Subject (SQ): MANAGEMENT ACCOUNTING

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  • 20 Marks

MA – L2 – Q34 – Relevant cost and revenue

Calculate minimum price for 500 units of Product M22, considering relevant costs of materials, labour, overheads, and development.

KK Enterprises has received an enquiry from a customer for the supply of 500 units of a new product, Product M22. Negotiations on the final price to charge the customer are in progress and the sales manager has asked you to supply relevant cost information.
The following information is available:

(1) Each unit of Product M22 requires the following raw materials:

Raw material type Quantity
X 4 kg
Y 6 kg

(2) The company has 5,000 kg of material X currently in stock. This was purchased last year at a cost of GH¢7 per kg. If not used to make Product M22, this inventory of X could either be sold for GH¢7.50 per kg or converted at a cost of GH¢1.50 per kg, so that it could be used as a substitute for another raw material, material Z, which the company requires for other production. The current purchase price per kilogram for materials is GH¢9.50 for material Z and GH¢8.25 per kg for material X.

(3) There are 10,000 kilograms of raw material Y in inventory, valued on a FIFO basis at a total cost of GH¢142,750. Of this current inventory, 3,000 kilograms were purchased six months ago at a cost of GH¢13.75 per kg. The rest of the inventory was purchased last month. Material Y is used regularly in normal production work. Since the last purchase of material Y a month ago, the company has been advised by the supplier that the price per kilogram has been increased by 4%.

(4) Each unit of Product M22 requires the following number of labour hours in its manufacture:

Type of labour Hours
Skilled 5
Unskilled 3

Skilled labour is paid GH¢8 per hour and unskilled labour GH¢6 per hour.

(5) There is a shortage of skilled labour, so that if production of M22 goes ahead it will be necessary to transfer skilled workers from other work to undertake it. The other work on which skilled workers are engaged at present is the manufacture of Product M16. The selling price and variable cost information for M16 are as follows:

GH¢ per unit
Selling price 100
Less: variable costs of production
Skilled labour (3 hours) 24
Other variable costs 31
55
Contribution 45

(6) The company has a surplus of unskilled workers who are paid a fixed wage for a 37-hour week. It is estimated that there are 900 hours of unused unskilled labour time available during the period of the contract. The balance of the unskilled labour requirements could be met by working overtime, which is paid at time and a half.

(7) The company absorbs production overheads by a machine hour rate. This absorption rate is GH¢22.50 per hour, of which GH¢8.75 is for variable overheads and the balance is for fixed overheads. If production of Product M22 is undertaken, it is estimated that an extra GH¢4,000 will be spent on fixed costs. Spare machining capacity is available and each unit of M22 will require two hours of machining time in its manufacture using the existing equipment. In addition, special finishing machines will be required for two weeks to complete the M22. These machines will be hired at a cost of GH¢2,650 per week, and there will be no overhead costs associated with their use.

(8) Cash spending of GH¢3,250 has been incurred already on development work for the production of M22. It is estimated that before production of the M22 begins, another GH¢1,750 will have to be spent on development, making a total development cost of GH¢5,000.

Required:
Calculate the minimum price that the company should be prepared to accept for the 500 units of Product M22. Explain briefly but clearly how each figure in the minimum price calculation has been obtained.
(Note: The minimum price is the price that equals the total relevant costs of producing the items. Any price in excess of the minimum price will add to total profit).

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  • 15 Marks

MA – L2 – Q33 – Cost-volume-profit (CVP) analysis

Calculate Leaflet C sales needed for Apex Printing Solutions to achieve GH₵5,400 monthly profit with fixed orders for Leaflets A and B.

Apex Printing Solutions
(a) The manager of Apex Printing Solutions has received enquiries about printing three different types of advertising leaflet, type A, type B, and type C. Selling price and cost information for these leaflets is shown below:

Leaflet type: Type A Type B Type C
GH₵ GH₵ GH₵
Selling price, per 1,000 leaflets 300 660 1,350
Estimate printing costs:
Variable costs, per 1,000 leaflets 120 210 390
Specific fixed costs per month 7,200 12,000 28,500

In addition to the specific fixed costs, GH₵12,000 per month will be incurred in general fixed costs.
Required:
Assuming that fixed orders have been received to print 50,000 of Leaflet A and 50,000 of Leaflet B each month, calculate the quantity of Leaflet C that must be sold to produce an overall profit, for all three leaflets combined, of GH₵5,400 per month.                                                                                                                                                                                                                                                           (B)

Apex Printing Solutions now receives an enquiry from a customer about printing 30,000 of a different type of leaflet. The customer is willing to pay GH₵25,000. The variable labour and overhead costs of producing these leaflets would be GH₵80 per 1,000 leaflets.

The leaflets would be printed on a special type of paper. This costs GH₵500 per 1,000 leaflets. However, there are already sufficient quantities of the paper in inventory for 20,000 of the leaflets. This special paper was purchased three months ago for a customer who then cancelled his order. The material has a disposal value of GH₵1,500, but it could also be used to produce 20,000 units of leaflet C. The cost of normal paper for leaflet C is GH₵300 per 1,000 leaflets.

Required:

Calculate the relevant costs of making the leaflets for this special order, and indicate by how much profit would increase as a result of undertaking the order.

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  • 10 Marks

MA – L2 – Q32 – High/low analysis

Calculate variable/fixed costs using high/low analysis for ZAMCO and assess profit impact of a customer's offer.

ZAMCO

(a) Using the high/low method, calculate the variable cost per unit and the monthly fixed costs for ZAMCO.

(b) Calculate the normal sales price per unit and the contribution per unit at this sales price.

(c) A new customer has offered to buy 25,000 units each month from ZAMCO at a price that is 20% below the normal sales price. Accepting this offer would result in a fall in other sales by one-fifth of the units sold to the new customer. Advise whether ZAMCO should accept the new customer’s offer.

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  • 20 Marks

MA – L2 – Q31 – Standard costing and variance analysis

Explain types of standards, purposes of standard costing, its problems, and calculate sales, material, wage, and overhead variances for NORGA LIMITED.

NORGA LIMITED

Required:

(a) Explain the following types of standards, stating one advantage and one disadvantage of each:

(i) Basic cost standard
(ii) Ideal standards
(iii) Currently attainable standard

(b) State five purposes of standard costing

(c) State seven problems of standard costing in a modern manufacturing environment

(d) From the information provided, calculate the following:

(i) Sales price and sales volume variances
(ii) The total material variance
(iii) The total wage variances
(iv) Total manufacturing overhead variances
(v) Reconciliation of budgeted profit to actual profit

Additional Information:

The following additional information was extracted from the management accounts:

GH₵
Budgeted net profit for the period 200,000
Actual profit 45,000

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  • 20 Marks

MA – L2 – Q30 – Budgetary control

Redraft budget statement for APP Limited, identify behavioural issues, and suggest steps to improve budgeting system.

APP LIMITED

APP Limited is a well-established book publishing company founded in the early 1950s, following the success of books published by Adio. The company has recently been acquired by Contemporary Publishing Group (CPG) – a multinational company operating across all continents.

Mr. Goodluck of CPG International has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by APP.

During his visit to all departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the Advanced Education Notebook Production Department (AENP) for period III was presented to him.

The budget statement presented was as shown below:

Budget statement for period III

Department: AENP Department

ACTUAL RESULTS GH₵’000 BUDGET GH₵’000 VARIANCES GH₵’000
Units produced 37,500 36,000
Labour hours 106,050
Sales 2,325 2,232 93 (F)
Material cost 756 720 (36) (A)
Labour cost 369 360 (9) (A)
Variable overhead 237 216 (21) (A)
Fixed overhead 177 168 (9) (A)
Other overhead 123 120 (3) (A)
Administration cost 150 144 (6) (A)
Total cost 1,812 1,728 (84) (A)
Profit 513 504 9 (F)

Mr. N. Kevin

Head of Department

Subsequent interaction with Mr. Kevin – AENP Department Manager, revealed that the budget statement presented was based on 36,000 units with a standard labour content of 2.85 hours per unit.

Mr. Goodluck observed that Kevin was not enthusiastic about the budget system. He saw it as a pressure system imposed by the company to penalize some managers. He pointed out that the system was hurriedly introduced by Sano Consult about twelve months ago. The consultant never took time to provide explanations that could assist users to understand the system. The experienced AENP Manager was doubtful about the competence of the consultant. He was of the opinion that the system introduced in APP Limited was either a ready-made one developed for another company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all departments, and so the need to address the situation became very urgent.

The task of making the budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult, but your advice to Mr. Goodluck will assist tremendously in resolving the issue.

Required:

(a) Redraft the budget statement in a more informative manner.

(b) State the behavioural problems brought out in this situation.

(c) State the steps you think Mr. Goodluck should take.

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  • 20 Marks

MA – L2- Q29 – Standard Costing and Variance Analysis

Calculate budgeted output, material purchased, units produced, hours worked, wage rate, and causes of variances for KLM Enterprises Ltd.

KLM Enterprises Ltd. uses a standard costing system. The following profit statement summarises the performance of the company for August 20X3:

GH¢ GH¢
Budgeted profit 3,500
Favourable variance:
Material price 16,000
Labour efficiency 11,040 27,040
Adverse variance:
Fixed overheads expenditure (16,000)
Material usage (6,000)
Labour rate (7,520) (29,520)
Actual profit 1,020

The following information is also available:

  • Standard material price per unit (GH¢): 4.0
  • Actual material price per unit (GH¢): 3.9
  • Standard wage rate per hour (GH¢): 6.0
  • Standard wage hours per unit: 10
  • Actual wages (GH¢): 308,480
  • Actual fixed overheads (GH¢): 316,000
  • Fixed overheads absorption rate: 100% of direct wages

Required:
(a) Calculate the following from the given data:
(i) Budgeted output in units
(ii) Actual number of units purchased
(iii) Actual units produced
(iv) Actual hours worked
(v) Actual wage rate per hour
(b) State any two possible causes of favourable material price variance, unfavourable material usage variance, favourable labour efficiency variance, and unfavourable labour rate variance.

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  • 20 Marks

MA – L2- Q28 – Standard Costing and Variance Analysis

Calculate sales, material, and labour variances for Zest Foods Ltd. and prepare an operating statement reconciling budgeted to actual gross profit.

Zest Foods Ltd., a premium food manufacturer operating out of Tamale, is reviewing operations for a three-month period of 20X8. The company operates a standard marginal costing system and manufactures one product, ZP, for which the following standard revenue and cost data per unit of product is available:

Selling price GH¢ 12.00
Direct material A 2.5 kg at GH¢ 1.70 per kg
Direct material B 1.5 kg at GH¢ 1.20 per kg
Direct labour 0.45 hrs at GH¢ 6.00 per hour

Fixed production overheads for the three-month period were expected to be GH¢ 62,500.

Actual data for the three-month period was as follows:

  • Sales and production: 48,000 units of ZP were produced and sold for GH¢ 580,800
  • Direct material A: 121,951 kg were used at a cost of GH¢ 200,000
  • Direct material B: 67,200 kg were used at a cost of GH¢ 84,000
  • Direct labour: Employees worked for 18,900 hours, but 19,200 hours were paid at a cost of GH¢ 117,120
  • Fixed production overheads: GH¢ 64,000

Budgeted sales for the three-month period were 50,000 units of Product ZP.

Required:
(a) Calculate the following variances:
(i) Sales volume contribution and sales price variances;
(ii) Price, mix, and yield variances for each material;
(iii) Labour rate, labour efficiency, and idle time variances.
(b) Prepare an operating statement that reconciles budgeted gross profit to actual gross profit with each variance clearly shown.

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  • 10 Marks

MA – L2- Q27 – Advanced Variance Analysis

Calculate material price, mix, and yield variances for Product Z at Tamale Industries using standard and actual cost data.

Tamale Industries has the following standard cost for producing 1 unit of Product Z:

Material Quantity Price per kilo Cost
Material M 5 kilos GH¢8 GH¢40
Material N 3 kilos GH¢12 GH¢36

Actual results showed that 9,600 kilos of materials were used during a particular period as follows:

Material Quantity Cost
Material M 6,700 kilos GH¢51,400
Material N 2,900 kilos GH¢39,500

During the period, 1,250 units of Product Z were produced.

Required:
(a) Calculate the following variances:

  • Direct materials price variance
  • Materials mix variance
  • Materials yield variance

    (b) Summarize the standard materials cost, materials price variance, materials mix variance, materials yield variance, and actual materials cost.

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  • 9 Marks

MA – L2 – Q26 – Standard Costing and Variance Analysis

Calculate standard cost sheet for Product AB using given actual costs and variances to determine standard costs and rates.

Standard marginal production cost – Product AB
Direct materials (8 kilos at GH¢1.50 per kilo)
Direct labour (2 hours at GH¢4 per hour)
Variable production overhead (2 hours at GH¢1 per hour)
Standard marginal production cost

Tutorial note: This problem tests your understanding of the formulae for calculating variances. Here, you are given the actual costs and the variances, and have to work back to calculate the standard cost. The answer can be found by filling in the balancing figures for each variance calculation.

Workings
Materials price variance
150,000 kilos of materials did cost
Material price variance
150,000 kilos of materials should cost
(The variance is favourable, so the materials did cost less to buy than they should have cost.)

Materials usage variance
Materials usage variance in GH¢ = GH¢9,000 (A)
Standard price for materials = GH¢1.50
Materials usage variance in kilograms = 9,000 / 1.50 = 6,000 kilos (A) kilos
18,000 units of the product did use
Material usage variance in kilos
18,000 units of the product should use

Required:
Calculate the standard cost sheet for Product AB, including:

  1. Standard price for materials.
  2. Standard quantity of materials per unit.
  3. Standard time per unit for labour.
  4. Variable production overhead rate per hour.

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  • 15 Marks

MA – L2 – Q25 – Advanced variance analysis

Calculate actual quantity purchased and cost of materials X and Y, including variances, for VRS Limited.

VRS Limited has the following data for a particular period:

Standard consumption quantities:

  • Material X: 50,000 units × 6 kg = 300,000 kg
  • Material Y: 50,000 units × 3 kg = 150,000 kg

Adverse quantity variance (quantity used in excess of standard usage):

  • Material X: 5,000 kg
  • Material Y: 5,000 kg

Actual quantity used:

  • Material X: 300,000 kg + 5,000 kg = 305,000 kg
  • Material Y: 150,000 kg + 5,000 kg = 155,000 kg

Inventory data:

  • Closing inventory:
    • Material X: 300,000 kg × 20/365 = 16,438 kg
    • Material Y: 150,000 kg × 20/365 = 8,219 kg
  • Opening inventory:
    • Material X: 300,000 kg × 25/365 = 20,548 kg
    • Material Y: 150,000 kg × 25/365 = 10,274 kg

Actual cost data:

  • Material X: GH₵150,000 ÷ GH₵30 = 5,000 kg (used to calculate actual quantity used)
  • Standard cost per kilo:
    • Material X: GH₵50
    • Material Y: GH₵30

          Required:
(a) Calculate:

  • Actual quantity purchased for Materials X and Y.
  • Actual cost of purchase for Materials X and Y, including price variance and percentage saved on standard rate.

    VRS Limited has the following data for a particular period:

    Labour rate variance data:

    • Actual hours: 168,000
    • Standard rates:
      • 3/7 of hours at GH₵150 per hour
      • 4/7 of hours at GH₵100 per hour
    • Rate variance: 10% and 5% (Adverse)

    Required:
    (b) Calculate the labour rate variance and any relevant overhead variances.

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