revenue may be insufficient to cover the total fixed costs).
3 It ignores the existence of a profit maximizing price.
4 It causes problems of finding a suitable overhead absorption basis
5 It is difficult to accurately establish budgeted output (needed when calculating OAR).
(b) (i) Absorption rates
OAR = Total overhead
Total bugeted level of activity
OAR per labour hour = 500,000 = K10/labour hour
50,000
OAR per machine hour = 500,000 = K5/machine hour
100,000
30
Price Quotations for Job No. 2
Using labour hour basis:
K
Direct material 1 000
Direct labour (60 × K4.50) 270
Prime cost 1 270
Factory overheads
(60 × K10/labour hr) 600
Factory cost 1 870
+ 100% mark-up 1 870
Selling price K 3 740
Using machine hour basis:
K
Prime cost 1 270
Factory overhead (72 × K5) 360
Factory cost 1 630
+ 100% mark-up 1 630
Selling price K 3 260
(ii) The machine hour basis is likely to be the most appropriate as there is expensive machinery
which will account for much of the overheads.
(a) Option 1
Fixed costs = K6,810,000
BEP sales in litres = Fixed cost
Contribution/unit
= K6,810,000
K4,400 - K4,000
= 17025 litres
BEP sales in revenue = 17,025 × K4,400
= K74,910,000
Option 2
Fixed cost increase by K1,500,000
Therefore BEP sales in litres = 17,025 + 1,500,000
K400/litre
= 20,775 litres
31
BEP sales in revenue= 20,775 × K4,400 = K91,410,000
Option 3
Contribution per litre becomes K3,800
Therefore BEP (Sales in litres) = K6,810,000
34,050
BEP Sales revenue = 34,050 × K4,400 = K149,820,000
Option 4
Fixed costs = K6,810,000
Contribution/unit = K4,300 – K4,000 = K100/litre
Therefore BEP in litres = K6,810,000

K100/litre
= 68,100 litres
In sales value = 68,100 × K4,300 = K292,830,000
(i) Litres required to meet target profit
Fixed cost + target profit
=
Contribution/unit
K6,810,000 + (K700,000 × 4) K9,610,000

= =
K4,400 - K4,000 K4,400/lite
= 24,025 litres
32
Solution 6
(a) Long-term future investments decisions are based on
(i) the sum to be invested in a capital project.
(ii) the estimated returns from the projects
(iii) the length of time the project is expected to last
(iv) the economic conditions prevailing at the time e.g. the rates of bank interest to borrow
(b) (i) BN
SANDMASTER
Year 0 1 2 3 4 5
K’000 K’000 K’000 K’000 K’000 K’000
Cash inflow 12,500 15,000 20,000 20,000 20,000
Less:
Cash outflow:
Fixed 2,000 2,000 2,200 2,400 2,000
Variable 3,000 3,600 4,800 4,800 4,800
Operating cashflow 7,500 9,400 13,000 12,800 13,200
Capital 40,000 8,000
40,000 7,500 9,400 13,000 12,800 21,200
Discount factor 1.0 0.909 0.826 0.751 0.683 0.621
Present Value (40,000) 6,817 7,764 9,763 8,742 13,165
NPV = K6,251,000 (positive)
FX
RAINMASTER
Year 0 1 2 3 4 5
K’000 K’000 K’000 K’000 K’000 K’000
Cash inflow 12,500 15,000 20,000 20,000 20,000
Less cash outflow
Fixed 1,800 1,800 1,800 2,000 2,200
Variable 4,000 4,800 6,400 6,400 6,400
Operating cashflow 6,700 8,400 11,800 11,600 11,400
Capital 45,000 9,000
45,000 6,700 8,400 11,800 11,600 20,400
Discount factor 1.0 0.909 0.826 0.751 0.683 0.621
(45,000) 6,090 6,938 8,862 7,923 12,668
NPV = K2,519,000 (Negative)
33
VR
SPEEDMSTER
Year 0 1 2 3 4 5
K’000 K’000 K’000 K’000 K’000 K’000
Cash inflow 12,500 15,000 20,000 20,000 20,000
Less Cash outflow
Fixed 1,500 1,500 1,400 1,400 1,400
Variable 3,500 4,200 5,600 5,600 5,600
7,500 9,300 13,000 13,000 13,000
Capital 50,000 14,000
50,000 7,500 9,300 13,000 13,000 27,000
Discount factor 1.0 0.909 0.826 0.751 0.683 0.621
50,000 6,817 7,682 9,763 8,879 16,767
NPV = K92,000 (Negative)
(ii) REPORT
TO: THE DIRECTORS OF AMALORIES LTD
RE: THE NPV REVIEW OF LORRIES
ThE NPV anticipated for three lorries is as follows;
BN SANDMASTER K6,251,000 positive
FX RAINMASTER K2,519,000 negative
VR SPEEDMASTER K92,000 negative
On the basis of NPV assessment using a discount rate of 10%, the BN SANDMASTER
Appears to be the best option.
The payback position on the three vehicles is as follows;
BN 3 years 9.3 months
FX 4 years 3.8 months
VR 4 years 3.2 months
This indicates that the BN SANDMASTER recovers the cash outlay faster that the other two
options which is in its favour.
Since the capital outlay on the BN is also significantly lower than the other options this
indicates a lower risk and therefore BN appears to be the best choice.
34
(iii) Problems in evaluating capital projects are;
− forecasting of revenues and costs (methods used)
− Some other factors in decision making may not be readily quantified (e.g. environmental
concerns)
− New technology need to be quantified as well or taken into consideration (not known)
− Cost of capital need to be considered highly in relation to risks.
35
Solution 7
Points to consider
(a) (i) − Management accounts can be tailor made to suit the needs of the business.
− Management accounts are not subject to audit, so information can be prepared more
quickly.
− Management accounts contain budgets, which can be used to control a company’s
activities.
(ii) Limitations of financial accounts include among others:

□ Financial accounts do not give a break-down of profits over product, location type etc
□ Financial accounts are historical
□ Financial accounts do not give any indication of performance
□ Financial accounts are subject to legal and regulatory constraints
□ Financial accounts do not give any indication of future prospects.
(b) Key features of relevant costs and incomes are:

(i) Future costs and revenues – decision making is concerned with the future therefore past
cost and revenues are irrelevant.
(ii) Differential costs and incomes – those that will alter as a result of the decision. They are
costs which may be avoided or revenues foregone or opportunity cost, if the particular
alternative is not adopted.
(c) Relevant benefits of continuation Notes
K’000
Contract 200 000
*Penalty saved 70 000 1
*Material disposal costs
Saved 10 000 2
280 000
Relevant costs of continuation are:
K’000
*Staff 11 000 3
*Overheads 20 000 4
31 000
.: Net benefit from continuation
= K280 000 000 – K31 000 000 = K249 000 000.
Recommendation:
Contract should be continued to completion.
36
Note 1 If the contract is continued the firm will not have to pay the penalty of K70 000 000. This is
therefore a benefit of continuation.
2 If the material is used on the contract, the K10 000 000 disposal costs will be saved. K60 000
000 is incurred whether or not the contract continues, so it is irrelevant to the decision being
considered.
3 The staff will cost K25 000 000 if the contract is continued but their redundancy pay will be
saved.
(K25 000 000 – K14 000 000 = K11 000 000)
K5 000 000 allocated cost is not relevant as the supervisor will continue to be paid whether or
not the contract continues.
4 The K20 000 000 overheads specific to the contract are avoidable and therefore relevant. The
allocated fixed costs are not relevant.
5 The expenditure to-date of K130 000 000 is a sunk cost and is not relevant for the decision at
hand.
37
LICENTIATE LEVEL
SERIES: DECEMBER 2010
TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS
1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so that
you understand what to do in each question. You will be told when to start writing.
2. There are seven (7) questions in this paper. You are required to attempt any five (5) questions. All
3. Enter your student number and your National Registration Card number on the front of the answer
5. The marks shown against the requirement(s) for each question would be taken as an indication of
the expected length and depth of the answer.
38
Question 1
(a) You are the management accountant at ABC Chemicals Ltd which makes a single product, A.
Product A is sold in 5 litre tins.
One of your responsibilities is to prepare a report each month for the management team comparing
the actual cost of production with its standard cost of production. The printout for November 2010
is reproduced below.
ABC Chemicals Ltd – Production report for November 2010

Number of tins of Budgeted production Actual production
Product A 1,750 1,700
Input Units of input Standard Standard cost Standard cost of Actual cost Actual cost
cost per unit per tin of A Budgeted per unit of of
of input production input production
K K K K K
Material 5 litres 4,000 20,000 35,000,000 4,020 33,828,300
Labour 10 hours 600 6,000 10,500,000 590 11,033,000
FOH* 10 hours 2,400 24,000 42,000,000 41,000,000
50,000 87,500,000 85,861,300
* FOH = Fixed Overheads
Required:
1. Calculate the following.

(i) Actual litres of materials used. (1 mark)
(ii) Actual hours worked in November 2010. (1 mark)
(iii) Standard litres of material which should have been used to produce 1,700 tins of A.
(1 mark)
(iv) Standard number of labour hours that should have been worked in producing 1,700
tins of A. (1 mark)
(v) Standard hours of fixed overheads charged to the budgeted production of 1,750 tins of
A. (1 mark)
(vi) Standard hours of fixed overheads charged to the actual production of 1,700 tins of A.
(1 mark)
2. Calculate the following variances, making use of the answers in part (i).
(i) Material price and material usage variance (1 mark)
(ii) Labour rate and labour efficiency variance (1 mark)
39
(iii) Fixed overhead expenditure and fixed overhead volume variances (1 mark)
(iv) Fixed overhead capacity variance and fixed overhead efficiency variance
(2 marks)
3. Prepare a report reconciling the standard cost of actual production to the actual cost of actual
production. (3 marks)
(b) Give THREE separate reasons why Product A production might result in a favourable material
usage
variance. (3 marks)
(c) It seems unnecessary to investigate favourable variances. Favourable variances improve
profitability and should be encouraged. Only adverse variances should be investigated.
Briefly discuss whether or not a favourable material usage variance should be investigated.
(3 marks)
(Total: 20 marks)
40
Question 2
Tiyeseko plc produces two products, T1 and T2 which use the same machines. These machines are X1
and X2 and they can only work on one product at a time.
In quarter 1 maximum time available on the machines are 252 hours on X1 and 390 hours on X2. The
machine time needed to make one unit of T1 and T2 is:
T1 T2
Machine type X1 0.70 hrs 0.80 hrs
Machine type X2 1.20 hrs 1.30 hrs
T1 T2
K/unit K/unit
Selling price 72,000 78,000
Direct materials 28,400 33,500
Direct labour 12,000 15,000
Variable production overhead 2,000 2,500
Fixed Production Overheads 4,000 5,000
Profit per unit 25,600 22,000
Any mix of output can be sold at the above prices and there is unlimited demand for each of the
products. All output is sold.
Required:
(a) Calculate the maximum production that is possible from each machine for T1 and T2 and identify
the bottleneck. (4 marks)
(b) Using traditional marginal costing contribution analysis, calculate the maximizing output in quarter
1 and the maximizing contribution at this level of output. (4 marks)
(c) Using the throughput approach, calculate the maximizing output in quarter 1 and the throughput
contribution at this level of output. (5 marks
(d) Calculate the throughput accounting ratio for each product. (4 marks)
(e) Explain THREE actions that can be considered to improve the throughput accounting ratio.
(3 marks)
(Total: 20 marks)
41
Question 3
Choma Plc makes and sells two types of products, A and B. The company currently has a monopoly for
both products.
The Management Director is considering increasing the price for Product A and has produced the
following information:
At the current selling price of K110 per unit, weekly sales of Product A are 1,800 units.
If the price is increased to K140 per unit, weekly demand for Product A will fall to 1,500 units
Product B is sold in two distinct markets. The Management Director believes that there should be price
discrimination. The price is currently K160 per unit in either market.
Required:
(a) Explain the term ‘price discrimination’ and discuss the conditions that are necessary for the
successful operation of this pricing strategy. (4 marks)
(b) Find the linear relationship between price (P) and quantity demanded (Q) for product A, i.e. derive
the price/demand equation. (3 marks)
(c) Calculate the price elasticity of demand (PED) for product A and comment on whether the revenue
will increase or decrease if the price is increased from K110 to K140 per product. (to one decimal
place). (3 marks)
(d) As a Management Accountant, write a report to the Management Director to explain how the
pricing strategy may change if new competitors enter the market. Include, as part of your answer, a
discussion of the different pricing strategies that may be implemented by Choma Plc or its
competitors. (10 marks)
(Total: 20 marks)
42
Question 4
For some time the G4U Company has sold its entire output of canned goods to supermarket chains
which sell them as ‘own label’ products. One advantage of this arrangement is that G4U incurs no
marketing costs, but there is continued pressure from the chain on price, and margins are tight. As a
consequence, G4U is considering selling some of its output under the G4U brand. Margins will be better
but there will be substantial marketing costs.
The following information is available.
Current year’s results – 2010 Forecast for 2011

(adjust to 2011 cost levels) (Assuming all ‘own label’ sales)
Sales (millions of cans) 18 19
K’million K’million
Sales 594 627
Manufacturing costs 430 445
Administration costs 120 120
Profit 44 62
For 2011 the unit contribution on G4U brand sales is expected to be 33Error! Bookmark not
defined.⅓% greater than ‘own label’ sales, but variable marketing costs of K2 million per can and fixed
marketing costs of K40 million will be incurred.
Required:
(a) Calculate contribution per can and total contribution for 2011 assuming that all sales will be G4U
brand. (7 marks)
(b) Prepare a contribution breakeven chart for 2011 assuming that 50% of sales are ‘own label’ and
50% are of the G4U brand.
Note. The breakeven point and margin of safety must be shown clearly on the chart.
(9 marks)
(c) (i) Comment on the positions shown by the chart and your calculation. (2 marks)
(ii) Discuss what other factors management should consider before making a decision
(2 marks)
(Total: 20 marks)
43
Question 5
Zambezi Ltd manufactures a line of four related products in a single factory which is currently operating
below capacity. Annual sales and costs of the products are shown below.
W X Y Z Total
Products K’000 K’000 K’000 K’000 K’000
Sales 2,000 2,500 1,000 500 6,000
Factory costs of sales:
Materials 300 400 200 40 940
Labour 500 600 400 100 1,600
Overhead 600 800 500 100 2,000
1,400 1,800 1,100 240 4,540
Gross margin 600 700 (100) 260 1,460
Selling overheads 300 375 150 75 900
Operating profit/ (loss) 300 325 (250) 185 560
The factory overhead costs allocated to products are based on predetermined overhead rates of which
40% is estimated to be variable at the current operating volume. Selling overheads are applied to
products based on 15% of sales value, the variable component of this being approximately 5% of sales.
The loss being reported in the above table against product Y is indicative of recent results and has led
the management to consider its withdrawal. It is estimated that if Product Y were to be withdrawn a
saving of fixed factory and selling costs of K100,000 would occur.
Required:
(a) Determine whether, on financial grounds, Y should be withdrawn. Briefly explain and qualify your
answer. (7 marks)
(b) The Managing Director has said that he believes in the long run a product that does not cover its
costs should be retained.
(i) Explain whether it is conceivable that in the long run it might be profitable to keep Product Y
in the product line. (3 marks)
(ii) Describe the circumstances in which it would be appropriate to consider dropping product Y.
(3 marks)
44
(c) Following some further enquiries, the following has been established.
Product Z may in some cases be a substitute for Y. If Y were to be withdrawn, sales of Z would
increase by K300,000. Products W and Y are complimentary. 20% of Y is sold in conjunction with
W. These customers would not be able to substitute Z for Y and would be likely to move to other
companies for their supplies if product Y is dropped. As a consequence sales of W would drop by
10% if Product Y were to be withdrawn completely.
In the light of this new information, determine whether product Y should be continued or withdrawn
completely. Briefly explain your answer. (7 marks)
(Total: 20 marks)
45
Question 6
Acenol Fabagas Plc operates in a dynamic, fast changing and complex market environment. To cope
with this uncertain nature the company prepared for the year 2010 budgeted cost forecasts based on
90%, 100% and 105% activity as follows.
90% 100% 105%

K’000 K’000 K’000
Material costs 337,500 375,000 393,750
Labour costs 440,000 485,000 507,500
Production overhead costs 217,500 235,000 243,750
Administration costs 120,000 130,000 135,000
Selling and distribution costs 70,000 75,000 77,500
1,185,000 1,300,000 1,357,500
Note that 100% activity represents production of 50,000 units.
However, actual activity turned out far worse than expected and 37,500 units were produced, with the
following results.
K’000
Material costs 311,750
Labour costs 351,500
Production overhead costs 171,250
Administration costs 117,500
Selling and distribution costs 66,500
1,018,500
Required:
(a) Given that the element of the budgeted costs will remain unchanged at all levels of production,
prepare a statement for the year showing the flexed budget at the actual level of activity, the actual
results and the variance for each item of cost. (14 marks)
(b) Examine the variances calculated in (a) above , analyse the reasons for such variances and
suggest the follow up action management could take. (6 marks)
(Total: 20 marks)
46
Question 7
Kambilombo Plc is a newly established company in Zambia based in Solwezi a town rich in minerals
especially copper. The company specializes in transportation and supplying of spare parts to Kansai
Mining Ltd. The Company has recently grown and is boasting of having about 100 employees. Because
of the rapid growth it is experiencing, management have thought it wise to establish two accounting
departments namely management accounting and financial accounting. The Company has engaged a
consultant to design these two accounting systems.
The Chief Executive Officer however, is still not for the idea to have two separate departments as he
looks at it as a ‘cost’ and a duplication of duties. The meeting, however, resolved to have the consultant
present at the next meeting so that he could answer queries which may be raised.
Required:
(a) As a consultant prepare detailed notes for presentation to the meeting describing the five major
elements required for any accounting system to meet its objectives. (10 marks)
(b) To distinguish between management accounting and financial accounting for a company like
Kambilombo Plc. (10 marks)
END OF PAPER
47
DECEMBER 2010
SUGGESTED SOLUTIONS
48
Solution 1
1 (a) (i) Actual litres of material used

K33,828,300 ÷ K4,020 = 8,415 litres
(ii) Actual labour hours worked
K11,033,000 ÷ K590 = 18,700 hours
(iii) Standard litres of material to produce 1,700 tins of Product A
1,700 x 5 litres = 8,500 litres
(iv) Standard labour hours to produce 1,700 tins of Product A
1,700 × 10 hours = 17,000 hours
(v) Standard hours of fixed overheads charged to budgeted production
1,750 × 10 hours = 17,500 hours
(vi) Standard hours of fixed overheads charged to actual production
1,700 ×10 hours = 17,000 hours
(b) (i) 8,415 litres should cost (× K4,000) 33,660,000

But did cost 33,828,300
Material price variance K168,300 (A)
(ii) 1,700 tins should use 8,500 litres
But did use 8,415 litres
Material usage variance in litres 85 litres(F)
x standard price per litre x K4,000
Material usage variance K340,000 (F)
K
(iii) 18,700 hrs should cost (x K600) 11,220,000
But did cost 11,033,000
Labour rate variance 187,000 (F)
49
(iv) 1,700 tins should take 17,000 hours
But did take 18,700 hours
Labour efficiency variance in hours 1,700 hours (A)
X standard rate per hour × K600
Labour efficiency variance K1,020,000 (A)
K
(vi) Budgeted fixed overhead expenditure 42,000,000
Actual fixed overhead expenditure 41,000,000
Fixed overhead expenditure variance 1,000,000 (F)
(vii) Actual number of tins produced 1,700 tins

Budgeted number of tins 1,750 tins
Volume variance in number of tins 50 tins (A)
X standard overhead per tin × K24,000
Fixed overhead volume variance K1,200,000 (A)
(viii) Budgeted hours of work 17,500 hours

Actual hours of work 18,700 hours
1,200 hours (F)
X standard overhead rate per hour × K2,400
Fixed overhead capacity variance K2,880,000 (F)
(ix) Efficiency variance in hours 1,700 hours (A)

X standard overhead rate per hour × K2,400
Fixed overhead efficiency variance K4,080,000 (A)
50
2 (a) ABC Chemicals Ltd November 2010
Operating statement for Product A
Standard cost of actual K

Production (1,700 × K50,000) 85,000,000
Cost variances FAV ADV
Material price variance 168,300
Material usage variance 340,000
Labour rate 187,000
Labour efficiency 1,020,000
FOH expenditure 1,000,000
FOH capacity 2,880,000
FOH efficiency 4,080,000
4,407,000 5,268,300 861,300 (A)
Actual cost of actual production 85,861,300
(b) Three possible reasons for the favourable material usage variance
(i) Skilled labour may have been used to produce Product A.

(ii) The machine which measures the output of A may be inaccurate. This may indicate
inaccuracies in the machines movements.
(iii) Spillage or wastage of the material may have been lower than the allowance in the standard.
(c) Every variance is potentially worthy of investigation, whether it is adverse or favourable. There are
a number of reasons why it might be worth investigating a favourable material usage variance.
(i) A favourable usage variance maybe inter-related with an adverse variance elsewhere in the
business. For example, the use of more highly skilled labour may lead to favourable usage,
but may result in an adverse labour rate variance.
(ii) Unrealistic standard costs causing favourable variances need to be identified so that
planning and control can be improved in the future.
(iii) The variance may be caused by data recording errors, so that management is working with
inaccurate information and is therefore unable to exercise effective control.
(3 marks for any 3 reasons)
51
Solution 2
(a) T1 T2
Machine Type X1 360 units (252/0.70) 315 units (252/0.8)
Machine Type X2 325 units (390/1.20) 300 units (390/1.30)
Machine type X2 is the bottleneck because machine Type X1 has a greater capacity to produce
more of both products, T1 and T2.
(b) T1 T2
K’000/units K’000/unit
Selling Price 72 78
Direct Material (28.4) (33.5)
Direct Labour (12.00) (15.00)
Variable production
Overheads (2.00) (2.50)
Contribution per unit 29.6 27.0
÷ ÷
Machine Type X2
hours per unit 1.20 hrs 1.30 hrs
Contribution per hour K24.67/hr K20.77/hr
Ranking 1st 2nd
Optimal output: 325 units of T1
Maximising contribution: 325 units x K29,600 = K9,620,000
(c) T1 T2
K’000/unit K’000/units
Selling Price 72 78
Direct Material (28.4) (33.5)
Throughput contribution 43.60 44.50
÷ ÷
Machine Type X2 hours 1.20 hrs 1.30 hrs
Throughput Contribution
per hour K36.33/hr K34.23/hr
Ranking 1st 2nd
Optimal output: 325 units
52
Maximising throughput contribution: 325 units × K43,600 = K14,170,000
(d) Throughput Accounting Ratio (TAR) = Return per hour/Cost per hour
T1 T2
= K36,330/(K18,000 ÷ 1.2hrs) K34,230/(K22,500 ÷ 1.30hrs)
= 2.42 1.98
(e) Improve the TAR
− Increasing the selling price if possible
− Reducing total factory costs (operating expenses)
− Improving productivity of employees
− Reducing material costs per unit
53
Solution 3
(a) A price-discrimination is where a company sells the same product at different prices in different
markets.
Three conditions are necessary for the successful operation of this pricing strategy:
• The seller must be able to determine the selling price. Choma Plc has a monopoly and therefore
this would be possible.
• It must be possible to segregate customers into different markets, e.g. using geographical
location or age.
• Customers must not be able to buy at the lower price in one market and sell at the higher price
in another market.
(b) The equation of a straight line is Y=a + bx or P=a - bx

Where: y = price (P)
a = intersection of the line with the y-axis, i.e. where demand = zero (0)
b = change in price/ change in demand
x = quantity (Q)
calculate the value of ‘b’
Gradient = Change in price/change in demand
= K100 − K140
1,800 − 1,500
= − 0.1
Calculate price where demand = zero (0)
P = a − bx
110 = a – (0.1 × 1,800)
110 = a – 180
a = 110 +180
a = 290
Therefore the linear relationship is P = 290 – 0.1Q
(d) PED = % change in demand/ % change in price
= [(1800 – 1500) ÷1800] × 100%/[(K110 – K140) ÷K110] × 100%
= -16.67%/ −27.27%
= 0.611
The PED is less than 1 and as a result demand is inelastic. Therefore increasing the price from
K110 to K140 will increase the revenue.
54
(e) To: Management Director
From: Management Accountant
Date: 18 December 2010
The current pricing strategy may not be able to be applied if competition was to emerge in the
market as the business would now have to be more aware of the competitors’ prices.
We may be forced to use going rate pricing to match the competitors price to compete.
However, our competitors may choose to adopt a penetration pricing strategy, which means that
they will start off with a low price to try and gain some of our market share. Competing at this
price will drive down our profit margins. However, we may be able to sustain low margins in the
short term to try and hold on to our customer base.
As we have had such a strong monopoly of the market we should already have sufficient
economies of scale to be able to withstand the lower profit margins for longer than our
competitors.
We may even be able to undercut them so that they cannot gain any market share.
Alternatively, as we are already an established name in the market we may be able to rely on
brand loyalty and market and keep our prices high. By keeping a high price our customer may
also perceive our product to be of higher quality.
Signed: Management Accountant
55
Solution 4
Assumption. Manufacturing costs for the G4U brand will be the same as for own label brands.
Workings:
Manufacturing costs (Total cost analysis)
Analyse total costs into fixed and variable using the high low method
Sales Cost
Millions K ‘million
2011 19 445
2010 18 430
1 15
Variable manufacturing cost per can = K15

Fixed manufacturing cost = K445 million – (19 million x K15)
= K160 million
(a) Contribution per unit

Selling price per can in 2011(own label) = K627m ÷ 19m cans = K33
∴Unit contribution per can (own label) = K33 – K15 = K18
∴Contribution per can of G4U brand = K18 × 133Error! Bookmark not defined.⅓% =
K24
Variable cost per can of G4U brand = K15 + K2 = K17
∴Selling price per can of G4U brand = K17 + K24 = K41
Total contribution (19m cans × 24) = K456million
(b) Data for drawing chart

K’million K’million
Variable costs: own label (9.5m × K15) 142.5G4U brand (9.5m × K17)
161.5
304.0
Fixed costs: Manufacturing 160
Administration 120
Marketing 40
160
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Total costs 624
Sales: own label(9.5m × K33) 313.5
G4U brand (9.5m × K41) 389.5
Total sales 703.0
Our standard mix is 1 own label, 1 G4U brand.
Breakeven point = fixed costs/contribution per mix = K320m/K(18+24)
= K320m/K42
= 7.62 million can mixes = 15.24 million cans (7.62m × 2)
= 7.62 × (K(33 + 41)) million sales = K564 million sales
Margin of safety = 19m (9.5m × 2) – 15.24 million
= 3.76 million cans
= 1.88 million mixes
= 1.88 × (K(33 + 41)) million sales
= K139 million sales
Profit = K703 million – K624 million = K79 million
Breakeven chart for 2011 – all sales (own label and G4U)
K million
703
700
Sales
600 Profit
Total cost
500
Fixed
400
300 Variable
Contribution cost
200 Loss
100 Margin of
safety
0
2 4 6 8 1 1 1 1 1 1
Million of cans
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Breakeven point
15.24 million
(c) (i) The chart shows a breakeven point of 15.24 million cans and a margin of safety of 3.76
million cans. Forecast profit for sales of 19 million cans is K79 million against the forecasted
profit of K62million if the sales were for all ‘own label’.
(ii) Other factors which management should consider before making a decision
• The supermarket chains may put the same pressure on margins and prices of the G4U
brand as they do on the own label brands.
• Customers may realize that the G4U brand is the same product as the own label brand
and may not be willing to pay the premium.
• If the mix of sales can be changed in favour of the G4U brand then profits will improve
further.
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Solution 5
(a)
W X Y Z Total
K’000 K’000 K’000 K’000 K’000
Sales 2,000 2,500 1,000 500 6,000
Variable costs:
Materials 300 400 200 40 940
Labour 500 600 400 100 1,600
Factory overhead (40% of total) 240 320 200 40 800
Selling overhead (5% of sales) 100 125 50 25 300
1,140 1,445 850 205 3,640
Contribution 860 1,055 150 295 2,360
Fixed costs:
Factory (K(2,000,000 – 800,000)) 1,200
Selling (K(900,000 – 300,000)) 600
Total profit 560
The analysis produced in the question allocates fixed costs to the four products on an arbitrary basis,
which is not helpful for product discontinuance decisions since products which appear to be making a
loss may actually be making a positive contribution to fixed costs and profit.
The analysis above shows that product Y is in fact making a contribution of K150,000, which is K50,000
greater than the saving in fixed costs which would occur if the product were discontinued. Profit would
therefore fall by K50,000 if product Y were discontinued.
Product Y is obviously not performing as well as the other three products, however, and management
should pay close attention to its performance in order to ascertain whether a more profitable use could be
made of the company’s resources.
(a) (i) On the basis that the Zambezi Limited has sufficient capacity to produce the four products to
maximum demand level (i.e. product Y is not being produced at the expense of a product or
products which earn a greater contribution) and that product Y is making a positive
contribution to fixed costs and profit, it should continue to be produced in the short term.
If the maximum cost savings that could be made by discontinuing product Y cannot be
increased above K100,000, it should continue to form part of the product line in the longer
term, given that it is making a positive contribution. Any effect that its discontinuance might
have on the demand levels for the other products should also be taken into consideration.
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(ii) There are a number of situations in which it would be appropriate to consider dropping
product Y.
1. If the Zambezi Ltd were to develop a fifth product that could be manufactured using
the same facilities as those used for the manufacture of product Y and which would
earn a greater level of profit after taking directly-attributable fixed costs into account,
the future of product Y should be reconsidered.
2. If demand for the existing products expand so that insufficient production facilities
were available to meet demand, the discontinuance of product Y would be one way of
making available additional production facilities and resources.
3. If significant capital expenditure was required to maintain the existing production
capacity, the company could consider discontinuing product Y rather than incur that
additional expenditure.
The effect on the sales of the existing products by the discontinuance of product Y
would, of course, need to be taken into consideration in the situations envisaged
above.
(b) If product Y were to be continued, the financial result would be the same as that in (a) above.
That is, K560,000 (K860,000+ K1,055,000 + K150,000 + K295,000 – K1,800,000), i.e. Profit
= K560,000.
If product Y were to be withdrawn completely:
 Sales of Z would increase by K300,000;
 Sales and hence contribution from W would fall by 10% (K86,000);
 Fixed costs would fall by K100,000.
This could be summarised for Product A as follows
K’000
Production W contribution (K(860,000 – 86,000)) 774
Production X contribution (unchanged) 1,055
Production Y contribution -
Production Z contribution (K(295,000 + 177,000)) 472
2,301
Less: fixed costs K(1,800,000 – 100,000) (1,700)
Profit 601
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Working
C/S ratio of Z is 295/500 (from (a)) × 100% = 59%
∴ if revenue increases by K300,000, contribution increases by

K300,000 × 59% = K177,000.
Conclusion and recommendation
On financial grounds, it would appear that product Y should be withdrawn completely, since this
option results in the highest profit.
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Solution 6
(a)
Flexed budget Actual Results
Activity (in units) 37,500 37,500 Variance
K’000 K’000 K’000
Material costs
(37,500 x K7,500) 281,250 311,750 30,500 (A)
Labour costs 372,500 351,500 21,000 (F)
(37,500 x 9,000+K35,000,000)
Production overhead costs 191,250 171,250 20,000 (F)
(37,500 × K3,500 + K60,000,000)
Administration costs 105,000 117,500 12,500 (A)
(37,500 × K2,000 + K30,000,000)
Selling and distribution costs 62,500 66,500 4,000 (A)
(37,500 × K1,000 + K25,000,000)
1,012,500 1,018,500 6,000 (A)
Workings
1. Number of units sold at 100% = 50,000
∴If 37,500 units have been sold, this represents 37,500÷50,000 = 75% activity. 90% activity
represents 90% × 50,000 = 45,000 units.
Variable costs
90% *100% Difference per unit
K’million K’million K’million K’million
Material 337.5 375 37.5 7500
Labour 440.0 485 45.0 9000
Production overhead 217.5 235 17.5 3500
Administration 120.0 130 10.0 2000
Selling and distribution 70.0 75 5.0 1000
Number of units 45,000 50,000 5,000
*Difference ÷ 5,000 units
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Fixed costs
Total costs Variable costs Fixed costs

at 100% at 100%
K’000’000 K’000’000 K’000’000
Material 375 375 –
Labour 485 455 35
Production overhead 235 175 60
Administration 130 100 30
Selling and distribution 75 50 25
Total costs at 75%
Costs = (37,500 units x variable costs per unit (W2) + fixed costs (W3)
The favourable labour cost variance of K21,000,000 and the favourable production
overhead cost variance of K20,000,000 suggest that fewer hours have been worked, perhaps
because overtime has been controlled. The favourable labour cost variance could, on the other
hand have arisen because wage rates were decreased, a less skilled and therefore lower paid
workforce was used or not so much labour was used. The production overhead cost variance
may be favourable due to a more economical use of services such as repair and maintenance
or a change in overhead such as a different supervisory structure.
Management should encourage further similar variance provided the quality of output is not
affected.
The adverse material cost variance of K30,500,000 should be investigated. It could have
arisen because of a price increase beyond the control of the company or because of careless
purchasing or a change or error in the material standard. The material may have been defective,
some may have been stolen or the use of less skilled labour may have led to excessive waste.
All possible reasons for the variance need to be investigated to assess whether the variance is
controllable or uncontrollable and whether it can be corrected next year.
Administration of heads cost variance of K12 500 was due to excessive use of resources.
Selling and distribution of heads cost variance of K4000 was due to increased final cost and
increased number of distribution routes.
63
Solution 7
(a) − When considering the design of any accounting system, whether it be a cost accounting
system, a financial accounting system, or part of an overall information system, the first stage
is to identify the needs of the users of the system both now and in future. This requires an
analysis of the organisation itself and of the people working in it.
− The system must be flexible enough to cope easily with routine changes and limited growth
of the organisation and be able to be easily modified to take account of more fundamental
changes which occur over a period of time. This ability to be flexible, however, must be
tempered by the costs of achieving the flexibility so that a positive cost benefit analysis
results.
− The system will be designed around a cost centre/cost unit coding structure which should
reflect the levels of authority within the organisation. Costs and revenues need to be
collected easily and cheaply using modern recording devices wherever appropriate, and the
system should collect the data at a low level so that the detail is accessible even if the
standard reporting parameters of the system are summaries of the data.
− When designing the system, the activity of the organisation is also important. Different cost
accounting methods are required by different types of organisations and larger groups may
need to cater for a number of different cost accounting methods within the same system. In
such circumstances coding structures need to be uniformly designed so as to avoid
difficulties later.
− The use of computerized systems is now almost automatic and care must be taken to ensure
that their use is appropriate. The decision as to whether to use local or central computer
services is also important. Some tasks can more easily be performed using a stand alone
micro computer which may be connected to a network system by a modem.
(2 marks each = 10 marks)
(b) Difference between management accounting and financial accounting:-
The major differences between these two accounting systems for a company like Kambilombo Ltd
are:-
(i) Legal requirements:-
There is a statutory requirement for a public company like Kambilombo Plc to produce
annual financial accounts. Management accounting by contrast, is entirely optional and
information should be produced only if it is considered that the benefits from the use of
information by management exceed the cost of collecting it.
64
(ii) Focus on individual parts or segments of the business.
Financial accounting reports describe the whole of the business where as management
accounting focuses on small parts of the organization e.g costs and profitability of products.
(iii) Financial accounting follow IFRS
Whereas management accounting does not follow IFRS, the focus is on serving
management needs.
(iv) Time dimension
Financial accounting reports what has happened in the past in an organisation whereas
management accounting is concerned with both past and future information for decision
making.
(v) Report Frequency
A detailed set of financial accounts is published annually and Management Accounting
Reports on various activities may be prepared at daily, weekly or monthly intervals e.g for
each type of vehicle used or indeed spare parts sold.
(2 marks × 5 = 10 marks)
65
LICENTIATE LEVEL
SERIES: DECEMBER 2011
TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS
1. You have ten (10) minutes reading time. Use it to study the examination paper carefully so that you
understand what to do in each question. You will be told when to start writing.
2. There are seven (7) questions in this paper. You are required to attempt any five (5) questions. All
3 Enter your student number and your National Registration Card number on the front of the answer
5. The marks shown against the requirement(s) for each question should be taken as an indication of
the expected length and depth of the answer.
7. Present legible and tidy work.
8. Graph paper (if required) is provided at the end of the answer booklet.
66
Question 1
You work for Mpandamano Plc, a large manufacturing company. Before going on a recent vacation you
submitted the following report to the company’s new Finance Director.
K’000
Budgeted profit 4,884,000
Sales volume variance 55,500 A
Standard profit on actual sales 4,828,500
Sales price variance 913,500 A
Profit before cost variances 3,915,000
Cost variances: Fav Adv
K’000 K’000
Materials price 31,225
Materials usage 5,250
Labour rate ?? ??
Idle time 31,500
Labour efficiency ?? ??
Variable overhead rate 17,520
Variable overhead efficiency ?? ??
Fixed overhead expenditure 555,000
Fixed overhead volume 30,000
?? ??
450,955 A
Actual Profit 3,464,045
You had hoped to finish the report before going on vacation, but in the excitement of arranging your last
minute shopping you forgot to do so.
The finance director is not happy. She comes primarily from a financial accounting background and does
not entirely understand the statement, but she can tell that it is obviously incomplete.
From the company’s management information system she has been able to pull together the following
pieces of information:
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(i) Budgeted production and sales were 8,800 units, but 8,700 units were sold and 8,900 units were
produced
(ii) 62,450 kgs of materials were purchased and used
(iii) 177,450 hours of labour were paid for, at a total cost of K2,448,810,000
(iv) Actual variable overheads were K1,419,120,000
(v) Actual fixed overheads were K3,195,000,000
(vi) The finance director was also informed that due to a labour dispute at the end of last year, the
hourly rate paid to labour had to be increased by K2,000 above the original plan
(vii) The standard cost card for one unit of production is:
K
Materials 7 kg at K35,000 per kg 245,000
Labour 20 hours at K12,000 per hour 240,000
Variable overheads 20 hours at K8,000 per hour 160,000
Fixed Overheads 20 hours at K15,000 per hour 300,000
Total cost 945,000
Selling price 1,500,000
Profit 555,000
Required:
(a) Explain the possible reason for inter-relationship between material price variances and material
usage variances in the statement above. (2 marks)
(b) Calculate the missing figures from the operating statement (6 marks)
(c) Prepare a report for the Finance Director of Mpandamano Plc that explains and interprets the
variance report. This report should explain how the variance has been calculated and what the
cause of the variance might be. (12 marks)
(Total: 20 marks)
68
Question 2
Sobelenge Enterprises undertakes several research projects. As an assistant management accountant

you recently attended a workshop organized by a local bank on ‘Budgeting in small and medium
enterprises’. The first session discussed the need for budgeting and the second session looked at the
budgeting techniques. For a number of years, Sobelenge has produced its annual budget using
incremental budgeting techniques. The Managing Director of Sobelenge Enterprises has always pointed
out that budgeting is not a value adding exercise and is considering to do away with it in future. During
the workshop, the zero based budgeting was encouraged for enterprises undertaking new projects.
Required:
(a) Explain to the Managing Director on the need for budgeting for an enterprise such as Sobelenge.
(5 marks)
(b) Explain the differences between incremental and zero based budgeting techniques.
(5 marks)
(c) Explain how Sobelenge enterprises could operate a zero based budgeting system for their new
projects. (10 marks)
(Total: 20 marks)
Question 3
Quick Foods Ltd makes and packs snacks which it sells to retailers for K5,000 per package. The
recommended retail price is K8,000 per package.
Budgeted production for the forthcoming period is 200,000 packages. Budgeted fixed overheads are
K480 million. Variable cost per pack is expected to be K1,300.
Retailers have started to use their buying power against Quick Foods Ltd and have begun to demand a
discount off the existing price charged to them. The directors of Quick Foods Ltd are concerned that they
may lose business if they do not offer some sort of discount to their customers and have asked for advice
from a market research consultancy firm.
The consultants have suggested that Quick Foods Ltd need to decrease the selling price charged to
retailers by at least 10% if they are to retain their existing customers. However, they believe that Quick
Foods Ltd can use some buyer power of their own over supplier of materials such that the variable cost
per pack would fall by 5%.
In addition to the above, the consultants have also suggested that Quick Foods Ltd restricts itself to
making a profit of K417.6 million in the coming year.
69
Required:
(a) Calculate the breakeven point in terms of packages and sales revenue, and the margin of safety
based upon the existing selling price and variable cost per pack. (5 marks)
(b) Draw the Profit/Volume chart (also called P/V graph) based upon the existing selling price and
variable cost per pack. You should label clearly the break-even point and margin of safety. (3
marks)
(c) Calculate the breakeven point in terms of packages and sales revenue, and the margin of safety,
assuming the company adopts the consultancy firm’s suggestion. (5 marks)
(d) Explain four limitations of using the breakeven charts. (4 marks)
(e) Calculate the number of sales packages that would achieve a profit of K417.6 million.
(3 marks)
(Total: 20 marks)
Question 4
Mwanamaida Research Centre undertakes a project on behalf of its client. It has already incurred costs
of K200,000,000. It is estimated that a further K280,000,000 would be charged to the project before its
completion in one year’s time.
The further costs have been calculated as follows.
K
Materials 100,000,000
Staff costs 60,000,000
Overheads 120,000,000
The overheads comprise depreciation of plant and equipment amounting to K40,000,000 and an
allocation of general overheads incurred by the business based on 80% of material costs.
You have been asked to review the project because the project’s total estimated costs of K480,000,000
exceeded the contracted value of K350,000,000 for the completed research.
If the project is abandoned the client will receive K150,000,000 as compensation. You obtain the
following information about the estimated cost to completion of the project.
Materials
Contracts have already been exchanged for the purchase of K100,000,000 of materials. The material is
highly specialised and has no alternative use on other projects. If not used on this project the material
would have to be disposed of, incurring costs of K15,000,000.
70
Staffing
Two highly skilled researchers each receive a salary of K25,000,000. The remaining K10,000,000 is an
allocation of part of the salary of a supervisor who is overall in charge of several projects.
If the project is abandoned, the research workers would be declared redundant, each receiving
K10,000,000 in compensation.
Overheads
Plant and equipment costing K80,000,000 was bought at the commencement of the project, and a
second year’s depreciation charge (K40,000,000) is included in the estimated costs. The plant and
equipment is highly specialised and has no other use.
Estimated scrap values: now K10,000,000
in one year K4,000,000
Required
(a) Give your recommendation whether on financial grounds the project should be continued or
abandoned. Your calculations must be supported by clear statements of the reasons why a
particular figure is included or excluded, and of any assumptions you make. (16 marks)
(b) Briefly explain four non-financial factors which need to be considered before finally deciding to
abandon such a research project. (4 marks)
(Total: 20 marks)
Question 5
Tubombeshe Contractors Ltd is a construction company based in Lusaka and specializes in road
construction. Tubombeshe employs a number of skilled workers especially the civil engineers who do a
lot of work starting from design, mapping, actual construction and so on. Of late Tubombeshe has been
running tenders only for pothole mending without major road construction works.
To date Tubombeshe Ltd has adopted a cost plus approach to setting its prices. This is based upon
absorption costing system that uses machine hours as the basis of absorbing overhead costs into
contract costs for each job. The Managing Director is concerned that over the recent months,
Tubombeshe has been successful when quoting for pothole mending with the consequence that it has
lost out on major contracts. It has been suggested that Tubombeshe Ltd should adopt an alternative
approach to its pricing based on marginal costing since any quote price that exceeds variable costs is
better than no work at all.
71
Required:
With reference to the above scenario
(a) Explain the two pricing methods being mentioned above i.e full cost and marginal cost, and
recommend the most useful method which Tubombeshe can use. (15 marks)
(b) Make brief comments on the validity of the statement that “any price that exceeds variable costs is
better than no work at all”. (5 marks)
(Total: 20 marks)
Question 6
A company based in Kapiri Mposhi produces three products namely Kapiri honey, Kapiri Jam and Kapiri
butter. The company uses three different machines to produce each product. The following information is
available for each quarter as the products are sold quarterly.
Products Kapiri Kapiri Kapiri
Honey Jam Butter
K/unit K/unit K/unit
Selling price 20,000 15,000 10,000
Direct material (8,000) (5,000) (4,000)
Direct labour (K100/hr) (1,800) ( 600) ( 300)
Fixed Overheads (1,200) (1,400) (1,700)
Profit 9,000 8,000 4,000
Machine hours required
Per unit:
Machine One 6 2 1
Machine Two 9 3 1.5
Machine Three 3 1 0.5
Estimated sales
Demand: 200 200 200
The capacity for each machine is limited to 1600hrs. Currently the company uses marginal costing and
contribution analysis for decision making.
Required:
(a) Calculate the machine utilization rate for each machine per quarter and explain which of the
machines is the bottleneck /limiting factor. (5 marks)
(b) Using the current system of marginal costing and contribution analysis, calculate the profit
maximizing quarterly output of the three products (5 marks)
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(c) Using a throughput approach, calculate the throughput maximizing quarterly output plan of the
three products and comment on the results obtained using the plan obtained. (10 marks)
(Total: 20 marks)
Question 7
(a) Mizinga Confectionaries Ltd (MC Ltd) produces fruit pizzas in three different sizes, small, medium
and large. They all use the same basic inputs. The data below relate to the unit costs and the
selling price for each pizza:
Small Medium Large
K K K
Selling Price 6,000 10,000 18,000
Ingredients 3,600 4,800 9,200
Direct Labour 800 1,000 1,200
Variable Overheads 600 1,000 1,600
Monthly demand (pizzas) 400 1,000 600
Fruit (Kg per pizza) 0.2 0.3 0.6
Fruit for making pizzas are in short supply and limited to 600kg in a month.
Fruits are highly perishable and it is, therefore, not possible to buy for stocking.
Required:
Calculate the optimal production mix and the value of the optimal contribution. (4 marks)
(b) Investac Plc is preparing its annual capital budget and is considering three projects, X, Y and Z.
The following financial data relates to the projects.
X Y Z
K’m K’m K’m
Capital expenditure 800 900 700
Cash inflows
Year 1 200 260 100
Year 2 240 260 220
Year 3 280 260 260
Year 4 240 260 300
Year 5* 200 300 200
NPV 78 110 96
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Cash inflow in year 5 include K40m scrap value for each project. Investac uses 10% cost of capital
to evaluate its investments.
Required:
(i) Calculate the payback period of project X (2 marks)
(ii) Calculate the discounted payback period of project Y (4 marks)
(iii) Calculate the Internal Rate of Return of project Z (4 marks)
(iv) Justify why the Payback Period and Accounting Rate of Return (ARR) methods are widely
used in practice. Give TWO reasons for each method. (4 marks)
(c) Monthly Sales of product X follow a linear trend of y=9.72 + 5.816x, where y is the number of units
sold and x is the number of the month. Month deviations from the trend follow an additive model.
Required:
What is the forecast number of units of product X to be sold in month 23, which has a seasonal
factor of + 6.5 to the nearest whole unit? (2 marks)
(Total: 20 marks)
END OF PAPER
74
JUNE 2011
L2 MANAGEMENT ACCOUNTING
SUGGESTED SOLUTIONS
75
Solution 1
(a) Inter –relationship between material and labour variances

Materials usage variance is adverse, possibly due to using of poor quality materials bought at
cheaper price hence, the favourable material price variance.
(b) Missing Variances
Labour Rate Variance K
Revised budgeted hourly rate = 14,000
Actual hourly rate (K2,448,810,000/177,450 hours) = 13,800
Rate variance 200 (F)
Hours paid × 177,450
Labour Rate Variance K35,490,000 (F)
Labour Efficiency Variance
8,900 units of production should take (× 20 hrs) 178,000 hrs
Actual hours worked (W1) 175,200 hrs
Efficiency variance (in hrs) 2,800 (F)
Revised standard rate × K14,000/hr
Labour Efficiency Variance K39,200,000 (F)
(W1) Actual hours worked
Idle time (hours) = K31,500,000(A)/ K14,000 = 2,250 hours
Hours paid = 177,450 hours
Hours worked = 175,200 hours
Variable overhead Efficiency Variance
8,900 units of production should take (× 20 hrs) 178,000 hrs
Actual hours worked (W1) 175,200 hrs
Efficiency variance (in hrs) 2,800(F)
Standard rate × K8,000/hr
Labour Efficiency Variance K22,400,000(F)
76
REPORT
To: The Finance Director of Mpandamano Plc
From: Management Accountant
Date: 15th December 2010
Subject: Variance Report
This report aims to explain and interpret the annual variance report.
Budgeted Profit
As can be seen from the original standard cost card, the original plan was to sell the product for
K1,500,000 and a profit of K555,000 was planned for each unit.
Mpandamano budgeted to produce and sell 8,800 units so the original budgeted profit was
expected to be K4,884,000,000.
As actual profit was only K3,464,045,000 there must have been some deviation (or “variance”)
away from the original plan. The variance report aims to explain why and where this has occurred.
Variances
There have been a number of deviations away from the original plan and each one is split into a
different variance.
Sales Volume Variance
Mpandamano actually sold 8,700 units, 100 units less than was budgeted. So at a profit of
K555,000 per unit this has had an adverse effect of K55,500,000 on profit. This is the “volume
variance” so that the expected profit on actual sales of 8,700 units was K4,828,500,000.
There are a number of possible causes of this variance. It could be due to uncontrollable issues
such as market maturity or the global recession, or it may be linked to the other changes that
occurred within the business such as the use of cheaper materials ,which may have altered the
perceived quality of the
product.
Sales Price Variance
The sales price variance is also adverse which tells us that the actual selling price of the product
must have been below the original budgeted price of K1,500,000. As 8,700 units were sold and the
variance totals K913,500,000, the reduction in price must have been K105,000 per unit. So the
actual selling price must have been reduced to K1,395,000 per unit.
There are many reasons why this variance may have occurred; it could have been a reaction to
new competition, it could have been a reaction to a downturn in the market, it could have been
caused by a reduction in product quality, it could have been poor sales team performance etc.
77
Without further investigation we do not know exactly why the price was lowered – the board may
therefore determine that such investigation is worthwhile on the basis of cost benefit analysis.
Materials Price Variance
This variance has had a favourable effect on profits. This could only happen if the materials used in
production had a lower price per kg than the K35,000 planned in the standard cost card. 62,450kg
of material was used so the saving per kg must have been K500 (K31,225,000/62,450kg) This
saving could have come from finding cheaper suppliers, a reduction in overall market prices, or a
deliberate attempt to buy lower quality material. If the reason is that lower quality material was
purchased this might explain some of the adverse materials usage, sales volume and sales price
variances.
Materials Usage Variance
Mpandamano originally planned to use 7 kgs of material on each unit of production. As 8,900 units
were actually produced, 62,300kg should have been used. 62,450kg were actually used which
gives an adverse variance of 450kg. At a standard cost of K35,000/kg, this caused the adverse
usage variance of K5,250,000.
This variance could be down to a change in production techniques or poor performance by labour,
or it could be linked to the change in materials price. If lower quality material was purchased this
might lead to more wastage in production or more errors by staff.
Labour Rate Variance
The planning variance can be explained by the increase in the agreed wage rate due to the labour
dispute at the start of the year. The remaining, favourable labour rate variance is due to the fact
that the company only paid an average of K13,800 per hour (K2,448,810,000 for 177,450 hours)
rather than the agreed new rate of K14,000.
This may have been caused by a delay in finalising the rate, or perhaps some lower grade labour
was used when it was appropriate (though this in turn could be linked to the adverse materials
usage variance).
Labour Idle Time Variance
This variance represents the fact that there were occasions when labour was being paid but not
actually performing any tasks. At the agreed hourly rate of K14,000 per hour, this represents 2,250
hours of labour.
This could be down to the ending of the labour dispute, or it may have been caused by operational
problems such as machine breakdowns, lack of sales orders, or disruption caused by new
materials.
78
Labour Efficiency Variance
Mpandamano budgeted for each unit to take 20 hours of labour. The total expected time for the
8,900 units actually produced would therefore be 178,000 hours. 177,450 hours were paid for, but
after taking account of the 2,250 hours of idle time, only 175,200 hours were actually worked. This
saving of 2,800 hours overall, saved the company K39,200,000.
This could be down to increased motivation due to the resolution of the wage dispute and the
increase in wage rate.
Variable Overhead Expenditure Variance
If 175,200 hours were worked, then this adverse variance indicates that there was an increase in
the variable overhead rate of K100 per hour (K17,520,000/175,200 hrs).
Variable overheads are usually linked to the cost of running machines etc. These costs might have
increased due to increase in electricity rates or adjustments might have been needed to machines
in order to cope with changes in production methods/ materials used.
Variable Overhead Efficiency Variance
Variable overhead efficiency is linked to the labour efficiency variance. Because labour worked
2,800 hours less than expected, the company’s machines, for example, will have had to have been
operated for 2,800 hours less time – this gives a saving to the company.
Fixed Expenditure Variance
The adverse fixed overhead variance tells us that Mpandamano spent K555,000,000 more than the
amount originally budgeted on these costs. Fixed overheads represent items such as factory rent,
supervisors salaries, depreciation and insurance.
Increases might come from changes to production techniques, market forces or poor control. But
more detailed analysis is not possible without a detailed breakdown of the individual elements of
the fixed overheads.
Fixed Overhead Volume Variance
This variance is linked directly to the volume of activity and only arises in an absorption costing
system. Because actual production was greater than budgeted production, the variance is
favourable and represents the over-absorption of fixed overheads into production. It is merely an
accounting entry that does not warrant further investigation.
Overall
The variance report highlights that the main cause of the downturn in profits was the reduction in
sales price. The next step should be to investigate why these variances occurred.
Signed
Management Accountant
79
Solution 2
(a) The need to budget

A budget is a quantitative expression of a plan of action prepared in advance of the period to which
it relates. The main aims of budgeting are as follows:
Planning
This should be in line with the objectives of the organization.
Control
Controlling costs by comparing the plan of the budget with the actual results and investigating
significant differences between the two.
Co-ordination
The different activities of the business may be well coordinated by the a budget by ensuring that
managers are working towards the same common goal.
Communication
Budgets communicate the targets of the organization to individuals managers.
Motivation
Budgets can motivate managers by encouraging them to beat targets or budgets set at the
beginning of the budget period. Bonuses are often based on ‘beating budgets’.
Performance Evaluation
The performance of managers is often judged by looking at how well the manager has performed
against budget.
Authorisation
Budgets act as a form of authorization of expenditure.
(b) • An incremental budget starts off with last year’s budget or last year’s actual results and adds
on a certain percentage to take account of expected inflation and/or any expected changes in
the level of activity. It is a very simple, quick and cheap budget to produce, but it does not
promote a questioning attitude. Activities are undertaken without thought. They are simply
incorporated into the next budget because they were in the last budget and nobody has
given any thought as to whether the activity is still really worthwhile.
• With ZBB, each manager sets out what he or she wishes to accomplish over the forthcoming
period. For each activity they want to undertake, they look at different ways of achieving the
objective and they look at providing the service at different levels. They estimate the costs
and benefits and the activity only takes place if the benefits exceed the costs. Also once all
the activities have been evaluated, they can be ranked against each other and the
company’s resources directed to the best activities.
80
(c) • The managers responsible for each project should decide which projects they wish to
undertake in the forthcoming period. These projects will be a mixture of continued projects
and new projects. For the projects which have already been started and which the managers
want to continue in the next period, we should ignore any cash flows already incurred (they
are sunk costs), and we should only look at future costs and benefits. Similarly, for the new
projects we should only look at the future costs and benefits. Different ways of achieving the
same research goals should also be investigated and the projects should only go ahead if
the benefit exceeds the cost. Once all the potential projects have been evaluated there are
insufficient funds to undertake all the worthwhile projects, then the funds should be allocated
to the best projects on the basis of a cost-benefit analysis.
• ZBB is usually of a highly subjective nature. (The costs are often reasonably certain, but
usually a lot of uncertainty is attached to the estimated benefits.) This will be even true of a
research division where the researchers may have their own projects which they are unable
to view in an objective light.
Solution 3
Fixed cost
(a) Break Even Point (packages) =
Contribution per unit
K480,000,000
=
K(5,00 - 1,300)
= 129,730 packages (2 marks)
Break Even Point (revenue) = BEP(units) × selling price per pack
= 129,730 × K5,000
= K648,650,000 (1 mark)
Budget sales BEP sales

Margin of safety = × 100%
Budgeted sales
K2000,000 - 129,730
= × 100%
200,000
81
= 35.1% (2 marks)
(b) Profit/Volume chart
K’m
260m
Profit
Profit
0 Sales volume
200,000
Loss
Margin of safety
K489m
Loss Breakeven point
(3 marks)
(c) New selling price unit (K5000 × 90%) = K4,500 (½ mark)

New variable cost per unit (K1,300 × 95%) = K1,235 (½ marks)
New contribution per unit = K3,265
Fixed costs
New BEP units =
Contribution per unit
K480,000,000
=
K3,265 per unit
= 147,014 packages (1 mark)
New BEP sales revenue = 147,014 units × K4,500
= K661,563,000 (1 mark)
Budget sales - Breakeven sales
New margin of safety is × 100%
Budgeted sales
K200,000 - 147,014
= × 100%
200,000
82
= 26.49% (2 marks)
(d) Limitations of Break Even chart
• It can only be used for a single product.
• It assumes that sales are linear.
• It assumes that variable costs are linear.
• It does not take into account inflation.
• It ignores uncertainty.
• It assumes that total fixed costs remain the same within the range of activity.
(1 mark for any 4) maximum 4 marks
(e) Sales to achieve a profit of K417.6 million
Target profit + fixed costs
Sales volume = Contribution per unit
K417,600 + K480,000,000
Sales volume =
K3,265 per unit
Sales (volume) = 274,916 packages (3 marks)
83
Solution 4
(a) Relevant cost of continuing with the research project

Note K’000
Costs already incurred 1 0
Materials 2 (15,000)
Staff costs 3 30,000
Overheads – plant and equipment 4 6,000
– general overhead 5 0
21,000
Contracted value (350,000)

Relevant future contribution from project 329,000
Saving in compensation 150,000
Total gain from continuing with project 479,000
On financial grounds the project should therefore be continued.
Notes
1. Costs already incurred are sunk and are not relevant to any future decision.
2. Contracts have already been exchanged and so the material must be paid for and the
K100,000,000 cost is sunk. Using the material on this project would save the disposal costs.
3. This K15,000,000 is a saving.
4. The K10,000,000 allocated salary of the supervisor would not be affected by this project and
so is not relevant. To continue to employ the skilled researchers would cost K15,000,000
each more than making them redundant.
The original cost of the equipment is a sunk cost.
5. Depreciation is not a cash flow and is irrelevant. The relevant cost of using the equipment for
this project is the K6,000,000 reduction in scrap value which would occur.
6. General overheads are allocations of business overheads which are unaffected by this
decision.
Assumptions
(i) Objective is to maximise cash flow/contribution.
(ii) All opportunities have been identified.
(iii) All cash flows are certain.
84
(b) Non-financial factors to consider (NB. Only four required)
(i) The effect on the company's reputation for completing projects once commenced.
(ii) The likelihood of further projects being received from the same customer
(iii) The effect on the morale of the research staff.
(iv) Other opportunities for research projects which could use the facilities currently being
employed on the project under consideration.
(v) The ease with which the skilled researchers could be replaced for future projects.
85
Solution 5
(a) (i) Full cost pricing – using absorption costing. This methods determines the cost of production
which includes a fair share of overheads. The total costs therefore includes both variable and
fixed overheads. A margin for profit is added to the full cost of production to which a selling
price is determined. (maximum 5 marks)
(ii) On the other hand marginal cost pricing is a method of determining the sales price by adding
a profit margin on the marginal cost of sales (i.e. variable costs). This method draws
management attention to contribution.
(iii) It is not clear however if Tubombeshe Ltd is using the same margin on all contracts as such it
could consider varying the margin depending on the contract customers. Marginal costing
pricing ignores the fixed costs and so mark up may be sufficiently be high to ensure they are
covered (fixed costs) (maximum 5 marks)
(iv)Tubombeshe has used a cost plus approach to pricing based on absorption costing. The
approach is appropriate to a company at the moment because it is pricing for various jobs
which are contractual in nature. Tubombeshe uses a machine hour basis but a labour basis
may be more appropriate given the skilled workers it employs who appear to drive the work
carried out. (maximum 5 marks)
(b) Comment on the Managing Director’s remark
− A price based on available cost reflects the marginal costing approach to pricing.
− Any price that exceeds variable cost will at least offer some contribution toward fixed costs,
but in the long run, this approach is not sustainable.
− The price must cover fixed costs for a profit to be made.
− In the short term, Tubombeshe could consider the approach in an effort to win business but it
may prove difficult to raise prices in the future without again losing business. (maximum 5
marks)
86
Solution 6
(a) Machine hours required

Kapiri Kapiri Kapiri
Honey Jam Butter Total
Machine one 1,200 400 200 1800
Machine two 1800 600 300 2700
Machine Three 600 200 100 900
∴Machine utilization Rate
1800
Machine One = × 100 = 112.5% (1 mark)
1600
2700
Two = 1600 × 100 = 168.75% (1 mark)
900
Three = × 100 = 56.25% (1 mark)
1600
Machine type two is the bottleneck / limiting factor because it has the highest rate and the rate is
above 100 per cent. (2marks)
(b) Contribution /unit
Products
Kapiri Kapiri Kapiri
Honey Jam Butter
Sales price 20,000 15,000 10,000
Direct costs
Material (8,000) (5,000) (4,000) ½ mark
Labour (1,800) (600) (300) ½ mark
Contribution 10,200 9,400 5,700 ½ mark
Machine two hrs/unit 9 3 1.5
Contribution/hr K1,133.33 K3,133.33 K3,800 1 mark
Ranking 3 2 1 1 mark
Allocation of machine type 2 hours according to this ranking.
Product: Kapiri: Butter 200 units using 300 hours ½ mark
Kapiri: Jam 200 units using 600 hours ½ mark
Kapiri: Honey 77.78 units using 700 hours ½ mark
1600 hours
87
(c) Throughput: method
Products Kapiri Kapiri Kapiri
Honey Jam Butter
Selling price 20,000 15,000 10,000
Direct material (8,000) (5,000) (4,000)
Throughput /unit 12,000 10,000 6,000 (1 mark)
Machine type 2
Hours/unit 9 3 1.5
Throughput/ hour 1,333.33 3,333.33 4,000 (1mark)
Ranking 3 2 1 (1mark)
Production mix
Kapiri Butter 200 units × 1.5 hrs/unit = 300 hrs
Kapiri Jam 200 units × 3 hrs/unit = 600 hrs
Kapiri Honey 77.78 units × 9 = 700 hrs
= 1600 hrs (2 marks)
Comment
The mixture is the same to that of the marginal costing method due to the fact that the company has
maintained the same level of sales demand. There is need, therefore to explore other avenues in as far
as marketing of the products otherwise, the company should concentrate on just one line or two lines of
product especially that, there is increased cost for the manufacture of the Kapiri honey (labour costs)
whose contribution is minimal.
(maximum 5 marks)
88
Solution 7
(a) (i) Confirm Limiting Factor

Pizza Size Monthly Demand Kg/Pizza Total Kg’s
Small 400 0.2kg 80
Medium 1,000 0.3kg 300
Large 600 0.6kg 360
Kg’s Required 740
Kg’s Available 600
Shortfall 140
Conclusion: Fruits availability is a limiting factor.
(ii) Computation of contribution per pizza and Ranking
Small Medium Large
K K K
Selling Price 6,000 10,000 18,000
Ingredients (3,600) (4,800) (9,200)
Direct Labour (800) (1,000) (1,200)
Variable Overheads (600) (1,000) (1,600)
Contribution per pizza 1,000 3,200 6,000
÷ ÷ ÷
Fruit per pizza 0.2Kg 0.3Kg 0.6Kg
Contribution per Kg K5,000 K10,667 K10,000
Ranking 3rd 1st 2nd
(iii) Optimum production mix
Pizza Size Output Kg Pizza Pizza Total Contribution Pizza Total Contribution
K’000
1st Small 1,000 0.3kg 300kgK3,200 K3,200
2nd Medium 500 0.6kg 300kgK6,000 K3,000
6,200
Advice
MC Ltd should produce 1,000 medium pizzas and 500 large pizzas to earn a maximum
contribution of K6,200,000.
89
(i) Payback period of project X
Year Cashflow (K’m)
0 (800)
1 +200
(600)
2 +240
(360)
3 +280
(80)
4 240
+ 160
∴ Payback period = 3 80/240 = 3.33yrs
(ii) Discounted Payback of Project Y
Year Cashflow Discount Factor PVCumulative PV
n k’m@ 10% k’m k’m
0 (900) 1.0 (900) (900)
1 260 0.909 236 (664)
2 260 0.826 215 (449)
3 260 0.751 195 (254)
4 260 0.683 178 (76)
5 300 0.621 186 110
∴ Discounted Payback period = 4 76/186 = 4.41years
(iii) Internal Rate of Return for Project Z
Year Cashflow Discount Factor PV
n k’m @ 20% k’m
0 (700) 1.0 (700)
1 100 0.833 83
2 220 0.694 153
3 260 0.579 150
4 300 0.482 145
5 200 0.402 80
NPV (89)
 P 
IRR = A% +  (B% − A%) 
P + N 
90
 96 
= 10% +  (20% − 10%) 
 96 + 89 
= 10% + 5.19%
= 15.19%
(iv) The payback back method is frequently used in practice because

(a) it is considered useful when firms face liquidity constraints and require a fast
repayment of their investments.
(b) it serves as a simple first-level screening device that identifies those projects that
should be subject to more rigorous investigations.
(c) it provides a rough measure of risk, based on the assumption that the longer it
takes for a project to pay for itself, the riskier it is.
The ARR is a widely-used financial accounting measure of managerial and company
performance. Therefore, managers are likely to be interested in how any new
investment contributes to the business unit’s overall accounting rate of return.
(b) Trend = 9.72 + (5.816 × 23)

= 143.488
Seasonal factor + 6.5
Forecast Ŷ = T ± SV
= 143.488 + 6.5
= 149.988 units
150 units.(approximately)
To the nearest whole unit, the forecast number of units to be sold is 150.
91

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ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

QUESTION PAPERS AND SUGGESTED SOLUTIONS

JUNE 2010 MANAGEMENT ACCOUNTING ................................................................ 3

DECEMBER 2010 MANAGEMENT ACCOUNTING .............................................................. 38

JUNE 2011-09-01: MANAGEMENT ACCOUNTING .............................................................. 66

CHARTERED ACCOUNTANTS EXAMINATIONS

L2: MANAGEMENT ACCOUNTING

TIME ALLOWED: THREE (3) HOURS

Data from current budget

The following information relates to BETTER BOOKS LIMITED, a publishing company.

(ii) Redrafted Budget Statement (November, 2009)

K’000 K’000 K’000 K’000 K’000

1 025Kg × K30 000 30 750

100 × 10Kg × k30,000 30 000 K750 ADV

Actual issue at std. price K580 FAV

Standard usage at std. price usage

(c) Statement of Reconciliation

(ii) Effect on labour (check this)

Therefore BEP in litres = K6,810,000

K6,810,000 + (K700,000 × 4) K9,610,000

(ii) Limitations of financial accounts include among others:

(b) Key features of relevant costs and incomes are:

CHARTERED ACCOUNTANTS EXAMINATIONS

L2: MANAGEMENT ACCOUNTING

SERIES: DECEMBER 2010

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS

4. Do NOT write in pencil (except for graphs and diagrams).

6. All workings must be done in the answer booklet.

ABC Chemicals Ltd – Production report for November 2010

* FOH = Fixed Overheads

1. Calculate the following.

The following information is available.

Current year’s results – 2010 Forecast for 2011

90% 100% 105%

L2: MANAGEMENT ACCOUNTING

1 (a) (i) Actual litres of material used

(b) (i) 8,415 litres should cost (× K4,000) 33,660,000

Fixed overhead expenditure variance 1,000,000 (F)

(vii) Actual number of tins produced 1,700 tins

X standard overhead per tin × K24,000

Fixed overhead volume variance K1,200,000 (A)

(viii) Budgeted hours of work 17,500 hours

1,200 hours (F)

X standard overhead rate per hour × K2,400

Fixed overhead capacity variance K2,880,000 (F)

(ix) Efficiency variance in hours 1,700 hours (A)

Fixed overhead efficiency variance K4,080,000 (A)

Standard cost of actual K

(i) Skilled labour may have been used to produce Product A.

(3 marks for any 3 reasons)

Maximising contribution: 325 units x K29,600 = K9,620,000

(b) The equation of a straight line is Y=a + bx or P=a - bx

Variable manufacturing cost per can = K15

(a) Contribution per unit

(b) Data for drawing chart

C/S ratio of Z is 295/500 (from (a)) × 100% = 59%

∴ if revenue increases by K300,000, contribution increases by

Conclusion and recommendation

Total costs Variable costs Fixed costs

CHARTERED ACCOUNTANTS EXAMINATIONS

SERIES: DECEMBER 2011

TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS