CAT L2.3 MANAGEMENT ACCOUNTING Revision Guide

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CAT
Certified Accounting Technicians Examination
Stage:
Level 2 L2.3
Subject Title: Management Accounting

Revision Guide

INSIDE COVER - BLANK

CONTENTS

Title

Page

Study Techniques

Examination Techniques

Assessment Strategy

Learning Resources

Revision Questions and Solutions

Page 1

BLANK

Page 2

STUDY TECHNIQUE
What is the best way to manage my time?
•

Identify all available free time between now and the examinations.

•

Prepare a revision timetable with a list of “must do” activities.

•

Remember to take a break (approx 10 minutes) after periods of
intense study.

What areas should I revise?
•

Rank your competence from Low to Medium to High for each topic.

•

Allocate the least amount of time to topics ranked as high.

•

Allocate between 25% - 50% of time for medium competence.

•

Allocate up to 50% of time for low competence.

How do I prevent myself veering off-track?
•

Introduce variety to your revision schedule.

•

Change from one subject to another during the course of the day.

•

Stick to your revision timetable to avoid spending too much time on one topic.

Are study groups a good idea?
•

Yes, great learning happens in groups.

•

Organise a study group with 4 – 6 people.

•

Invite classmates of different strengths so that you can learn from one another.

•

Share your notes to identify any gaps.

Page 3

EXAMINATION TECHNIQUES
INTRODUCTION
Solving and dealing with problems is an essential part of learning, thinking and intelligence.
A career in accounting will require you to deal with many problems.
In order to prepare you for this important task, professional accounting bodies are placing
greater emphasis on problem solving as part of their examination process.
In exams, some problems we face are relatively straightforward, and you will be able to deal
with them directly and quickly. However, some issues are more complex and you will need to
work around the problem before you can either solve it or deal with it in some other way.
The purpose of this article is to help students to deal with problems in an exam setting. To
achieve this, the remaining parts of the article contain the following sections:
•

Preliminary issues

•

An approach to dealing with and solving problems

•

Conclusion.

Preliminaries
The first problem that you must deal with is your reaction to exam questions.
When presented with an exam paper, most students will quickly read through the questions
and then many will … PANIC!
Assuming that you have done a reasonable amount of work beforehand, you shouldn’t be
overly concerned about this reaction. It is both natural and essential. It is natural to panic in
stressful situations because that is how the brain is programmed.
Archaeologists have estimated that humans have inhabited earth for over 200,000 years. For
most of this time, we have been hunters, gatherers and protectors.
In order to survive on this planet we had to be good at spotting unusual items, because any
strange occurrence in our immediate vicinity probably meant the presence of danger. The
brain’s natural reaction to sensing any extraordinary item is to prepare the body for ‘fight or
flight’. Unfortunately, neither reaction is appropriate in an exam setting.
The good news is that if you have spotted something unusual in the exam question, you have
completed the first step in dealing with the problem: its identification. Students may wish to

Page 4

use various relaxation techniques in order to control the effects of the brain’s extreme
reaction to the unforeseen items that will occur in all examination questions.
However, you should also be reassured that once you have identified the unusual item, you
can now prepare yourself for dealing with this, and other problems, contained in the exam
paper.

A Suggested Approach for Solving and Dealing with Problems in Exams.
The main stages in the suggested approach are:
1. Identify the Problem
2. Define the Problem
3. Find and Implement a Solution
4. Review

1. Identify the Problem
As discussed in the previous section, there is a natural tendency to panic when faced with
unusual items. We suggest the following approach for the preliminary stage of solving and
dealing with problems in exams:
Scan through the exam question
You should expect to find problem areas and that your body will react to these items.
PANIC!!
Remember that this is both natural and essential.
Pause
Take deep breaths or whatever it takes to help your mind and body to calm down.
Try not to exhale too loudly – you will only distract other students!
Do something practical
Look at the question requirements.
Note the items that are essential and are worth the most marks.
Start your solution by neatly putting in the question number and labelling each part of your
answer in accordance with the stated requirements.
Actively reread the question

Page 5

Underline (or highlight) important items that refer to the question requirements. Tick or
otherwise indicate the issues that you are familiar with. Put a circle around unusual items that
will require further consideration.

2. Define the Problem
Having dealt with the preliminary issues outlined above, you have already made a good start
by identifying the problem areas. Before you attempt to solve the problem, you should make
sure that the problem is properly defined. This may take only a few seconds, but will be time
well spent. In order to make sure that the problem is properly defined you should refer back
to the question requirements. This is worth repeating: Every year, Examiner Reports note that
students fail to pass exams because they do not answer the question asked. Examiners have a
marking scheme and they can only award marks for solutions that deal with the issues as
stipulated in the question requirements. Anything else is a waste of time. After you have reread the question requirements ask yourself these questions in relation to the problem areas
that you have identified:
Is this item essential in order to answer the question?
Remember that occasionally, examiners will put ‘red herrings’ (irrelevant issues) into the
question in order to test your knowledge of a topic.
What’s it worth?
Figure out approximately how many marks the problem item is worth. This will help you to
allocate the appropriate amount of time to this issue.
Can I break it down into smaller parts?
In many cases, significant problems can be broken down into its component parts. Some parts
of the problem might be easy to solve.
Can I ignore this item (at least temporarily)?
Obviously, you don’t want to do this very often, but it can be a useful strategy for problems
that cannot be solved immediately.
Note that if you leave something out, you should leave space in the solution to put in the
answer at a later stage. There are a number of possible advantages to be gained from this
approach:
1) It will allow you to make progress and complete other parts of the question that you are
familiar with. This means that you will gain marks rather than fretting over something
that your mind is not ready to deal with yet.

Page 6

2) As you are working on the tasks that you are familiar with, your mind will relax and you
may remember how to deal with the problem area.
3) When you complete parts of the answer, it may become apparent how to fill in the
missing pieces of information. Many accounting questions are like jigsaw puzzles: when
you put in some of the parts that fit together, it is easier to see where the missing pieces
should go and what they look like.

3. Find and Implement a Solution
In many cases, after identifying and defining the problem, it will be easy to deal with the
issue and to move on to the next part of the question. However, for complex problems that
are worth significant marks, you will have to spend more time working on the issue in order
to deal with the problem. When this happens, you should follow these steps:
Map out the problem
Depending on your preferred learning style, you can do this in a variety of ways including
diagrams, tables, pictures, sentences, bullet points or any combination of methods. It is best
to do this in a working on a separate page (not on the exam paper) because some of this work
will earn marks. Neat and clearly referenced workings will illustrate to the examiner that you
have a systematic approach to answering the question.
Summarise what you know about the problem
Make sure that this is brief and that it relates to the question requirements. Put this
information into the working where you have mapped out the problem. Be succinct and
relevant. The information can be based on data contained in the question and your own
knowledge and experience. Don’t spend too long at this stage, but complete your workings as
neatly as possible because this will maximise the marks you will be awarded.
Consider alternative solutions
Review your workings and compare this information to the question requirements. Complete
as much of the solution as you can. Make sure it is in the format as stipulated in the question
requirements. Consider different ways of solving the problem and try to eliminate at least one
alternative.
Implement a solution
Go with your instinct and write in your solution. Leave extra space on the page for a change
of mind and/or supplementary information. Make sure the solution refers to your workings
that have been numbered.

Page 7

4. Review
After dealing with each problem and question, you should spend a short while reviewing your
solution. The temptation is to rush onto the next question, but a few moments spent in
reviewing your solution can help you to gain many marks. There are three questions to ask
yourself here:
Have I met the question requirements?
Yes, we have mentioned this already. Examiner Reports over the years advise that failure to
follow the instructions provided in the question requirements is a significant factor in causing
students to lose marks. For instance, easy marks can be gained by putting your answer in the
correct format. This could be in the form of a report or memo or whatever is asked in the
question. Likewise, look carefully at the time period requested. The standard accounting
period is 12 months, but occasionally examiners will specify a different accounting period.
Is my solution reasonable?
Look at the figures in your solution. How do they compare relative to the size of the figures
provided in the question?
For example, if Revenue were 750,000 and your Net Profit figure was more than 1 million,
then clearly this is worth checking.
If there were some extraordinary events it is possible for this to be correct, but more than
likely, you have misread a figure from your calculator. Likewise, the depreciation expense
should be a fraction of the value of the fixed assets.
What have I learned?
Very often in exams, different parts of the solution are interlinked. An answer from one of
your workings can frequently be used in another part of the solution. The method used to
figure out an answer may also be applicable to other parts of your solution.
Conclusion
In order to pass your exams you will have to solve many problems. The first problem to
overcome is your reaction to unusual items. You must expect problems to arise in exams and
be prepared to deal with them in a systematic manner. John Foster Dulles, a former US
Secretary of State noted that: The measure of success is not whether you have a tough
problem to deal with, but whether it is the same problem you had last year. We hope that, by
applying the principles outlined in this article, you will be successful in your examinations
and that you can move on to solve and deal with new problems.

Page 8

ASSESSMENT STRATEGY
Examination Approach
Questions in this examination are structured to ensure that students may demonstrate their
knowledge and understanding of the principles and techniques of cost and management
accounting at an introductory level.
Where appropriate, students are expected to apply and integrate relevant learning from other
syllabi with their learning from the Management Accounting syllabus. This is achieved
through a blend of theoretical and numeric questions, often set in the context of a scenario.

Examination Format
Examination Duration: 3 Hours
The examination is unseen, closed book.
The paper has 6 questions. Questions 1 and 2 are compulsory. Students are required to
answer 3 of the remaining 4 questions. Generally the examination consists of 1
essay/memorandum-type question and 5 computational-type questions. A multiple choice
question may be included as one of the computational questions. Some of the computational
questions may require brief commentary on salient points related to the computations carried
out.

Marks Allocation
Question
1
2 (students have a choice part A or B)
Choice of 3 questions out of 4

Marks
25
15
60 (20 marks each)

Total

100

Page 9

LEARNING RESOURCES
Core Texts
Drury, C., Cost and Management Accounting – An Introduction, 7th ed. / Cengage 2011 /
ISBN: 97814032138

Manuals
Institute of Certified Public Accountants of Rwanda – L2.3 Management Accounting

Supplementary Texts and Journals
Lucey, T., /Costing / 7th ed. 2009 / Thomson Learning / ISBN 13-9781844809431 / ISBN
10-1844809439.
C. Drury / Management and Cost Accounting (7th edition) Cengage 2008 / ISBN 139781844805662 / ISBN 10-1844805662.
Horngren, Foster & Datar/ Cost Accounting – A Managerial Emphasis/ Pearson 14th ed 2011
ISBN-10- 0132109174.

Useful Websites (as at date of publication)
www.accountingeducation.com
http://www.icparwanda.com/services.php

Page 10

L2.3 MANAGMENT ACCOUNTING
REVISION QUESTIONS AND SOLUTIONS

Page 11

PRINCIPLES OF COSTING
REVISION QUESTION
1.

Answer any one of the following three questions.
(a)

Imagine that you and a friend have recently established a small business. You are
the “financial brains” of the business and your friend is the “technical/production
expert”.
Prepare a briefing for your friend setting out the role you will play as the
management accountant in the business. Your answer should make reference to
issues such as:
•

The importance of financial information to a business.

•

The categories of financial information (Strategic, Tactical and Operational)
and the users of such information.

•

The role of the management accountant in the organisation.

You may address any other issue(s) in your briefing, which you feel would be
important to your friend’s understanding of your role in the business.
(b)

5 marks
“A graphical representation of cost/volume/profit [CVP] relationships has more
impact than a written statement”.
Briefly outline the major assumptions of CVP analysis.
Using a fictitious example, draw two fully labelled charts, one of which should be
a breakeven chart, which are commonly used in CVP analysis to represent
financial information. Use graph paper to prepare the charts.

(c)

5 marks
Outline the principal differences between standard absorption costing and
standard marginal costing and the arguments offered in favour of each method.
Your answer should include a brief numerical example demonstrating the
differences you describe.
5 marks

Page 12

PRINCIPLES OF COSTING
ANSWER TO REVISION QUESTION
1.

(a)

The answer should address the following general issues:
•

A wide range of entities may be interested in the financial activities of a
business- owner/manager, investors, suppliers, customers, banks and tax
authorities. In broad terms, financial information is an essential element in
the process of evaluation, formulation, development and implementation of
strategic plans. It is used for strategic planning purposes, for establishing
selling prices, costs and for product profitability analysis. It is also used for
evaluating performance of individuals and business units.

•

Different information is required for different purposes. Information can be
conveniently categorised under three headings. Strategic information, which
is typically used by senior management is characterised as having a broad
focus (particularly looking at the ‘big global picture’ of the external
environment) with a long time frame, typically up to a decade ahead.
Strategic information consists of aggregated data rather than large amounts
of detail. Tactical information, which is typically used by middle
management, is narrower in its focus and has a significantly shorter time
frame (typically up to 1 year). It is more precise than strategic information
and focuses principally on the internal workings of the organisation with
some reference to the external environment. Low level employees use
operational information. It is principally concerned with the efficient use of
resources in order to achieve tactical plans.

•

The role of the management accountant is to provide useful information to
assist management in planning, controlling and making decisions. The
management accountant fulfils this role in various ways. In the planning
field, the management accountant is a central figure in the budgeting
process. S/he will also contribute to determining product costs. The
management accountant assists in the control function by monitoring
outcomes of decisions or performance on an ongoing basis. A traditional
example of this is the preparation of periodic variance analysis reports by
means of which management can identify possible difficulties in the
manufacturing process. Management accountants in many world-class

Page 13

companies commonly monitor the quality of output for the purpose of
control.

(b)

Assumptions of CVP analysis
•

Selling price is constant throughout the entire relevant range.

•

Total costs can be separated into fixed and variable components.

•

Unit revenues and costs are known with certainty. Costs are linear
throughout the entire relevant range. Both variable cost per and total fixed
costs do not change.

•

In multi-product companies, the sales mix remains constant.

•

Stock levels do not change.

Candidates should draw the following breakeven chart and one of the other charts
following it:

1. Breakeven chart

Revenues

{Profit

Breakeven

RWFR
WF’00
0

Total costs
80
Contributio
n

70
60

Variable costs

50
40
30

Fixed costs

20
10
500

1000

1500

2000

Page 14

2500

3000

Output

2. Contribution chart

Revenues

{Profit

Breakeven

RWFR
WF’00
0

Total costs
80
Contributio
n

70
60

Variable costs

50
40
30
20
10
500

1000

1500

2000

2500

3000

Output

3. Profit / volume chart
Profit/loss

Volume
Breakeven point

Page 15

Under absorption costing, all production costs - both fixed and variable- are
attributed to output. Under marginal costing, only variable production costs
are attributed to production, with fixed production costs treated as a period
cost rather than a product cost.

•

Proponents of marginal costing argue that absorption of fixed costs is both
illogical and potentially confusing. They argue that it is illogical because
such costs do not accrue as production increases. Rather, they accrue as
time passes. Accordingly, the costs should be treated as a period cost rather
than as a product cost. Furthermore, the technique can be confusing to some
members of management, as it may imply that fixed costs vary in
accordance with production- the greater the level of production, the greater
the level of absorbed overhead and vice-versa. Marginal costing principles
are also considered to be more useful in a short-term decision making
context because they highlight contribution as opposed to profit. Under
absorption costing, short-term profits increase as stock levels are built up.
This may tempt managers to engage in stock building, with the associated
costs and risks of obsolescence and theft.

•

Proponents of absorption costing argue that fixed costs are a necessary cost
of production. If such costs are ignored or overlooked, a business is likely
to face losses in the medium to long term. In a seasonal business, where
stock building occurs during periods of low revenues, absorption costing
avoids reporting ‘fictitious losses’ (which would arise under marginal
costing) because the fixed costs would be included as part of stock until the
stock itself is expensed when sold. Additionally, financial reporting
standards mandate the use of absorption costing for the purpose of external
reporting.

•

Numerical example:
Candidates are expected to demonstrate their understanding of the impact of
increasing/decreasing and static stocks. This would be achieved by
preparing a three period financial statement for each system, with each
period demonstrating an aspect of the effect of stock movements.

Page 16

COST BEHAVIOUR PATTERNS
REVISION QUESTIONS
1.

Answer all parts of this question.
(a)

Select the statement that most precisely defines each of the following terms:
(i)

A combined cost represents:
(a)

Expenditure incurred in previous years which has no impact on
decisions affecting the future.

(b)

The forecasted expenditure on acquiring assets of a capital nature.

(c)

A future cash outflow that will be incurred regardless of current
decisions.

(d)

Any cost which, within certain production limits, does not vary with
the production of goods.
(1 mark)

(ii)

The master budget:
(a)

Consists of the Capital Expenditure budgets of profit centres only.

(b)

Comprises the summarised budgeted Profit & Loss account, budgeted
Balance Sheet and cash budget of the entire company.

(c)

Consists of the budgeted Profit & Loss account, budgeted Balance
Sheet and cash budget of Head office only.

(d)

Consists of the qualitative Mission Objectives of the entire company.
(1 mark)

(iii) A profit centre is:
(a)

A business unit accountable for both costs and revenues.

(b)

A committee established by management which is responsible for
overseeing the budgeting process.

(c)

The area in a breakeven chart where total revenues exceed total costs.

(d)

The sales quantity, expressed in numbers of units sold, after which a
company earns enough to cover total fixed costs.
(1 mark)

Page 17

(iv) The relevant range defines:
(a)

The range of variation incorporated into sales forecasts to allow for
uncertainty of demand.

(b)

The process of adjusting a budget for a period so that the budgeted
costs for the actual volume of production of the period can be
compared with the actual costs incurred.

(c)

The activity levels within which assumptions about cost behaviour in
a breakeven chart remain valid.

(d)

The budget period for the short to medium term, usually not
exceeding 12 months.
(1 mark)

(b)

“Cost classifications and groupings help to identify relevant and irrelevant costs
and are important for the purposes of cost-volume-profit analysis”.
Explain (with the aid of appropriate diagrams) each of the following patters of
cost behaviour.
•

Variable costs

•

Fixed costs

•

Step costs

•

Semi-variable costs.

(11 marks)
[Total: 15 marks]

Page 18

COST BEHAVIOUR PATTERNS
ANSWER TO REVISION QUESTIONS
1.

(a)

(i)

c is correct

(ii)

b is correct

(iii) a is correct
(iv) c is correct
(b)

Main points to be discussed:
Variable costs vary as a function of the level of output or sales. Examples include
raw materials or labour paid on an hourly basis.

Cost

Output
Fixed costs are those costs which are likely to remain unchanged regardless of the
level of output or the particular decision under consideration. The term “fixed”
refers primarily to the short term. Examples of fixed costs include rent, directors
salaries.

Cost

Output
Page 19

Step costs are costs which change in discrete “steps”. They are similar to variable
costs except that each change in the level of cost is usually caused by a larger
change in input levels than is the case for “true” variable costs. A typical example
would be a supervisors cost – for production of, say, 5,000 units 1 supervisor may
be required; for 5,001 to 10,000 units, a second supervisor may be required etc.

Cost

Output

Semi-variable costs are costs which possess both a fixed and variable cost
component. A typical example is telephone charges which have a fixed rental
charge and a variable unit rate. Note that the starting point is not at the origin as
for normal variable costs.

Cost

Output

Page 20

MATERIALS AND STOCK CONTROL
REVISION QUESTION
1.

FN Distribution has recorded the following transactions in respect of raw material
“RM–01” for the month of April 2010:
Date

Details

No. of units

Apr 3

Materials received, RWF12,000

1,500

Apr 8

Materials issued

1,700

Apr 9

Materials received, RWF12,880

1,600

Apr 13

Materials issued

900

Apr 19

Materials issued

450

Apr 26

Materials received, RWF16,000

Apr 30

Materials issued

2,000
300

At the start of April, the company had 1,200 units of RM–01 in stock made up of the
following batches
units costing RWF7.95
each

Remainder of a batch purchased mid March:

200

Full batch received on 30th March:

1,000 units costing RWF7.97
each

REQUIREMENT:
(1)

Briefly outline the advantages and disadvantages of the FIFO (First-in, First-out)
method and the LIFO (Last-in, First-out) method of valuing stocks.
(6 marks)

(2)

Calculate the total value of each of the material issues in April (and of the
Closing Stocks of RM–01at the end of April using the FIFO method.
(6 marks)

(3)

“It is necessary to set off the costs of holding a large stock against the advantages
derived from holding it”. List and briefly explain the typical advantages and
costs of holding large stocks.
(8 marks)
[Total: 20 marks]

Page 21

MATERIALS AND STOCK CONTROL
ANSWER TO REVISION QUESTION
1.

FN Distribution Ltd

(1)

Workings
Supervisors costs.
Total costs

16,000

75 % production 12,000 = RWF150 per production employee
25 % service

4,000 = RWF200 per service employee

Note:
An equally acceptable basis of appropriating the production departments
supervisory overhead would be on the basis of production hours worked.
SOLUTION
Advantages of FIFO
1.
2.
3.
4.

Logical – it corresponds to what happens in most businesses as the older
stock is used up first.
Easy to understand
Generally results in closing stocks being valued at the most current price.
Required under SSAP 9.

Disadvantages of FIFO
1.
2.
3.

Understates the cost of material issues in times of high inflation.
Cumbersome to operate.
Can cause some confusion for decision making purposes when the same
material is issued at varying prices.

Advantages of LIFO
1.
2.

Stock issues approximate current market price.
Decision making may be easier due to 1 above.

Disadvantages of LIFO
1.
2.
3.

Cumbersome to operate.
Generally would not reflect actual practice in a stockroom.
Does not comply with the SSAP 9.
Page 22

(2)
Qty
in

Qty Value (ref)
out

Opening
Balance

1,200

9,560

Aug 3

Receipt

1,500

12,000

Aug 8

Issue

Aug 9

Receipt

Aug 13

Issue

900

(7,200)

(3)

13,680

Aug 19

Issue

450

(3,618)

(4)

10,062

Aug 26

Receipt

Aug 31

Issue

Date

Details

Aug 1

1,700
1,600

(13,560)

Cl.
balance

(1)

21,560
(2)

12,880

2,000

(2,415)

8,000
20,880

16,060
300

9,560

26,122
(5)

23,707

Workings
1.
2.
3.
4.
5.
(3)

(200 @ RWF7.95) + (1,000 @ RWF7.97) = RWF9,560
RWF9,560 + (500 @ (RWF12,000/ 1,500)) = RWF13,560
(900 @ (RWF12,000/1,500)) = RWF7,200
(100 @ (RWF12,000/1,500)) + (350 @ (RWF12,880/ 1,600))= RWF3,618
(300 @ (RWF12,880/1,600)) = RWF2,415

Advantages of holding large stocks
1.
2.
3.
4.

Form a buffer against “stock-outs”.
Can enable discounts to be negotiated.
In some cases, quality will be more consistent as they originate from a
larger batch rather than from numerous small batches.
In times of inflation, large stockholding may provide a competitive edge to
a firm as their stocks will have cost less than stocks bought at current prices

Costs of holding large stocks
a.
b.
c.
d.

Large stockholding results in high financing costs.
Storage and insurance costs are higher.
Risks of obsolescence and theft/pilferage are greater.
Spoilage and obsolescence risks increase.

Page 23

LABOUR
REVISION QUESTION
1.

Given the following information, calculate for workers (A) to (J) using a Rowan
system:
(a)

Time saved;

(b)

Earnings (at RWF4 per hour);

(c)

Effective hourly rate.

Time allowed
Time taken

(A)

(B)

(C)

(D)

(E)

(F)

(G)

(H)

(J)

3 marks

Page - 24 -

LABOUR
ANSWER TO REVISION QUESTION
1.

You should concentrate on one of the formulae and use it constantly. I prefer the
second (see (c) below).
(a)

Time saved:
(A)
1

(b)

(B)
2

(D)
4

(E)
5

(F)
6

(G)
7

(H) (J)
8 9

Earnings (at RWF4 per hour):
(A)
(B)
(C)

(c)

RWF39.60
RWF38.40
RWF36.40

(D) RWF33.60
(E) RWF30.00
(F) RWF25.60

(G)
(H)
(J)

RWF20.40
RWF14.40
RWF7.60

Using the second formula, we find:
Time taken

9 +

Time taken 9 × Time saved 1
× Time rate per hour RWF4
Time allowed 10

9 × 1
× 4 = RWF39.60
10

Effective hourly rate:
(A)
(B)
(C)

RWF4.40
RWF4.80
RWF5.20

(D) RWF5.60
(E) RWF6
(F) RWF6.40

(G) RWF6.80
(H) RWF7.20
(J) RWF7.60

You should note that the effective hourly rate rises RWF0.40 for every hour
saved. It does not offer any special incentive for exceptional effort.

Page - 25 -

OVERHEADS AND ACTIVITY BASED COSTING
REVISION QUESTIONS
1.

TBA Ltd manufactures and sells a range of steam, water and gas valves. The valves are
produced by passing components through a series of production processes preparation, assembly and finishing - which are backed up by service functions for
material receipt and inspection, maintenance and material handling.
REQUIREMENT:
(a) (i)

Prepare a diagram to illustrate the physical and service flows of the existing
system.
(3 marks)

(ii)

Explain the procedure by which product cost accumulation and
responsibility accounting will operate in the system if a traditional
absorption cost approach is used.
(7 marks)

(b)

Explain how activity-based costing and the use of cost drivers may help to
improve both product cost data and the effectiveness of responsibility accounting
in TBA Ltd.
(10 marks)
[Total: 20 marks]

FVD Limited produces two products - 'Newthings' and 'Oldthings'. Each product uses
similar processes and equipment, but 'Newthings' are produced in large volumes whereas
'Oldthings' are produced in smaller volumes. At present, overheads are apportioned to
products using a traditional absorption costing basis.
You are the cost accountant at FVD Limited and, as a result of the large amount of
discussion in the management literature of Activity Based Costing; you are considering
changing from absorption costing to Activity Based Costing for the purposes of charging
overheads to production.

Page - 26 -

You have decided to prepare a comparison of the product costs using both the current
method and an Activity Based Costing method prior to making a final decision and have
accumulated the following summarised data from next year's budget:
Cost category

Current basis of
apportionment

RWF

Volume related costs

320,000

Machine hours

Purchasing related
costs

156,000

Labour hours

44,000

Labour hours

Set-up costs

520,000
Extracts from the standard cost cards for
following:-

'Newthings' and 'Oldthings' show the
Newthings

Oldthings

Labour hours per unit

Machine hours per unit

Budgeted production next year

30,000 units

10,000 units

Number of purchase orders per
annum

170

Number of machine set-up per
annum

REQUIREMENT:
(a)

Prepare calculations showing the overheads charged to each product using:
(i)
the proposed Activity Based Costing system
(ii)
the current (traditional) costing system
(12 marks)

(b)

"The ABC system recognises that some activities are unrelated to volume by
using allocation bases that are independent of production volume."
Briefly explain how traditional costing systems can result in distorted product
costs using the example of FVD Limited to illustrate your point.
(8 marks)
[Total: 20 Marks]
Page - 27 -

OVERHEADS AND ACTIVITY BASED COSTING
ANSWERS TO REVISION QUESTIONS

TBA Ltd.
(a)(i)

Figure 4.1
(ii)

Product cost responsibility accounting operates on a system of cost centres.
These cost centres are decided by breaking down the physical operations
under the responsibility of each manager and by attaching costs to product
units as they go through production. An appropriate absorption basis is
decided upon for the overhead costs.

Figure 4.1 illustrates production cost centres (e.g. preparation, assembly,
finishing) and service cost centres (maintenance and material handling).
Labour and overhead costs are allocated to specific cost centres if possible.
Where allocation is not possible an appropriate apportionment will be made (e.g.
maintenance at an apportionment rate per labour-hour and material handling per
unit of, say, 500 valves moved; material receipt and inspection could also be
charged to batches of valves).
Total labour and overhead costs of the production centres, together with
apportioned service centre costs, would then be charged to valve batches. It is

Page - 28 -

likely that this would be based on time spent on each batch of valves in the
appropriate cost centre.
The system can then be controlled by use of standard costing or budgetary control
(both of which we will look at later in the course) through the analysis of
variances.
(b)

Activity-based costing links cost to activity and considers that costs incurred
above an acceptable minimum are due to lack of control of activities causing
costs to occur, known as cost drivers.
To take the process of receipt and inspection of material, cost drivers in this
activity could be:
•

The relative importance of component inspection (e.g. glassware used in
valves might require a high degree of inspection, whereas moulded plastic
might need just a sampling).

•

The bulk of material involved (e.g. it may require four trips to transport
1,000 valves of one size and a single trip to transport 1,000 smaller valves).

Any relationship between the cost drivers and the actual cost of material used is
likely to be simply accidental, so an apportionment using absorption costing
could bear no resemblance to the charge calculated using cost drivers under
activity-based costing. The examples above give illustrations of how this could
occur.
Looking at maintenance charges, these may not be driven by time spent (under
absorption costing), but by type of valve produced - some causing far more wear
on machines than others.
Actually identifying cost drivers can be difficult but, once identified, they are
useful in focusing on activities which cause costs to be incurred. This gives
management a target on which to concentrate when seeking to reduce costs which
are considered to be their responsibility. For instance, machines could be checked
carefully before producing batches of valves which usually cause high machine
maintenance, as a way of reducing breakdown and interruption of production.

Page - 29 -

FVD Ltd
(a)

(i)

Overhead per unit under an Activity Based Costing system
Total
overhead

Overhead

Cost driver

Cost
driver
total

Rate per
cost driver

Volume related
costs

RWF320,000

Total units

40,000
units

RWF8

Purchase related
costs

RWF156,000

Purchase
orders

260 orders

RWF600

Set-up costs

RWF44,000

Set-up qty.

132 set-ups

RWF333.33

∴the overheads charged to the total units are as follows:

Newthings

Oldthings

Volume related costs

RWF240,000

RWF80,000

Purchase related
costs

RWF102,000

RWF54,000

Set-up related costs

RWF25,000

RWF18,667

RWF367,333

RWF152,667

RWF12.24

RWF15.27

Overhead per unit

Page - 30 -

(ii)

Current costing system overheads per unit

Newthings

Oldthings

Total

Total labour hours

90,000

20,000

110,000

Total machine hours

30,000

10,000

40,000

∴the overhead rate per labour hour is RWF1.82 per hour (RWF200,000/110,000
hours) and the overhead
(RWF320,000/40,000 hours)

rate

per

machine

hour

RWF8

per

hour

The overheads charged to production under this current basis are as follows:

(b)

Newthings

Oldthings

Labour
hours

3 hours @ RWF1.82 =
RWF5.46

2 hours @ RWF1.82 = RWF3.64

Machine
hours

1 hour @ RWF8 = RWF 8

1 hour @ RWF8= RWF 8

Overheads
per unit

RWF13.46

RWF11.64

Traditional overhead costing systems use volume-related bases to trace overheads
to production
Many costs of production are not related to volume. These costs are allocated
using an inappropriate base under traditional systems. High-volume products
effectively subsidise the lower volume products.
ABC recognises this by using allocation bases, which are independent of volume.
In the example of FVD Limited, Set-up costs and purchase order costs were
traditionally charged to units using machine hours as a base. This is not an
appropriate base and resulted in Newthings being charged with more overheads
even though they consumed a lower proportion of total resources than Oldthings.

Page - 31 -

JOB COSTING/BATCH COSTING
REVISION QUESTION
1.
PAS Limited is a small company which manufactures furniture to order. The company
uses Job costing in determining the costs and profit of each order. At the start of the
financial year, the cost accountant gathered the following information in respect of the
budgeted overheads for each of the three production departments as follows:
Department
Carving
Assembly
Decoration

Budgeted overheads
RWF15,000
RWF36,000
RWF19,000

Overhead absorption basis
1,000 machine hours
6,000 labour hours
1,000 labour hours

Note: These figures are based on normal activity levels.
Selling and distribution overheads are calculated as 20% of factory cost i.e. direct costs
plus production overheads.
The accountant is now calculating the total net profit or loss on a recently completed
order for 100 reproduction regency wardrobes. Details of this order are as follows:
•

The selling price of each wardrobe was RWF270

•

Materials consumed ……. RWF8,935

•

Labour:

•

Machine usage in the carving department totalled 150 hours.

•

A fee of RWF500 was paid to an expert furniture historian for consultancy
services provided in respect of the completion of this order.

Carving department 170 hours @ RWF10 per hour
Assembly department 210 hours @ RWF12 per hour
Decoration department 40 hours @ RWF8 per hour

REQUIREMENT:
(a)

Calculate the overhead absorption rates for the production departments.
(3 marks)

(b)

Calculate:
(i)

The total cost of the batch, clearly identifying Prime Cost, Factory Cost
and Total Cost.
(11 marks)
(ii) The unit cost.
(3 marks)
(iii) The profit or loss per wardrobe.
(3 marks)
[Total: 20 marks]

Page - 32 -

JOB COSTING/BATCH COSTING
ANSWER TO REVISION QUESTION
(a)

(b)

Overhead absorption rates for each department
Department

Overhead

Budgeted no. of
Absorption units

Rate per
absorption

Carving
Assembly
Decoration

RWF15,000
RWF36,000
RWF19,000

1,000 machine hours
6,000 labour hours
1,000

RWF15 per hour
RWF6 per hour
RWF19 per hour

(i)
Direct costs:
Materials
Labour-Carving
- Assembly
- Decoration
Consultancy fee
Prime cost

8,935
1,700
2,520
320
500
13,975

Production Overheads:
Machine time in carving
Labour time in assembly
Labour time in decoration

2,250
1,260
760
4,270

Factory cost

18,245

Add: 20% for selling/distribution expenses
Total cost

3,649
21,894

(ii)
Unit cost
Total cost of batch as per (a)
No. of units in batch

RWF21,894
100

∴ each unit cost RWF218.94

Page - 33 -

(iii)
Profit per unit
Sales price per unit
Less:
Cost per unit

RWF270.00

Profit per unit

RWF51.06

RWF218.94

Page - 34 -

PROCESS COSTING
REVISION QUESTIONS
1. CB Limited manufactures a range of chemicals and fertilisers for agricultural
purposes.
The manufacture of one of the company’s products, “BeefEmUp”, involves three
distinct processes in which the output from Process 1 is used as the input into Process 2.
Similarly, the output from Process 2 is used as input into Process 3 by which stage the
final product is prepared and then packed for shipping.
The company has established standards for each process as follows:
Process 1

Process 2

Process 3

Normal loss (%)*

10%

Sales value of each unit lost

RWF1.83

RWF2.00

RWF4.00

*Note: The normal loss for a process is calculated as a percentage of the units
processed in that process.
The following data is available for August 2011 in respect of each of the processes:
Process 1
Qty

RWF

Units from previous process
Materials added

Process 2
Qty

RWF

1,150
1,200

600

2,010

Process 3
Qty

RWF

2,980
4,299

600

7,344

Labour incurred

1,500

1,800

900

Overheads incurred

2,000

2,200

600

At the end of process 3, a total of 3,190 fully completed units was transferred to
Finished Goods.
REQUIREMENT:
Prepare each of the Process Accounts for the month of August.
[Total: 15 marks]

Page 35

SLR Limited is a company that manufactures a range of tinned soups. The soups are
made by processing raw materials through two distinct processes, Blending and
Flavouring, and a process costing system is in place for the purpose of calculating the
costs of finished output.
Relevant details of each of these processes for the most recent month are as follows:
Blending
95% of inputs
Nil
RWF11,950

Expected output
Value of lost liquids per kg
Materials added: 4,000 kgs
500 kgs
Labour charged
RWF1,700
Machinery time: @ RWF5 per 300 hours
hour
@ RWF7 per
hour
Output
3,700 kgs to Flavouring

Flavouring
90% of inputs
RWF1
RWF1,000
RWF555

60 hours
3,810 kgs Finished Goods

The total departmental overhead for the month was RWF960 and is absorbed into the
cost of each process using the cost of machinery for each process as a basis.
REQUIREMENT:
(a)

Prepare the following accounts for the month:
(i)

Blending process account
(8 marks)

(ii)

Flavouring process account
(8 marks)

There are no stocks at either the start or the end of the period.
(b)

Briefly outline the common features of most process costing systems.
(4 marks)
[Total: 20 marks]

Page 36

PROCESS COSTING 1
ANSWERS TO REVISION QUESTIONS
1.

CB LIMITED

Process 1
Units

RWF

1,200

600

Labour

1,500

Overheads

2,000

Materials

Abnormal gain

Units

RWF

Normal loss

110

To process 2

1,150

4,025

1,210

4,135

1,210

4,135

Units

RWF

Units

RWF

From Process 1

1,150

4,025

Normal loss

Materials added

2,010

4,299

Abnormal loss

Labour

1,800

To process 3

Overheads

2,200

Process 2

158

316

2,980

11,920

3,160

12,324

3,160

12,324

Units

RWF

Units

RWF

2,980

11,920

600

7,344

Process 3

From Process 2
Materials Added
Labour

900

Overheads

600
3,580

20,764

Page 37

Normal loss

358

1,432

192

Finished 3,190

19,140

3,580

20,764

Abnormal loss
To
Goods

Calculations

Normal Loss units

Abnormal loss/(gain) units Value of good unit

Calculation
Process 5% * 1,200
1

(1,200 * 95%)–1,150 = (10) RWF4,100 – RWF110/(1,200 * 95%)

Process 5% * (1,150 + 2,010) (3,169 * 95%) – 2,980 = 22 RWF12,324 – RWF316/(3,160 * 95%)
2
Process 10% * (2,980 + 600) (3,580 * 90%) – 3,190 = 32 RWF20,764 – RWF1,432/(3,580 * 90%)
3

Page 38

2.
Blending Account

Details

Units

RWF

Details

Units

RWF

Material

4,000

11,950

Trfr. To Flav.

3,700

15,482

Labour

1,700

Norm. loss

200
---

Machine time

1,500

Overhead

Abn. Loss

100

418

4,000

15,900

750
4,000

15,900

Flavouring Account

Details

Units

RWF

Details

Units

RWF

Ex. Blending

3,700

15,482

Output to Stock

3,810

17,384

500

1,000

420

Material added
Labour

555

Machine time

420

Overhead

210

Ab. Gain

137

4,230

17,804

Norm. loss

Page 39

4,230

17,804

(b)

Common features of process costing systems
Main points covered should include the following:
•
•
•
•
•

Continuous processes are normally a feature of this costing system e.g.
chemicals.
The output of one process is the input to a subsequent process until a
completed product is made.
Valuation of Work-in-Process requires a method for valuing homogeneous
units rather than counting individual items.
Process losses are a standard feature – evaporation, spoilage, spills etc.
By product or joint products.

Page 40

PROCESS COSTING 2
REVISION QUESTIONS
1.

Draw up the process accounts, normal loss account, abnormal loss/gain accounts and
scrap account in the following instance:
Units going into process
Normal loss
Cost of process
Income from sale of
scrap per 100 units

Process I
8,000
10%

Process II
7,000
5%

Finished Goods
6,800

Process I
RWF8,000

Process II
RWF4,000

Finished Goods

RWF4

RWF1

(You may assume that all output from Process I enters Process II.)
There is no work-in-progress at the beginning or end of the period.
(10 Marks)
2.

Given the following information show the entries which would appear on Process 4
account for period 8 of the current year, and on the scrap account, abnormal loss/gain
account, and normal loss account.
Value of input to Process 4

RWF9,875

Number of units entering Process 4

9,400

Normal loss percentage

10%

Total process costs

RWF4,500

Sales value of loss

RWF5 per 100 units

Number of units entering Process 5

8,500
(10 Marks)

Page 41

PROCESS COSTING 2
ANSWERS TO REVISION QUESTIONS
Question 1
Workings
Process I
Input 8,000 units.
Normal loss 800 units, scrap value RWF32.
Expected output 7,200 units
Actual output 7,000 units, i.e. abnormal loss of 200 units.
Cost per unit of normal output =

RWF( 8,000 − 32 ) = RWF 7,968
7,200

7,200

Cost of abnormal loss = 200 × RWF 7,968 = RWF221
7,200

Cost transferred to Process II = 7,000 ×

RWF 7,968
7,200

= RWF7,747.

Process II
Input 7,000 units.
Normal loss 350 units, scrap value RWF3.50, say RWF4.
Expected output 6,650 units.
Actual output 6,800 units, i.e. abnormal gain 150 units.
Cost per unit of normal output = RWF(

7,747 + 4,000 − 4
)
6,650

= RWF11,743
6,650

Value of abnormal gain = 150 ×
Cost transferred to finished goods

11,743
= RWF265
6,650

= 6,800 × RWF 11,743
6,650

= RWF12,008
PROCESS I ACCOUNT
Input in units
Cost of process

Units
8,000

RWF

Units
Normal loss
800
Abnormal loss
200
Process
II 7,000
account

8,000

RWF8,000

Page 42

8,000

RWF
32
221
7,747
RWF8,000

PROCESS II ACCOUNT
Input in units
Cost of process
Abnormal gain

Units
7,000
150
7,150

RWF
7,747
4,000
265

Normal loss
Finished stock

RWF12,012

Units
350
6,800
7,150

RWF
4
12,008
RWF12,012

NORMAL LOSS ACCOUNT
Process I
Process II

Units
800
350

RWF
32
4

1,150

Units
200

RWF
221

Units
200

200

221

Abnormal gain
Scrap a/c
Scrap a/c

Units
150
800
200

RWF
2
32
2
36

ABNORMAL LOSS ACCOUNT
Process I

Scrap
Profit and loss

RWF
8
213

200

221

Units
150

RWF
265

150

265

ABNORMAL GAIN ACCOUNT
Normal loss
Profit and loss

Units
150
150

RWF
2
263

Process II

265

SCRAP ACCOUNT
Abnormal waste
Normal loss
Process I
Normal loss
Process II

Units
200

RWF

Units
8

800

200

Cash

RWF
42

Page 43

Question 2
PROCESS NO. 4 ACCOUNT
Units
Input
Process cost
Abnormal gain
account

RWF
Value
9,875
4,500

9,400

Units
Normal loss
Process No. 5

RWF
Value

940
8,500

47
14,396

9,440

RWF14,443

9,440

RWF14,443

Calculations
(a) Normal output (9,400) less normal waste of 10% (940) = 8,460
Abnormal gain = 40 units.
(b)

Normal cost in total = RWF9,875 + RWF4,500 – RWF47
Normal cost per good unit = RWF9,875 + RWF4,500 − RWF47
8,460

(c)

Value of abnormal gain = Normal unit cost × Abnormal gain in units
= RWF9,875 + RWF4,500 − RWF47 × 40 = RWF68
8,460

(d)

Value of units transferred to Process 5 = Normal unit cost × Output in units
=

RWF9,875 + RWF4,500 − RWF47
× 8,500 = RWF14,396
8,460

ABNORMAL GAIN ACCOUNT
Normal loss
Profit and loss

Units
40
40

RWF
2
66

Process 4

Units
40

RWF
68

SCRAP ACCOUNT
Normal loss

Units
900

RWF
45

Cash

Units
900

RWF

NORMAL LOSS ACCOUNT
Process 4 a/c

Units
940

RWF
47

Units
Abnormal gain a/c
40
Scrap a/c
900

940

940
Page 44

2
45
47

MARGINAL V ABSORPTION COSTING
REVISION QUESTIONS
1.

The following information is available for XY Ltd, which manufactures a standard
product. Quarterly budget for each of the quarters 3 and 4, Year 1:
RWF
Sales (30,000 units)
Production cost of sales:
Variable
Fixed overhead

19,500
6,000

Total
RWF
30,000

25,500

RWF

0.65
0.20

Per Unit
RWF
1.00

0.85

4,500

0.15

Selling and administration
cost (fixed)

2,100

0.07

Net profit

2,400

0.08

Actual production, sales and stocks in units for quarters 3 and 4, Year 1:
Quarter 3
34,000
28,000
6,000

Opening stock
Production
Sales
Closing stock

Quarter 4
6,000
28,000
32,000
2,000

You are required to produce trading and profit and loss accounts for each of the
quarters:

(a)

Using absorption costing

(b)

Using marginal costing

(10 marks)
A manufacturer of leather handbags has been affected by competition from plastic
handbags and is currently operating at between 65 and 70 per cent of maximum
capacity.
The company at present reports profit on an absorption costing basis. The accountant
has been criticised for reporting widely different profits from month to month. He is
proposing to answer these criticisms by reporting differently in order to take into
consideration the impact of the nature of costs (fixed or variable) and, changes due to
seasonal fluctuations in sales volume. This, he hopes, will enable the management to
determine a more positive sales policy.

Page 45

The following information is available from the accounting records:
Standardised cost per unit:
Direct materials
Direct labour
Variable production overheads

RWF
8.00
7.20
3.36

Total variable cost of production
Fixed production overheads

18.56
7.52

Total cost of production

26.08

Fixed production overheads are based on annual budgeted overheads of RWF7,584,000
(RWF632,000 per month) and production volume of 1,008,000 handbags, which
represents 70% of maximum capacity.
There is some small element of flexibility in the fixed overheads, which could be
established at:
Activity level (% of
maximum capacity)
50 - 70%
76 - 90%
91 - 100%

Amount of fixed overheads
RWF000
632
648
656

Fixed overheads actually incurred were the same as budgeted.
Additional information:
March
87,000
115,000
RWF32
RWF120,000
RWF80,000

Units sold
Units produced
Sales price per unit
Fixed selling costs
Fixed administration costs

April
101,000
78,000
RWF32
RWF120,000
RWF80,000

There were no finished goods in stock at 1 March.
REQUIREMENT:
You are required to prepare monthly profit statements for March and April using:
Absorption costing
Marginal costing.

(10 Marks)

Page 46

MARGINAL V ABSORPTION COSTING
ANSWERS TO REVISION QUESTIONS

Page 47

Note: You will notice that in this example the net profit in total for the two quarters is not the
same using both methods. This is because there was a net stock increase over the period, an
absorption costing would therefore show a higher profit because of the fixed production
overheads carried forward in stock.
Absorption
Costing

Marginal Costing

Difference - Overheads
Carried Forward in
Stock
RWF
1,200

Quarter 3 profit

RWF
2,900

RWF
1,700

Quarter 4 profit

2,300

3,100

(800)

Total net profit

5,200

4,800

400

Using absorption costing, fixed production overheads carried forward in Quarter 4:
Stock

(a)

= 2,000 units × RWF0.20
=RWF400

Absorption Costing
March
RWF000
Sales
Opening stock
Direct materials
Direct labour
Variable production overhead
Fixed production overhead

April

RWF000

2,784.00
Nil
920.00
828.00
386.40
864.80

Gross profit
Over/(under) absorption
Fixed selling cost
Fixed admin. cost

120.00
80.00

Net profit

3,232.00
730.24
624.00
561.60
262.08
586.56

2,999.20
(730.24) (2,268.96)

Closing stock

RWF000

2,764.48
(130.40) (2,634.08)

515.04
208.80

597.92
(45.44)

723.84

552.48

(200.00)
523.84

120.00
80.00

(200.00)
352.48

Closing stock calculations:
March: (Units produced 115,000 − Units sold 87,000) × Total unit production
cost RWF26.08
=

RWF730,240

Page 48

April:

Opening stock 28,000 + Production 78,000 − Sales 101,000 = 5,000
5,000 × RWF26.08 = RWF130,400

Over/under-absorption of fixed production overhead:
Budgeted monthly production = 1 ,008,000/12 = 84,000 = 70% capacity
March production = 115,000 =

115
× 70% = 95.8% capacity
84

So budgeted fixed overheads = RWF656,000
April production = 78,000 so budgeted fixed overheads = RWF632,000
(b)

Marginal Costing
March
RWF000
Sales
Opening stock
Direct materials
Direct labour
Variable production overhead
Closing stock
(based on variable cost)
Contribution
Fixed costs:
Production overheads
Selling overheads
Admin. overheads

April

RWF000

2,784.00

3,232.00

Nil
920.00
828.00
386.40

519.68
624.00
561.60
262.08

2,134.40

1,967.36

(519.68) (1,614.72)

(92.80) (1,874.56)

1,169.28
656
120
80

Net profit

(856.00)
313.28

Page 49

RWF000

1,357.44
632
120
80

(832.00)
525.44

BREAK EVEN ANALYSIS
REVISION QUESTIONS
1.

The following figures relate to one year's working in a manufacturing business:
RWF
120,000
200,000
150,000
410,000

Fixed overhead
Variable overhead
Direct wages
Direct materials
Sales 1,000,000

Represent each of these figures on a break-even chart, and determine from the chart the
break-even point.
2.

(3 marks)
Production of a chemical product which sells at RWF2.70 per kg usually fluctuates
between 80,000 and 90,000 per month. Costs have been calculated as follows.
Monthly output (kg)

80,000
RWF
60,000
72,000
57,000
189,000

Direct materials
Direct wages
Production overhead
Total production cost

90,000
RWF
67,500
81,000
58,500
207,000

The production overhead included in the above costs contains both fixed and variable
elements. The fixed production overhead is expected to remain unchanged up to a
monthly output level of 120,000 kg.
REQUIREMENT:
Calculate:
(a)

The fixed overhead cost per month.

(b)

The marginal cost per kg.

(c)

The total cost if output is increased to 100,000 kg.

(d)

The break-even point in kg per month.
(10 marks)
Page 50

A sealing compound is manufactured and marketed by Cohesive LTD. The factory has
a production capacity of 10,000,000 litres per annum but is at present working at 40%
capacity.
The compound is sold in 20-litre drums at RWF8.00 each.
The sales manager has suggested reducing the price per drum in order to capture a
larger share of the market. His forecast of sales levels at different prices is:
Price per drum
RWF
8.00
7.20
6.40
5.60

Sales forecast
(drums per annum)
200,000
300,000
400,000
500,000

Variable costs amount to RWF4.48 per drum whilst fixed costs would be expected to
remain constant at RWF640,000 over the range of output levels under consideration.
REQUIREMENT:
Present in column form a statement showing the forecast profit at each production level
and state which volume should be adopted as the target sales and production level per
annum.
(10 marks)

Page 51

BREAK EVEN ANALYSIS
ANSWERS TO REVISION QUESTIONS
Question 1

Break-even point occurs at RWF500,000 sales value. (See Figure 5.)

Figure 5
Question 2

Units

Direct materials
Direct wages
Production overhead
Total

90,000

80,000

10,000

High
RWF
67,500
81,000
58,500
207,000

Low
RWF
60,000
72,000
57,000
189,000

Difference
RWF
7,500
9,000
1,500
18,000

RWF18,000
10,000

Variable cost per unit

Page 52

= RWF1.80

At 80,000 units
RWF
Total cost
189,000
Less Variable cost 80,000 × RWF1.80 =144,000
Total fixed cost
45,000
Direct materials cost
Less Variable cost 80,000 × RWF 7,500

60,000
(60,000)

10,000

Fixed costs

NIL

Direct wages cost
Less Variable cost 80,000 × RWF 9,000

72,000
(72,000)

10,000

Fixed wages cost

NIL

Production overhead cost

57,000

Less Variable cost 80,000 × RWF1,500
10,000

(12,000)

Fixed production overhead cost

RWF45,000

(a)

Fixed overhead cost per month =

RWF45,000

(b)

Marginal cost per kg

(c)

Total cost of producing 100,000 kg

RWF

Variable cost 100,000 × RWF1.80
Fixed cost

180,000
45,000

RWF1.80

RWF225,000
(d)

Break-even point in kg
Fixed cost
Contribution per unit

RWF 45,000
( RWF 2.70 − RWF1.80)

50,000 kg

Page 53

Question 3
Sales units
Sales unit price
Total sales
Total variable cost*
Contribution
Fixed costs
Profit/(Loss)

200,000
RWF8.00
RWF
1,600,000
(896,000)
704,000
(640,000)
64,000

300,000
RWF7.20
RWF
2,160,000
(1,344,000)
816,000
(640,000)
176,000

* Variable cost per unit = RWF4.48
Sales and production should be set at a target of 300,000 drums.

Page 54

400,000
RWF6.40
RWF
2,560,000
(1,792,000)
768,000
(640,000)
128,000

500,000
RWF5.60
RWF
2,800,000
(2,240,000)
560,000
(640,000)
(80,000)

DECISION MAKING
REVISION QUESTIONS
1.

(a)

Explain what is meant by a break-even chart, and describe its uses.

(b)

Illustrate by a graph using the following information:
Sales
RWF
10,000
5,000
15,000
RWF30,000

Product A
B
C

Fixed expenses

Variable Cost
RWF
4,000
4,000
12,000
RWF20,000

RWF6,000

On the same graph, show the effect of eliminating Product B and increasing the
sales of Product A by 100%, with an increase of RWF1,000 in fixed expenses.
2.

(10 marks)
CTT Limited is involved in the manufacture of precision engineering machinery. It
Manufactures a substantial proportion of sub-components in-house and is currently
investigating the possibility of sub-contracting the manufacture of a key sub-component
to an outside supplier.
The budgeted annual costs of manufacturing 9,000 units (the annual requirement) of
this component in-house are as follows:
RWF
Direct labour
1,500 hours @ RWF36 per hour
54,000
Direct material
900 kgs @ RWF15 per kg
13,500
Variable overheads
200% direct labour
108,000
Fixed overheads
1,500 hours @ RWF12 per hour
18,000
193,500
Budgeted Fixed Overheads absorbed into this component consist of the following:
RWF
12,000
6,000

Factory rent (10 year lease)
Management charges

18,000
Page 55

If the manufacture of the sub-component is sub-contracted, CTT Ltd will be able to sublet the factory space currently used for its manufacture at an annual rent of RWF10,000.
The company will also sell some machinery which would become surplus to
requirements. This machinery has a book value of RWF18,700 and its sale would be
estimated to realise a book loss of RWF2,000.
CTT Ltd will also be able to sell 80kgs of the raw material currently in stock which is
used in the manufacturing process. The company will have the choice of either selling it
to the successful tenderer at a price to be negotiated or else, if no acceptable price is
offered by the successful tenderer, return it to the original supplier at cost less a 15%
restocking charge.
Additionally, two of the four workers currently employed in the manufacture of the
subcomponent would be redeployed within the company but the other two workers will
be made redundant. This will necessitate a redundancy payment of RWF17,000 to each
of these two workers.
The wage of each of the four workers, all of whom are highly skilled and have
considerable accumulated experience, is RWF27,000 per annum. Currently, each of
these workers spends half of his time making the sub-component and the remainder of
his time in the Quality Control department, where the two redeployed workers will now
spend all of their time.
CTT Ltd has prepared a shortlist of the following tenders and has decided that both of
them should be critically evaluated against the costs of in-house production with a view
to making a decision.
•

MK Limited has quoted a price of RWF248,000 for the supply of 9,000 units per
annum. It has offered the sum of RWF1,100 for the 80kgs of raw materials. In
addition, it has offered to take on both of the workers due to be made redundant
and will pay each an annual wage of RWF24,000 if its tender is accepted. Both
workers have indicated their agreement to this proposal and, if the tender is
successful, will each receive a concessionary lump-sum payment from CTT
Limited of RWF7,000 instead of a redundancy payment.

•

FB Limited has quoted a price of RWF245,000 for the production of 10,000 units
per annum. It has offered the sum of RWF1,000 for the raw materials. FB Ltd
will use its own staff to produce the component but would like to utilise the
machinery and floor space currently used by CTT Ltd for the manufacture of the
Page 56

subcomponent as it believes that such an arrangement would enable it to be better
placed to respond to fluctuations in demand for the sub-component.
The use of these facilities is a key provision of FB Limited tender and is not open
to negotiation. FB Limited has valued the annual use of these facilities at
RWF13,000 and has deducted this sum from the gross value of the tender to
arrive at the quotation of RWF245,000 above.
FB Limited has also agreed to a profit sharing scheme in respect of the 1,000
surplus subcomponents which would be made should the tender be accepted –
2.5% of the sales value of these surplus units will be paid to CTT Limited
annually in arrears. It is expected that these surplus units will be sold for RWF40
each on the open market.
REQUIREMENT:
(a)

Determine which of the two external offers gives the lowest price per unit to CTT
Limited.
(18 marks)

(b)

On the basis of your calculations in (a), state whether or not the company should
continue to make the sub-component in-house and briefly outline any qualitative
matters relevant to the decision.
(8 marks)
[Total: 26 marks]

Page 57

DECISION MAKING
ANSWERS TO REVISION QUESTIONS
1.

Contributions are:

Present

Revised

Product

Sales

Variable Cost

Contribution

RWF
10,000

RWF
4,000

RWF
6,000

5,000

4,000

1,000

15,000

12,000

3,000

Product

Sales

Variable Cost

Contribution

RWF
20,000

RWF
8,000

RWF
12,000

15,000

12,000

3,000

Present fixed expenses are RWF6,000.
Revised fixed expenses are RWF7,000.

RWF 000s

Figure 8

From the graph it can be read that:
(a)

Present profit is RWF4,000 for sales of RWF30,000.

(b)

Revised profit is RWF8,000 for sales of RWF35,000.

(c)

Present BEP is RWF18,000.

(d)

Revised BEP is RWF16,500 approx.
Page 58

This question must be solved by initially evaluating each tender on the basis that it will
be accepted and comparing the resultant inflows/outflows with the current costs of
making the sub-component in-house.
This question tests the candidate’s ability to identify “relevant” costs and revenues in
the light of the particular terms of each tender, as well as examining candidates
knowledge of typical qualitative factors which impact upon many business decisions.
(a)

Quotation price
Sale of raw materials (note 1)
Rental income: (note 2)
Sale of machinery: (note 3)
Wages saved
Redundancy/lump sum (note 4)
Profit sharing: (note 5)
Total costs of accepting
Number of units
Cost per unit

Accept
MK Ltd
Tender
RWF248,000
(1,100)
(10,000)
(16,700)
(54,000)
14,000
None

Accept
FB Ltd
Tender
RWF245,000
(1,020)
None
None
(554,000)
34,000
(1,000)

180,200
9,000
RWF20.02

222,980
10,000
RWF22.30

Therefore, the offer from MK Ltd is the cheaper of the two tenders.
Notes:
1.
Sale of raw materials
If CTT Ltd returns the raw materials to the supplier, it will receive RWF1,020
calculated as follows:
80 kgs @ RWF15 per kg
Less:
15% restocking charge
Amount received

1,200
(180)
1,020

When this is compared to the offers from MK Ltd (RWF1,100) and FB Ltd
(RWF1,000), it can be seen that CTT Ltd will sell the material to MK Ltd if its
tender is accepted or else return the materials to the supplier if FB Ltd tender is
successful.

Page 59

Rental income
CTT Ltd will be able to sub-let the floor space if MK Ltd is successful; therefore,
the sum of RWF10,000 is shown as income in the above evaluation of that
company’s proposal. However, if FB Ltd succeeds, CTT ltd will not be able to
sub-let the floor space, as it will be used by FB Ltd as part of the overall deal. It
should be noted that, in either case, CTT Ltd will still have to pay the rent. This
sum does not differ under either decision, it has not been shown in the above
evaluation.

Sale of machinery
The cash proceeds realised on the sale of the machinery are calculated as follows:
RWF
Book value
Less
Book loss on disposal

18,700
(2,000)
16,700

As per note 2, if FB Ltd is successful the machinery will not be sold; therefore, no
proceeds are shown under the evaluation of FB Ltd tender.
2.

Redundancy/lump sum costs
Payment to staff if MK Ltd succeeds: 2 staff @ RWF7,000 each = RWF14,000
Payment to staff if FB Ltd succeeds: 2 staff @ RWF17,000 each = RWF34,000

Profit sharing
The cash which CTT Ltd will receive under the profit sharing arrangement is
calculated as follows:
1,000 units at RWF40 per unit x 2.5% = RWF1,000
(a)

On a purely economic basis, CTT Ltd should not sub-contract the
manufacture of the sub-component to MK Ltd as the relevant (variable) cost
of so doing is approximately RWF0.50 higher (RWF175,500/9,000 =
RWF19.50 present cost per unit). This assumes a one year horizon.
Additionally, there may be other factors which the company might wish to
take into account. These include the following:
Page 60

Track record of MK Ltd – is the company a reliable, experienced
supplier?

Quality of the component manufactured by MK Ltd – as this is a key
component, it would be of paramount importance that clearly defined
Quality Assurance procedures are installed to ensure top quality.

Effect on the morale of staff if two fellow workers are made redundant.
There may be a decline in productivity if staff feel insecure in their
positions.

Are there opportunities for CTT Ltd to extract greater economies from
the current production process? Perhaps increased Capital investment
may lower the average unit cost.

CTT Ltd should consider the implications of a decision to sub-contract
the manufacture of the component, with special consideration of the
consequences of dependency upon one supplier.

Page 61

STANDARD COSTING AND VARIANCE ANALYSIS
REVISION QUESTION
1.

ACM Co Limited manufacture a single product, product W, and have provided you
with the following information which relates to the period which has just ended:
Standard Cost per Batch of Product W
Materials:

Kilos

F
G
H

15
12
8
35
3
32

Less: Standard loss
Standard yield
Labour:

Price per kilo
RWF
4
3
6

Hours

Department P
Department Q

Total
RWF
60
36
48
144

Rate per hour
RWF
10
6

4
2

40
12
196

Budgeted sales for the period are 4,096 kilos at RWF16 per kilo. There were no
budgeted opening or closing stocks of product W.
The actual materials and labour used for 120 batches were:
Materials:

Kilos

F
G
H
Less: Actual loss
Actual yield

1,680
1,650
870
4,200
552
3,648

Labour:

Hours

Department P
Department Q

Price per kilo
RWF
4.25
2.80
6.40

Rate per hour
RWF
10.60
5.60

600
270

Total
RWF
7,140
4,620
5,568
17,328

6,360
1,512
25,200

All of the production of W was sold during the period for RWF16.75 per kilo.
REQUIREMENT:
(a)

Calculate the following material variances:
•
•
•
•

Price
Usage
Mix
Yield

(5 marks)

Page 62

(b)

Prepare an analysis of the material mix and price variances for each of the
materials used.
(3 marks)

(c)

Calculate the following labour variances:
•
•
•

Cost
Efficiency
Rate

for each of the production departments.
(4 marks)
(d)

Calculate the sales variances.
(3 marks)

(e)
variance.

Comment on your findings to help explain what has happened to the yield
(5 marks)
[Total: 20 marks]

You have been assigned the task of assessing the performance of a division within the
company in which you work.
The division, which is a major production centre, uses standard absorption costing for
product costing and stock valuation purposes.
The cost card for the product line where you intend to start your assessment shows the
following data:
Quantity
Direct materials
Direct labour
-

10 kgs

RWF
105

-Category A

30 minutes

Category B

45 minutes

Variable overheads

20% of material

Fixed overheads (note)

30 minutes @ RWF12 per hour

Standard absorption cost

21
6

156

Note: Fixed production overheads are absorbed on the basis of standard time allowed
for Category A labour. The monthly budget for Category A labour was 2,500 hours.

Page 63

In the most recent month, 4,977 units were made at the following costs:

RWF
Direct materials

Direct labour

- Purchased

55,000 kgs

- Used

52,350 kgs

- Category A

2,610 hours

77,648

- Category B

3,730 hours

45,000

Variable overheads

555,600

114,925

Fixed overheads

29,055

REQUIREMENT:
(a)

Calculate the following variances:
(i)

Direct materials price and usage.
(3 marks)

(ii)

Direct labour rate and efficiency variance for both categories of labour.
(3 marks)

(iii) Variable overheads expenditure and efficiency variance.
(4 marks)
(iv) Fixed overheads expenditure and production volume variance.
(4 marks)
Show all workings.

(b)

Briefly comment on the information provided about the department’s
performance by the variance analysis.
(6 marks)
[TOTAL: 20 MARKS]

Page 64

STANDARD COSTING AND VARIANCE ANALYSIS
ANSWERS TO REVISION QUESTIONS
1.

(a)

Material Variances
(i) Actual quantity at actual price (given)

RWF17,328

(ii) Actual quantity at standard price:
F
1,680 × RWF4
G
1,650 × RWF3
H
870 × RWF6

RWF
6,720
4,950
5,220
RWF16,890

(iii) Standard yield × Standard cost
(32 × 120) × RWF4.50 (see working)

RWF17,280

(iv) Actual yield × Standard cost
3,648 × RWF4.50

RWF16,416

Variances (A = Adverse, F = Favourable):
Price
(i) − (ii)
Usage
(ii) − (iv)

RWF
438 A
474 A

Cost

(i) − (iv)

912 A

Mix
Yield

(ii) − (iii)
(iii) − (iv)

390 F
864 A

Usage (as above)

474 A

Workings:
Standard cost per kilo = RWF144 = RWF4.50
32kilos

(b)

Further Analysis of Material Variances
Mix
Standard (kilos)
Actual (kilos)

F
1,800
1,680
120 F
4

× Standard price (RWF)

G
1,440
1,650
210 A
3

H
960
870
90 F
6

RWF390 F

RWF480 F

RWF630 A RWF540 F

RWF438 A

F
RWF
4.00
4.25
0.25 A
1,680
RWF420 A

G
H
RWF
RWF
3.00
6.00
2.80
6.40
0.20 F
0.40 A
1,650
870
RWF330 F RWF348 A

Price
Standard
Actual
× Actual kilos used

Page 65

(c)

Labour Variances
Total
RWF
6,240
7,872

Cost variances
Standard cost
Actual cost
(1)

RWF1,632
A

Efficiency variances
Standard hours
Actual hours

Dept P
RWF
4,800
6,360
RWF1,560
A
480
600
120 A
10

× Standard rate per hour

Dept Q
RWF
1,440
1,512
RWF72 A

240
270
30 A
6

(RWF)
(2)

RWF1,380
A

Rate variances
Standard rate
Actual rate
× Actual hours worked
(3)

RWF252 A

RWF1,200
A
RWF
10.00
10.60

RWF180 A
RWF
6.00
5.60

0.60 A
600

0.40 F
270

RWF360 A

RWF108 F

Proof: (1) + (2) = (3)
(d)

Sales Variances
Budgeted sales for actual level of activity
Actual sales

120 × 32 × RWF16
3,648 × RWF16.75

RWF
61,440
61,104
RWF336 A

Made up of: Volume variance
(3,840 − 3,648 kilos) × RWF16
Price variance (RWF0.75 × 3,648)

3,072 A
2,736 F
RWF336 A

(e)

The actual mix used had the same weight as the standard mix (4,200 kilos) but
used a different combination from the standard mix (as indicated in (b)). It used
less than planned of materials F and H, and more of material G, a lower-cost
material. In addition to substituting the lower-cost material for F and H, which
could affect the yield, the adverse yield variance could have also been caused by
using materials of a lower quality than planned, e.g. the lower price per kilo of G
gives a favourable price variance, but this could be due to buying a lower-quality
material.
Page 66

The labour efficiency variance may have been caused by poor-quality materials
taking longer to process. It could also be due to lack of motivation of employees,
e.g. those in department Q getting a lower pay rise than expected, could have
caused them to work more slowly and to waste more material by not taking as
much care as they should. This could also help explain the actual yield, 30.4
kilos per batch, being lower than the standard yield of 32 kilos per batch.
2.

(a)

Variance analysis calculations
Actual costs
incurred

Materials

RWF555,600
↑

Standard cost of
inputs

RWF577,500i

Standard cost
of production

RWF549,675ii

Price: RWF21,900
(F)
↑

↑

RWF522,585iii
Quantity: RWF27,090
(A) ↑

Labour:
RWF78,300iv

Category A RWF77,648
↑

Rate: RWF652 (A)
↑

↑

Efficiency: RWF3,645
(A) ↑

RWF44,760vi

Category B RWF45,000
↑

RWF74,655v

Rate: RWF240 (A)
↑

RWF44,793vii
↑ Efficiency: RWF33 (F)
↑

Variable Overheads
RWF109,935viii

RWF114,925
↑

Expenditure: RWF4,990
(A) ↑

RWF104,517ix
↑ Efficiency: RWF5,418
(A) ↑

Fixed Overheads
RWF30,000x

RWF29,0
55
↑

Budget: RWF945 (F)
↑

Page 67

RWF29,8
62xi
↑

Volume: RWF138
(A)
↑

(i)

Standard cost of materials purchased: 55,000 kgs @ RWF10.50 per kilo

(ii)

Standard cost of materials used: 52,350 kgs @ RWF10.50 per kilo

(iii) Standard materials cost of actual output: 4,977 units @ RWF105 per unit
(iv) Standard cost of category A hours used: 2,610 hours @ RWF30 per hour
(v)

Standard category A labour cost of actual output: 4,977 units @ RWF15 per
unit

(vi) Standard cost of category B hours used: 3,730 hours @ RWF12 per hour
(vii) Standard category B labour cost of actual output: 4,977 units @ RWF9 per
unit
(viii) Standard cost of variable overheads (based on materials used): 20% of
RWF549,675 as calculated in note (ii)
(ix) Standard variable overhead cost of actual output: 4,977 units @ RWF21 per
unit
(x)

Budgeted level of Fixed overheads per month: 2,500 category A hours @
RWF12 per hour

(xi) Standard Fixed cost of actual output: 4,977 units @ RWF6 per unit
(b)

Commentary on the performance of the production centre should include the
following points:
Materials Variances
While the price being paid for the materials used is substantially lower than that
budgeted for, it is clear that the quantity of materials being used to make the
products is greater than allowed. Management should investigate the reasons for
this – perhaps the Purchasing Department is buying materials of a lower grade
which has occurred the levels of wastage experienced.

Labour Variances
Category A labour appears to be working at a level of efficiency which is less
than expected. This may be related to the previous point if the quality of
materials being used has resulted in the workers having to spend more time
reworking the units produced. However, management should investigate any
hypothesis in order to ascertain the precise reason for the adverse efficiency
variance. No material problems are evident in respect of Category B labour.

Page 68

Overhead Variances
Variable overheads appear to give cause for concern. The sizeable variances in
both expenditure and efficiency variances may be due to the use of an
inappropriate basis of applying such costs to output – it is possible that variable
overheads are incurred in proportion to some cost other than materials. In any
event, management should investigate the reasons for the substantial variances
and may need to reconsider the use of materials as a means of allocating such
costs to output.

Page 69

PREPARATION TECHNIQUES AND CONSIDERATIONS OF
BUDGETS
REVISION QUESTIONS
1.

ALP Ltd is about to commence business to manufacture a standard product. The
following standards have been prepared:
RWF
per unit
Sales price
48
Direct materials
Direct wages
Variable overhead

10
20
15

Fixed overheads, excluding depreciation, are budgeted at RWF80,000 for the year.
The company will have a share capital of RWF100,000 all of which will be invested in
plant and equipment. Depreciation is to be calculated on a straight-line basis over a
five-year period, with no residual value.
The following budgeted sales and production figures for the coming year have been
prepared:
Quarter

Sales
Production

(1)
units

(2)
units

(3)
units

(4)
units

9,000
10,000

9,000
12,000

15,000
15,000

21,000
20,000

Customers will be given a two-month credit period, and suppliers of direct material will
allow three months’ credit.
Stock of finished goods will be valued at standard variable cost.
Wages and overheads will be paid as incurred. Fixed overheads will accrue evenly
throughout the year.
REQUIREMENT:
Prepare:
(a)

Quarterly trading and profit and loss accounts

(b)

A quarterly cash flow forecast

Page 70

The budgeted balance sheet of KTU Ltd is as follows:
1 March Yr 5
Cost
Fixed assets
Land and buildings
Machinery and equipment
Motor vehicles

RWF
500,000
124,000
42,000

Depreciatio
n to date
RWF
84,500
16,400

RWF
500,000
39,500
25,600

666,000

100,900

565,100

Working capital:
Current assets
Stock of raw materials (100 units)
Stock of finished goods (110 units)*
Debtors (January RWF7,680, February
RWF10,400)
Cash and bank

Net

4,320
10,450
18,080
6,790
39,640

Less Current liabilities
Creditors (raw materials)

3,900

35,740
600,840

Represented by:
Ordinary share capital (fully paid) RWF1
shares
Share premium
Profit and loss account

500,000
60,000
40,840
600,840

*The stock of finished goods was valued at marginal cost.
The estimates for the next four-month period are as follows:
March
Sales (units)
80
Production (units)
70
Purchases of raw materials (units)
80
Wages and variable overheads at
RWF65 per unit
RWF4,550
Fixed overheads
RWF1,200

April
84
75
80

May
96
90
85

June
94
90
85

RWF4,875
RWF1,200

RWF5,850
RWF1,200

The company intends to sell each unit for RWF219 and has estimated that it will have
to pay RWF45 per unit for raw materials. One unit of raw material is needed for each
unit of finished product.

Page 71

All sales and purchases of raw materials are on credit. Debtors are allowed two
months’ credit and suppliers of raw materials are paid after one month’s credit. The
wages, variable overheads and fixed overheads are paid in the month in which they are
incurred.
Cash from a loan secured on the land and buildings of RWF120,000 at an interest rate
of 7.5% is due to be received on 1 May. Machinery costing RWF112,000 will be
received in May and paid for in June.
The loan interest is payable half-yearly from September onwards. An interim dividend
to 31 March Yr 5 of RWF12,500 will be paid in June.
Depreciation for the four months, including that on the new machinery, is:
Machinery and equipment RWF15,733
Motor vehicles RWF3,500
The company uses the FIFO method of stock valuation. Ignore taxation.
REQUIREMENT:
(a)

Calculate and present the raw materials budget and finished goods budget in
terms of units, for each month from March to June inclusive; and
(5 marks)

(b)

The corresponding sales budgets, the production cost budgets and the budgeted
closing debtors, creditors and stocks in terms of value.
(5 marks)

(c)

Prepare and present a cash budget for each of the four months.

(d)

Prepare a master budget, i.e. a budgeted trading and profit and loss account for
the four months to 30 June Yr 5, and budgeted balance sheet as at 30 June Yr 5.

(6 marks)

(10 marks)

Page 72

PREPARATION TECHNIQUES AND CONSIDERATIONS OF
BUDGETS
ANSWERS TO REVISION QUESTIONS

ALP LTD: TRADING AND PROFIT AND LOSS ACCOUNTS
FOR THE YEAR ENDED . . . . .
Quarter
(3)
RWF

(1)
RWF

(2)
RWF

Sales

432,000

720,000

1,008,000

2,592,000

Direct materials
Direct wages
Variable overheads

100,000
200,000
150,000

120,000
240,000
180,000

150,000
300,000
225,000

200,000
400,000
300,000

570,000
1,140,000
855,000

450,000

540,000

675,000

900,000

2,565,000

45,000

180,000

450,000

585,000

855,000

1,080,000

2,565,000

45,000

180,000

135,000

405,000

675,000

945,000

2,430,000

Gross profit

27,000

45,000

63,000

162,000

Fixed overheads
Depreciation

20,000
5,000

80,000
20,000

2,000

20,000

38,000

62,000

Opening stock of
finished goods
Less: closing stock of
finished goods

Net profit

(4)
RWF

BALANCE SHEET AS AT . . . .
RWF
Fixed Assets at cost
Less depreciation

Total
RWF

RWF
100,000
20,000
80,000

Current Assets
Stock
Debtors

135,000
672,000
807,000

Current Liabilities
Creditors

200,000
Page 73

Bank overdraft

525,000
725,000

Net current assets

82,000
162,000

Represented by:
Share capital
Profit

100,000
62,000
162,000
Cash Budget

Share capital
Debtors
Payments:
Plant
Creditors
Wages
Expenses
Balance on
quarter
Brought forward
Carried forward

(1)
RWF
100,000
144,000

Quarter
(2)
(3)
RWF
RWF
432,000
528,000

(4)
RWF
816,000

Total
RWF
100,000
1,920,000

244,000

432,000

528,000

816,000

2,020,000

100,000
200,000
170,000

100,000
240,000
200,000

120,000
300,000
245,000

150,000
400,000
320,000

100,000
370,000
1,140,000
935,000

470,000

540,000

665,000

870,000

2,545,000

(226,000)

(108,000)

(137,000)

(54,000)

(226,000)

(226,000)
(334,000)

(334,000)
(471,000)

(471,000)
(525,000)

(525,000)

Page 74

(a)

Raw Materials Budget
(Units)
March
Opening stock
100
Add: Purchases
80

April
110
80

May
115
85

June
110
85

180
Less: Used in production 70

190
75

200
90

195
90

Closing stock

115

110

105

100
75

91
90

85
90

Less: Sales

180
80

175
84

181
96

175
94

Closing stock

100

110

Finished Goods Budget (units)
Opening stock
110
Add: Production
70

(b)

Sales Budget

Total

(at RWF219 per unit) RWF17,520 RWF18,396 RWF21,024 RWF20,586 RWF77,526

Production Cost Budget
Raw materials (using FIFO)3,024*
Wages and variable costs 4,550

3,321**
4,875

4,050
5,850

14,445
21,125

RWF7,574 RWF8,196 RWF9,900 RWF9,900RWF35,570
Budgeted Closing Debtors
May + June sales = RWF41,610
Budgeted Closing Creditors
June, raw materials = 85 units × RWF45 = RWF3,825
*  RWF 4,320 × 70  = RWF3,024


100 

**  RWF 4,320 × 30  = RWF1,296 + 45 units at RWF45 = RWF3,321


100 

Budgeted Closing Stocks
Raw materials:

105 units × RWF45 = RWF4,725

Finished goods: 81 units × RWF110 = RWF8,910
Lab + OH

 material
+


RWF65 per unit 
 RWF45 per unit

Page 75

(c)

Balance
b/f
Add Receipts:
Debtors (two months’ credit)
Loan

May
RWF
5,545

June
RWF
132,415

7,680
-

10,400
-

17,520
120,000

18,396
-

14,470

15,220

143,065

150,811

3,900
4,550
1,200
-

3,600
4,875
1,200
-

3,600
5,850
1,200
-

3,825
5,850
1,200
112,000
12,500

(B)

9,650

9,675

10,650

135,375

(A) − (B)

4,820

5,545

132,415

15,436

(A)
Payments:
Creditors (one month’s credit)
Wages and variable overheads
Fixed overheads
Machinery
Interim dividend
Balance c/f

Cash Budget
March
April
RWF
RWF
6,790
4,820

Page 76

(d)

Master Budget

BUDGETED TRADING AND PROFIT AND LOSS ACCOUNT
FOR FOUR MONTHS TO 30 JUNE YR 5
RWF
RWF
Sales
77,526
Less: Cost of sales: Opening stock finished goods 10,450
Add Production cost
35,570
46,020
Less Closing stock finished goods
8,910
37,110
40,416
Less: Expenses
Fixed overheads (4 × RWF1,200)
Depreciation:
Machinery and equipment
Motor vehicles
Loan interest (two months)

4,800
15,733
3,500
1,500

25,533

Less: Interim dividends

14,883
12,500

Add: Profit and loss account balance b/f

2,383
40,840
43,223

Page 77

BUDGETED BALANCE SHEET AS AT 30 JUNE YR 5
Depreciation
Cost
to date
Fixed Assets
RWF
RWF
Land and buildings
500,000
Machinery and equipment
236,000
100,233
Motor vehicles
42,000
19,900
778,000
Current Assets
Stock of raw materials
Stock of finished goods
Debtors
Cash and bank balances

120,133

Net
RWF
500,000
135,767
22,100
657,867

4,725
8,910
41,610
15,436
70,681

Less: Current Liabilities
Creditors
Loan interest owing

3,825
1,500

5,325

65,356
723,223

Capital employed
Ordinary share capital RWF1 shares (fully paid)
Share premium
Profit and loss account

500,000
60,000
43,223

Secured loan (7.5%)

603,223
120,000
723,223

Page 78

COST BOOK-KEEPING
REVISION QUESTION
1.

The cost accounts of LMN Ltd are kept separately from its financial accounts. The
following balances have been brought forward at the beginning of Period 3.
RWF000
200
50
100

Stores Control
Work-in-Progress Control
Finished Goods Control
Cost Ledger Control

RWF000

350

The following transactions were recorded in the cost ledger for Period 3.
RWF000
93
3
10
110
35
15
21
45
185
195
230

Purchases for stores
Returns to suppliers
Stores issued - indirect materials
Stores issued - direct materials
Direct wages
Indirect wages
Indirect expenses
Production overhead absorbed
Work completed, at cost
Cost of goods sold
Sales
Required

Make the necessary entries in the Cost Ledger Control record, Stores Control account,
Work-in-Progress account, Finished Goods Control account and the Production
Overhead Control account, and in the Costing Profit and Loss account.

(10 marks)

Page 79

COST BOOK-KEEPING
ANSWER TO REVISION QUESTION
COST LEDGER CONTROL ACCOUNT
RWF
3,000
230,000
315,000

Stores Control A/c
Sales Control A/c
Balance b/f

Balance b/f
Stores Control A/c
W-I-P Control A/c
Production Overhead A/c
Production Overhead A/c
Costing P & L A/c

548,000

RWF
350,000
93,000
35,000
15,000
21,000
34,000
548,000

Balance b/f

315,000

WORK-IN-PROGRESS CONTROL ACCOUNT
Balance b/f
Stores Control A/c
Direct Wages:
Cost Ledger Control A/c
Production Overhead A/c

RWF
50,000
110,000

Finished Goods Control A/c
Balance c/f

35,000
45,000
240,000

Balance b/f

RWF
185,000
55,000

240,000

55,000
FINISHED GOODS CONTROL ACCOUNT

Balance b/f

RWF
100,000

Costing P & L A/c

W-I-P Control A/c

185,000

Balance c/f

285,000
Balance c/f

RWF
195,000
90,000
285,000

90,000
STORES CONTROL ACCOUNT

Balance b/f
Purchases - Cost Ledger
Control A/c

RWF
200,000
93,000

RWF
Returns Outwards - Cost
Ledger Control A/c
Production Overhead A/c
W-I-P Control A/c
Balance c/f

293,000
Balance b/f

170,000
Page 80

3,000
10,000
110,000
170,000
293,000

PRODUCTION OVERHEAD CONTROL ACCOUNT
Stores Control A/c
Direct Wages - Cost Ledger
Control A/c
Indirect Expenses - Cost
Ledger Control A/c

RWF
10,000
15,000

RWF
W-I-P Control A/c
(Overhead Absorbed)
Costing P & L A/c (UnderAbsorbed)

45,000
1,000

21,000
46,000
SALES CONTROL ACCOUNT

46,000

RWF
Costing P & L A/c

230,000

RWF
Cost Ledger Control A/c

230,000

COSTING PROFIT & LOSS ACCOUNT
Sales
Less Costs of Sales
Gross Profit
Less Production Overhead Under-Absorbed
Net Profit - Cost Ledger Control A/c

RWF
230,000
(195,000)
35,000
(1,000)
34,000

Note: this account can be shown in “T” account format.

Page 81

MCQ
REVISION QUESTIONS
1.

Answer all parts of this question.
The following information refers to questions (a) to (d):

Direct material
Direct labour: Skilled
Unskilled
Variable overheads
Fixed overheads

0.5 kg @ RWF10 per kg
0.25 hour @ RWF8 per hour
0.25 hour @ RWF6 per hour
100% of skilled cost per unit
0.25 hours skilled labour @ RWF4 per hour

Standard absorbed cost of production

RWF
5.00
2.00
1.50
2.00
1.00
11.50

Budgeted usage of skilled labour per month is set at 1,000 hours. The standard selling
price of a “Leviathan” is RWF20.
In a recent 4 week period, 3,800 “Leviathans” were produced at the following costs:
Direct material used:
Direct labour: Skilled
Unskilled
Variable overheads incurred
Fixed overheads incurred

2,000 kgs costing
1,000 hours costing
1,100 hours costing

RWF19,930
RWF7,820
RWF6,370
RWF4,020
RWF4,100

Answer the following multiple-choice questions:
(a) In the 4 week period, the efficiency ratio (or productivity ratio) of the skilled staff
was to one decimal place:
1.
2.
3.
4.
5.
(b)

97.8%
95%
Not quantifiable with the information given.
96.1%
None of the above

(2 marks)

The variable overhead efficiency variance was:
1.
2.
3.
4.

RWF3,580 adverse
RWF7,600 favourable
RWF3,600 favourable
RWF400 adverse
(3 marks)
Page 82

(c)

The budgeted level of Fixed Overheads for the month was:
1.
2.
3.
4.

(d)

Over absorbed by RWF100
Under absorbed by RWF200
Over absorbed by RWF80
Under absorbed by RWF300

(3 marks)
The budgeted level of production of “leviathans” each month in units was:
1.
2.
3.
4.

3,580 units
3,900 units
4,000 units
3,800 units
(3 marks)

(e)

When considering the operating statements prepared under marginal costing with
those prepared under absorption costing, which of the following statements holds
true:
1.
2.
3.

In the long run, total profits reported under both type of statement will be
the same.
SSAP 9 permits the use of marginal costing for external reporting
requirements.
If stocks are built up between one period and the next, the profits reported
under an absorption based system will be higher than those under a
marginal costing system.
Reported profits cannot be affected by stock changes under an absorption
costing system.

Choices:

(a)
(b)
(c)
(d)

Statement 1 only is correct
Statements 3 and 4 only are both correct
Statement 2 only is correct
Statements 1 and 3 only are correct.
(1 mark)
[Total: 12 marks]

Page 83

Answer all parts of this question.
(a)

WTT Limited is considering whether or not to continue with production of the
“Bauble” product line. Summarised budgeted results for the upcoming financial
year are as follows:
Baubles

Gadgets

Total

RWF

120,000

190,000

310,000

- Variable costs

85,000

102,000

187,000

Contribution
margin

35,000

88,000

123,000

- Fixed overheads

42,000

45,000

87,000

Net Profit/(Loss)

(7,000)

Sales revenue

43,000

36,000

It has been determined that of the RWF42,000 of Fixed Overheads deducted from
the contribution generated by the “Baubles” product, RWF5,000 is directly
attributable to the “Baubles” product line with the remaining RWF37,000 being
an allocation of general overheads (Rent, Insurance, Light/Fans, etc) currently
incurred by the company. By discontinuing production of the “Baubles” product
line the company will be able to begin production of “Whatsits”. It is expected
that sales of this new product will generate a contribution of RWF25,000 from
which Fixed Overheads of RWF19,000 will be deducted. Of this total of
RWF19,000, the sum of RWF12,000 represents a management allocation of part
of the RWF37,000 overheads currently deducted from the contribution of the
“Baubles” product (the remaining RWF25,000 of these overheads will be
allocated to the “Gadgets” product line) and RWF7,000 represents the cost of
hiring special purpose equipment to manufacture “Whatsits”.
REQUIREMENT:
If the decision is made to drop the “Baubles” product line in favour of
“Whatsits”, the effect on the total net profits of the company would be:
(a)
(b)
(c)
(d)
(e)

An increase of RWF11,000.
An increase of RWF6,000.
A reduction of RWF12,000.
An increase of RWF13,000.
None of the above.
Page 84

(5 marks)

(b)

Which of the following items would appear in a cash flow statement only and not
in a Profit and Loss account for the same period:

(a)
(b)
(c)
(d)
(e)

Rental income received.
Dividends paid.
Cost of Opening Stock held at the start of a financial year.
Purchase of second-hand motor vehicles.
None of the above.
(1 mark)

(c)

Select the statement that most precisely defines each of the following terms:
(i) The contribution to sales ratio measures:
(a) The total sales value required to be achieved in order to breakeven.
(b) The total number of units which must be sold in order to breakeven.
(c) The percentage contribution earned on the selling price of one extra
unit.
(d) The percentage gross profit mark-up on sales.
(1 mark)
(ii)

An accounting system which contains separate cost accounting and
financial accounting ledgers is called a/an:
(a) Integrated system.
(b) Marginal costing system.
(c) Interlocking system.
(d) Memorandum ledger control account.
(1 mark)

(iii) Equivalent units of production are defined as:
(a) Notional whole units representing uncompleted work which are used
to apportion costs between WIP and completed output.
(b) Partially completed units which may be further processed if the
additional costs of so doing are less than potential additional
revenues.
(c) Normal levels of losses expected in a typical process costing system
which can be sold as scrap.
(d) An average valuation calculated for stocks of materials using the
cumulative weighted average pricing system.
(1 mark)
Page 85

(iv) In the context of process costing, the split-off point is defined as:
(a) The point in a process beyond which it is uneconomic to incur
additional processing costs on work-in progress.
(b) The point in a process from which production overheads are charged
to work-in-progress.
(c) The point in a process at which joint products and by-products of the
process are separately identifiable.
(d) The point at which it is more appropriate to apportion common
process costs using a sales value basis rather than a physical units
basis.
(1 mark)
(v)

In stock control the reorder level is calculated as:
(a)
(b)
(c)
(d)

Average stock usage *Average lead time
Reorder quantity – (minimum usage * minimum lead time)
Maximum stock usage * maximum lead time
Average stock usage * maximum lead time
(1 mark)

(vi) In the context of cost bookkeeping, a notional cost is defined as:
(a) A cost which cannot be affected by management within a given time
period.
(b) The value of a benefit where no actual cost is incurred.
(c) A standard cost of production calculated using ideal standards.
(d) The valuation of partly completed production.
(1 mark)
(d)

“Standard costing systems are widely used because they provide cost data for
many different purposes.” Briefly outline the major purposes for which a
standard costing system can be used.
(8 marks)

[Total: 20 marks]

Page 86

MCQ
ANSWERS TO REVISION QUESTIONS
1.

(a)
Efficiency ratio

Hours allowed for actual production

Hours taken for actual production

(13,800*.25)/1,000 = 95% efficiency

(b)
Standard cost of variable overhead based on skilled hours used
1,000 hours @ RWF8 per hour

RWF8,000

RWF7,600

Variable allowed for actual production
3,800 units @ RWF2 per unit
Variable overhead efficiency variance

RWF400 adverse

RWF4,000 Per
month

3,800 units @ RWF1 per unit

RWF3,800

Under absorbed Fixed overheads

RWF200

Overheads absorbed by production

(d)
Budgeted usage of skilled hours per month = 1000
Time taken per unit: 15 minutes
Budgeted level of production
(e)

Statements 1 and 3 are correct.
Page 87

1000/0.25 = 4,000 units

WTT LIMITED
(a)

This requires the relevant costs and revenues to be identified if the decision is
made to drop the “Baubles” product line. The main point which candidates had
to identify was that the Fixed Costs were split between relevant and non-relevant
amounts.
Relevant costs/revenues

Drop line

Contribution of “Baubles” foregone
Fixed costs attributable to “Baubles” saved

(RWF35,000)
RWF5,000

New contribution generated from “Whatsits” RWF25,000
Additional Fixed costs incurred on “Whatsits” (RWF7,000)
Net change in Net Profits if product line dropped(RWF12,000)
Therefore the correct answer is (c).
(b)

Option (d) is correct.

(c)

(i)

c is correct

(ii)

c is correct

(iii) a is correct
(iv) c is correct
(v)

c is correct

(vi) b is correct

Contribution/Sales ratio (or Profit/Volume ratio)
Interlocking; Integrated
Equivalent units of production

Page 88

(d)

Points which should be made in the candidates solution include the following:
•

Assists in setting budgets and evaluating management performance.

•

Acts as a control device and an aid to “management by exception”.

•

Can help provide a prediction of future costs for decision making purposes.

•

Can assist inventory valuation.

•

Provides a target for individuals. This can aid motivation.

Page 89

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