KENYA METHODIST UNIVERSITY

END OF 1ST TRIMESTER 2014 (FT) EXAMINATION

SCHOOL : BUSINESS AND ECONOMICS

DEPARTMENT : ACCOUNTING, FINANCE AND INVESTMENT
UNIT CODE : ACCT 321
UNIT TITLE : MANAGERIAL ACCOUNTING
TIME : 2 HOURS

INSTRUCTIONS
Answer question one and any other two questions
Question One
a. Maridadi Company Limited manufactures plastic egg trays. The company
estimates to sell 20,000 units of egg trays with an average unit of cost of
Sh.
Direct material 30
Direct labor 10
Overhead: fixed 10
Variable 10
60
The management accountant is preparing a budget for the next financial year
Additional Information
i) Due to prevailing economic conditions prices of raw materials are
expected to rise by 20%, direct labor 5%, variable overheads by 5% and
fixed overheads by 25%
ii) A cheaper material costing sh.31.25 per unit could however be used in
place of the current material

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iii) If the cheaper material is used, 5% of completed output would be
rejected by customers and an inspection process be introduced at a cost
of sh.40,000 per annum (including sh.10,000 allocation of existing
factory overheads). The 5% rejected output translates into sh.2.75 per
unit
iv) The company charges a mark up of 5%
v) The previous year’s selling price was sh.90 per unit but it is now
expected to vary with demand as follows

Price per tray (sh.) 8 8 8 9 9 96 10

0 4 8 0 2 0
Demand (thousands of units) 2 2 2 2 1 17 15
5 3 1 0 9

Required:
i) Advice the management on whether to adopt the cheaper material or
continue using the current materials (20 Marks)
ii) Determine the best selling price per tray based on your
recommendation in (b) (i) above (10 marks)
Question Two
a. XYZ Ltd took 60 hours to produce the 1 st unit of a product, industry
experience associates such products with 80% learning rate
Required:
Determine how long it will take to produce
i) 8 units
ii) The 2nd unit
iii) The 8th unit (6 marks)
b. Swaza company ltd manufactures and sells three products namely; D, E
and F.
The company’s products department consists of processing and assembling.

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 The management accountant of Swaza company ltd has provided you with
the following budgeted information for the six month period ending 31
December 2013
Product Productio Selling Direct Direct Machine Direct
n Unit price Sh. Material labor Per unit labor
cost per cost per hours
unit Sh. unit Sh. per unit
D 100,000 45 16 14 4 14
E 80,000 95 50 30 10 6
F 60,000 70 30 30 8 4

In a bid to embrace modern business techniques, the management accountant

intends adopt the activity based costly (ABC) method of cost allocation and has
identified the following activities as the main cost drivers for the overhead
costs;
Overhead costs Cost drivers
Processing services Machine hours
Assembly services Direct labor hours
Quality control Number of inspections
Materials handling and dispatch Number of internal requisitions
Selling and administration Number of customer orders
Machine set ups Number of production runs

The following additional information is provided

(i) The company’s projected overhead costs for the period are;
Cost pools Sh.
Processing services 714,000
Assembly services 636,000
Quality control 52,000
Materials handling and dispatch 156,000
Selling and administration 168,000

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 Machine set up 156,000
1,882,000
(ii) All units produced will be sold within the six month period
(iii) Production takes place in batches of 1000 units
(iv) The following estimates have also been provided for the period

Product Number of inspection Number of internal Number of customer

requisitions orders
D 240 8000 3000
E 400 8000 4000
F 400 16,000 4200

Required:
i) Prepare budgeted income statement for the period ending 31
December 2013 based on activity based costing (ABC) (12 Marks)
ii) Highlight the shortfalls of the actively based costing method over the
conventional cost allocation methods (2 Marks)
Question Three
a. State and explain five differences between management and financial
accounting (10 marks)
b. XYZ ltd produces product W. The projected income statement for the year
2013 is as follows:
Sh. Sh.
Sales (50,000 units) 2,500,000
Variable cost
Direct materials 600,000
Direct labor 300,000
Direct expenses 400,000
Variable overheads 140,000 (1,440,000)
Contribution Margin 1,060,000
Less fixed costs 816,412

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Net profit 243,588
Required:
i) Break-even point in units and revenue (4 Marks)
ii) How many units to be sold to earn a profit of sh.150,000 (4 marks)
iii) For the projected level of sales, compute the margin of safety in units
(2
marks)
iv) Assuming a tax rate of 30%, how many units must be sold to realize
an after tax profit of sh.84,000 (3 Marks)
v) Suppose 30,000 units are sold above the break- even point, what is
the operating profit for the company (3 Marks)
vi) Assuming the price per unit increased by 20% fixed cost by
sh.20,000, while variable costs remain the same, compute the break-
even point in units and the contribution margin ration for the
company (4 marks)
Question Four
a. A radio manufacturing company finds that it costs $625 to make each
component XYZ. The same is available in the market at $485 each, with an
assurance of continued supply. The breakdown of cost is
$
Direct materials 275
Direct labor 175
Variable overheads 50
Depreciation 125
625
Required;
(i) Should the company make or buy? (4 Marks)
(ii) Explain two qualitative factors that the firm should consider for the
decision made in (i) above (4 Marks)

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b. Due to industrial depression, a plant is currently operating at 50% capacity
The following details are available;
Cost of production per units
$
Direct materials 2
Direct labor 1
Variable overhead 3
Fixed overhead 2
8
Production per month 20,000 units
Total cost of production 160,000
Sales price 140,000
Loss (20,000)

An exporter offer to buy 5,000 units per month at the rate of $6.50 per unit
and the company hesitates to accept the offer for fear of increasing its already
operating losses

Required:
Advice whether company should accept or decline this offer (12 Marks)

Question Five
a. Discuss the types of budgets (5 Marks)
b. Elaborate on the importance of budgeting (10 marks)
c. Discuss the limitations of budgeting (5 marks)

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