UNIVERSITY OF ZIMBABWE

DEPARTMENT OF ACCOUNTANCY

MANAGEMENT ACCOUNTING AND CONTROL I

FIRST SEMESTER EXAMINATION

DATE 19 APRIL TIME ALLOWED: 4 HRS

INSTRUCTION TO CANDIDATES

Candidates should attempt all questions and should begin each answer on a new
sheet of paper.

In marking papers, examiners take into account clarity of exposition, effective

arrangement, and presentation.

Question Topic Marks

1 Marginal and Absorption Costing 25
2 Decision Making 13
3 Pricing 12
4 Activity Based Costing 25
5 Investment Appraisal 25
TOTAL MARKS 100

HIS PAPER HAS 8 PAGES

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QUESTION 1 [25 MARKS]

Mudzimu Ltd makes and sells one product, the standard production cost of which is as
follows for one unit.

$
Direct labour 3 hours at $6 per hour 18
Direct materials 4 kilograms at $7 per kg 28
Production overhead – Variable 3
- Fixed 20
Standard production cost 69

Normal output is 16,000 units per annum and this figure is used for the fixed production
overhead calculation..

Costs relating to selling, distribution and administration are as follows:

Variable 20% of sales value

Fixed $180,000 per annum

The only variance is a fixed production overhead volume variance. There are no units in
finished goods stock at 1 October 2009. The fixed overhead expenditure is spread evenly
throughout the year. The selling price per unit is $140.

For the two six-monthly periods detailed below, the number of units to be produced and
sold are budgeted as:

Six months ending Six months ending

31 March 2009 30 September 2009
Production 8,500 7,000
Sales 7,000 8,000

Required:
(a) Prepare statements for management showing sales, costs and profits for each
of the six monthly periods, using:

(i) marginal costing (6 marks)

(ii) absorption costing (6 marks)

(b) Prepare an explanatory statement reconciling for each six-monthly period the
profit using marginal costing with the profit using absorption costing
(6 marks)
(c) State and explain three business situations where the use of marginal costing
may be beneficial to management in decision making (7 marks)

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 [25 marks]
Question 2 [13 MARKS]

Climate Control Ltd manufacturers a variety of heating and air- conditioning units. The
Company is currently manufacturing all for its own component parts. An outside
supplier has offered to produce and sell a particular part to the company at a cost of $20
per part. To evaluate this offer, Climate Control Pvt Ltd, has gathered the following
information relating to its own "cost” of producing the part internally.

Per 15,000 Parts

Part per year
Direct materials $6 $ 90,000
Direct labour 8 120,000
Variable manufacturing overhead 1 15,000
Fixed manufacturing overhead, traceable 5* 75,000
Fixed manufacturing overhead, common,
but allocated 10 150,000
Total cost $30 $450,000

*40% Supervisory; 60% depreciation of special equipment (no resale value)

Required:
1. Assuming that the company has no alternative use for the facilities
now being used to produce the part, should the outside supplier’s offer
be accepted? Show all computations (7 marks)

2. Assuming that a new product that will generate a segment margin of

$65,000 per year could be produced if the part were purchased, should
the offer be accepted? Show computations (6 marks)/

[13marks]

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Question 3 [12 MARKS]

Meridian Company must determine a target selling price for one of its products. Cost
data relating to the product are as follows:
Per Cost Total
Direct materials ………….. $ 6
Direct labour…………… 10
Variable manufacturing………. 3
Fixed manufacturing overhead……. 5 $450,000
Variable selling, general, and administrative expenses 1
Fixed selling, general, and administrative…….. 4 360,000

The costs above are based on an anticipated volume of $90,000 units produced and sold
.ach period. The company uses cost-plus pricing, and it has a policy of obtaining target
selling prices by adding a markup of 50% of unit manufacturing cost or by adding a
markup of 80% of variable costs.

Required:
1. Assuming that the company uses absorption costing, compute the target
selling price for one unit of product. (6 marks)

2. Assuming that the company uses the contribution approach to costing,

compute the target selling price for one unit of product. (6 marks)

[12 marks]

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Question 4 [25 MARKS]

The following budgeted information relates to Bunu Pvt Ltd for the forthcoming period:

Products
__________________

XYI YZT ABW

(000) (000) (000)
_______________________________________

Sales and production (units) 50 40 30

$ $ $
Selling price (per unit) 45 95 73
Prime cost (per unit) 32 84 65

Hours Hours Hours

_________________________________________
Machine department
(machine hours per unit)….. 2 5 4
Assembly department
(direct labour hours per unit)…… 7 3 2

Overheads allocated and apportioned to production departments (including service cost

centre costs) were to be recovered in product costs as follows:

Machine department at $1.20 per machine hour

Assembly department at $0.825 per direct labour hour

You ascertain that the above overheads could be re-analysed into cost pools as follows:

Quantity
for the
Cost pool $000 Cost driver period

Machining services 357 Machine hours 420 000

Assembly services 318 Direct labour hours 530 000
Se-up costs 26 Set – ups 520
Order processing 156 Consumer orders 32 000
Purchasing 84 Suppliers 11 200
941

You have also been provided with the following estimates for the period:

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 Products
__________________

XYI YZT ABW

_______________________________________

Number of set ups 120 200 200

Customer orders 8 000 8 000 16 000
Suppliers orders 3 000 4 000 4 200

Required:

(a) Prepare and present profit statements using:-

(i) Conventional absorption costing (8 marks)

(ii) Activity based costing (12 marks)

(b) Comment on why activity based costing is considered to present a fairer

valuation of the proper cost per unit (5 marks)

[25 marks]

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 Question 5 [25 MARKS]

Chikazaza Pvt Ltd

You have been appointed finance director of Chikazaza Pvt Ltd. The company is
considering investing in the production of an electronic security device, with an
expected market life of five years.

The previous finance director has undertaken an analysis of the proposed project.
the main features of her analysis are shown below:

She has recommended that the project should not be undertaken because the
estimated annual accounting rate of return is only 12.3%

Proposed Electronic Security Device Project

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

$000 $000 $000 $000 $000 $000

Investment in depreciable
Fixed Assets 4,500
Cumulative investment in
working capital 300 400 500 600 700 700
Sales 3.500 4,900 5,320 5,740 5320
Materials 535 750 900 1,050 900
Labour 1,070 1,500 1,800 2,100 1,800
Overhead 50 100 100 100 100
Interest 576 576 576 576 576
Depreciation 900 900 900 900 900
3,131 3,826 4,276 4,276 4,276
Taxable profit 369 1,074 1,044 1,014 1,044
Taxation 129 376 365 355 365
Profit after tax 240 698 679 659 679

Total initial investment is $4,800.000. The average annual after tax profit is $591,000.

All of the above cash flow and profit estimates have been prepared in terms of present
day costs and prices, as the previous finance director assumed that the sales price could
be increased to compensate for any increase in costs.

You have available the following additional information.

(i) Selling prices, working capital requirements and overhead expenses are
expected to increase by 5% per year.

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(ii) Material costs and labour costs are expected to increase by 10% per year.

(iii) Capital allowances are allowable for taxation purposes against profits at 25%
per year on a reducing balance basis.

(iv) Taxation of profits is at a rate of 35% payable one year in arrears.

(v) The fixed assets have no expected scrap value at the end of five years.

(vi) The company’s real after-tax cost of capital is estimated to be 8% per year and
money after-tax cost of capital 15% per year.

Assume that all receipts and payments arise at the end of the year to which they relate
except those in year 0, which occur immediately.

Required:

(a) Estimate the NPV of the proposed project. State clearly any assumptions
that you make (15 marks)

(b) Calculate by how much the discount rate would have to change to result in
a net present value of approximately zero. (10 marks)

[25 marks]

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