Series: MAY 2022

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  • 15 Marks

TAX – May 2022 – L2 – SA – Q7 – The Nigerian Tax System

Discuss the aspects of the tax system in Nigeria, focusing on tax policy, key tax laws, and administrative bodies.

The tax system in Nigeria has been reviewed in recent times with a view to ensuring ease of doing business in Nigeria, among other things. With the enactments of Finance Acts 2019 and 2020, many enabling Acts were amended.

The tax system usually involves a tripartite aspect, namely, the tax policy, tax law, and tax administration.

Required:
a. Explain tax policy. (5 Marks)
b. State notable tax legislations. (5 Marks)
c. State the bodies charged with the administration of taxes in Nigeria. (5 Marks)

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  • 15 Marks

TAX – May 2022 – L2 – SA – Q6 – Tax Administration and Enforcement

Identify the badges of trade and compute the minimum tax payable for a given year of assessment.

a. The difficulty in determining what constitutes a trade has led to many litigations and the huge number of tax cases that exist on the issue. The problem from the decided cases is that of finding an absolute test for identifying a trade.

The conclusion had always been that there are no fixed rules but that each case could be examined on its own facts.
Required:
State FOUR considerations that influence the identification of badges of trade. (8 Marks)

b. Ndakogi Nigeria Limited commenced business in 2007. The extract of the statement of profit or loss of the company for the year ended December 31, 2021, has revealed the following:

Required:
Compute the minimum tax payable

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  • 15 Marks

TAX – May 2022 – L2 – SA – Q5 – Withholding Tax (WHT)

Discuss the contents of withholding tax returns, the time frame for compliance, and the merits and demerits of the withholding tax scheme.

Withholding tax is a tax deducted at source from proceeds made to a taxable person for the supply of goods and services. It is not another form of tax, but simply an advance payment of tax, as the withholding tax deducted at source is off-set against any subsequent tax liability that may be due in respect of the income.

Required:
a. State the contents of withholding tax returns/payment schedule. (5 Marks)
b. State the time frame for compliance with withholding tax returns. (5 Marks)
c. Explain the merits and demerits of the withholding tax scheme. (5 Marks)

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  • 20 Marks

TAX – May 2022 – L2 – SA – Q4 – Companies Income Tax (CIT)

Explain the recent changes in taxation introduced by the Finance Acts of 2019 and 2020, specifically related to insurance companies.

Bakosa Insurance Co. Plc. is a company engaged in both life and other insurance businesses. You were appointed as the tax consultant of the company on June 30, 2021. The Managing Director of the company invited you to a meeting of the directors with a view to intimating them of the recent changes introduced by the Finance Acts 2019 and 2020, relating to insurance business.

Required:
Explain the following to the management of the company:
a. Recent changes introduced by Finance Acts 2019 and 2020, that relate to the computation of tax liabilities of insurance companies. (16 Marks)
b. Additional documents/information to be filed by insurance companies. (4 Marks

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  • 20 Marks

TAX – May 2022 – L2 – SA – Q3 – Tax Administration and Enforcement

Identify the taxes and levies collectible by the Federal, State, and Local Governments in Nigeria, in light of a recent court ruling.

The Federal Government of Nigeria expanded the taxes and levies which the tiers of government can impose through the Schedule to the Taxes and Levies (Approved List for Collection) Act (Amendment) Order, 2015. In this Order made by the Minister of Finance, several new tax/levy heads, such as infrastructure maintenance/development levy, wharf landing charge/fee, consumption tax, the National Information Technology Development levy, etc., were introduced.

However, on May 8, 2020, the Federal High Court sitting in Lagos, delivered judgment in suit number FHC/L/CS/1082/2019, between The Registered Trustees of Hotel Owners and Managers Association of Lagos (suing for itself and on behalf of all its members) vs The Attorney-General of the Federation and others. The court held that the Ministerial Order of 2015 is unconstitutional, null, and void.

The court submitted that the Constitution vests the legislature with the power to make laws. The court further stated that schedules to a law are part and parcel of the law and, as such, only the legislature can amend schedules to a law. The implication of this ruling is that all the taxes and levies that were added to those in the Taxes and Levies (Approved List for Collection) Act Cap. T2 LFN 2004, via the Ministerial Order 2015, are illegal and cannot be enforced.

Since the judgment, your firm has been faced with a series of inquiries from taxpayers on the taxes/levies they are now expected to pay.

Required:
a. State five (5) taxes collectible by the Federal Government.
b. State five (5) taxes/levies collectible by the State Governments.
c. State ten (10) taxes/levies collectible by the Local Governments.

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  • 20 Marks

TAX – May 2022 – L2 – SA – Q2 – Personal Income Tax (PIT)

Compute the personal income tax assessable for each partner in a partnership, considering legal fees, capital allowances, and profit-sharing.

You attended an interview for employment as Assistant Manager (Tax) in a professional firm. The following were presented to you to proffer solutions:

Mariam, Ola, Jude and Co., a firm of quantity surveyors, makes up its accounts to December 31 of each year. The following details were extracted from the firm’s accounting books in respect of the year ended December 31, 2019:

Item Amount (N)
Net profit for the year 1,540,000
Legal expenses for successfully defending one of the partners for alleged professional misconduct 100,000
Depreciation 360,000
Profit on sale of property, plant and equipment 4,220
Balancing charge 10,400
Balancing allowance 6,900
Capital allowances for the year 300,000

Additional information:

  1. Profit sharing ratio agreed by the partners: Mariam 2, Ola 3, Jude 5
  2. Mariam, Ola, and Jude received N7,400 each per annum as interest on loan to the firm
  3. Salaries paid to each of the partners are:
    • Mariam: N240,000
    • Ola: N200,000
    • Jude: N220,000

Required:
Compute the personal income tax assessable for each partner for the relevant year of assessment.

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  • 30 Marks

TAX – May 2022 – L2 – SA – Q1 – The Nigerian Tax System

Discuss the tax filing obligations and implications of non-compliance for a new company, covering both corporate tax and VAT.

Mr. Danko Chinyere, who has worked in a neighboring African country for many years, returned to Nigeria in August 2018. He incorporated a private limited liability company known as ChiDan Limited located in Lagos on October 30, 2018. The company deals in processing and packaging of plantain chips for local consumption.

The directors of the company opened a business bank account with one of the leading commercial banks in November 2018. The company commenced full operations on January 2, 2019.

Your firm, Adama & Co., was appointed as the tax consultant to ChiDan Limited in January 2021. At the first engagement meeting with the company, you discovered that the company was yet to register with the Federal Inland Revenue Service (FIRS). Relevant taxes, including value-added tax (VAT), were not remitted to FIRS.

An extract of the company’s first set of financial statements made up to December 31, 2020, is as follows:

Required:
Advise management of the company on the following:
a. Due date for submission of audited financial statements to the tax office. (2 Marks)
b. Requirements for filing of VAT returns and remittance of VAT liabilities – Section 16 of VAT Act (as amended). (4 Marks)
c. Basis of assessment on commencement of business – Section 29 (3) of CITA
(as amended) (6 Marks)
d. The income tax liabilities payable for the relevant year of assessment
(18 Marks)

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  • 15 Marks

CSME – May 2022 – L2 – SC – Q7 – Business Ethics and Corporate Governance

Explain personal, business, and professional ethics, and describe Kohlberg’s stages of moral development.

a. All accountants are expected to act ethically in the discharge of their respective duties. In light of this, evaluate the following concepts as they apply to professional accountancy practice:

  • i. Personal Ethics (1 Mark)
  • ii. Business Ethics (1 Mark)
  • iii. Professional Ethics (1 Mark)

b. With the aid of a clear example, explain the term “ethical/moral dilemma.” (2 Marks)

c. Explain Kohlberg’s stages of moral development. (10 Marks)

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  • 15 Marks

CSME – May 2022 – L2 – SC – Q6 – Corporate Governance

Discuss the purpose of board remuneration, the role of the remuneration committee, and the challenges of linking board pay to company performance.

At the Annual General Meeting of TAIMAKO Nigeria Limited, shareholders expressed displeasure about what they considered to be excessively high remuneration paid to members of the company’s board of directors. Some shareholders believed that board remuneration should be tied to the company’s financial performance. Consequently, a group of shareholders has asked you to advise them on the position of the Code of Corporate Governance on remuneration of directors.

Required:

a. The purpose and structure of the remuneration package for board members. (5 Marks)

b. The role of the remuneration committee. (5 Marks)

c. The problems of linking board members’ rewards with the company’s performance. (5 Marks)

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  • 15 Marks

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

a. A friend of yours who recently lost his job came to you for advice on how to invest his life savings in a way that will minimize the risk of loss of capital.

  • i. Advise him on how risk of losses could be minimized using the following:
    1. Risk Diversification (1 Mark)
    2. Risk Transfer (1 Mark)
    3. Risk Sharing (1 Mark)
    4. Risk Hedging (1 Mark)
    5. Risk Avoidance (1 Mark)
  • ii. Explain to your friend when risk diversification is the best option for him. (4 Marks)

b. What is risk appetite? Explain THREE factors that determine the risk appetite of a company. (6 Marks)

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  • 30 Marks

PSAF – May 2022 – L2 – SA – Q1 – The Budgeting Process in the Public Sector

Prepare proposed budget estimates for 2021-2023 based on actual and approved estimates for the year 2020.

The ministry of finance of Ojaja Republic prepared the aggregate Medium-Term Expenditure-Framework (MTEF) budget for consideration by the National Assembly as contained in the country’s Constitution. The following are the MTEF actual budget estimates and the approved budget estimates by various sectors as thoroughly screened by the Budget Committees of the Senate and House of Representatives:

Ojaja Federal Republic Summary of total budgeted expenditure by sector for 2020

Sector Code Sector Name Actual Estimates 2020 (N’m) Approved Estimates 2020 (N’m)
01 Administrative Sector
Personnel Cost 40,000 34,000
Overhead Cost 25,000 21,250
Consolidated Revenue Charges 18,600 15,810
Capital Expenditure 62,400 53,040
Sub-Total 146,000 124,100
02 Economic Sector
Personnel Cost 22,500 20,250
Overhead Cost 12,600 11,340
Consolidated Revenue Charges 28,600 25,740
Capital Expenditure 41,300 37,170
Sub-Total 105,000 94,500
03 Law and Justice Sector
Personnel Cost 15,800 15,800
Overhead Cost 20,200 20,200
Consolidated Revenue Charges 17,500 17,500
Capital Expenditure 38,500 38,500
Sub-Total 92,000 92,000
04 Regional Sector
Personnel Cost 40,800 38,760
Overhead Cost 22,200 21,090
Consolidated Revenue Charges 16,700 15,865
Capital Expenditure 32,300 30,685
Sub-Total 112,000 106,400

Summary of total expenditure by sectors:

Description Actual Estimates 2020 (N’m) Approved Estimates 2020 (N’m)
Personnel Cost 119,100 108,810
Overhead Cost 80,000 73,880
Consolidated Revenue Charges 81,400 74,915
Capital Expenditure 174,500 159,395
Total 455,000 417,000

Additional Information:
(i) Administrative sector – all costs at an incremental basis of 15%, except for capital expenditure which will increase by 10%.
(ii) Economic sector – all costs at an incremental basis of 25%, except for overhead cost which will decrease by 5%.
(iii) Law and justice sector – all costs at a declining basis of 5%, except for personnel cost which will increase by 10%.
(iv) Regional sector – all costs at an incremental basis of 10%, except for consolidated revenue charges which will decrease by 15%.

Required:
a. Prepare proposed budget estimates for 2021, 2022, and 2023 based on the approved estimates for the year 2020. (20 Marks)
b. Explain the following in relation to National Chart of Accounts (NCOA) structure for budgeting:
i. Functional segment (2 Marks)
ii. Programme segment (2 Marks)
iii. Geographical segment (2 Marks)
c. Enumerate FOUR steps required for budgeting with the National Chart of Accounts. (4 Marks)

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  • 15 Marks

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

Eko Limited is a small manufacturing company producing two high-quality products called ‘Kay’ and ‘Lay’. Both products use a raw material Tee (costing ₦30 per kg) in their manufacture. The Directors are reviewing the company’s stock management policies for the forthcoming year as part of the annual budget preparation cycle.

Due to the product specification, quality is an important factor and a quality control inspection takes place immediately after the production cycle has ended. At this point, any inferior products are rejected and only good production becomes available for sale. In addition to these losses, a certain quantity of waste is unavoidable from material Tee due to the cutting process for both products.

The following forecast information has been extracted from departmental estimates for the year ending 31st December 2020 (the budget period).

Product Kay Product Lay
Sales (quality approved units) 23,000 10,000
Finished goods stock increase by year-end 275 185
Post-production rejection rate (%) 2 3
Material Tee usage (per completed unit, net of wastage) 2kg 3kg
Material Tee wastage (%) 5 10

Additional Information:

  • Usage of raw material Tee is expected to be at a constant rate over the period.
  • Annual cost of holding one unit of raw material in stock is 17% of the material cost.
  • The cost of placing orders is ₦30 per order.
  • Eko Limited maintains a constant 1,000 kg of safety/buffer stock of material Tee regardless of the quantity ordered each time.

Required:
a. Prepare operational budgets for the year ending 31st December 2020 under the following headings: (Show your workings clearly)
i. Production budget for Products Kay and Lay (in units). (5 Marks)
ii. Purchases budget for Material Tee (in kgs and value). (5 Marks)

b. Calculate the Economic Order Quantity for Material Tee (in kgs). (5 Marks)

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  • 15 Marks

PM – May 2022 – L2 – SA – Q6 – Budgeting and Budgetary Control

Preparation of flexible budgets for varying production levels and analysis of variances.

Ezenwa Nigeria Limited is a company which produces a single product on an assembly line. The budget personnel has been availed with the following information which represents the extremes of high and low volumes of production which the company will achieve over a three month period.

Costs Production of 80,000 units Production of 160,000 units
Direct materials 3,200,000 6,400,000
Indirect materials 480,000 800,000
Direct labour 2,000,000 4,000,000
Power 720,000 960,000
Repairs 800,000 1,200,000
Supervision 800,000 1,440,000
Rent, insurance and rates 360,000 360,000

Additional Information:
Supervision is a “step function”. To this end, one supervisor is employed for all production levels up to and including 100,000 units. For higher levels of production, an assistant supervisor whose remuneration is N640,000 will be added.

Required:
a. Prepare a set of flexible budgets for presentation to the Production Director to cover the following levels of production over a period of three months:
i. 80,000 Units
ii. 100,000 Units
iii. 120,000 Units
iv. 140,000 Units
v. 160,000 Units (9 Marks)

b. During the three months July to September 2021, 100,000 units were produced. Actual costs incurred during this period were as follows:

Costs Amount (N)
Direct materials 4,150,000
Indirect materials 580,000
Direct labour 2,700,000
Power 760,000
Repairs 885,000
Supervision 850,000
Rent, insurance and rates 320,000

Required:
i. Prepare a budget report for presentation to the Production Director displaying all relevant variances. (3 Marks)
ii. For each variance, suggest any further investigations which might be required and the necessary actions required to be taken by the Director. (3 Marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q5 – Cost-Volume-Profit (CVP) Analysis

Analysis of Abayomi Plc's financial data to determine break-even sales and evaluate budget adjustments.

Abayomi Plc produces and sells two major products, A and B. The budgeted income statement for the year to December 31, 2022 is given below:

The budgeted selling prices of the products are:

  • A: ₦120
  • B: ₦180

Required:
a. Determine the breakeven sales in units for each of the products, using the budgeted data. (6 Marks)

Now assume that the following changes are made to the budget:
(i) Unit selling price of product B is reduced to ₦160.
(ii) Direct material cost is expected to drop by 10% for product A and 20% for product B.
(iii) Direct labour costs for each product will increase by 10%.
(iv) Additional ₦456,000 will be spent on advertising.
(v) 80% of total revenue will be derived from product B.

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  • 20 Marks

PM – May 2022 – L2 – SA – Q4 – Costing Systems and Techniques

Analysis of activity-based costing applications and challenges in large service organizations.

Large service organisations, such as banks and hospitals, used to be noted for their lack of management accounting techniques and their relatively unsophisticated budgeting and control systems compared with large manufacturing organisations. But this is changing and many large service organisations are now revising their use of management accounting techniques, especially as it relates to activity-based approaches.

Required:
a. Explain which features of large-scale service organisations encourage the application of activity-based approaches to the analysis of cost information. (5 Marks)

b. Explain which features of service organisations may create problems for the application of activity-based costing. (5 Marks)

c. Explain the uses for activity-based cost information in service industries. (5 Marks)

d. Many large service organisations were at one time state-owned, but have been privatised. Examples in some countries include electricity supply and telecommunications. They are often regulated. Similar systems of regulation of prices by an independent authority exist in many countries and are designed to act as a surrogate for market competition in industries where it is difficult to ensure a genuinely competitive market. Explain which aspects of cost information and systems in service organisations would particularly interest a regulator, and why these features would be of interest. (5 Marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q3 – Performance Evaluation

Evaluate Uzochuks' financial performance using ARR and EVA, and assess the NPV of a solar project.

Uzochuks Nigeria Limited is a company established four years ago to produce medical equipment. The income statement and statement of financial position for 2019 and 2020 are as follows:

(ii) Economic depreciation is assessed to be N50.5million in 2020. Economic depreciation includes any appropriate amortisation adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.
(iii) Tax is the cash paid in the current year (N16 million) and an adjustment of N2 million for deferred tax provisions. There was no deferred tax balance prior to 2020.
(iv) The provision for doubtful debts was N2.5million on the 2020 statement of financial position.
(v) Research and development is not capitalised in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. 2020 is the first year of this project.
(vi) The company had a non-capitalised leased assets of N18million in January 2020. These assets are not subjected to depreciation.
(vii) Cost of capital of Uzochuks:
Equity 18%
Debt (pre-tax) 6%
(viii) Capital structure of Uzochuks:
Equity 60%
Debt 40%
(ix) The company had the opportunity to invest in a solar project that will require the procurement of an equipment worth N3million in January 2020 and run for a period of 5 years with a salvage value of N0.50million, generating a stable net cash flow of N0.85 million. The applicable cost of capital is the associated weighted average cost of capital of the company.

Required:
a. i. Compute and evaluate the company’s performance using the average rate of return (ARR). (4 Marks)
ii. Compute and evaluate the company’s performance using the economic value added (EVA) parameter. (9 Marks)
b. Calculate the net present value (NPV) of a solar project that will require the procurement of equipment worth N3 million in January 2020, generating a stable net cash flow of N0.85 million annually for five years with a salvage value of N0.50 million. The applicable cost of capital is the associated weighted average cost of capital of the company. (7 Marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q2 – Cash Budgeting and Working Capital

Preparation of a cash budget for Mega Laboratories PLC for the quarter ending June 30, 2021.

Mega Laboratories plc is a successful manufacturing company in the pharmaceutical industry. The company manufactures a number of household drugs. Since the advent of the Covid-2019 pandemic, its products have been in high demand. One of its newest products is known as vacineDcovid. In order to manufacture the product, a single raw material, Zithromax, is used.

Budgets are to be prepared for the quarter ending 30 June 2021, and the following information is available for this purpose:

(i) At 31 March 2021 various balances were as follows:

  • Receivables: N500,700
  • Creditors (suppliers of Zithromax): N153,000
  • Inventory of vacineDcovid: 20,300 units
  • Inventory of Zithromax: 200,000 kg

(ii) Extracts from the ‘standard cost card’ – vacineDcovid are as follows:

  • Direct material Zithromax, 10kg at N5.00 per kg: N50.00
  • Direct labour, 2 hours at N6.00 per hour: N12.00

(iii) Suppliers of Zithromax give two months credit to the company, whereas customers take one month’s credit.
(iv) Sales expectations for the quarter ending 30 June 2021 are as follows:

  • 25,000 units of vacineDcovid at a selling price of N95.00 per unit.
    (v) Assume that sales of vacineDcovid and purchases of Zithromax will be evenly spread over the three months to 30 June 2021.
    (vi) Depreciation relating to plant and machinery is N55,000 for the quarter ending 30 June 2021.
    (vii) Other expenses are paid immediately in cash and are estimated to be N200,000 for the quarter ending 30 June 2021.
    (viii) The anticipated inventory levels at 30 June 2021 are as follows:
  • Inventory of vacineDcovid: 15,000 units
  • Inventory of Zithromax: 150,500 kgs

(ix) Assume there is no work-in-progress and that stocks of vacineDcovid and Zithromax are valued at standard direct cost – see (ii) above.

Required:
For the quarter ending 30 June 2021 prepare:
a. A cash budget (amounts for each separate month are not required). (8 Marks)
b. Income Statement budget (clearly state any assumptions you have made). (5 Marks)
c. Briefly state the benefits of a Cash Budget to Mega Laboratories plc. (3 Marks)
d. Sales are often considered to be a principal budget factor of an organisation. Explain the meaning of a ‘principal budget factor’ and assuming that it is sales, explain how sales may be forecast, making appropriate reference to the use of statistical techniques and the use of computers. (4 Marks)

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  • 5 Marks

PM – May 2022 – L2 – SA – Q1C – Costing Systems and Techniques

Explain the concepts

Explain the following concepts:
i. Incremental cost;
ii. Differential cost;
iii. Committed cost;
iv. Sunk cost;
v. Opportunity cost.

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  • 10 Marks

PM – May 2022 – L2 – SA – Q1B – Costing Systems and Techniques

Appraisal of a one-off order outside normal operations with relevant cost considerations.

The company is considering the viability of investing in a one-off order outside its normal budgeted routine operation. The Management Accountant is requested to appraise the procurement and sale of some useful medical equipment. The following cost estimate has been prepared by a junior accountant:

  1. The steel is regularly used and has a current stock value of N50 per square meter. There are currently 400 square meters in stock. The steel is readily available at a price of N55 per square meter.
  2. The brass fittings would have to be bought specifically for the job. A supplier has quoted N800 for the fittings required.
  3. The skilled labor is currently employed by the company and paid at the rate of N80 per hour. If this job were undertaken, it will be necessary to either work 100 hours overtime which would be paid at time plus one half (N120 per hour), or hire additional labor at N100 per hour.
  4. The company has sufficient unused capacity in terms of general fixed overheads. The junior accountant has made no allocation for fixed overheads.
  5. The company’s policy is to add 20% to the production cost as an allowance against administrative costs associated with the jobs accepted.
  6. The standard profit added by the company as part of its pricing strategy is N150.

Required:

  1. Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimates. (6 Marks)
  2. There may be a possibility of repeat orders from your company which would occupy part of the normal production capacity. What factors need to be considered before quoting for this order? (4 Marks)

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  • 15 Marks

PM – May 2022 – L2 – SA – Q1A – Costing Systems and Techniques

Budgeted contribution, effect of product discontinuation, and sales to cover extra costs.

You are the Management Accountant of Dankoli Nigeria Limited, which specializes in the production of three products: Product 1, Product 2, and Product 3.

The following information is available for the first quarter of 2021:

Particulars Product 1 Product 2 Product 3
Sales units (’000) 225 376 190
Selling Price per unit N15.00 N13.00 N10.00
Variable costs per unit N7.80 N6.00 N5.00
Attributable fixed costs N275,000 N337,000 N296,000

General fixed overhead is apportioned on the basis of sales value. The budgeted general fixed overhead is N1,668,000.

Required:

  1. Calculate the budgeted contribution and profit of the Products and Company. (5 Marks)
  2. Calculate the budgeted profits assuming that Product 3 is discontinued with no effect on sales of the other products. (5 Marks)
  3. Calculate the extra sales in units and value required to cover the additional cost of advertising of N80,000 if such cost is treated as general fixed overhead. (5 Marks)

 

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