Answers

1. A. (i) Variable overhead cost per unit= 4,050,000-1,65000

500,000-100,000
= 6/ unit
(ii) Fixed overhead cost per annum:
Y=a+bx
1,650,000=a+6(100,000)
1,650,000=a+600,000
a = 1,650,000-600,000
a = 1,050,000

B. Sales ( 300,000 x 15 ) 4,500,000

Less: variable cost
(300,000 x 6) 1,800,000
Contribution Margin
(300,000 x 9) 2,700,000
Less: fixed cost 1,050,000
Net profit 1,650,000

C. Sales ratio = 2,700,000

4,500,000
= 60 %
Break even point sales revenue = 1,050,000
60 %
= 1,750,000

D. (i) sales volume variance = (300,000 – 250,000) x 9

= 450,000 A
(ii) sales price variance = (15-16) x 250,000
= 250,000 F
(iii) materials price variance = (.64-.60) x 250,000
= 10,000 F
(iv) material usage variance = (300,000-250,000) x .64
= 32,000 A
(v) direct labour rate variance = (1.65-1.68) x 45,000
= 1,350 A
(vi) direct labour efficiency variance = (60,000-45,000) x 1.65
= 24,750 F
(vii) variable overhead rate variance = (3.75-3.70) x 30,000
= 1,500 A
(viii) variable overhead efficiency variance = (37,500-30,000) x 3.75
= 28,125 F
(ix) fixed overhead expenditure variance = 1,050,000-1110,000
= 60,000 A

E. There is a tendency to have a adverse sales volume variance and a favourable

sales price variance. This might happen when the company increase the selling price above
its standard price thus causing a favourable sales price variance but demand on sale might fall
which will cause an adverse sales volume variance. Similarly when a company wants to sell
more products the company might reduce its selling price thus causing an adverse Sales price
variance and a favourable sales volume variance.

2. A. A B C
Sales / unit 130 180 210
Variable cost /unit 60 100 120
Contribution margin 70 80 90
MP3 player A should sell because it has the lowest contribution margin per unit

B. (i) Budget system is the official book of record for budget appropriations. It
maintain and adjust permanent operating budget as such the budget system generates
appropriations into the General Ledger system and is updated throughout the year to support
current year budgetary decisions and to support planning and preparation of the next budget.
(ii) variable cost are corporate expenses that vary indirect proportion to the
quantity of output.
(iii) fixed cost are cost that remains unchanged irrespective of the output level of a
firm such as depreciation, interest, rent, salaries and wages.
(iv) contribution of a sales i s the amount it adds to the profit. The term reflect the
contribution a sale makes towards covering fixed costs.
(v) limiting factors is a key factor which puts a limit on production and profit of a
business. Usually this limiting factors is sales. A company may not be able to sell as much as
it can produce. Sometimes a company can sell all its produces but production is limited due
to the shortage of materials, labour, plant capacity or capital. A decision has to be taken
regarding the choice of the product whose production is to be increased, reduced, or stopped.
When there is scarce of limited resources selection of the product will be on the basis of
contribution per unit of the scarce factor of production.
(vi) In making decisions it is important that you based it on contribution / unit
because whether the product will continue or not the fixed cost will usually be the same
therefore by maximizing contribution margin a maximize profit will also be achieved.

3. A. Alternatives 1: 80,000 boxes at full capacity

August
Direct materials (7x80,000) 560,000
Direct labour 850,000
Prime cost 1,410,000
Overhead
Y= 60,000 + 5(80,000) 460,000
Other overhead cost 130,000
Total Production cost 2,000,000

Alternatives 2: 80,000 at 25 % capacity

August
Direct materials (7x20,000) 140,000
Direct labour 250,000
Prime cost 390,000
Overhead cost
Y= 40,000+6(20,000) 160,000
Other overhead cost 45,000
Total Production cost 595,000
 595,000x4months=2,380,000

B. > factors such as the cost that already been incurred such as sunk cost because
these are irrelevant in decision making because the amount cannot be changed regardless of
alternatives selected
> the net difference in cost between the two alternatives
> the limited resources of the company such as if they have enough materials,
employees to work to be able to meet the desired quantity of product to be produced.
> the unavoidable fixed cost you have to ascertain if the fixed cost is
unavoidable or avoidable

4. A. (i) Return of capital employed = 1800 / 585= 3.07times 1850 /615=3times

(ii) operating margin = 104 / 1800=5.78% 93/1,850=5.03%
(iii) asset turnover = 1800/1339=1.34times 1850/1547=1.20times
(iv) current ratio = 139/84=1.65times 147/122=1.20times
(v) capital gearing = 20/585=3.42% 160/615=26.02%
B. operating margin : is the measurement of what proportion of company revenue is left
over paying for variable cost of production
Asset turnover : the amount of sales generated for every worth of assets. It measures
how effectively a business is using assets to generates sales.
Current ratio : an indication of a company’s ability to meet short term debt obligations
the higher the ratio the more liquid the company is.
C. (1) nonfinancial measures focus on annual short term performance against accounting
yardstick by using this strategic performance and plans may achieved.
(2) nonfinancial data can provide indirect, quantitative indicators of a firms, intangible
asset. Using nonfinancial data will provide the missing link by providing forward looking
information on accounting.