F2.1 Notes & PP

SCHOOL OF PROFESSIONAL AND
EXECUTIVE PROGRAMS
MANAGMENT ACCOUNTING
KIGALI AND MUSANZE CAMPUS
SEPTEMBER, 2021
ICPAR MANAGEMENT ACCOUNTING
MANAGEMENT ACCOUNTING COURSE OUTLINE
LECTURER: CHARLES KOMBO OMANYO

CONTACT: +250781833731 / +254724291295
EMAIL: [email protected] / [email protected]
CONTACT HOURS: 48 HOURS
Aim: to develop knowledge and understanding of the application of management Accounting

Techniques to support the management processes of planning, control and decision making.
1. The nature and purpose of cost and management accounting

 Data and Information
 Qualities of good information
 Presentation of Information
 Managerial process of planning, control and decision making
 Responsibility accounting
 Difference between financial and cost & management accounting
2. Cost classification and cost behaviour
 Cost concept
 Classification of costs
 Analysis of costs
 Cost behavior and their types
 High and Low methods of separating fixed costs and variable costs
3. Cost Estimation
 High Low Method
 Regression Analysis
 Scatter graph Method
 Accounts Analysis Method
4. Materials
 Types of material
 Procedures and documentation for purchasing materials
 Stock taking
i. Periodic stocktaking
ii. Perpetual stocktaking or continuous stocktaking
 Stock control
i. Stock levels
ii. Economic order quantity
 Material inventory account
5. Labour
 Methods of labour remuneration
 Premium and Bonuses
 Labour turnover
 Labour Efficiency and Utilization
6. Overheads Apportionment and Absorption
 Overhead cost classification and analysis
 Re-allocation of service overheads to production departments
 Determination of the overhead absorption rates
 Under and over absorption of overheads
 Treatment of over or under absorbed overheads
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ICPAR MANAGEMENT ACCOUNTING
7. Marginal and Absorption costing

 Marginal costing
i. Profit statement under M.C
ii. Stock valuation under M.C
iii. Over and under absorbed overheads
 Absorption costing
i. Profit statement under A.C
ii. Adjustments of under and over absorbed of overheads and treatment of fixed
costs
iii. Stock valuation under A.C
 Advantages and disadvantages of M.C and A.C
 Reasons for the difference in M.C and A.C profits
8. Alternative Costing Techniques
 Activity Based Costing (ABC)
9. Cost Volume Profit Analysis
10. Decision Making
 Relevant Costing
 Make or Buy Decisions and Contracting
 Limiting factors
11. Job and Batch and Service Costing
 Preparation of job cost card and profit statement
 Batch costing
 Service cost and cost units
 Service costing for internal services
12. Process costing
 Preparation of process ledger accounts
 Treatment of process losses, wastage scrap and abnormal gains
 WIP valuation using FIFO method and AVCO method and the concept of Equivalent
production
 Joint and by products
13. Budgeting
 Nature and Purpose of budgeting
 Types of budgets
 Budget Preparation
14. Standard costing
 Establishment of standard costs
 Variance analysis
 Explanation of variances and control
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MANAGEMENT ACCOUNTING
CHAPT 1: NATURE AND PURPOSE OF COST ACCOUNTING
INTRODUCTION
Management Accounting is accounting which assists management in carrying out its
functions. It is concerned with accounting for information that is useful to
management. Its purpose is to assist management in running the business in ways that
will improve the performance of the business.
Cost accounting that part of management accounting that provides a detailed analysis
of the costs of products and services, activities and responsibility centres of an
organization.
Cost Accounting is also defined as that part of management accounting which

establishes budgets and standard costs and actual costs of operations, processes,
departments or products and the analysis of variances, profitability or social use of
funds” (Chartered Institute of Management Accountants - CIMA)
Data and Information

Data: consist of raw facts and statistics before they have been processed.
Information: this is the data that has been processed into useful form, appropriate to
the needs of the user.
One way of assisting management is to provide them with good information to help
them in their decision making. The information can be provided to management in
different ways, but is usually in the form of reports. It is the work of the management
accountant to provide the information and in order to do so he needs to collect data.
Qualities of Good Information

1. Accurate: information should be as accurate as it needs to be otherwise
incorrect action might be taken based on inaccurate information. The degree of
accuracy depends on why the information is needed.
2. Complete: users should be provided with all the information necessary to
make decisions, plan and control activities. Inform should be complete as it
needs to, but not excessive.
3. Cost effective: management information is not effective if the cost of
obtaining it is more than the benefits it is expected to provide.
4. Understandable: the recipient (manager) should be able to understand what the
information is telling him. Excessive use of jargon must be avoided and the
level of complexity of the information should be appropriate to the skills and
knowledge of the manager using it.
5. Relevant: the information must be relevant to the needs of the users. The
provision of irrelevant information wastes time and money and there is the risk
that relevant information might be overlooked if the manager is required to
search for relevant items.
6. Attainable: information should be based on what is in the ability of the user to
achieve.
7. Time bound: should be provided to the manager in time for him to make use
of it.
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8. Easy to use: information should be communicated in a way which is clear and

easily understood by the user.
Managerial process of planning, control and Decision making

Managers are responsible for running their organization. They are put in control of a
work force and are allowed to spend money on resources such as labour, materials,
equipment and external services. They plan and direct operations within their area of
responsibility, and are accountable for the performance of those operations.
The functions of a manager include:

o Setting objectives for achievement
o Making plans for how to achieve those objectives
o Putting the plans into action
o Monitoring actual results and taking control measures and adjustents as
necessary.
o Evaluating actual performance
These functions could be described in broad terms as the tasks of planning and
control.
1. Planning
This involves the quantification of plans for the future operations of the enterprise;
such plans may for the long or short term, for the enterprise as a whole or for the
individual aspects of the enterprise.
Planning hierarchy: the functions of planning are performed by all managers, from the
most senior down to the most junior in an organization.
o Strategic level; where senior managers formulate long term objectives and
plans (strategies) and seek to achieve these long-term goals.
o Tactical level; senior managers make short-term plans for say the next year.
o Operational level; day to day decisions about what to do next and how to deal
with problems that arise are taken by all managers including junior managers
2. The control of the operations of the enterprise

Control may be assisted by the comparison of actual cost information with that
included in the plan. Any differences between planned and actual events can be
investigated and corrective action implemented as appropriate.
3. Decision Making
Cost accounting information assists in the making of decisions about the future
operations of the enterprise; such decisions making may be assisted by the
information from cost techniques and cost-volume – profit analysis.
Purpose and role of cost and management accounting

Cost accounting is utilized for a number of purposes, some of which are briefly
described in the following points :
1. Accounting for costs: this may be seen as a record keeping or store keeping
role. Information must be gathered and analyzed in a manner which will help
in planning, control and decision making
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2. Planning and Budgeting: this involves the quantification of plans for the future
operations of the enterprise; such plans may for the long or short term, for the
enterprise as a whole or for the individual aspects of the enterprise.
3. The control of the operations of the enterprise: control may be assisted by the
comparison of actual cost information with that included in the plan. Any
differences between planned and actual events can be investigated and
corrective action implemented as appropriate
4. Decision Making: cost accounting information assists in the making of

decisions about the future operations of the enterprise; such decisions making
may be assisted by the information from cost techniques and cost-volume –
profit analysis.
5. Resource allocation decisions: for example product pricing in determining

whether to accept or reject jobs: This is based on cost and revenue
implications of the relevant decisions
6. Performance evaluation: cost accounting information is used to measure and

evaluate actual performance so as to make a decision of the degree of
optimality or efficiency of resource utilization.
7. Motivation: Motivation involves influencing human behaviour so that the

participants identify with the objectives of the organisation and makes
decisions that are in harmony with these objectives. Budgets and performance
reports produced by management accountants motivate the firm’s employees.
To be motivating however, targets should be challenging but achievable.
8. Communication: To communicate means to make known, impart or transmit

the information. The management accountant aids the communication process
by installing and maintaining an effective communication system such as the
Management Accounting Information System (MAIS).
Difference between financial and Cost & Management Accounting

Financial Accounting: This is the analysis, classification, and recording of financial
transactions and the ascertainment of how such information will be reported to the
various users. It involves the development of general-purpose financial statements
largely for external reporting. These statements are developed in accordance with
standards imposed by the public (through the professional accounting bodies such as
the ACCA and the International Accounting Standards Board – IASB).
Management Accounting: This is the part of accounting that provides special-

purpose statements and reports to management and other persons inside the
organization. The information generated by management accounting is therefore for
internal uses and is not guided by any standards or legal requirements. Management
Accounting, unlike financial accounting, is proactive i.e. it is future-oriented. It is
required in making decisions that affect the organization.
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Management Accounting Financial Accounting

Information Internal use e.g managers External use e.g shareholders,
for; and employees creditors, lendors, banks and
government
Purpose; Aid planning, control and Record financial performance in a
decision making period and f. position at the end
Legal None Limited companies must produce
requirement financial accounts
Formats Management decide on the Format and content of financial
inform they require and accounts intending to give a true and
most useful way of fair view should follow accounting
presenting it. standards and company law.
Nature of Financial and non- Mostly financial
information financial
Time period Historical and forward Mainly a historical record
looking
Cost:
Sum of expenditure incurred in order to make a product or to offer a service. It
measures the economic sacrifice made to achieve an organizations goals. For a
product, cost represents the monetary measurement of resources used such as
materials, labour and expenses. For a service, cost is the monetary sacrifice made to
provide the service.
Cost Unit
It’s a measure of a unit of a product or service to which costs are ascertained. Cost
unit is determined by the nature of business enterprise. It may be job, batch or
contract.
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CHAPT 2: COST CLASSIFICATION
INTRODUCTION
Cost; is the sum of expenditure incurred in order to make a product. It refers to the
amount of resources that have been diverted from other uses or sacrificed so as to
achieve the desired objective. But the term is used to refer to various aspects of cost,
depending on the base of argument that one is approaching the issue from.
Classification is a means of analyzing costs into logical groups so that they can be
summarized into meaningful information for management use or for preparing
external financial reports.
Management will require information to make decisions on a variety of issues, each of

which may require different cost summaries. For example costs may be required for a
particular product, or for department, or for organization as a whole.
The criteria used for classification will depend on the information being collected.
Some possible classification are:
1. Classification by the elements of the costs

2. Nature of the costs
3. Classification by function
4. Classification by the behaviour of the costs
5. Classification by responsibility
6. Product or service costs and Period costs
7. Avoidable and unavoidable costs
8. Controllable and Uncontrollable costs
Remember, a cost is simply a quantification or measurement of the economic sacrifice

made to achieve a given objective. It is therefore a measurement of the amount of
resources sacrificed in attaining a specified goal.
1. Elements of costs
o Materials:
Material refers to all the physical inputs into the production process. For example; raw
materials, WIP, consumable materials, maintenance materials etc.
o Labour:
Salaries and wages paid to the workers of the company.
o Expenses:
Any cost that can not be classified as either material or labour is an expense.
2. Nature of costs
o Direct costs (Prime costs)
Direct costs consist of costs that can be directly attributed to a specific output, product
or level of activity. Direct costs include direct raw materials and direct labour also
called prime costs in aggregate.
o Indirect costs (Overheads):
They are also called indirect production costs. Are costs that will not be directly
attributable to a specific product. They are regarded as overheads. Identification of
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overheads to specific products is done through cost allocation and apportionment.

They include supervisors’ salaries, rent, electricity, depreciation of building etc.
3. Classification by function
Under this classification, costs are classified according to the function they perform in
an organization. Costs can functionally be classified as:
o Production costs
Are all the costs incurred in production of units during a time period e.g. raw material
costs, direct labour costs and production overheads.
o Non production costs
Non-production costs are costs incurred by all activities that support the production of
goods and services. They are administration costs, selling costs and distribution costs.
These are explained as follows:
a) Administration costs: These are all costs incurred in ensuring the smooth
running of the organization so as to facilitate the production and sale of goods
and services. These include: salaries for the managers, salaries for support
employees (such as accountants, clerks and secretaries) etc
b) Selling and distribution costs: These are costs that are incurred to enable the
delivery of products and services to the actual markets and promote or
complete a sale. These costs include: salesmen commission, saleswoman
salaries, advertising costs, depreciation on motor vehicles used by salesmen,
the cost of fuel used by vehicles used for distribution purposes etc.
c) Other functional classifications
4. Behaviour of costs
Cost behavior refers to the change in costs (increase or decrease) as the output level
changes, i.e. as we increase output, are the costs rising, dropping or remaining the
same. Cost Behaviour can be used to produce various classifications of costs such as:
o Fixed costs:
Are costs that do not change with of the level of output. It is also called autonomous
cost, as it remains the same irrespective of the activity level as shown below.
Costs
Fixed Cost
Activity Level
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NOTE: The classification of cost into fixed and variable costs would only hold within
a relevant range beyond which all costs are variable. The relevant range is the activity
limits within which the cost behaviour can be predicted.
o Variable costs:
Are costs that increase or decrease proportionately with the level of activity, i.e. that
portion of the cost of an activity that changes with the level of output.
Costs
Variable Costs
0 Activity Level
Note that with variable costs, the cost level is zero when production is zero. The cost
increases in proportion to the increase in the activity level, thus the variable cost
function is represented by a straight line from the origin. The gradient of the function
indicates the variable cost per unit.
o Semi-variable/ semi-fixed/ mixed costs:

Are costs with both a fixed and variable cost component. The fixed component is that
portion which is constant irrespective of the level of activity. They are variable
within certain activity levels but are fixed within other activity levels, as shown
below:
Costs
Variable cost
Fixed
Cost
Activity Level
o Stepped costs:
Are costs that are constant for a range of activity levels, and then change, and are then
constant again for another range. They increase in steps as the activity level increases.
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Costs
Activity Level
Other cost behaviour
Non- linear variable cost
There are situations where variable costs are curvilinear.
Graph (a) Graph (b)
Total Total
Variable variable
Cost cost
Level of activity level of activity

Graph (a) becomes steeper as levels of activity increase. Each additional unit of
activity is adding more to the total variable cost than the previous unit. Graph (b)
becomes less steep as levels of activity increase. Each additional unit is adding less to
total variable cost than the previous unit.
5. By Responsibility
o Cost centre
Is a production or service location, function, activity or item of equipment whose
costs are identified and recorded. E.g In a paint manufacturer; mixing department,
packaging department, administration etc.
o Revenue centre
Is a responsibility centre where by revenue earned are identified and recorded.
o Profit centre
Is a part of a business for which both the costs incurred and the revenues earned are
identified. Within each profit centre, there could be several cost centres and revenue
centres.
o Investment centre
Is a production or service location, function or activity for which costs, revenues and
net assets can be determined. Therefore an investment centre is similar to a profit
centre but as well as having identifiable costs and revenues it also has identifiable
assets and liabilities.
6. Product or service and Period costs

o Product cost
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Product costs or production costs are costs of making, or buying, an item of inventory.
E.g the material and labour costs of an item are part of its product costs.
o Period cost
Are those costs charged in the income statement for the period that are not directly
related to the production of the goods. Period costs relate to the passage of time rather
than to the output of individual products or services. Many period costs are fixed
costs. E.g selling, marketing and administration costs.
7. Avoidable and Unavoidable costs

o Avoidable costs
Costs which can be eliminated by changing the operations of the company
o Unavoidable costs
Costs which will not be changed by the decision being made.
8. Controllable and Uncontrollable costs

o Controllable costs
Refers to the costs which can be influenced by the actions of a person in whom
authority for such control is vested, for example control of labour cost will be
influenced by the method of remuneration and the degree at management control
which is exercised by a certain managers.
o Uncontrollable costs
Are costs which cannot be influenced by a person in whom authority for such control
is vested for example if the trade union demands an increase in wages the increment is
non controllable cost. Similarly, the depreciation of a building is a non-controllable
cost to a manager as he does not have authority over depreciation!
NOTE: In decision making, only controllable costs are considered because they can
be changed by the decision maker. There is little or nothing that the decision maker
can do about the non-controllable costs thus they are irrelevant in decision making.
However, the facilities provided by the nun-controllable costs should be efficiently
used.
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CHAPT 3: COST ESTIMATION

Cost estimation may be defined as ‘a study which attempts to predict the difference between
costs and the activity level or cost driver that causes those costs.
Purpose of Estimation
1. It assists in estimating the future expenditure (cost prediction) as the expenditure will depend
on the cost of the respective activities.
2. It assists in determining the net benefits anticipated in a specific activity based on the
relationship between projected costs and projected revenue.
3. Cost estimation is useful in business planning, cost control, performance evaluation and
decision making.
Methods of Cost Estimation

A number of methods can be used to analyse semi variable costs into their fixed and variable
elements. The main methods are:
1) High/Low Method
2) Least Square Regression Method
3) Visual Fit (Scatter Graph Method
4) Accounts Analysis
High/Low Method
Step 1: Select the Highest and Lowest Activity Levels with their associated Costs
Step 2: Find the V.C per Unit
V.C per Unit = Cost at Highest Activity – Cost at Lowest Activity
Highest Activity – Lowest Activity
Step 3: Find the Fixed Costs by Substitution using either Highest or Lowest Activity
F.C = T.C – V.C
Example 1:
The following relates to ABC ltd
Activity Level Costs (T.C)
200 units $7000
300 units $8000
400 units $9000
Required:
Calculate
1) Variable cost per unit
2) Fixed cost
3) Formulate the Total Cost Equation
4) Calculate Total Cost at 350 units
5) Calculate Total Cost at 600 units
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Example 2:
The Total Costs incurred at various output levels in a factory have been measured as follows:
Output (units) Cost (T.C)
26 $6566
30 $6510
33 $6800
44 $6985
48 $7380
50 $7310
Required:
Calculate V.C/ unit and Fixed cost using High/Low Method
Stepped Costs
Example 3 (Stepped Fixed Costs)
An organisation has the following Total Costs at three activity levels:
Activity (units) 4000 6000 7500
Total Costs $40800 $50000 $54800
Variable Cost per unit is constant within this activity range and there is a step up of 10% in the
Fixed Costs when activity exceeds 5500 units
Required:
What is the Total Cost at an activity level of:
a) 5000 units
b) 7000 units
Example 4 (Stepped V.C per Unit)
The following information relates to the manufacture of product M in the year 2013.
Output (Units) Total Costs ($)
200 7000
300 8000
400 8600
For output volume above 350 units the V.C per Unit falls by 10% (Note: this fall applies to all
units; not just units in excess of 350).
Required:
Estimate the Cost of producing 450 units
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Linear regression analysis

Linear Regression analysis is a statistical technique for calculating the line of best fit from a set
of data. The method uses all available data to calculate the line of best fit by a statistical method.
Establishing a linear function

Regression analysis calculates the values of "a" and "b" from past cost data using the following
formulae:
a = ∑y - b∑x
n n
b= n∑xy- ∑x∑y
n∑x² - (∑x)²
Where:
 a = fixed cost per period (the intercept)
 b = variable cost per unit (the gradient)
 x = activity level (the independent variable)
 y = total cost
 ∑ = sum of
 n = sample size
Example 1:
ABC Ltd has the following information
Output (Units) Total Costs ($)
20 82
16 70
24 90
22 85
18 73
Required:
a) Calculate the Variable Cost per unit
b) Calculate the Fixed Cost
c) Formulate the Total Cost Equation
Example 2:
Smart Ltd has the following:
Output Total Cost
2 9
3 11
1 7
4 13
3 11
5 15
Required:
a) Calculate the Variable Cost per unit
b) Calculate the Fixed Cost
c) Formulate the Total Cost Equation
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Example 3:
Month Output (units) Total cost ($)

1 80 6,500
2 60 6,200
3 72 6,400
4 75 6,500
5 83 6,700
6 66 5,400
Required:
a. Estimate the fixed costs per month and variable cost per unit using linear
regression analysis.
b. Estimate the total costs for the following activity levels in a month.
i. 75 units
ii. 90 units
NOTE: Where care is needed

• Can be used to calculate values within known range.
• But treated with caution outside known range (other factors may influence situation).
• The relationship between the two sets of figures needs to be checked using "correlation",
care must be taken if the readings are low.
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Visual Fit (Scatter Graph) Method

Cost estimation is based on past data regarding the dependent variable and the cost driver.
The past data (on cost levels and output levels) is plotted on a graph (called a scatter graph)
and a line of best fit is drawn.
A line of best fit is a line drawn so as to cover the most points possible on a scatter graph. Its
intersection with the vertical axis indicates the fixed costs while the gradient indicates the variable
cost per unit.
Accounts Analysis
The accountant examines and classifies each cost as variable, fixed or mixed. Mixed
costs are broken down into their variable and fixed components. They base their
classification on experience, inspection of cost behavior for several past periods or
intuitive feelings of the manager.
The danger in using this method lies in the fact that many managers may assume a cost
behavior without further analysis. This is because the method is highly subjective.
Example
ABC Ltd produces a single product which is meant for the local market only. The
monthly demand for this product varies from one month to the other.
During the month of November 2013, 1000 units were produced incurring the following
expenses.
$000
Direct Materials 30
Direct Labour 40
Rent (Fixed) 25
Electricity (40% fixed) 27
Property Taxes and Rates (80% variable) 50
Technical Support (fixed) 28
Total 200
Required:
a) Using accounts analysis method, formulate a predictor equation in the form of y=
bx + a
b) During the month of December 2013, ABC Ltd estimates to produce 1150 units.
Calculate the estimated cost to be incurred in December 2010.
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CHAPT 4: MATERIALS
Types of Materials
Materials are of two types:
1) Direct materials
Direct Materials are the raw materials from which the product is made e.g. sheet steel from
which the product car body sections are made.
2) Indirect materials
Indirect materials are consumable stores used in production e.g., grease, nuts, screws and
materials used in operating the business as opposed to making the product e.g., machine parts
and fuel for power generation. Indirect materials form part of overhead costs.
Classification of Materials
Materials could be classified according to:
1. Substances that make them up.
Wood, metal, plastic, wool etc
2. How they are measured
Litres, metres, kilograms etc
3. Their physical properties
Colour, shape, flexibility, quality etc
Material Purchase Procedure

This means the procedure an organization follows in order to acquire materials from the
suppliers.
When the materials are used in the production department is over, the production department
manager sends material requisition note to the purchasing department. Once this note is received,
the purchasing department manager orders for materials from the supplier. When the supplier
receives an order form, he releases the materials to the store.
Stock Levels
A stock level refers to the amount of stock that can be held in the store at any given time. Stock
levels include the following:
• Economic Order Quantity (EOQ)
• Reorder level
• Minimum Stock Level
• Maximum Stock Level
• Average Stock Level
• Economic Batch Quantity (EBQ)
1. Economic Order Quantity (EOQ)

EOQ is the quantity of stock ordered each time which minimizes the annual costs of stock
ordering plus stock holding. EOQ is also called Optimal Stock Level or Reorder Quantity.
Q= 2CoD
√ Hc
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Where
Q = EOQ
2 = Constant
Co = Cost per order
D = Annual Demand
Hc = Holding Cost per annum
2. Reorder Level
Also called warning level. Reorder level indicates to the stock keeper that he should place for
more orders i.e the stock is going down.
Reorder Level = Maximum Consumption × Maximum Lead Time
3. Minimum Stock Level

Also called Buffer stock or Security stock. It is the lowest level the stock can be allowed to go.
Min Stock Level = Reorder Level - (Average Consumption × Average Lead time)
4. Maximum Stock Level

This is the highest level stock can be allowed to reach, beyond which it becomes uneconomical
to continue keeping more stock.
Max Stock Level = Reorder Level + Reorder Quantity – (Min Consumption × Min Lead time)
5. Average Stock Level

Average inventory assumes that inventory levels fluctuate evenly between the minimum stock
and the maximum stock.
Average Inventory = Q + Buffer Inventory

2
6. Economic Batch Quantity (EBQ)
When business manufacturers its own stock items in batches, it will order a fresh supply of the
item as a batch quantity. The economic batch size is the quantity that minimizes the combined
total of the costs of stockholding and the cost of setting up the batch for manufacturer.
EBQ = 2CoD
√Hc (1-D/R)
Example 1
The demand for stock in a year is 144,000 units. The price of one unit of stock is $15. The stock
holding cost is 8%. The cost of one delivery is $400.
Consumption 700 – 900 units
Lead time 5 – 7 weeks
Required:
a) EOQ
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b) Reorder Level
c) Minimum Stock Level
d) Maximum Stock Level
e) Average Inventory
Example 2
A company uses 60,000 units of items Z every year. It manufacturers units of Z internally and
can produce them at a rate of 240,000 units each year. The cost of holding a unit of Z in stock
for one year is £4, and the cost of ordering and setting up a batch production run for Z is £2,025
Required:
What is the economic batch quantity for Z?
Total Cost Components (EOQ and Bulk Purchasing Discounts)
Total costs include the following components:
1) Purchase Cost
= Demand x Stock price per unit
2) Stock Ordering Costs
= D x Co
Q
3) Stock Holding Costs
= Q x Hc
2
NB
1. Cost minimizing order size is the quantity of stock (EOQ) to be ordered that has the least
Total Costs.
2. Discount rates only affect purchase costs and holding costs. They do not affect ordering
costs.
Example
The annual demand for an item of stock is 45 units. The item costs $200 per unit to purchase.
The holding cost for one unit for one year is 15% of the unit cost. The ordering cost is $300 per
order.
A supplier offers a 3% discount for orders of 60 units or more and a discount of 5% for orders of
90 units or more.
Required:
Calculate the cost minimizing order size.
Stock Valuation
Stock valuation is the process of determining the value of the stock issued to production
department from the store. Stock valuation does not affect the receipts or purchase of stock, it
only affects the stock issued.
Methods of Stock Valuation
1. First In First Out (FIFO)
This method assumes that the first batch of stock is issued first and the price of this batch of
stock is used until the batch is exhausted.
2. Last In First Out (LIFO)
This method assumes that the last batch of stock is issued first and the price of this batch of stock
is used until the batch is exhausted.
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3. Weighted Average Cost Method (AVCO)

This method assumes that the issue price is the average price of the batches of stock held.
Issue price = Total Value of Stock Held

Number of units of Stock Held
Example 1
ABC ltd has the following transactions:
1st Jan: Opening Inventory 600 units @ $3 per unit
5th Jan: Purchased 1800 units @ $4 each
15th Jan: Sold 4200 units
28th Jan: Purchased 2100 units @ $6.5 each
30th Jan: Sold 5400 units
Required:
Prepare a stock ledger card to show the units and value of closing stock on 30th January using
a) FIFO
b) LIFO
c) AVCO
Example 2
XYZ ltd had the following transactions:
1st Nov: Opening inventory 600 units @ $2 each
5th Nov: Produced 800 units @ $3 each
15th Nov: Sold 2200 units
20th Nov: Purchased 1800 units @ $5 each
30th Nov: Sold 3500 units
The selling price of stock was $12
Required:
a) Using FIFO Calculate the units and Value of closing stock
b) Find the gross profit
Example 3: Assignment
List the advantages and disadvantages of the three stock valuation methods
Accounting for Materials

These are the double entry transactions that affect the movement of inventory.
The following sets of accounts are normally affected:
1. Suppliers/ cash/ Bank a/c
2. Stores/ stock a/c
3. Work in Progress a/c : for direct materials
4. Production Overhead a/c : for indirect materials
5. Stock Adjustment a/c
C. OMANYO
Example 1
Show the Dr and Cr entries affected by the following transactions:
1. When materials are purchased from the supplier
2. When materials are issued to the production department
3. When materials are returned to the store from the factory
4. When materials are returned to the supplier from the store
5. When materials are destroyed inside the store
6. When indirect material are requisitioned in the factory
Example 2
At 1st July 2010 the total value of items held in store was $50,000. During July the following
transactions occurred:
1. Materials purchased from suppliers on credit $120,000.
2. Materials returned to suppliers because they were unsatisfactory $3,000.
3. Materials purchased for cash $8,000.
4. Materials issued to the production department $110,000.
5. Indirect materials issued as production overheads $25,000.
6. Value of materials written off after a discrepancy was found in the stock check $1,000.
7. Direct materials returned to store from production $4,000.
Required:
Draw up all the following ledger a/cs
a) Stores a/c
b) WIP a/c
c) Production overhead a/c
d) Suppliers/ cash/ bank a/cs
e) Stock Adjustment a/c
Stock Taking
It involves counting the physical stock on hand at a certain date and checking this against the
balance shown in the stock records.
Methods of Stock Taking
1. Periodic Stock Taking
Is the process whereby all the stock items are physically counted and valued at a set point in
time, usually at the end of an accounting period.
2. Continuous Stock Taking
Is the process of counting and valuing selected items at different times on a rotating basis. This
involves a specialist team counting and checking a number of stock items each day so that each
item is checked at least once a year.
Advantages of Continuous over Periodic Stock taking
1. The annual stock taking is unnecessary and the disruption it causes is avoided
2. Regular skilled stock takers can be employed, reducing likely errors
3. Deficiencies and losses are reviewed sooner than they would be if stock taking were
limited to an annual check
4. Production holders are eliminated because the stores staff are at no time so busy to be
unable to deal with material issue to the production department
5. Staff morale is improved and standards raised
C. OMANYO
Reasons for holding stocks

1. To ensure sufficient goods are available to meet expected demand
2. To provide a buffer between processes
3. To meet any future shortages
4. To take advantage of bulk purchasing discount
5. To allow production processes to flow smoothly and efficiently
6. As a deliberate investment policy especially in times of inflation or possible shortages
Holding Costs
These are costs associated with high inventory levels. Holding costs include:
1. Cost of storage and stores operation: larger stocks require more storing spaces and
possibly extra staff and equipment to control and handle them
2. Interest charges: Holding stocks involves the tying up of capital (cash) on which interest
must be paid
3. Insurance costs: The larger the value of stock held, the greater the insurance premiums
are likely to be
4. Risk of obsolescence: The longer a stock item is held, the greater is the risk of
obsolescence
5. Risk of theft
NB. These costs can be reduced by keeping the stock to a minimum.
Stock out Costs

These are costs associated with running out of inventory. Stocks out costs include:
1. Lost contribution from lost sales
2. Loss of future sales due to disgruntled customers
3. Loss of customer goodwill
4. Cost of production stoppages
5. Labour frustration over stoppages
6. Extra costs of urgent, small quantity, replenishment orders.
C. OMANYO
CHAPT 5: LABOUR
Labour is a cost of producing the products of the organization. It is always one of the major expenses of a
business.
Classification of labour
1. Direct labour costs:

Labour engaged directly in the production of goods and services. Direct labour cost make up part of the
prime cost of a product and include the basic pay of direct workers.
2. Indirect Labour costs
Make up of the overheads (indirect costs) and include the basic pay of indirect workers. Indirect workers
are employees not directly involved in making products e.g. factory supervisors, maintenance staff.
Indirect labour costs also include
a) Bonus payments
b) Idle time: when workers are paid but not making any products e.g. machine breaks down
c) Employers’ national insurance contributions
d) Sick pay
e) Time spent by direct workers doing ‘indirect jobs’ e.g. cleaning or repairing machines.
Overtime
When employees work overtime, they receive a basic pay element and an overtime premium.
Overtime is time that is paid for, usually at a premium, over and above the basic hours for the period.
Example
If John is paid £10 per hour and overtime is paid at time and a half, when John works overtime, he will
receive £15 per hour (£10+£5). It is important that his pay is analyzed into Direct and indirect labour
costs
Basic pay (Direct cost) = $10
Overtime pay ($15)
Overtime premium (indirect cost) = $5
Overtime premiums are indirect cost (overheads) unless;
1) If at the specific request of a customer’s because they want a job to be completed as soon as
possible.
2) If overtime is worked regularly by a production department in the normal course of operations
C. OMANYO
Example 1
Vienna is a direct labour employee who works a standard 35 hours per week and is paid a basic rate of
£12 per hour. Overtime is paid at time and a third. In a particular week she worked 42 hours and
received a £50 bonus.
Required
Calculate
1) Basic pay for standard hours
2) Basic pay for overtime hours
3) Overtime premium
4) Classify as Direct and Indirect Costs
Example 2
Carol is a direct labour employee who works a standard 40 hours per week. She is paid a basic pay of £15
per hour. Overtime is paid at time and a half. In a certain week she worked 50 hours and received a £100
bonus.
Required
Calculate
a) Basic Pay for Standard Hours
b) Basic Pay for Overtime Hours
c) Overtime Premium
d) Classify as Direct and Indirect Costs if overtime is worked regularly by the production
department
Example 3
A company operated a factory which employed 40 direct workers throughout the four week period just
ended. Direct employers were paid at a basic rate of £4 per hour for 38 hour week. Total hours of the
direct workers in the four week period were 6,528. Overtime which is paid at a premium of 35% is
worked in order to meet general production requirements. Employee’s deductions total 30% of gross
wages. 188 hours of direct workers’ time were registered as idle.
Required:
Calculate; Gross Wages, Deduction, net wages, direct labour cost and indirect labour costs.
Accounting for labour costs
• Labour costs are an expense and are recorded in an organization’s income statement. Accounting
transactions relating to labour are recorded in the labour account.
• The labour account is debited with the labour costs incurred by an organization. The total labour
costs are then analyzed into direct and indirect labour costs.
• Direct labour costs are credited from the labour account and debited labour costs are directly
involved in production and are therefore transferred to WIP before being transferred to finished
goods and then to the costs of sales.
• Indirect labour costs are also credited “out of” the labour account and debited to the production
overhead account. It is important that total labour costs are analyzed into their direct and indirect
elements.
C. OMANYO
I.e. when cash is with drawn

Dr labour a/c xx
Cr Bank a/c xx
Next: Direct labour costs

Dr. work in progress a/c xx
Cr labour a/c xx
Indirect labour costs

Dr production overhead a/c xx
Cr labour a/c xx
Example
Direct indirect Total
Workers workers
£ £ £
Basic pay for basic hours 43000 17000 60000
Overtime- basic pay 10000 4500 14500
Overtime- premium 5000 2250 7250
Training 2500 1250 3750
Sick pay 750 250 1000
Idle time 1200 - 1200
The above information is taken from the pay roll of a company.
Required
Using the information given, prepare the following
a) Bank a/c
b) labour a/c
c) Work In Progress a/c
d) Production Overhead a/c
Remuneration methods
There are two basic approaches to remuneration.
1) Time related
2) Output related (piecework)
1) Time- based systems

It’s the most common remuneration method employees are paid a basic rate hour, day, week or month.
Total = hours x Basic rate + overtime x overtime
Wages worked of pay per hours hours worked premium per hour
Basic time based systems do not provide any incentive for employees to improve productivity and close
supervision is often necessarily.
NB. Look at overtime examples
2) Piecework systems
Pays a fixed amount per unit produced.
Total = units x Rate of
Wages produced pay per unit
C. OMANYO
Piecework system of pay can be subdivided into

a) Straight piecework systems
Straight piecework system is where by a fixed amount is paid for all the units that have been produced. It
can also be accompanied by guaranteed minimum wage.
Example 1
Aiden is paid $10 per unit and is guaranteed a minimum wage of $1500 for a 40 hour week. In a series of
4 weeks he produced 130, 150, 170 and 180 units.
Required
Compute his expected pay for each of the four weeks and the total pay.
b) Differential Piecework systems

Differential piecework systems involve different piece rates for different levels of production. It is the
most widely used piecework system.
Example 1
Braiden is subject to the following rates of pay
Production (units) Rate of Pay per unit
0 - 100 $1.50
101- 200 $1.75
201 - 300 $2.00
The company pays a guaranteed minimum wage of $300 per week. In a week, the employee produces 220
units.
Required
Calculate his earnings for that particular week.
Example 2
Beuty is subject to the following rates of pay
Production (units) Rate of Pay per unit
0 - 100 $1.20
101- 200 $1.50
201 - 300 $1.75
The company pays a guaranteed minimum wage of $350 per week. In a week, the employee produces 215
units.
Required
Calculate his earnings for that particular week.
Example 3
A co operates piecework systems of remuneration, but also guarantees its employees 75% of a time based
rate of pay which is based on£19 per hour for an eight hour working day. Three minutes is the standard
time allowed per unit of output. Piecework is paid at the rate of £18 per standard hour.
Required
If an employee produces 200 units in eight hours on a particular day, what is the employee gross pay for
that day?
A) $ 114 B) $ 152 C) $ 180 D) $190
C. OMANYO
Incentive schemes (Bonus)

Employees might be offered an incentive or bonus payments for improving their productivity or for
achieving certain production targets during a period.
The purpose of an incentive scheme for greater productivity should be

• Increase total production output with the same number of employees
• Achieve the same total output volume but in fewer hours of work.
Incentive schemes can be aimed at individual and /or groups.
The General Rules when calculating Bonus schemes include the following
1) They should be closely related to the effort expended by employees.
2) They should be agreed by employees/employers before being implemented
3) They should be easy to understand and simple to operate
4) They must be beneficial to all of those employees taking part in the scheme.
Examples of Bonus Schemes

1) Halsey
This is where the employee receives a bonus of 50% of the time saved
Bonus = Time Allowed – Time Taken x Time Rate
2
2) Rowan
In this scheme, the proportion paid to the employee is based on the ration of the time taken to the time
allowed.
Bonus = Time Taken x Time x Time
Time Allowed saved rate
Example 1
The following information was taken from x its. The employees basic rate £6 per hour
Allowed time for the Job 50 minutes
Time Taken for the job 32 minutes
Required
Calculate the total payment for the job using both the Halsey and Rowan schemes
Example 2
The following data relate to job A
Employee’s basic rate = £4.80 per hour
Allows time for Job A = 1 hour
Time Taken for job A = 36 minutes
Required
Calculate the total payment for Job A
C. OMANYO
Labour Turnover
Is the rate at which employees leave a company. It is a measure of a number of employees leaving/ being
recruited in a period of time expenses as a percentage of the total labour force.
Labour Turnover rate = Replacement x 100%
Average number of employees
Example 1
X its had a staff numbering 800 at the beginning of 20x1 and 1200 at the end of that year, 400 employees
resigned on 30 June, and were immediately replaced by 400 new employees on 1 July. 400 extra
employees were also recruited at that time.
Required:
What is the labour Turnover rate?
Example 2
Y it had a staff of 2000 at the beginning of 20x1 and, owing to a series of redundancies caused by the
recession, 1000 at the end of the year. Voluntary redundancy was taken by 1500 staff at the end of June,
500 more that the company has anticipated and those excess redundaneis were immediately replaced by
new joiner
Required:
The labour Turnover rate
Causes of labour Turnover

Causes of Labour turnover can either be avoidable or unavoidable
a) Avoidable
Are causes of labour turnover that can be influenced by the management.
They include:
• Paying a lower wage rate than available elsewhere
• Requiring employees to work in unsafe or highly stresses conditions
• Requiring employees to work unsociable hours
• Poor relationships between management and staff
• Lack of opportunity for careers enhancement
b) Unavoidable
Are causes of labour turnover that cannot be influenced by the management.
They include:
• Ilness or accidents
• A family move away from the locality
• Marriage pregnancy or difficulties with child care
• Retirement or death
Costs of Lobour turnover

Can either be replacement costs or preventative costs
a) Replacement costs
Are the costs incurred as a result of hiring new employees.
C. OMANYO
Replacement costs include;

• Cost of selection and placement
• Loss of output due to delay in new labour becoming available
• Increased wastage and spoilage due to lack of expertise among new staff
• Cost of tool and machine breakdown
b) Preventative costs
Costs incurred in order to prevent employees leaving. They include:-
• Costs of personal administration incurred in maintaining good relationships

• Costs of medical services including sports facilities laundry services and canteen meats
• Costs of medical services including sports to employees
• Costs of providing training and offering career progression.
Measurement of Labour (Labour Control)

Since the labour cost is significant in any organization, it should be continuously measured against preset
or budgeted targets. This is done by comparing the actual efficiency against predetermined target or
budget using standard hours
A standard hour is the number of production units which must be achieved by an experienced worker with
a period of one year.
1. Labour Efficiency
= Standard hours for actual output x 100%
Actual hours worked to produce output
2. Capacity Ratio
= Actual Hours worked x 100%
Total Budgeted Hours
3. Production Volume Ratio/Activity Ratio

= Standard Hours for actual Output x 100%
Total Budgeted Hours
Example 1
BR co budgets to make 25,000 units of output (in four hours each) during a budget period of 100,000
hours. Actual output during the period was 27000 units which took 120,000 hours to make.
Required:
Calculate
1. Efficiency Ratio
2. Capacity utilization ratio
3. Production volume ratio
C. OMANYO
Example 2
Swiss company has the following data concerning labour
Standard time allowed per unit 20 minutes
Actual output in the period 990 units
Actual Hours worked 320 hours
Budgeted hours 350 hours
Required:
1. Labour efficiency
2. Capacity
3. Activity ratio/production volume
ASSIGNMENT:
Read on the following Incentive Schemes and their associated characteristics and or advantages
1. Individual Bonus Schemes
2. Group Bonus Schemes
3. Profit sharing schemes
4. Incentive Schemes involving shares
C. OMANYO
CHAPT 6: ACCOUNTING FOR OVERHEADS

Overheads
Overheads are expenditure on labour, materials or services which cannot be economically
identified with a specific saleable cost unit. It comprises costs, which may be classified as
materials, labour or expenses. They are indirect costs. Therefore, overhead cost comprises
indirect material, indirect labour and indirect expenses.
The indirect nature of overheads means that they need to be ‘shared out’ among the cost units as
fairly and as accurately as possible.
Classification of Overheads
Overheads can be classified into:
1. General Overheads
Are those overheads which are incurred in more than one cost centre. General overheads should
be apportioned. Apportionment is the process of sharing out of overheads to all the cost centres.
2. Specific Overheads
Are overheads which are incurred in the specific cost centre or departments. Specific overheads
should be allocated. Allocation is the process of transferring the overheads to specific cost
centres.
Steps in Accounting for Overheads

There are three steps undergone when accounting for Overheads:
1. Allocation and Apportionment
2. Re-apportionment
3. Overhead Absorption
1. Allocation and Apportionment
Allocation and apportionment is the process of sharing out and transferring the overhead cost to
all the cost centres or departments. Overheads can be apportioned using the most appropriate
basis of Apportionment.
Bases of apportionment
1. Rent, rates, heating and lighting, repairs and depreciation of building are apportioned on the
basis of floor area occupied by each cost center.
2. Depreciation, insurance of equipment apportioned on the basis of cost or book value of
equipment
3. Personnel office, canteen, welfare, wages and cost offices, first aid apportioned on the basis
of number of employees or labour hours worked in each cost center
4. Heating, lighting on the basis of space or light points.
5. Power expenses on the basis of kilowatt hours
The basis of apportionment should be Equitable, Practicable, Economical, Reasonable, and
Accurate. The allocation and apportionment of overheads to cost centers is done by the use of
overhead analysis sheet.
C. OMANYO
Example 1
ABC Ltd has the following information:
Rent $12,000
Depreciation $30,000
Canteen Costs $6,000
Other Overheads:
Dept 1 Dept 2 Dept 3
Indirect Labour $4,000 $3,000 $2,000
Indirect Materials $6,000 $15,000 $4,500
Additional Information
Area (M2) 1200 800 1000
Number of Employees 100 50 150
Plant Book Value ($000) 500 300 200
Required:
Allocate and Apportion the Overhead Costs as Appropriate
Example 2
X Ltd has incurred the following Overhead costs:
Overhead $
Depreciation of Factory 1000
Factory Repairs and Maintenance 600
Factory Office Costs 1500
Depreciation of Equipment 800
Insurance of Equipment 200
Heating Costs 390
Lighting Costs 100
Canteen Costs 900
Total 5490
Information relating to production and service departments in the factory is as follows:
Details Production Department Service Department
A B X Y
Floor Space (Sq Ms) 1200 1600 800 400
Volume (M3) 3000 6000 2400 1600
30 30 15 15
$30,000 $20,000 $10,000 $20,000
Required:
Determine how the overhead costs should be apportioned in the four departments.
2. Re-apportionment
This is the process of transferring the service department overheads to the production
departments.
Methods of Re-apportionment
1) Direct Method
This method is used when the Service Departments do not work for each other
2) Step Down Method
C. OMANYO
This method is used when the first service department works for the second, but the second
service department does not work for the first. The first service department is the one with the
higher overhead cost.
3) Algebraic Method/Simultaneous Method
Used when all the service departments work for each other.
4) Repeated Distribution Method/Continuous Apportionment Method
Used when all the service departments work for each other
Example 1
ABC Ltd had the following information:
Production Department Service Department
A B Stores (S) Mainte (M)
Allocated/Apportioned 28000 24000 8000 12000
Re-apportion Stores 40% 45% - 15%
Re-apportion Maintenance 50% 40% 10% -
Required:
Reapportion the service department overheads to production department using
a) Direct Method
b) Step Down Method
c) Algebraic Method/Simultaneous Method
d) Repeated Distribution Method/Continuous Apportionment Method
Example 2
D Ltd has two production centres and two service centres to which the following applies:
Production Depts Service Depts Total
1 2 S M
Floor Area (M2) 5900 1400 400 300 8000
Cubic Capacity (M3) 18000 5000 1000 1000 25000
Number of Employees 14 6 3 2 25
Direct Labour Hours 2400 1040 - - -
Machine Hours 1500 4570 - - -
The following overheads were recorded for the month just ended
Rent $12,000
Heat and Light $6,000
Welfare Costs $2,000
Supervision Costs: Dept 1 $1,500
Dept 2 $1,000
The Service Centres work for the other centres as follows:
Production Dept Service Dept
1 2 Stores Maint
Stores 50% 40% - 10%
Maint 45% 50% 5% -
Required:
a) Allocate and Apportion the overheads to each Department
b) Reapportion the Overheads using Step Down Method
c) Calculate the OAR for each Department and Justify the basis that you have used.
C. OMANYO
3. Overhead Absorption
Is the process whereby costs allocated and apportioned to production cost centres are added to
unit, job or batch costs. Overhead absorption is sometimes called overhead recovery.
In order to absorb or recover overheads to cost units, we must find the Overhead Absorption
Rate (OAR) or Overhead Recovery Rate (ORR).
OAR = Budgeted Overheads

Budgeted Activity Level
Overhead Absorbed = OAR x Actual Activity
Activity Levels include the following

• Machine Hours
• Labour Hours
• Production Units
• Material Costs
• Labour Costs
• Prime Costs
Example 1
The budgeted production overhead and other budgeted data of R Ltd are as follows:
Budget Department A Department B
Overhead Cost $36000 $5000
Direct Material Cost $32000 -
Direct Labour Cost $40000 -
Machine Hours 10000 -
Direct Labour Hours 18000 -
Units of Production - 1000
Required:
Calculate the Overhead Absorption Rate using the various basis of absorption.
Example 2
Department A Department B
Budgeted Overhead $120,000 $60,000
Budgeted Labour Hours 20,000 10,000
Budgeted Machine Hours 5,000 15,000
Actual Labour Hours 21,500 9,800
Actual Machine Hours 5,200 15,800
Actual Overheads $118,000 $65,000
Required:
a) For each department, calculate Departmental Rate (OAR)
b) For each Department, find Overhead Absorbed
c) Using Labour Hours, find a single Rate (Blanket Rate)
d) Using (C) find overhead Absorbed
Over and Under Absorbed Overheads
Normally, the actual overhead expenditure will not be the same as the budgeted overhead
expenditure likewise; the actual volume of activity will not be the same as the budgeted volume
C. OMANYO
of activity. These differences between budgeted and actual result into either over absorption or
under absorption of overheads.
Over Absorption: Arises when the overhead absorbed are more than the actual overhead
expenditure.
Under Absorption: Arises when the actual overhead expenditure are more than the overhead
absorbed.
$
Overhead Absorbed xx
Less: Actual Overhead Expenditure (xx)
Over/ Under Absorbed xx/(xx)
Example 1
Company X Ltd has the following data.
Budget Actual
Overheads $80,000 $90,000
Labour Hours 20,000 22,000
Required:
Calculate Over/Under Absorbed Overheads
Example 2
Company X Ltd has the following data.
Budget Actual
Overheads $148,750 $146,200
Machine Hours 8,500 7,928
Required:
Calculate Over/Under Absorbed Overheads
Working Backwards
Example 1
A business absorbs its fixed production overheads on a basis of direct labour hours. Budgeted
direct labour hours were 4200. During the week, 4050 direct labour hours were worked and the
production overhead incurred was $16,700. The overheads were under absorbed by $1310.
Required:
What was the Budgeted Fixed Overhead for the week?
Example 2
A business absorbs its fixed overheads on the basis of machine hours worked. The following
figures are available for the month of January.
Budgeted Fixed Overheads $45,000
Budgeted Machine Hours 30,000
Actual Fixed Overheads $49,000
There was an over absorption of overheads of $3500.
Required:
How many machine hours were worked in the month?
C. OMANYO
CHAPT 7: MARGINAL COSTING AND ABSORPTION COSTING

Marginal and absorption costing are costing techniques, which are used to present the
information to the management in specific ways.
MARGINAL COSTING
Marginal cost is the variable cost incurred as a result of undertaking a specific activity. It is the
total of the variable costs incurred in producing one unit of a good or in the provision of a
service.
Marginal costing may be defined as a technique where by variable costs are charged to cost units
and the fixed cost attributable to the relevant period is written off in full against the contribution
for that period.
The fixed costs are treated as period costs and, as such are simply deducted from contribution in
the period incurred to arrive at net profit. Contribution is the difference between sales and
marginal cost.
Marginal cost and contribution are calculated as follows:
Marginal cost = Direct materials + Direct labour + Direct expenses + Variable overheads
Contribution = Sales – Marginal cost
Profit = Contribution – Fixed cost
Marginal Costing Profit Statement

$ $
Sales (Sales Units x S.P per Unit) xx
Variable Cost of Sales:
Opening Inventory (units x V.C/ Unit) xx
Add: Production (units x V.C/ Unit) xx
Less: Closing Inventory (units x V.C/ Unit) (xx)
Contribution xx
Less: Fixed Costs (xx)
Profit xx
Example 1
A manufacturing company produced and sold 10,000 units during the month of April. The
following additional information was also provided:
Direct materials £8 per unit
Direct labour £4 per unit
Variable cost £4 per unit
Fixed cost for the month of April £36,000
Selling price per unit £20
Required:
Prepare a Marginal Costing Profit Statement for the month of April
C. OMANYO
Example 2
Mill Stream Ltd makes two Products: The Mill and The Stream. Information relating to each of
these products for the month of December 2013 is as follows:
Mill Stream
Opening Stock - -
Production Units 15000 6000
Sales Units 10000 5000
Sales Price Per Unit $20 $30
Unit Costs:
Direct Materials $8 $14
Direct Labour $4 $2
Variable Production OHs $2 $1
Variable Sales OHs $2 $3
Fixed Costs for the Month:
Production Costs $40000
Administration Costs $15000
Sales and Distrib Costs $25000
Required:
a) Using Marginal Costing Principles, Calculate the Profit for December 2013.
b) Calculate the Profit if Sales had been 15000 units of Mill and 6000 units of Stream.
Stock valuation under marginal costing

Stock valuation under marginal costing is based on variable production costs only. This is in
contrast to absorption costing where fixed production overhead costs are included in stock
valuations using the predetermined absorption rate.
ABSORPTION COSTING
In absorption costing, all costs are absorbed into production and in this case, there is no
distinction between fixed and variable costs. Absorption Costing is also known as Total Costing
or Full Costing.
It bases the cost of production on total costs i.e. direct plus overhead cost. All overheads are
absorbed into the cost of production (or total factory cost)
Closing stocks are valued at full production costs. This means that the cost of sales in a period
will include some fixed overhead incurred in a previous period (in opening stock value) and will
exclude some fixed, overhead incurred in the current period but carried forward in closing stock
values as a charge to a subsequent accounting period.
An absorption costing system traditionally classifies costs by function. Sales less production
costs of sales) measures the gross profit (manufacturing profit) earned.
Gross profit less costs incurred in other business functions establishes the net profit (operation
profit) earned
C. OMANYO
Absorption Costing Profit Statement

$ $
Sales (Sales Units x S.P per Unit) xx
Cost of Sales:
Opening Inventory (units x T.C/ Unit) xx
Add: Production (units x T.C/ Unit) xx
Less: Closing Inventory (units x T.C/ Unit) (xx)
Gross Profit xx
Less: Non Production Costs (xx)
Profit xx
Example 1
At the beginning of Period 1, there is no opening inventory for the product for which the
Variable production costs is $6 per unit and the Sales price is $10 per unit.
Fixed Costs are $3500 per period of which $3000 are fixed production costs.
Details Period 1 Period 2

Sales 1200 units 1700 units
Production 1500 units 1500 unit
Required:
Determine the Profit in each period using the following methods of costing
a) Absorption Costing
b) Marginal Costing
Example 2
At the beginning of Period 1, there is no opening inventory for the product for which the
Variable production costs is $4 per unit and the Sales price is $6 per unit.
Fixed Costs are $1800 per period of which $1500 are fixed production costs.
Details Period 1 Period 2

Sales 1200 units 1500 units
Production 1500 units 1500 unit
Required:
Determine the Profit in each period using the following methods of costing
a) Absorption Costing
b) Marginal Costing
RECONCILIATION OF MARGINAL AND ABSORPTION COSTS

When reconciling the Marginal Costing Profit to the Absorption Costing Profit, note the
following points:
1. When there is an increase in inventory, the A.C Profit is always higher than the M.C
Profit.
2. When there is a decrease in inventory, the M.C Profit is always higher than the A.C
Profit.
3. When there is no change in inventory, the M.C Profit and the A.C Profits are the same.
C. OMANYO
4. The difference in A.C Profit and M.C Profit = Change in Inventory x F. Prod. C/ Unit
Example 1
Using Example 1 under Absorption Costing Section, Reconcile the Two Profits
Example 2
Using Example 1 under Absorption Costing Section, Reconcile the Two Profits
Advantages of Absorption Costing

(1) Fixed costs are related to production
(2) This method is more logical for fixing selling prices
(3) Profit can be calculated more accurately
(4) Analysis of under or over absorbed inefficient utilisation of production resources
Advantages of Marginal Costing

(1) Fixed costs are not taken because these are incurred on time basis
(2) Under or over absorption of overheads does not arise
(3) This method is simpler
(4) This helps to assess the effect of alternative policies
Uses of Marginal Costing

Marginal costing is very useful as a management aid to decision making. The marginal costing
can be applied to make the following decisions.
(a) Decision regarding the production of one specific product when there are various
alternatives
(b) Acceptance or rejection of a special contract
(c) Choice of product where a limiting or key factor exists
(d) Make or buy decisions
C. OMANYO
CHAPT 8: ALTERNATIVE COST MANAGEMENT TECHNIQUES
ACTIVITY BASED COSTING (ABC)

ABC and Cost Drivers
ABC is an alternative approach to the traditional methods costing.
The ABC approach is to link overhead costs to the products or services that causes them
by absorbing overhead costs on the basis of activities that ‘drive’ costs (cost drivers)
rather than on the bases of production volume.
 A cost pool is an activity that consumes resources and for which overhead costs
are identified and allocated. For each cost pool, there should be a cost driver.
 A cost driver is a unit of activity that consumes resources. OR a cost driver is a
factor influencing the level of cost.
Calculation of costs per driver and per unit using ABC
The are five basic steps in establishing and applying a system of ABC
Step 1: Identify activities that consume resources and incur overhead costs
Step 2: Allocate overhead costs to the activities that incur them. (Directly allocated to a
cost pool)
Step 3: Determine the cost driver for each activity or cost pool.
Step 4: Collect data about actual activity for the cost driver in each cost pool.
Step 5: Calculate the overhead cost of products or services. This is done by calculating
an overhead cost per unit of the cost driver (a cost per unit of activity). Overhead costs
are then charged to products or services on the basis of activities used for each product or
service.
Example 1
X Ltd makes two types of high quality – the light (L) and the heavy (H)
Details of the two products are as follows:
L H
Budgeted production volume (units) 10,000 5,000
Direct material cost per unit Ksh 8 Ksh 16
Direct labour hours per unit 1.5 1.0
Machine hour per unit 2 3
• Direct labour costs Ksh 8 per hour and labour hours for the period are budgeted at
20,000.
• Machine hours for the period are budgeted at 25,000.
• Production overheads are estimated at Ksh 260,000.
• An analysis of the production overhead establishes that this cost arises in relation to
four activities in the following proportions and has the following associated volumes:
C. OMANYO
Proportion Activity volume Total

Of production
Overhead costs L H
Order 24% 167 83 250 (No of orders

handling processed)
Set ups 38% 40 90 130 (No of set ups)
Materials 18% 67 33 100 (No of movements of
handling materials)
Quality 20% 287 193 480 (No of inspections)
control
100%
Required:
a) Calculate the cost per unit for each product using traditional methods, absorbing
overhead on the basis of labour hours.
b) Calculate the cost per unit using ABC principles.
c) Drawing upon the information from X Ltd to illustrate your answer, explain why
the use of ABC often produces costs that are different to those calculated under
more traditional methods.
d) Discuss the implications of a switch to ABC on pricing and profitability.
Example 2
Y Ltd makes and sells two products, plus and doubles plus. The direct costs of
production are ₤12 for one unit of plus and ₤24 per unit of Double plus.
Information relating to annual production and sales is as follows:
Plus Double plus
Annual production and sales 24,000 units 24,000 units
Direct labour hours per unit 1.0 1.5
Number of orders 10 14
Number of batches 12 24
Number of setups per batch 1 3
Special parts per unit 1 4
Information relating to production overhead costs is as follows:
Cost driver Annual cost
₤ ₤
Setup costs Number of setups 73,200
Special parts handling Number of special parts 60,000
Other materials handling Number of batches 63,000
Order handling Number of orders 19,800
Other overheads - 216,000
432,000
Other overhead costs do not have an identifiable cost driver, and in an ABC system, these
overheads would be recovered on a direct labour hour’s basis.
Required
C. OMANYO
1) Calculate the production cost per unit of plus and of Double Plus if the company
uses traditional absorption costing and the overheads are recovered on a direct
labour hours basis.
2) Calculate the production cost per unit of plus and of Double plus if the company
uses ABC.
Implications of switching to ABC

1. Pricing can be based on more realistic cost data.
2. Sales strategy can be more soundly based
3. Performance management and decision making can be improved.
ASSIGNMENT: List the advantages and disadvantages of ABC Technique
C. OMANYO
CHAPT 9: CVP ANALYSIS

CVP Analysis
This is a tool that makes use of the contribution concept in order to assess the following
measures for a single product:
• Contribution to sales (C/S) ratio
• Breakeven point
• Margin of safety
• Target profit
1) C/S ratio
The C/S ratio is the proportion of the selling price that contributes to fixed overheads and profits
and is comparable to gross margin.
Contribution per unit Total contribution

C/S ratio = or
Selling price per unit Total sales revenue
Sometimes referred to as the P/V ratio.
Example 1:
The following information relates to Product J
$
Selling price per unit 20
Variable cost per unit 12
Fixed costs 100,000
Required:
Calculate the C/S ratio
Example 2:
The following information relates to Product Alpha.
$
Fixed costs 220,000
Required:
Calculate the C/S ratio
2) Breakeven point
This is the point at which neither a profit nor a loss is made. The following situations occur:
• Total sales revenue = Total costs
• Total contribution = Fixed costs
In terms of sales units
Fixed costs
Breakeven point in units =
Contribution per unit
In terms of sales revenue

Fixed costs
Breakeven point in sales =
C/S ratio
C. OMANYO
Example 1:
The following information relates to Product K
$
Fixed costs 100,000
Required:
a) Calculate the breakeven point in terms of numbers of units sold.
b) Calculate the breakeven point in terms of sales revenue.
Example 2:
$
Fixed costs 220,000
Required:
a) Calculate the breakeven point in terms of units sold.
b) Calculate the breakeven point in terms of sales revenue.
3) Margin of safety
This is the amount by which the sales in units or a % of budgeted sales can fall below before a
loss is made.
Margin of safety in units = Budgeted sales - Breakeven point sales
Budgeted Breakeven
Margin of safety as a % of -
= sales sales x100%
sales
Budgeted sales
Example 1:
Arrow Ltd manufactures Product L to which the following information relates.
$
Fixed costs 100,000
Budgeted sales for the period are 16,000 units.

Required:
a) Calculate the margin of safety in units.
b) Calculate the margin of safety as a % of budgeted sales.
Example 2:
$
Fixed costs 220,000
Budgeted sales are 7,500 units
Required:
a) Calculate the margin of Safety
b) Calculate the margin of safety as a % of budgeted sales.
C. OMANYO
4) Target profit
This enables you to calculate the number of units or sales required in order to earn a certain level
of profit.
Fixed Required Target

+
Sales volume to achieve a costs profit contribution
= =
target profit Contribution per
unit
Example 1:
Arrow Ltd manufactures Product L and wishes to achieve a profit of $20,000. The following
information relates to Product L.
$
Fixed costs 100,000
Required:
Calculate the sales volume required to achieve a profit of $20,000.
Example 2:
$
Fixed costs 220,000
Budgeted sales are 7,500 units
Required:
Calculate the unit sales required to achieve a target profit of $550,000.
Breakeven charts and PV charts

The measurements that we have calculated may be determined by drawing and interpreting
graphs.
• Traditional breakeven charts
• Contribution breakeven charts
• P/v charts
Example 1
A new product has the following sales and cost data
Selling Price per unit $60
Variable Cost per unit $40
Fixed Cost $25000 per month
Forecast Sales 1800 units per month
Required:
a) Prepare Break Even Chart using the above data
b) Prepare Profit/volume chart
Example 2
A product has the following information
Selling Price per unit $40
Variable Cost per unit $30
Fixed Cost $70000
Forecast Sales 8000 units
Required:
a) Prepare Break Even Chart using the above data
b) Prepare Profit/volume chart
C. OMANYO
CHAPT 10: DECISION MAKING

RELEVANT COST ANALYSIS
The concept of relevant costing
This concept is interlinked to decision making which is the making of a choice between
two or more alternatives. The objective of which is to maximize shareholder value. The
decision making process will require the use of relevant costs and revenue. Relevant costs
and revenues may be classified as such when it change as a direct result of a decision
taken.
Features of Relevant Costs include:
1. Future costs and revenues (looking to the future as the past cannot be changed)
2. Cash flows (of future costs and revenues and excludes non-cash flow items)
3. Incremental costs and revenues (when it increases as a result of decisions taken).
Differences in total costs or revenues between two alternatives.
4. Opportunity cost: It represents the best alternative foregone in taking a decision
5. Avoidable costs: Are specific costs associated with an activity that would be
avoided if that activity did not exist.
Non-relevant costs
Costs which are not relevant to decision making are known as non-relevant costs and
includes:
1. Sunk costs: Past costs / historical costs which are not directly relevant in decision
making.
2. Committed costs: Future costs that cannot be avoided whatever decision is taken.
3. Non- cash flow costs: Cost which do not involve the flow of cash, for e.g.
depreciation and notional costs.
4. General fixed overheads: Usually not relevant unless it is a stepped fixed costs.
5. Net book value: Costs which are determined by accounting conventions rather
than by future cash flows.
C. OMANYO
Relevant costs for materials, labor and overheads

Relevant cost for materials
Use the following decision tree to determine:
Example 1
Z Ltd has 50 kg of materials P in inventory that was bought five years ago for $70. It is
no longer used but could be sold for $3/kg.
Z is currently pricing a job that could use 40 kg of material P.
Required:
The relevant cost of material P that should be included in the contract is $ __________
Example 2
A firm is currently considering a job that requires 1,000 kg of raw material. There are two
possible situations.
Situation 1
The material is used regularly within the firm for various products. The present inventory
is 10,000 kg purchased at $1.80 per kg. The current replenishment price is $2.00 per kg.
Required:
The relevant cost $ _________
Situation 2
The company has 2,000 kg in inventory bought 2 years ago for $1.50 per kg, but no
longer used for any of the firm's products. The current market price for the material is
$2.00, but the company could sell it for $0.80 per kg.
Required:
The relevant cost is $ _________
C. OMANYO
Relevant cost for labor

Similar to materials but note that the existence of spare capacity is a factor
Example 1
100 hours of unskilled labor are needed for a contract. The company has no surplus
capacity at the moment, but additional temporary staff could be hired at $4.50 per hour.
Required:
The relevant cost of the unskilled labor on the contract is $ __________
Example 2
100 hours of semi-skilled labor are needed for a contract. There is at the moment roughly
300 hours worth of spare capacity. There is a union agreement that there are no lay-offs.
the workers are paid $6.50 per hour.
Required:
The relevant cost of the semi-skilled labor on the contract is $ _________
Example 3:
Z Ltd is pricing a job that involves the use of 20 hours of skilled labor and 50 hours of
semi-skilled labor. The four existing skilled workers are paid $15 per hour with a
minimum weekly wage of $450. They are currently working 24 hours a week.
The semi-skilled workforce is currently fully utilized. They are each paid $10 per hour,
with overtime payable at time and a half. Additional workers may be hired for $12 per
hour.
Required:
The relevant labor cost for Z Ltd's job = $ _________
C. OMANYO
MAKE OR BUY AND OTHER SHORT-TERM DECISIONS

In a make or buy decisions with no limiting factors, the relevant costs are the differential
costs between the two options.
Assessing the differences in costs between making a product in house or outsourcing
A make or buy problem involves a decision by an organization .i.e.
 Manufacture its own or buy from outside supplier
 Do construction by own employees or sub-contract the work
 To make internally or buy externally
Make versus buy
1. Production resources may be idle if the component is purchased from outside.
2. Fixed costs of those resources are irrelevant to decision in the short-term as they
will be incurred whether the component is made or purchased.
3. Purchase would be recommended, only if the buying price were less than variable
costs of internal manufacture.
4. Purchase from outside if the company saves more than cost of making.
Example 1
A company plans to build an extension to its factory. The estimated costs of carrying out
the work in-house are as follows:
Rwf
Materials 58, 500
Lab our 32, 800
Additional overheads 17, 200
Allocated fixed overheads 8, 200
If the extension is built internally, interference to normal production will result in lost
contribution to profit of Rwf, 500.
An outside contractor has bid Rwf 110, 000 for the job
Required:
Calculate the net gain or loss if the company does its own construction work.
Outsourcing
Outsourcing is the use of external suppliers for finished products, components or
services.
This is also known as contract manufacturing or sub-contracting.
Factors to consider before outsourcing overseas

1. Quality – quality of the overseas producers must be acceptable.
2. The management will also need to be sure that continuity of supply can be
guaranteed.
3. The quoted price may not be fixed and could be affected by changes in exchange
rates.
4. Management should investigate whether the available capacity freed up can be
used to generate additional profits from a different product.
5. Management should consider whether labour morale will be adversely affected by
a decision to locate production overseas.
C. OMANYO
Factors that have led to growth in the use of outsourcing

Companies and government bodies having increasingly tended to concentrate on their
core competences- what they are really good at (or set up to achieve) and turn other
functions over to specialist contractors.
A company that earns its profits from, say, manufacturing of bicycles, does not also need
to have expertise in say, mass catering or office cleaning.
Reasons for this trend include:
1. Specialist contractors can offer superior quality and efficiency- specialist
machinery labour, knowledge and skills.
2. Contracting out manufacturing frees capital that can then be invested in core
activities such as market research, product definition, product planning, marketing
and sales.
3. Contractors have the capacity and flexibility to start production very quickly to
meet sudden variation in demand.
Example
Z Ltd is considering whether to administer its own purchase ledger or to use an external
accounting service. It has obtained the following cost estimates for each option:
Internal service department:

Volume
Purchase computer software $320 pa
Hardware / software maintenance $750 pa
Accounting stationery $500 pa
Part-time accounts clerk $6, 000 pa
External services:
Processing of invoices /credit notes $0.50 per document 5, 000 pa
Processing of cheque payments $0.50 per cheque 4, 000 pa
Reconciling supplier accounts $2.00 per supplier per month 150 suppliers
Required
Determine the cost effectiveness of outsourcing the accounting activities and identify the
broad qualitative factors involved.
Shut-down situations
Part of a business may appear to be unprofitable. In evaluating closure the cost
accountant should identify:
1. Loss of contribution from the segment
2. Savings in specific fixed costs from closure.
3. Penalties resulting from the closure, e.g. redundancy, compensation to customers.
4. Alternative use for resources released.
C. OMANYO
Example
Fashion store comprises three departments, men’s wear, ladies wear and unisex.
The store budget is as follows:
Men’s Ladies Unisex Total
Sales 40,000 60,000 20,000 120,000
Direct cost of sales 20,000 36,000 15,000 71,000
Department sales 5,000 10,000 3,000 18,000
Apportioned store costs 5,000 5,000 5,000 15,000
Profit/ (loss) 10,000 9,000 (3,000) 16,000
It is suggested that unisex be closed to increase the size of men’s and ladies wear
Required:
Determine what information is relevant or required.
Solution
Possible answers are as follows:
1. Unisex earns Rwf 2,000 net contribution (apportioned costs will still be incurred
and thus reapportioned to other departments)
2. Possible increase in Men’s/ladies’ sales volume
3. Will unisex staff be dismissed or transferred to men’s/ ladies?
4. Reorganization costs e.g. repartitioning, stock disposal
5. Loss of customers because unisex attracts certain types of customers who will not
buy in men’s/ladies’.
One-off contracts
When a business is presented with the opportunity of one-off contract it should apply
relevant costing principles i.e. it should identify the incremental cash flows associated
with the project.
Example
On 1 January a company prepared the following budget for a one-off contract.
Rwf
Research and development 50, 000
Material 15, 000
Machinery 5, 000
Lab our 35, 000
Allocated fixed overhead 25, 000
130, 000
Budgeted selling price 200, 000
Profit 70, 000
In March, having spent Rwf 30,000 of the research costs and having contracted for the
machinery, the company realizes that the completed contract would be sold for only Rwf
100, 000.
Required:
Determine whether the project should be continued
C. OMANYO
LIMITING FACTOR
What is a limiting factor?
A limiting factor is a factor that prevents a company from achieving the level of activity that it
would like to.Uses the contribution concept to solve the allocation of scarce resources.
Scarce resources maybe one or more manufacturing inputs (material, labor, machine time)
needed to make a product and in short supply (the resource i.e.). Production can also be affected
by demand or sales.
Example 1:
Suppose A Ltd makes two products, X and Y. Both products use the same machine and the same
raw material that are limited to 200 hours and $500 per week respectively. Individual product
details are as follows:
Product X per unit Product Y per unit
Machine hours 5.0 2.5
Materials $10 $5
Contribution $20 $15
Maximum weekly demand 50 units 100 units
Required:
Identify the limiting factor.
Example 2
Two products, alpha and Gamma are made of Material X and require skilled labor in the
production process. The product details are as follows:
Alpha $ Gamma $
Selling price 10.00 15.00
Variable cost 6.00 7.50
Contribution 4.00 7.50
Material X required per unit 2 kg 4 kg

Skilled labor time required per unit 1 hour 3 hours
The maximum demand per week is 30 units of Alpha and 10 units of Gamma. The company can
sell all the Alphas and Gammas that it can make but there is a restriction on the availability of
both Material X and skilled labor. There are 150 kg of material, and 45 hours of skilled labor,
available per week.
Required:
Identify the limiting factor.
OPTIMAL PRODUCTION PLAN WHERE THERE IS A SINGLE LIMITING

FACTOR
Contribution per unit of limiting factor
In order to decide order of production, the contribution per unit of limiting factor will have to be
calculated. The following illustrate the steps:
A Ltd makes products X and Y using the same machine and raw materials. Machine hours are
limited to 200 hours and materials $500 per week respectively. Details:
Product X per unit Product Y per unit

Machine hours 5.0 2.5
Materials $10 $5
Contribution $20 $15
C. OMANYO
As there are two possible limiting factors, a test will be necessary if one or both are. You can only
apply these steps on one limiting factor situations. In this case, say machine hours is the limiting
factor. The following is then calculated:

Contribution per unit of limiting
= Units of limiting factor required per
factor
unit
Product X $20 / 5 hours = $4 per machine hour

Product Y $15/2.5 hours = $6 per machines hour
Product Y has a higher contribution per unit of limiting factor (machine hours) so it should be
made first. The balance of machine hours would then be assigned to Product X.
Optimal production plan

When limiting factors are present, the objective is to maximize contribution (which in turn
maximize profits) by producing products in the order of the highest amount of contribution per
unit of limiting factor. The profit maximizing production mix is known as the optimal production
plan. Steps:
1) Calculate the contribution per unit of product.
2) Calculate the contribution per unit of limiting factor (scarce resource)
3) Rank products
4) All the scarce resource to the highest ranked products.
5) Once demand for highest ranked products is satisfied, move on to the next highest
ranking product, repeat until the resource is used up.
Example 1
A company is able to produce four products and is planning its production mix for the following
period. Relevant data is given below:
A B C D
Selling price ($) per unit 19 25 40 50
Labor cost per unit ($) 6 12 18 24
Material cost per unit ($) 9 9 15 16
Maximum demand (units) 1,000 5,000 4,000 2,000
Labor is paid $6 per hour and labor hours are limited to 12,000 hours in the period.
Required:
Determine the optimal production plan and calculate the total contribution it earns for the
company.
C. OMANYO
C. OMANYO
CHAPTER 11: JOB, BATCH AND SERVICE COSTING

Costing systems
Costing systems are generally classified as specific order costing or continuous operation
costing. Each of which have different techniques applied to different situations.
Costing Systems
Specific Order Continuous

Costing Operation Costing
Job costing Process costing
Batch costing Service costing
Specific order Used when the work done by an organization consists of separately identifiable
costing jobs or batches.
Continuous Used when goods or services are produced as a direct result of a sequence of a
operation costing sequence of continuous operations or processes.
JOB COSTING
It is a technique or form of specific order costing and used when a customer orders a specific job
to be done. Each job is priced separately and each job is unique.
o Main aim is to identify the costs associated with completing the order and to record them
carefully.
o Individual jobs are given unique job number and the costs involved in completing the job
are recorded on a job cost sheet or job card.
o The selling prices of jobs are calculated by adding a certain amount of profit to the cost
of the job.
The main purpose of job costing is to:
1. Establish profit/loss of a completed job
2. Provide valuation of incomplete jobs, that is, work in progress
This is done by creating job cost cards/ job cost sheets for each job.
Job Cost Card for Job XYZ
Sh.
Direct Materials xx
Direct Labour xx
Direct Expenses xx
Prime Cost xx
Variable Overheads xx
Fixed Overheads xx
Total Costs xx
Profit xx
Selling Price xx
C. OMANYO
Characteristics of Job Costing

1. Costs all inputs associated with the completed or partially completed jobs
2. Unique job numbers
3. Selling price is calculated by adding a profit expressed as a percentage of cost
• Profit Markup is a profit expressed as a percentage of costs
• Profit Margin is a profit expressed as a percentage of sales
BATCH COSTING
Similar to job costing:
o Each production batch produces a number of identical units and each batch is different.
o Each batch is separately identifiable like job costing and is given a batch number.
o Costs can be identified by batch number.
When completed, unit cost is found by:
Total production cost of batch
Cost per unit in batch =
Number of units in batch
Common in:
• Engineering component
• Footwear
• Clothing
Selling prices of batches are calculated in the same ways as the selling prices of jobs, i.e. by
adding a profit to the batch.
Example 1 (Mark up and Margin)
The total cost of a product is sh. 4000
Required
What is the selling price when:
a) Profit margin of 20% is applied
b) Profit mark up of 20% is applied
Example 2
A business aims to make a net profit of 25% on sales. The cost estimates for job 264 are as
follows:
Job 264:
Direct Materials 50 kg @ sh. 4/kg
Direct Labour 30 hrs @ sh. 9/hr
Variable production overheads Sh. 6 per Labour hour
Fixed production overheads are budgeted as sh. 80,000 and are absorbed on the basis of direct
labour hours. The total budgeted direct labour hours for the period are 20,000 hours. Other
overheads are recovered at a rate of sh. 40 per job
Required
Calculate the price to be quoted for the job
Example 3
Test Print Ltd specializes in printing advertisement leaflets and is in the process of preparing its
price list. The most popular requirements is for a folded leaflet made from a single sheet of A4
papers. From past records and budgeted figures, the following has been estimated for a typical
batch of 10,000 leaflets.
C. OMANYO
Artwork Sh. 65
Machine Setting 4 hrs @ sh.22/hr
Paper Sh. 12.5 per 1000 sheets
Ink and Consumables Sh. 40
Printer’s Wages 4 hrs @ sh. 8/hr
NB. Printer’s wages vary with volume
General fixed overheads are sh. 15000/ period during which a total of 600 labour hours are
expected to be worked.
The firm wishes to achieve 30% profit markup when 10,000 leaflets are produced and 30% profit
margin when 20,000 leaflets are produced.
Required
Calculate the selling price for 10,000 leaflets and for 20,000 leaflets
SERVICE COSTING
Used when an organization or department provides a service.
Characteristics of Services
1. Simultaneous production and consumption: cannot be inspected in advance of receiving it
2. Heterogeneity: nature and standard of the service will be variable due to the high human
input
3. Intangibility: "performance" vs. "touchable"
4. Perishability: services required cannot be stored
Examples of service industries include the following:

o hotel
o college
o hairdressers
o restaurant
We can ask the following questions about service industries like hotels:
o Is output in the form of performance?
o Is the standard of the service variable?
o Can you inspect the services in advance of receiving them?
o Can the hotel services be stored?
Suitable unit cost measures for service/operation costing

Unit cost measures for service costing
In a lot of situations, it may be necessary to calculate a composite cost unit. It is necessary if a
service is a function of two variables.
Haulage companies Tonne-miles

Hospitals Patient-days
Public transport companies Passenger-miles
Hotel services Guest-days
C. OMANYO
Cost per service unit

The total cost of providing a service will include:
$
Direct materials X
Direct labor X
Direct expenses X
Overheads absorbed X
Total cost XX
The cost per service unit is calculated by establishing the total costs involved in providing the
service and dividing this by the number of service units used in providing the service.
The cost per service unit is as follows:

Total costs for providing the service
Cost per service
= Number of service units used to provide the
unit
service
Example
The canteen of a company records the following income and expenditure for a month.
$ $
Income 59,010
Food 17,000
Drink 6,000
Bottled water 750
Fuel costs (gas for cooking) 800
Maintenance of machinery 850
Repairs 250
Wages 15,500
Depreciation 1,000
During the month, the canteen served 56,200 meals.

Required
Calculate
a) The average cost per meal served
b) The average income per meal served.
C. OMANYO
CHAPT 12: PROCESS COSTING

What is Process Costing?
Process costing is a method of applying costing systems to goods or services that are produced in
a series of processes. Process costing is a form of operation costing used when cost units are
passed through a series of clearly defined process before the final product is completed.
A separate account is normally opened for each Process and all expenditure is charged to the
process account.
Features of Process Costing
1. Output of one process is input to the next process until the finished product is made.
2. The continuous nature of production processes means that there is always closing work in
Progress which must be valued.
3. There is often a loss in the process due to spoilage, spillage, wastage, evaporation etc
4. Output may be a Single product, but there may also be Joint Products or By Products.
Definition of Terms
1. Normal Loss: this is the expected loss which is normally expressed as a percentage of input
materials in quantity form.
2. Expected Output: This is the difference between input quantity and the Normal Loss
3. Abnormal Loss: This arises when the expected output is more than the actual output
4. Abnormal Gain: Arises when the actual output is more than expected output.
5. Actual Loss: This is the difference between Input Quantity and the Actual Output
6. Scrap: Scrap is the material that can no longer be used for its original purpose e.g.
broken parts. It can be sold at a much lower price than the cost. The income from sale of
scrap is taken into consideration and process loss is reduced by that amount.
7. Scrap Price: This is the price that is used to value normal loss units.
8. Normal Loss Amount: This is the scrap price per unit x the Normal loss units. If there is no
scrap price per unit, the normal loss amount will be zero.
9. Conversion Costs: These are Labour costs + Overheads
Dr Sample of a Process a/c Cr
Particulars Units Price Amount Particulars Units Price Amount

Opening WIP xx - xx Normal Loss xx xx xx
D. Materials xx xx xx Output xx xx xx
Added Materials - - xx Closing WIP xx xx xx
D. Labour - - xx
Overheads - - -
Abnormal Gain xx xx xx Abnormal Loss xx xx xx

xx xx xx xx
C. OMANYO
Basic Process Account

This is a simple process account without the opening and closing work in progress.
In a Basic Process account cost per unit is calculated as:
Cost per Unit = Amount on the Dr Side – Normal Loss Amount

Expected Output
The cost per unit is calculated for Actual Output, Abnormal Loss or Abnormal Gain
Example 1 (Abnormal Loss)

Direct Materials 6000 units @ $5 per unit
Direct Labour 4000 hours @ $3 per Hour
Overheads 60% of Labour Cost
Normal Loss 10% and Scrap value of the loss is $2 per unit
Output 5200 units
Required:
Prepare Process 1 Account
Example 2 (Abnormal Gain)

The following data relates to process one during March
Input material 1,000 kg £9,000
Labour cost £18,000
Overheads cost £13,500
A normal loss equals to 20% of input was expected. Actual output was 900 kgs. The normal
loss could be sold as scrap for £9 per kg.
Required:
Prepare Process 1 Account
Example 3 (Normal Loss without Scrap)

3000 units of materials are inputs to a process. Process costs are as follows:
Materials $11700
Conversion Costs $6300
Normal Loss is 20% of input
Output 2000 units
Required:
Prepare Process Account
Example 4 (Two Process accounts)

ABC Ltd Makes a Product X which undergoes two processes. Information relating to the two
processes is as follows:
Process 1
Direct Materials 10,000 units @ $4 each
Conversion Costs $45,000
C. OMANYO
Normal Loss 5% and Scrap value of Losses are $3 each

Output to process two 9600 units
Process 2
Conversion Costs $24,000
Normal Loss is 10% and scrap value per unit of the losses are $5 per unit.
Output to finished products 8400 units
Required:
a) Process 1 Account
b) Process 2 Account
c) Abnormal Gain or Loss Account for each Process
d) Scrap Account
Work In Progress
The work-in-progress represents uncompleted production in each process at the end of the
accounting period. This uncompleted production is carried forward to next accounting period.
This W.I.P consists of direct materials direct labour and production overhead. There may be
opening and closing work in progress.
Closing Work In Progress

Cost per unit under questions with closing WIP is computed via Equivalent Units Statements.
Equivalent Units statement has the following contents:
1) Output Units
2) Closing WIP units Completed
3) Abnormal Loss/Gain
4) Total Equivalent Units (1+2+3/-3)
5) Total Cost
6) Cost per unit (5÷4)
Example 1
Direct Materials 8000 units costing $24,000
Conversion costs $18,000
Normal loss 5% and Scap value $ 2 per unit
Output 5000 units
Closing WIP 2000 units completed as:
• D. materials 80%
• Conversion 60%
Required:
Process a/c
C. OMANYO
Example 2
C Ltd is a manufacturer of processed goods and the results in Process 2 are as follows:
Opening stock 0 units
Materials from process 1: 4000 units costing $6000
Added Materials in P2 are $1080
Conversion Costs $1720
Output is transferred to the next process 3
• Materials 100%
• Added Materials 50%
• Conversion Costs 30%
Required
Prepare Process 2 a/c
Opening Work In Progress

Cost per unit under questions with Opening WIP is computed via Equivalent Units Statements.
Equivalent Units statement is prepared using the following Methods
• FIFO
• AVCO
FIFO
When FIFO method is used,
• Equivalent units statement has the following contents:
1) Opening WIP units Not Completed
2) Fully Worked Units = Output units – Opening WIP
4) Abnormal Loss or Gain
5) Total Equivalent Units (1+2+3+4/-4)
6) Total Cost
7) Cost Per Unit (6÷5)
• The Value of Output = OWIP Completed + OWIP Not Completed + Fully Worked
AVCO
When AVCO method is used,
• Equivalent units statement has the following contents:
1) Output Units
3) Abnormal Loss/Gain
4) Total Equivalent Units (1+2+3/-3)
5) Total Cost (OWIP Costs + Period Costs)
6) Cost per unit (5÷4)
C. OMANYO
Example 1
ABC Ltd has the following information
D. Materials 8000 units costing $24000
Conversion costs $18000
Normal 5% and scrap value $2 per unit
Output 5000 units
• Materials 80%
• Conversion 60%
Opening WIP 1200 units completed as
• Materials 90% $4000
• Conversion 75% $3000
Required
Prepare Process a/c using
1) FIFO
2) AVCO
Example 2
M Ltd produces an item which is manufactured in 2 consecutive processes.
Information relating to process 2 is as follows:
Opening WIP 800 units completed as
• Materials 100% $4700
• Added Materials 40% $600
• Conversion Costs 30% $1000
During the month, 3000 units were transferred from process 1 costing $18100
Added Materials costs $9600
Conversion costs $11800
Closing WIP 1000 units completed as
• Materials 100%
• Added Materials 60%
• Conversion costs 40%
Required
Prepare Process 2 a/c using
1) FIFO
2) AVCO
C. OMANYO
JOINT PRODUCTS AND BY PRODUCTS
JOINT PRODUCTS
These are two or more products which are output from the same processing operations but which
are indistinguishable from each other up to their point of separation. These are those products
which are regarded as having substantially equal economic value and which arise from the same
process.
Main examples of Joint products are:
1. Oil refining: In Oil refining, the joint Product include diesel fuel, petrol, paraffin,
lubricants etc
2. Dairy products: Milk, butter and cream are produced together so these are Joint Products
3. Meat Processing: The Joint products included the various grades of meat and hides
4. Mining: Different types of metals are recovered from the same crushing
Joint products may need some further processing after the point of separation before they are
saleable.
Methods of Apportioning Joint Products
The major problem in Joint products costing is to apportion the Joint costs (Common Costs). For
this purpose, the following methods are adopted:
1. Physical Unit Basis
According to this method, the joint costs are apportioned over the Joint products in proportion to
the physical weight or volume of the products. This method is more suitable where the Joint
products have almost equal value
2. Sales Value or market value Basis.
Under this method, the Joint costs are apportioned in proportion to the relative sales values of the
Joint products. This method is more suitable where the Joint products have different economic
values.
3. Net Realizable value Basis (Sales less post separation costs)
The post separation processing costs are too high then these costs must be deducted from sales
value of Joint products in order to arrive at adjusted figures which are fair and reasonable. The
joint costs can be apportioned on the basis of the sales value of the products after deducting the
post separation costs.
Example 1
X,Y and Z are joint products incurring a joint cost of $150,000
Product Production Sales Units S.P/Unit Post Separation
Units $ Costs ($)
X 4000 3500 20 6000
Y 5000 4200 15 8000
Z 3000 2700 30 4000
C. OMANYO
Required
1) Calculate the Cost of each product using
a) Physical units method
b) Sales Value Method
c) Net Sales Value method
2) Calculate the value of Closing Inventory for each product using the above methods
Example 2
A, B and C are joint products incurring a joint cost of $150,000
Product Production Sales Units S.P/Unit
Units $
A 10000 8500 30
B 8000 7000 25
C 12000 10000 40
Required
a) Calculate the Cost of each product using
• Physical units method
• Sales Value Method
b) Calculate the value of Closing Inventory for each product using the above methods
Example 3
Three joint products are manufactured in a common process which consists of two consecutive
stages. Output from process 1 is transferred to process 2 and output from process 2 consists of 3
joint products H, N and B. All joint products are sold as soon as they are produced.
Data for the period are as follows:
Details Process 1 Process 2
Opening and Closing WIP - -
D. Materials 30000units @ $2/unit $60000 -
Conversion Costs $76500 $226200
Normal Loss 10% 10%
Scrap Value of NL $0.5/unit $2/unit
Output 26000 units 10000 units of H
7000 units of N
6000 units of B
Selling prices are $18/unit of H, $20/unit of N and $30/unit of B.
Required
(a) Prepare Process 1 a/c
(b) Prepare Process 2 a/c using Sales Value Method of Apportionment
(c) Prepare a profit statement for the joint products
C. OMANYO
BY PRODUCTS
Is a supplementary or secondary product (arising as a result of a process) whose value is small
relative to that of the principle product. A by product is not important as a saleable item and
whatever revenue it earns is a bonus for the organisation.
Methods of Accounting for By Products

1) Income (minus post separation or selling costs) from the sale of the by product maybe
added to the sale of the main product
2) Sale of the by product (minus post separation) treated as a separate source of income
3) Sale income of the by product deducted from the cost of production of main product
4) The net realizable value of the by product may be deducted from the cost of the main
product.
Example 1
During November 20X3 S Ltd recorded the following results
Opening stock of main product P: Nil
Opening stock of by product Z: Nil
Cost of Production $120000
Sales of the main product amounted to 90% of the output during the period, and 10% of the
production was held as closing stock at 30th November. Sales revenue from the main product
during November 20X2 was $150,000. A by product Z is produced and output had a net sales
value of $1000. Of this output, $700 was sold during the month and $300 was still in store at 30th
November.
Required
Calculate the profit for November using the four methods of accounting for by products.
Example 2
R Ltd manufactures two joint products J and K in a common process. By product X is also
produced. Data for the month of December 20x2 were as follows.
Opening Stock 0
Direct Materials $25500
Direct Labour $10000
Production overheads are absorbed at a rate of 300% of direct labour cost.
Details Production Units Sales Units
Product J 8000 7000
Product K 8000 6000
By Product X 1000 1000
The sales value of J, K and by product X is $4, $6 and $0.5 respectively. The sales value of the
by product is deducted from process costs before apportioning costs to each joint product. Cost
of the common processing are apportioned between product J and K on a sales Value method.
Required
Calculate the Individual profits of J and K for December 20x2.
C. OMANYO
BUDGETING
CHAPT 13: BUDGETING

A budget is a quantitative expression of a plan of action prepared in advance of the
period to which it relates to. Budgets set out the costs and revenues that are expected
to be incurred or earned in future periods.
Purposes of budgeting
1. Planning for the future - in line with the objectives of the organization.
2. Evaluation - to judge managerial performance.
3. Controlling costs - to compare with actual results to enable investigations into
significant differences.
4. Coordination - of different activities to ensure goal congruence.
5. Authorization - of expenditures.
6. Motivation - of managers by encouraging them to beat targets set at the
beginning of the budget period. Bonuses are often based on beating budgets.
7. Communication- budgets communicate the targets of the organization to
individual managers.
The stages in budget preparation
How are budgets prepared?

1. The long term objectives of an organization defined- so that budgets prepared
are working towards the goals of the business. The process entails:
2. Budget committee formed - typically made up of CEO, budget officer
(management accountant) and functional heads. Responsible for policy
guidelines communication to budget preparers, budgeting setting and approvals.
3. Budget manual produced - sets out instructions on budget preparation and
usage.
4. Limiting factor identified - in budgeting, the limiting factor is known as the
principal budget factor. Usually there will be one factor that will limit the activity
of an organization in a given period. It is usually sales but can be anything else
If sales is the principal budget factor then the sales budget must be produced first. If
labor were the factor, then the labor budget would be produced first. The rest can then
follow. The entire process may take weeks or months.
The final stages in budget process:
1. Initial budgets are prepared. Be aware of budget slack.

2. Initial budgets reviewed and integrated into complete budget system.
3. After any necessary adjustment are made to initial budgets, they are accepted
and the master budget is prepared which consists of budgeted income
statement, balance sheet and cashflows.
4. Budgets are reviewed regularly. Variances are checked and investigated.
C. OMANYO
BUDGETING
Approaches to budgeting
1. Top down and bottom up budgeting
2. Rolling budgets
3. Incremental budgets
4. Activity-based budgeting
5. Feed-forward control
6. Zero-based budgeting (ZBB)
Top down and bottom up budgeting
Allows staff to participate in target setting
Top down budget
A budget that is without allowing the ultimate budget holder to have the opportunity to
participate in the budgeting process, also called “authoritative” or non-participative”
Bottom up budget
Budget holders have the opportunity to participate in setting their own budget. A bottom up
budget is also called participative budget. Junior managers would be reviewed and challenged
by senior management.
Advantages of participative budgets
1. Increased motivation
2. Contain better information
3. Increases managers understanding and commitment
4. Better communication
5. Senior managers can concentrate on strategy
Disadvantages of participative budgets
1. Senior managers may lack control
2. Bad decisions from inexperienced managers
3. Budgets may lack corporate objectives as managers lack a strategic perspective
4. Figure may be subject to bias as junior managers may set easily achievable targets
(budget slack)
5. Budget preparation is slower and disputes can arise
Rolling budgets
Rolling budgets (continuous budgets) are budgets which are continuously updated by adding a
further period (say a month or quarter) and deducting the earliest period.
Advantages of rolling budgets
1. Process is more accurate
2. Reduce the element of uncertainty
3. They force managers to reassess the budget regularly, and to produce budgets which are
up date in the light of current events and expectations.
4. This budget is realistic giving a better motivation to managers.
5. Planning and control will be based on recent plan which is likely to be more realistic.
6. There is always a budget which extends for several months ahead.
Disadvantages of rolling budgets
1. Involve more time, effort and money in budget preparations.
2. An increase in budgeting work may lead to less control of actual results.
3. There is a danger that the budget may become the last budget “plus or minus a bit”
C. OMANYO
BUDGETING
Example
A company uses rolling budgeting and has a sales budget as follows:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Ksh Ksh Ksh Ksh Ksh
Sales 125,750 132,038 138,640 145,572 542,000
Actual sales for Quarter 1 were Ksh123,450. The adverse variance is fully explained by
competition being more intense than expected and growth being lower than anticipated. The
budget committee has proposed that the revised assumption for sales growth should be 3% per
quarter.
Required:
Update the budget as appropriate.
Solution
Incremental Budgets
The traditional approach to budgeting in the public sector has been incremental and this has
resulted in existing patterns of public expenditure being locked in.
An incremental budget starts with the previous periods’ budget or actual results and adds (or
subtracts) an incremental amount to cover inflation and other known changes.
It is suitable for stable businesses, where costs are not expected to change significantly.
Advantages of incremental budget
1. Quickest and easiest method
2. Assuming that the historic figures are acceptable only the incremental needs to be
justified.
Disadvantages of incremental budget
1. Uneconomic activities may be continued
2. Managers may spend unnecessarily to use up their budgeted expenditure allowances.
3. Builds in previous problems and inefficiencies.
Example
X Ltd produce two products A and C in the last year 2007 it produced 640 units of A and 350
units of C incurring costs of Ksh 672,000. Analysis of the costs is that 75% is variable. 60% of
these variable costs vary in line with the number of A produced and the reminder with the
number of C
The budget for the year 2008 is now being prepared using an incremental budgeting approach.
The following additional information is available for 2008
 All costs will be 4% higher than the average paid in 2007
 Efficiency levels will remain unchanged
 Expected output of A is 750 units and of C are 340 units.
Required:
What is the budgeted total variable cost of product C (to the nearest Ksh100) for the full year
2008?
Solution
C. OMANYO
BUDGETING
Activity Based Budgeting (ABB)

The approach is based on an activity frame work and utilizing cost driver data in the budget-
setting
ABB produces more accurate budgets and enable greater control of overhead expenditure.
Advantages of ABB
1. It draws attention to the cost of overhead activities.
2. It provides information for the control of activity costs
3. It provides a useful basis for monitoring controlling overhead costs
4. It provides useful control information by emphasizing that activity cost might be
controllable if the activity volume can be controlled.
5. Provides useful information for a total quality management (TQM)
Disadvantages of ABB
1. Amount of time and effort needed to identify the key activities and their cost drivers.
2. ABB might not be appropriate for the organization and its activities and cost structures.
3. ABB needs the clear individual responsibilities for activities.
4. Overhead costs are not controllable.
Example
A company has prepared an activity-based budget for its stores department. The budgeted costs
are:
Cost driver Budgeted cost

Receiving goods Number of deliveries Ksh 80 per delivery
Issuing goods from store Number of stores Ksh 40 per requisition
requisitions
Ordering Number of orders Ksh 25 per order
Counting stock Number of stock counts Ksh1,000 per count
Keeping records Ksh 24,000 each year
Supervision Ksh 30,000 each year
Actual results for April were:
Activity Quality Actual costs
Ksh
Receiving goods 45 orders delivered 3,450
Issuing goods 100 requisitions 4,400
Ordering 36 orders 960
Counting 2 stock counts 1,750
Record keeping 1,900
Supervision 2,700
15,160
Required: Prepare a variance report for the month.
Feed forward control
Is defined as the forecasting of differences between actual and planned outcomes and
implementation of actions before the event, to avoid such differences
Feed-forward looks ahead and compares:
 The target or objectives for the period
 The actual results forecast.
C. OMANYO
BUDGETING
Advantages
1. It informs managers of what is likely to happen unless control action is taken
2. It encourages managers to deal with problems before they occur
3. Reforecast on a monthly or continuous basis can store time.
Disadvantage
1. It may be time consuming as control reports must be produced regularly
2. It may require a sophisticated forecasting system, which might be expensive
Zero-Based Budgeting (ZBB)

Is that the budget for each cost centre should be made from “scratch” or zero
ZBB involves preparing a budget for each cost centre from a zero base. Every item of
expenditure has then to be justified.
Without approval the budget allowance is zero.
It is especially useful for:
1. It ensure optimum use of financial resources
2. Inefficient or obsolete operations can be identified and discontinued.
3. It increases the participation of all level of management in budget preparation
4. It allows budget adjustment during the year.
5. It links budget with corporate objectives
6. It provides the management with significant data base and can be helpful to operational
audit.
7. Resources should be allocated efficiently and economically
8. Leads to increased staff involvement at all levels.
9. Attention is focused on outputs in relation to value for money
10. Knowledge and understanding of the cost behavior patterns of the organization will be
enhanced.
Disadvantages
1. It requires more-time (time consuming)
2. It expects a high degree of managerial skills
3. Its application is limited
4. It may emphasize short-term benefits
5. Managers, staff and unions may feel threatened.
6. The rankings of packages may be subjective where the benefits are of a qualitative nature
7. Difficult to compare
8. The budgeting process may become too rigid and the company may not be able to react to
unforeseen opportunities or threats
9. Incremental costs and benefits of alternative courses of action are difficult to quantity
accurately.
Budget preparation
Master Budget Preparation
The master budget is a summary budget which incorporates all functional budgets
Is the budget into which all subsidiary budgets are consolidated? It includes:
1) Budgeted income statement
2) Budgeted balance sheet
3) Budgeted cash flow statement (cash budget)
C. OMANYO
BUDGETING
Functional budgets
Functional budgets are prepared and consolidated to produce the master budget. The normal
assumption is that demand is the principal budget factor
Functional budget is useful for variance analysis
Sales Budget
Sales Budget is basically straight forward to prepare.
Sales Budgets = Sales Units x Selling Price per Unit
Production Budget
Budgeted production = Forecast sales + Closing inventory – Opening inventory
Or
Budgeted production = Forecast sales + Increase in inventory
Material Usage Budget
Material usage = Usage per unit x Units produced
Materials Purchase Budget
Materials purchase budget = Forecast materials usage + Increase in inventory
Or Materials purchase budgeted = Forecast materials usage + Closing inventory- Opening
inventory
Labour Budget
Labour Hours x Rate per hour
Example 1:
A company makes two products - PS and TG. Sales for next year are budgeted to be 5,000 units
of PS and 1,000 units of TG. Planned selling prices are $95 and $130 per unit respectively.
Required:
Prepare the sales budget for the next year.
Example 2:
A company makes two products - A and B. The products are sold in the ratio 1:1. Planned selling
prices are $100 and $200 per unit respectively. The company needs to earn $900,000 revenue in
the coming year.
Required:
Prepare a sales Budget for the Period
Example 3:
A company makes two products, PS and TG. Forecast sales for the coming year are 5,000 and
1,000 units respectively. The company has the following opening and required closing inventory
levels:
PS TG
units units
Opening inventory 100 50
Required closing inventory 1,100 50
Required:
Prepare the production budget for the coming year
C. OMANYO
BUDGETING
Example 4:
A company produces Products PS and TG and has budgeted to produce 6,000 units of Product
PS and 1,000 units of Product TG in the coming year.
The data about the materials required to produce Products PS and TS is given as follows.
Finished products:
PS TG
Kg of raw material X 12 12
Kg of raw material Y 6 8
Direct materials:
X kg Y kg
Desired closing inventory 6,000 1,000
Opening Inventory 5,000 5,000
Standard price $0.72 $1.56
Required:
Prepare the following:
(a) The material usage budget.
(b) The material purchase budget.
Example 5:
A company plans to sell 400 units in the forthcoming year. Inventories of 100 units of finished
goods and 300kg of raw materials are held at the current year end. They are both expected to fall
by 25% during next year due to more efficient stockholding procedures. A loss of 10% is
expected on all raw materials received from suppliers. One unit of output requires 5 kg of raw
material.
Required:
What are the Budgeted Production units, Raw Material Usage and Raw Material Purchases?
Example 6:
Newton Ltd manufactures three products. The expected production levels for each product are
shown below:
Product 1 2 3
Budgeted production in units 2,700 4,100 2,800
Two types of labor are used in producing the three products. Standard times per unit and
expected wage rates for the forthcoming year are shown below:
Product 1 2 3
Hours per unit
Skilled labor 3 1 3
Semi-skilled labor 4 4 2
Skilled labor is to be paid at the rate of $9/hour and semi-skilled labor at the rate of $6/hour.
Required:
C. OMANYO
BUDGETING
Prepare a Labour Budget
FIXED AND FLEXIBLE BUDGET

A fixed budget is defined by:
• Only one level of activity
• Not adjusted to reflect actual activity level when change occurs
A fixed budget has the following limitations:
• It provides little assistance at the planning stage. It does not give implication of various
alternative strategies which management may wish to consider.
• It fails to provide relevant and reliable base against which to measure actual performance
where actual activity differs from the budget.
• Little motivation to management to use the budgeting control system as a control aid.
Flexible budget is a budget which is designed to change in accordance with the level of activity
attained. It involves budgeting at various levels in anticipation of changes. The original budget
is adjusted (flexed) to reflect the actual conditions in which the performance was done.
It is more useful than fixed budgeting due to:
• It provides a range of information at the planning stage which will assist in short term
planning.
• Control: It provides control data when compared with actual performance.
• Motivation: More likely to be acceptable to management to provide a positive motivational
stimulus because the control data is adjusted to conform with current activity level.
Example 1
Mini Bakeries Ltd. has budgeted to produce and sell 100,000 units of cakes during the next
period. The selling price per cake is Sh. 20 and variable cost per cake is Sh. 12. Fixed
overheads are budgeted to at Sh. 600,000.
Additional information
1. Fixed costs will increase to Sh. 700,000 where activity is in excess of 110,000 units; Fixed
costs will fall to Sh. 480,000 where activity level is less than 90,000 units.
2. Variable costs will fall by 5% per unit (cake) of all units where activity is in excess of
100,000 cakes because of the economies of scale.
The actual results of the period in which 115,000 units (cakes) were produced and sold were:
1. Sales revenue Sh. 2,242,500
2. Variable costs Sh. 1,320,000
3. Fixed costs Sh. 670,000
Required
1. Prepare a summary, which shows the budgeted results for activity levels from 80,000 to
120,000 cakes using the above information.
2. Prepare a control statement comparing budgeted with actual results where a fixed budget
system is used based on 100,000 units.
C. OMANYO
BUDGETING
Example 2
The expenses budgeted for production of 10,000 units in a factory is furnished below:
Per unit
Ksh
Materials 70
Labour 25
Variable overheads 20
Fixed overheads (100,000) 10
Variable expenses (Direct) 5
Selling expenses (10% fixed) 13
Administration expenses (50,000) 5
Distribution expenses (20% fixed) 7
155
Required
Prepare a budget for the production of (a) 8,000 units and (b) 6,000 units, for the year ended 31st
Dec. 2010. Assume that administration expenses are rigid for all level of production.
QUESTION: CASH BUDGETING

The following information related to the proposed budget for K.K Ltd for the months ending 31
December 1996.
Material Production Administration
Month Sales Purchases Wages Overheads Overheads
Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’
July 72000 25000 10000 6000 5500

August 97000 31000 12100 6300 6700
September 86000 25500 10600 6000 7500
October 88600 30600 25000 6500 8900
November 102500 37000 22000 8000 11000
December 108700 38800 23000 8200 11500
1. Depreciation expenses are expected to be 0.5%of sales.
2. Expected cash balance in hand on 1 July 1996 is Sh. 72,500,000
3. 50% of total sales are cash sales
4. Assets are to be acquired in the months of August and October at Shs. 8,000,000 and Shs.
25,000,000 respectively
5. An application has been made to the bank for the grant of a loan of Shs. 30,000,00 and it is
hoped that it will be received in the month of November
6. It is anticipated that a dividend of Shs. 35,000,000 will be paid in December
7. Debtors are allowed one month’s credit
8. Sales commission at 3% on sales is paid to the salesmen each month
Required: A cash budget for the six months ending 31 December 2003.
C. OMANYO
BUDGETING
Selecting a suitable budgetary system

There are many approaches to budgeting and organization will wish to select a system which is
most appropriate.
Factors, which will determine suitability include:
1. Type of organization
2. Type of industry
3. Type of product or product range
4. Culture of the organization
Information for budgeting
Main sources of information for budgeting purpose are:
1. Previous year’s actual results
2. Managers knowledge
3. Research and development of new product and study techniques.
4. Statistical techniques such as linear regression may help to forecast sales.
5. External sources of information i.e. suppliers price list, estimates of inflation and
exchange rate movements.
C. OMANYO
CHAPT 14: STANDARD COSTING

The purposes of standard costing
A standard cost is the planned unit cost of a product or service as required in the preparation of
budgets.
• It represents the "target" costs and are useful for planning and control.
• Essential for calculating and analyzing variances which is a feedback for company's
performance.
• Simplifies record keeping in accounting.
• May be on a marginal or absorption cost basis.
Types of cost standards
Basic Long term standards which remain unchanged over long periods of time meant to show
standards trends. Least use and least useful.
Ideal Based on perfect operating conditions. May be used for pinpointing areas where close
standards examination may result in large cost savings. May demotivate.
Attainable The most frequently encountered type of standard. It allows for losses, fatigue and
standards breakdowns. Based on higher performance level which are achievable with hard work.
Current Based on current levels of efficiency. Only drawback is it does not motivate for improved
standards performance.
Standard costs per unit

Once determined, it is presented on a standard cost card.
Example 1:
K Ltd manufactures Product 20K. Information relating to this product is given below.
Budgeted output for the year: 900 units
Standard details for one unit:
Direct materials: 40m² at $5.30 per m²
Direct wages: Bonding dept 24 hours at $5.00 per hour
Direct wages: Finishing dept 15 hours at $4.80 per hour
Budgeted costs and hours per annum are as follows:
$ Hours
Variable overhead
Bonding department 45,000 30,000
Finishing department 25,000 25,000
Fixed overhead apportioned to this product:
Production 36,000
Selling, distribution and administration 27,000
Note: Variable overheads are recovered (absorbed) using hours, fixed overheads are recovered
on a unit basis.
Required:
Prepare a standard cost card in order to establish the standard cost of one unit of Product 20K
and enter the following subtotals on the card:
1. prime cost
2. marginal cost
3. total absorption cost
4. total standard cost
C. OMANYO
VARIANCES
A variance is the difference that exists between budgets and actual performance. Variances can
either be favorable or adverse.
Sales variances
There are two causes of sales variances: sales price variance & sales volume variance.
Possible causes of sales variances

Causes:
Unplanned price increases or reductions
unexpected fall in demand due to recession
additional demand attracted by reduced prices
failure to satisfy demand due to production difficulties
Material cost variances

There are three different material variances that you need to know:
1. materials total variance
2. materials price variance
3. materials usage variance
Materials total variance

This variance is the difference between:
• standard material cost for actual variance (flexed budget)
• actual cost of direct materials
It can be sub analyzed as materials price variance and materials usage variance. Price variance
analyze whether the company paid more or less than expected for materials. Usage variance
quantified the effect on profit of using different quantities of raw materials from expected.
Possible causes of materials variances

Materials price variance may be caused by:
supplies from different sources
unexpected general price increases
changes in quantity discounts
substitution of one grade of material for another
materials price standards are usually set at a mid year price so one would expect
favorable price variances early in a period and an adverse variance later.
Materials usage variance may be caused by:

a higher or lower incidence of scrap
an alteration to design
use of a substitute
Labor cost variances

There are three labor variances that you need to know about:
1. labor total variance
2. labor price variance
3. labor efficiency variance
Labor total variance
This is the difference between:
• the standard direct labor cost of the actual production (flexed budget)
• the actual cost of direct labor
A price variance analyzes whether the company paid more or less than expected for labor. An
efficiency variance measures whether the company use more or less labor than expected.
C. OMANYO
Possible causes of labor variances

Labor price variance may be caused by:
an unexpected national wage award.
overtime or bonus payments which are different from planned
substitution of one grade of labor for another higher or lower grade
Labor efficiency variances may be caused by:
changes in work conditions or working methods
consequences of the learning effect
introduction of incentive schemes or staff training
Variable overhead variances

Similar to materials and labor variances. In exams, variable overheads will vary with labor hours.
The following will be calculated:
1. variable overhead total variance
2. variable overhead expenditure variance
3. variable overhead efficiency variance
Variable overhead total variance

As it will be based on direct labor hours of input, it will be due to one of the following:
• Variable overhead cost per hour was different to that expected.
• Working more or fewer hours than expected.
Possible causes of variable overhead variances

Variable overhead expenditure may be caused by:
Incorrect budgets being set at the beginning of a period
Overheads consisting of a number of items and may be affected by anyone of those
items.
Variable overhead efficiency may be caused by:

changes in working methods and conditions
consequences of the learning effect
introduction of incentive schemes or staff training
Note that the possible causes of variable overhead efficiency variances are the same as those for
labor efficiency variance.
Fixed overhead variances

Fixed overhead variances show the effect on profit of differences between actual and expected
fixed overheads.
• By definition, expected and actual fixed overheads do not change when there is a change
in activity.
• Effects on profit depends on whether marginal or absorption costing system is being
used.
Fixed overhead variances in a marginal costing system

As marginal costing does not relate fixed overheads to costs. There is no under or over
absorption and it is shown as a period cost. As fixed overhead costs are fixed, they are not
expected to change when there is an activity level change.
C. OMANYO
Variances calculated as:

1. fixed overhead total variance
2. fixed overhead expenditure variance
3. fixed overhead volume variance
Fixed overhead variances in an absorption costing system
In absorption costing, fixed overheads are related to cost units by using OARs. This complicates
the overhead variance calculations. The variances calculated:
1. fixed overhead total variances
2. fixed overhead expenditure variance
3. fixed overhead volume variance
The fixed overhead total variance is equivalent to the under/over absorption of overhead in a
period.
Volume variance can be sub analyzed as:
1. fixed overhead capacity variance
2. fixed overhead efficiency variance
Fixed overhead total variance

This variance measures the difference between:
• budgeted fixed overhead
• actual fixed overhead
In marginal costing, this is equal to the fixed overhead expenditure variance.
In absorption costing system, the fixed overhead total variance measures the effect on profit of
the difference between:
• amount absorbed by the use of the absorption rate based on budgeted costs and activity
• actual cost
This may be sub analyzed into expenditure and volume variance.
Fixed overhead capacity and efficiency variance

In absorption costing system, the fixed overhead volume variance can be subdivided into
capacity and efficiency variances.
Possible causes of fixed overhead variances

Fixed overhead expenditure variances maybe caused by:
• changes in prices relating to fixed overhead expenditure, e.g. increase in factory rent
• seasonal differences
Fixed overhead volume variances may be caused by:

• changes in the production volume due to changes in demand or alterations to
stockholding
• lost production due to industrial action
OPERATING STATEMENTS
Variances are often summarized in an operating statement (or reconciliation statement).
Example 1
Chapel Ltd manufactures a chemical protective called Rustnot. The following standard costs apply
for the production of 100 sylinders.
$
Materials 500 kg @ $0.80 per kg 400
Labor 20 hours @ $1.50 per hour 30
Fixed overheads 20 hours @ $1.00 per hour 20
450
C. OMANYO
The monthly production/sales budget is 10,000 cylinders.

Selling price = $6 per cylinder.
For the month of November the following actual production and sales information is available:
Produced/sold 10,600 cylinders

Sales value $63,000
Materials purchased / used 53,200 kg $42,500
Labor 2,040 hours $3,100
Fixed overheads $2,200
Required:
a) Calculate all the appropriate variances
b) Prepare an operating statement for November using AC
Example 2
ABC Ltd produces and sells one product only. The standard cost card and price for one
unit being as follows:
$
D. Material A 10 kgs @ $12 per kg 120
D. Material B 6 kgs @ $5 per kg 30
D. Wages 5 hours @ $8 per Hr 40
Fixed Production Overheads 60
Total Standard Costs 250
Standard Gross Profit 50
Standard Selling Price 300
The fixed production overhead included in the standard cost is based on an expected
monthly output of 750 units.
During April, actual results were as follows:
Sales 700 units @ $ 320 224,000
D. Material A 7500 kgs 91,500
D. Material B 3500 kgs 20,300
D. Wages 3400 hours 27,880
Fixed Production Overheads 37000
Total Cost 176,680
Gross Profit 47,320
NB. ABC Ltd does not hold any inventories.

Required
a) Calculate all the appropriate variances
b) Prepare an operating statement
C. OMANYO
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CERTIFIED PUBLIC ACCOUNTANT
LEVEL 2 EXAMINATIONS
F2.1: MANAGEMENT ACCOUNTING
MONDAY: 10 JUNE 2013
INSTRUCTIONS:
1. Time Allowed: 3 hours 15 minutes (15 minutes reading and 3 hours

writing).
2. This examination has seven questions and only five questions are to be
attempted.
3. Marks allocated to each question are shown at the end of the question.
4. Show all your workings

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F2.1 Page 1 of 4
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QUESTION ONE
a) Costs may be classified according to relevance in decision making. Distinguish the following costs in
reference to the above;
i) Relevant and irrelevant costs (4marks)
ii) Avoidable and unavoidable costs (4marks)
iii) Sunk and opportunity costs
(4marks)
(b) Explain the following costing terms as used in management accounting:
i) Cost (2marks)
ii) Cost unit (2marks)
iii) Cost Centre (2marks)
iv) Cost Tracing (2marks)
(Total 20 marks)
QUESTION TWO
Fan Base (FB) ltd operates a megastore featuring sports merchandise. It uses an economic order quantity decision
model to make inventory decisions. It is now considering inventory decisions for its APL soccer jerseys product
line, a highly popular item. Data for 2013 are:
Expected annual demand for jerseys 10,000 units
Ordering cost per purchase order Frw200
Carrying cost per year Frw 7 per jersey
Each jersey costs FB Frw 40 and sells for Frw 80. The Frw 7 carrying cost per jersey per year comprises the
required return on investment of Frw 4.80 (12% x Frw 40 purchase price) plus Frw 2.20 in relevant insurance,
handling, and theft-related costs. The purchasing lead time is 7 days. FB is open 365 days a year.
Required:
(i) Calculate the Economic Order Quantity (5marks)
(ii) Calculate the number of orders that will be placed each year. (2marks)
(iii) Calculate the reorder point. (4marks)
(iv) Calculate the total cost associated with the policy (4marks)
(v) Highlight the assumptions of the economic order quantity model. (5marks)
(Total 20 marks)
QUESTION THREE
Hammer ltd manufactures a product whose standard variable cost is given below
Frw
Direct materials (2kg @ Frw 3) 6
Direct labour (0.75 hours @ Frw 4) 3
The company treats fixed overheads as period costs and therefore they are not charged to products. The
following information relates to the month of March 2013
1/3/2013 31/3/2013
Frw Frw
Stocks (all at standard cost)
Raw materials 12,000 6,000
Finished goods 36,000 42,500
The following information is available for the month of March 2013 Sales @ Frw 20 per unit 200,000
Material purchases @ Frw 3.50 per kg 42,000
Direct labour cost (8000 hours) 30,000
Variable overheads 12,000
Material price variance (adverse) 21,000
The management is wondering whether they could have performed better.
F2.1 Page2 of 4
Required
Calculate the following variances in each case stating two possible causes
a) Materials usage variance (6 marks)
b) Labour rate variance (4 marks)
c) Labour efficiency variance (4 marks)
d) Variable overhead expenditure variance (3 marks)
e) Variable overhead expenditure variance (3 marks)
(Total 20 marks)
QUESTION FOUR
a) Reward ltd uses job order costing method. The following information relate to Job SN202.
Direct materials Frw 62,000
Direct labour (40hrs @ Frw 2000/hr) Frw 80,000
The company uses direct labour hours to absorb overhead. Budgeted overheads for the year 2013 are Frw
300,000 and the budgeted direct labour hours are 15,000 hours.
Required
i) Production cost for the Job (5marks)
ii) Total price of the job if the company’s profit mark up is 25% (5marks)
b) Engen ltd operates a transport business between Rwanda and Kenya. It has recently acquired a new bus to
cater for its expanding business.
The following information relates to the initial and maintenance cost of the bus.
Frw’000’
Cost 10,000
Scrap value 2,000
Insurance per annum 400
Annual road licence fee 12
Replacement of tyres (every 25,000 kilometres) 50
Maintenance costs (every 10,000 kilometres) 20
1. The bus has an economic life of 5 years.
2. The bus has 6 tyres each costing Frw 8,000.
3. On average the bus covers 20,000 km per litre of fuel. Fuel costs Frw 100 per litre.
4. The bus is expected to cover 10,000kilometres in the month of August 2013.
Required:
Determine for the month of August 2013:
i) Variable costs per Kilometre (4marks)
ii) Fixed costs per Kilometre (4marks)
iii) Total cost of running the bus per Kilometre (2marks)
(Total 20 marks)
QUESTION FIVE
Meka ltd manufactures a single product branded “K”. The standard cost per unit of the product is given
below; Frw
Direct materials 700
Direct labour 350
Variable production overheads 150
Fixed production overheads 400
Additional information:
1. Production and sales for the month of July and August 2013 are as follows July 2013 Aug 2013
F2.1 Page 3 of 4
Units Units
Production 2000 3200
Sales 1750 2750
2. The selling price per unit of “K” is Frw 2,010
3. The fixed production overheads are budgeted at Frw 14,400,000 per annum.
4. Budgeted administration and selling costs are estimated at Frw 6million and Frw 3million per annum
5. The variable marketing costs are estimated at 10% of sales.
Required:
a) Profit statement for the month of August 2013 using
i) Marginal costing (8marks)
ii) Absorption costing (8marks)
b) Reconcile the profits obtained in (a) above (4marks)
(Total 20 marks)
QUESTION SIX
a) ALOMA Ltd produces and sells a product whose variable costs per unit are 0.4. The product selling price
is Frw 80 per unit. ALOMA Ltd fixed costs are Frw 6million.
Required:
i)
Determine the quantity to be sold to break even (5marks)
ii) Determine the profit realised for sales revenue of Frw 20million
(5marks)
b) Draw a graph to illustrate the concept of break-even point in management accounting
(5marks)
c) State the limitations of Cost-volume-profit (C-V-P) analysis
(5marks)
(Total 20 marks)
QUESTION SEVEN
(a) Gen ltd manufactures three components A, B and C. The estimates of costs and revenues for each of the
coming financial year are as follows:
A B C Total
“000” “000” “000” “000”
Sales 200 150 100 450
Cost of goods sold 100 75 60 235
Gross profit 100 75 40 215
Expenses
Factory overhead 40 30 20 90
Selling & distribution costs 15 12 15 42
Head office admin costs 20 15 10 45
Total expenses 75 57 45 177
Net profit/loss 25 18 (5) 38
The factory overheads and 50% of the head office admin expenses are fixed and have been apportioned on the
basis of sales value.
Required:
a) Should the company cease production of component C?
(12marks)
b) Explain 4 factors a company should consider before discontinuing a product.
(8 marks)
(Total 20 marks)
End of question paper
F2.1 Page 4 of 4

FOUNDATION LEVEL 2 EXAMINATIONS

MONDAY 2 DECEMBER 2013

INSTRUCTIONS:

writing).
2. This examination has seven questions and only five questions are to be
attempted.

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F2.1 Page 1of 8
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QUESTION ONE v. 10,000 units were completed in process 2 and taken to finished goods while 4000 units
remained in progress, 100% complete at to direct materials and 50% complete as to labour and
(a) The central purpose of management accounting is to provide management with the information required
to direct the internal affairs of an organization. overheads.

Required: Required:
a) Explain how this central purpose can be achieved in an organization. (12 Marks) Using FIFO basis
i) The whole equivalent units statement for processes (6 Marks)
b) Describe the attributers of good management accounting information. (8 Marks)
ii) The cost per unit of good output for process 1 (4 Marks)
(Total 20 Marks)
iii) Valuation of the units transferred to process 2 (4 Marks)
QUESTION TWO
Process 1 account (6 Marks)
Kayonza Company manufactures its products through two processes 1 and 2. Work in progress on 1 April st
(Total 20 Marks)
2009 was
QUESTION THREE
Process 1: 200 units Frw ‘000’
Direct materials 1000 a) Distinguish between standard costing and budgetary control (4Marks)
Direct labour 400
Overheads 600 b) With respect to standard costing and with relevant examples discuss the following types of standards:
i) Basic standard (2 Marks)
Process 2: 600 Units
Direct materials 3400 ii) Ideal standard (2 Marks)

Direct labour 760 iii) Expected standards (2 Marks)
Overheads 1200
iv) Current standards (2 Marks)
c) Hygiene products Ltd manufactures a single product, melamine kitchen sink with a standard cost of
i. The goods were 100% complete as regards direct materials and 75% with regard to labour and
Frw 8,000 made up as follows:
overheads.
Frw
ii. The additions during the month were:
Direct materials (15 square metres at Frw 300 per square metre) 4,500
Direct labour (5 hours at 400 per hour) 2,000
Process 1:
Variable overheads (5 hours at 200 per hour) 1,000
• Direct materials; Frw 1,940,000 Fixed overheads (5 hours at 100 per hour) 500
8,000
• Labor :Frw. 728,000
The standard selling price of the kitchen sink is 10,000. The monthly budget projects production and sales of
• Overheads, Frw 1,080,000 1,000 units.
Process 2: Actual figures for the month of July 2012 were as follows:
• Direct material, Frw 560,000 Sales 1,200 units at 10,200 per unit
Production 1,400 units
• Labor, Frw 2,240,000
Direct materials 22,000 square meters at 400 per square meter
• Overheads, .Frw 4,200,000 Direct wages 6,800 hours at 500 per hour
Variable overheads 1,100,000
iii. By end month, 4000 units were completed and passed from process 1 to 2. Fixed overheads 600,000
iv. Closing work in progress in process 1: 1600 units, 100% complete as to direct materials, 90% as
regards labour and overheads.
F2.1 Page 2of 8 F2.1 Page 3of 8
Required: Required:
i) Material price variance (2 Marks) a) Absorption costing statement (5 Marks)
ii) Material usage variance (2 Marks) b) Marginal costing statement (5 Marks)
c) Explain the reason why the income statement under absorption costing shows a different profit or loss
iii) Labour rate variance (2 Marks)
figure compared with the income statement under marginal costing statement. (1 Mark)
iv) Labour efficiency variance (2 Marks)
d) Reconciliation statement of the difference between the profit or loss under absorption costing and
(Total 20 Marks) marginal costing above. (2 Marks)
(Total 20 Marks)
QUESTION FOUR
QUESTION FIVE
a) Ushindi Ltd manufactures ornaments for export trade. Jobs are allocated to two operators, Mboge and
Njuguna with bonus paid for hours saved. a) In the context of budgetary control explain the main functions and importance of a cash budget.
(5 Marks)
In the month of February 2012, Mboge made 186 units and Njuguna made 210 units for which the time
allowed of 30 standard minutes and 25 standard minutes per unit respectively was credited. The Basic
b) You are in charge of making forecasts and preparing budgets. You have been supplied with cost and
rate was Frw 18 per hour for both employees. revenue forecasts and details of payment as follows:
For every hour saved, a bonus was paid at 20% of the basic wage rate. Hours worked in excess were paid at 1. Forecast of revenue and costs for the quarter ending 31 March 2013
the basic wage rate plus two thirds. Mboge completed his job in 44 hours and Njuguna completed his job in
January February March
39 hours. A basic week has 40hours.
Direct
Required: Materials (purchases) 112,000 100,000 135,000
Wages 90,000 80,000 100,000
For each operator, compute:
Overhead
i) The amount of bonus payable (3 Marks) Production 34,000 32,000 40,000
Administration 22,000 20,000 27,000
ii) The total gross wage payable (2 Marks) Selling and distribution 13,000 11,000 18,000
Sales 360,000 350,000 440,000
iii) The wage cost per unit (2 Marks)
2. Forecast of revenue and costs for the quarter ending 30 June 2013
b) PQR is a manufacturer of sports shoes. The standard cost per pair of sports shoes is as follows:
April May June
Direct materials 500 Direct
Direct labour: 4 hours x Frw 60 per hour 240 Materials (purchases) 90,000 67,000 79,000
Production overheads: Wages 72,000 54,000 63,000
Variable 4 hours x Frw 30 per hour 120 Overhead
Fixed 100 Production 45,000 36,000 40,000
Standard production cost 960 Administration 22,000 25,000 27,000
Standard selling price 1,500 Selling and distribution 13,000 11,000 16,000
Additional information: Sales 350,000 360,000 360,000
Cash balance on 1 April
1. During the month production was 10,000 units as planned but the sales made were 8,000 units.
2013 Frw. 90,000
2. Other costs incurred during the month were as follows:
Variable Fixed
Selling and distribution 20% of sales 600,000
Administration 1,000,000
F2.1 Page 4 of 8 F2.1 Page 5 of 8
a) Other details Required:
• Period of credit allowed by suppliers averages two months. i. Break even sales revenue (4 Marks)
• Debentures to the value of Frw. 125,000 are being issued in May 2013 and the amount is expected to ii. Margin of safety in sales value (2 Marks)
be received during the month.
iii. The sales value at which profit of 4,500,000 will be achieved (2 Marks)
• A new machine is being installed at the end of March 2013 at a cost of Frw 150,000 and payment is
iv. A summary of operating statement that shows the net profit in (iii) above (6 Marks)
promised in early May 2013.
• Sales commission of 3% is payable within one month of sales. (Total 20 Marks)

QUESTION SEVEN
• A dividend of Frw 100,000 is to be paid in June 2013.
Kigari Engineering Company Limited wishes to set flexible budgets for each of its operating departments. A
• There is a delay of one month in the payment of overheads. There is also a delay in payment of wages
separate maintenance department performs all routine and major repair works on the company’s equipment
averaging a quarter of a month.
and facilities. The company has determined that maintenance department performs all routine and major
• Twenty per cent of the debtors pay cash, receiving a cash discount of 4% and 70% of debtors pay repair works on the company’s equipment and facilities. The company has determined that maintenance cost
within one month and receive a cash discount of 2 ½%. The other debtors pay within two months. is primarily a function of machine hours worked in the various production departments.
Required: The maintenance cost incurred and the actual machine hours worked during the months of May, June, July and
August 2013 were as follows:
Cash budget on a monthly basis for the second quarter (April-June) 2013. (15 Marks)
Month Machine hours in Maintenance
(Total: 20 Marks)
Production departments department’s Costs
QUESTION SIX May 800 350
June 1,200 350
a) State and briefly explain three assumptions underlying break-even theory. (6 Marks) July 400 150
August 1,600 550
b) Jamaa ltd manufactures and sells a single product the following information regarding company’s
Required:
operations for year ended 30/09/2012 was presented to you.
a) Determine the cost estimation function using:
Sales 30,000
Less: direct material 6,500 i. High-low method. (5 Marks)

Labour 5,400 ii. Regression analysis. (5 Marks)
Variable production overheads 7,000
11,100 b) Using the regression function estimate:
Other expenses: selling – Variable 2,600
i The maintenance costs that would have been incurred if the machine hours were expected to be 900 in the
Fixed 1997
month of September 2013. (1 Mark)
Administration 2,100
4,403 ii The maximum machine hours that would have been worked if the maintenance cost incurred had been
The following changes are expected to occur to 30/09/2013 limited to Frw 400, 000.00 for the month of September 2013. (6 Marks)
i. Selling price will go down by 3% in order to attract customers c) Assuming that in the month of September 2011 machine hours were 900, establish a 95% confidence
interval for this point estimate. (Assume t = 2.7764 and standard error of estimate, s = 63.25).
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ii. Material cost will increase by 2% due to inflation
(3 Marks)
iii. Labour cost will reduce by 4%
(Total: 20 Marks)
iv. Production overheads will increase by 3%
v. Variable selling costs will reduce by 5% for increasing efficiency of sales persons
vi. All other factors remains the same
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F2.1 Page 8 of 8

FOUNDATION LEVEL 2 EXAMINATION


TUESDAY: 10 JUNE 2014

INSTRUCTIONS:
1. Time Allowed : 3 hours 15 minutes (15 minutes reading and 3 hours writing).
attempted.

F 2.1 © iCPAR Page 1 of 8
QUESTION ONE
a) Management accounting is defined as “The application of the principles of accounting and financial
management to create, protect, preserve and increase value for the stakeholders of for-profit and not-for
profit enterprises in the public and private sectors”.
The main focus of management accounting is planning, control and decision making.
Required:
(i) Briefly explain the stakeholders that management accounting satisfies. (8 Marks)
(ii) Explain what entails planning, control and decision making in management accounting context.
(6 Marks)
b) Tiger Auto is a retailer of bicycles. The most popular children’s bicycle has an annual demand of 30,000
units. Demand is predictable and spread evenly throughout the year.
The bicycles are purchased by Tiger Auto for Frw 40,000 each. Ordering costs are Frw 15,000 per order
and the annual cost of holding one bicycle in inventory is Frw 2,500.
Required :
(i) Calculate the economic order quantity (EOQ) for the children’s bicycle. (3 Marks)
(ii) Calculate the total annual ordering and holding costs for the bicycle assuming the company purchases
the EOQ, does not hold any buffer inventory and the lead time is zero. (3 Marks)
(Total 20 Marks)
QUESTION TWO
a) Differentiate between the term “Job Costing” and “Process costing”. (4 Marks)
b) Abacus Rwanda pays its direct employees a basic hourly rate of Frw 1,000. Overtime hours are paid a
premium of 20% of the basic hourly rate.
During the last week of May 2014 a total of 18 hours of overtime were worked by 30 employees. Eight
of these overtime hours were at the request of a customer to finish an urgent job. The remainder was
necessary because of a machine breakdown.
(i) Determine the total overtime pay for the last week of May 2014 (4 Marks)
(ii) Show the journal entry to record the overtime pay for the week (4 Marks)
c) Gross wages incurred for April 2014 for Gorgeous Company were Frw53,400,000 analyzed as follows:
Direct employees Indirect employees Total Frw
Frw 000 Frw 000 “000”
Payment for ordinary time 30,700 12,210 42,910
Payment for overtime:
--basic pay 3,600 1,534 5,134
--overtime premium 1,800 767 2,567
Shift premium 1,559 1,230 2,789
Gross wages 37,659 15,741 53,400
Required :
(i) Determine the amount to charge to direct labour cost and the production overhead cost for the month
of April 2014 (4 Marks)
(ii) Show the journal entry for the labour cost for April 2014 (4 Marks)
(Total 20 Marks)
QUESTION THREE
a) Explain why a standard costing system may not be considered appropriate in a modern manufacturing
environment. (6 Marks)
b) Crome manufactures and sells a single product Krom. The company operates a standard absorption
costing system and absorbs overheads on the basis of direct labour hours.
The standard selling price and standard costs for one unit of the product are as follows:
Frw per unit
Selling price 300,000
Direct material 15 metres @ Frw 9,000 per metre 135,000
Direct labour 5 hours @ Frw12,000 per hour 60,000
Variable production overheads 5 hours @ Frw6,000 per hour 30,000
Fixed production overheads 5 hours @ Frw3,000 per hour 15,000
Gross profit 60,000
The budgeted production and sales for February 2014 were 1,000 units. The fixed overhead absorption rate
has been calculated based on budgeted production for the month.
Actual results for February were as follows :
Production 1,400 units
Sales 1,200 units
Selling price Frw 306,000 per unit
Direct materials 22,000 metres @ Frw12,000 per metre
Direct labour 6,800 hours @ Frw15,000 per hour
Variable production overheads Frw33,000,000
Fixed production overheads Frw18,000,000
No materials inventories are held.
Required :
(i) Prepare a statement to show the actual gross profit for February 2014 (4 Marks)
(ii) Prepare a statement that reconciles the budgeted gross profit with the actual gross profit for February
2014. Your statement should show the variances in as much detail as possible. (10 Marks)
(Total 20 Marks)
QUESTION FOUR
a) Differentiate between absorption costing and activity based costing. (4 Marks)
b) Rwamagana Metals Ltd (RML) manufactures three types of iron products for sale to retailers. RML
currently operates a standard absorption costing system. Budgeted information for next year is given
below :
Iron products Pipes Sheets Bars Total
Frw 000 Frw 000 Frw 000 Frw 000
Sales 60,000 38,000 22,000 120,000
Direct material 11,800 6,200 4,000 22,000
Direct labour 3,700 2,400 1,900 8,000
Fixed production overheads 15,400
Gross profit 74,600
Iron products Pipes Sheets Bars
Production and sales (units) 1,000,000 1,200,000 600,000
Fixed production overheads are absorbed using a direct material cost percentage rate.
The management accountant of RML is proposing changing to an activity based costing system.
The main activities and their associated cost drivers and overhead cost have been identified as follows:
Production
Activity Cost Driver
overhead cost
Frw 000
Machine set up Number of set ups 3,600
Quality inspection Number of quality inspections 1,200
Processing Processing time 6,500
Purchasing Number of purchase orders 1,800
Packaging Number of units of product 2,300
15,400
Further details have been ascertained as follows :
Pipes Sheets Bars
Batch size (units) 1,000 2,000 1,500
Machine set-ups per batch 3 3 4
Purchase orders per batch 2 2 1
Processing time per unit (minutes) 2 3 4
Quality inspections per batch 1 1 1
Calculate for each product:
i. The total fixed production overhead costs using the current absorption costing system; (3 Marks)
ii. The total gross profit using the proposed activity based costing system. (13 Marks)
(Total 20 Marks)
QUESTION FIVE
a) A company uses a top-down approach to budgeting. Budgets are imposed by senior management and
budget holders are not given the opportunity to participate in the budget setting process.
Required :
Explain ONE advantage and THREE disadvantages to the company of using this top-down budgeting
approach. (4 Marks)
b) Explain why it is important for a business to prepare a cash budget. (2 Marks)
c) State THREE ways, other than borrowing, of improving the cash flow position of a business. (3 Marks)
d) Kigali Designers has decided to purchase t-shirts and print them with a logo to commemorate the world
cup soccer 2014 event.
Sales
The commemorative t-shirts will be sold for Frw 10,000 each and predicted sales are as follows:
June 29,000 t-shirts
July 18,000 t-shirts
August 12,500 t-shirts
One third of sales will be for cash. The remainder will be on credit with the customer paying the month
after sale.
Purchases
The t-shirts will cost Frw 6,000 each and will be purchased in the month prior to sale. It is expected that
10% of the t-shirts purchased will be damaged during the printing process and will not be suitable for
sale. The supplier has offered two months credit.
Capital investment
To print the t-shirts with the logo of the sporting event will require the purchase of a machine costing Frw
30,000,000. The machine will be bought at the start of the project and paid for in July. The machine will
have a five-year useful life but no expected residual value. The machine will be used elsewhere in the
business at the end of this project.
Expenses
Expenses, excluding advertising, of Frw 20,000,000 per month will be incurred each month and paid in
the month incurred. Advertising costs of Frw 5,000,000 per month will be incurred in each of the months
June, July, and August and will be paid one month in arrears.
Required:
Produce a cash budget for the project for each of the three months June, July and August. (11 Marks)
(Total: 20 Marks)
QUESTION SIX
a) Briefly outline FIVE limitations of Cost-Volume-Profit (CVP) Analysis. (5 Marks)
b) Tremendous Company provided the following information regarding the company’s operations for year
ended 30/09/2013.
2012 2013
Sales Frw 25,000,000 20,000,000
Profit as percentage of sales 10% 8%
Required:
(i) Fixed costs (3 Marks)
(ii) Break-even point (3 Marks)
(iii) Margin of safety at a profit of Frw 270,000 (3 Marks)
(iv) The sales value at which profit of Frw 475,000 will be achieved (3 Marks)
(v) Amount of profit if sales is Frw 30,000,000 (3 Marks)
(Total 20 Marks)
QUESTION SEVEN
a) “Public sector organizations are responsible for taxpayers’ money therefore they should no longer be
allowed to use incremental budgeting but should instead use a zero based budgeting (ZBB) system”.
Required:
(i) Explain the concept of ZBB compared to other budgeting systems (2 Marks)
(ii) Explain TWO advantages and ONE disadvantage of public sector organizations using zero based
budgeting (ZBB). (3 Marks)
(iii) Explain the role of committed, engineered and discretionary costs in the operation of zero based
budgeting (ZBB). (6 Marks)
b) A management accountant of a company has provided detailed information regarding the labour mix for
the manufacturing business of the company.
The labour cost shown in the standard cost was made up as follows :
Skilled labour 1.8 hours @ Frw 300 per hour Frw 540
Semi-skilled labour 1.2 hours @ Frw 150 per hour Frw 180
3.0 hours Frw 720
The actual mix of labour used in October 2013 was as follows :
Skilled labour 64,000 hours costing Frw 17,500,000
Semi-skilled labour 50,000 hours costing Frw 9,060,000
Production and sales for the month of October 2013 was 36,000 units. The management accountant has
decided to undertake variance analysis using the detailed information.
Required :
Calculate the following variances for October 2013, taking account of the more detailed information
regarding the labour mix:
(i) The total labour efficiency variance (3 Marks)
(ii) The total labour mix variance (3 Marks)
(iii) The total labour yield variance (3 Marks)
(Total: 20 Marks)



MONDAY: 1 DECEMBER 2014

INSTRUCTIONS:

writing).
attempted.
@iCPAR
F2.1 Page 1of 8
QUESTION ONE
Success Ltd. commenced production for the first time on 1 January 2013 making and selling one single
product: “Effort”. The following information has been extracted by the Management Accountant from the
original budgeted data prepared for the first financial quarter as part of the company’s forecast plans for this
product:
Direct material per unit 5 Kg @ Frw 2,000 per Kg
Direct labour per unit 2 hrs @ Frw 10,000 per hr
Variable production overhead Frw 12,000,000 per month
Fixed production overhead Frw 18,000,000 per month
Each unit is sold at a fixed price of Frw 60,000
All overheads are absorbed to the products on a per unit basis and are calculated by the Management
Accountant using the budgeted production level of 1,500 units per month.
For the months of January, February and March, the following data has been gathered:
January February March
Units produced 1,200 1,480 1,530
Units sold 1,000 1,400 1,670
You may assume that the fixed production overheads are incurred evenly over the year and that there was no
difference between budgeted and actual costs during the quarter under review.
Because the company has only commenced trading, the Management Accountant is unsure which method
of costing the company should adopt for internal quarterly reporting to the directors. She has asked you to
prepare the following information for the forthcoming Board meeting.
Required:
(a) Calculate the unit cost of the product using both an absorption costing and a marginal costing approach.
(3 Marks)
(b) Prepare operating statements for the months of January, February and March using absorption cost-
ing and marginal costing. (Totals for the quarter are not required) Any under / over absorption should be
clearly shown. (14 Marks)
(c) Briefly explain why the monthly profits reported under each costing method differ from each other and
what the implications are in the long term. (3 Marks)
(Total: 20 Marks)
QUESTION TWO
(a) Activity-based costing is an attempt to apply costs to the activities that cause them.
(i) Explain what is meant by the term ‘cost driver’. (2 Marks)
(ii) Explain six of the stages involved in activity-based costing. (6 Marks)
F2.1 Page 2of 8
(b) The sole products of a company are A and B. The following manufacturing information relates to these
two products:
Product A Product B
Units produced per annum 40,000 5,000
Direct material cost per unit Frw3.00 Frw4.00
Direct labour cost per unit Frw10.00 Frw5.00
Direct labour time per unit 1 hour 0.50 hrs
Number of set-ups per annum 40 20
Annual purchase orders for materials 80 30
Total overhead costs allocated to cost pools:
Frw
Set-up 24,000
Purchasing 11,990
Labour supervision 34,000
Required:
Calculate the unit cost of both Product A and Product B using activity-based (ABC) costing principles. All
calculations should be to two decimal places. (12 Marks)
Total: 20 Marks
QUESTION THREE
a) Briefly explain the following terms as used in process costing:
i) Normal loss. (2 Marks)
ii) Abnormal loss. (2 Marks)
iii) Joint products. (2 Marks)
b) Tina Ltd produces a detergent which passes through two processes namely mixing and refining to com-
pletion. The following data relate to the refining process for the month of June 2014.
Cost of opening stock Frw
Materials 100,000
Labour 25,000
Overheads 60,000
During the month 20,000 units were passed from the mixing to the refining process. Costs incurred during
the month were:
Frw
Labour 125,000
Overheads 108,100
Other materials 45,300
At the end of the month 21,000 units had been completed and passed to finished goods while 4,000 were still
in process having reached the following stages:
F2.1 Page 3of 8
Material 100%
Labour 40%
Overheads 60%
Required:
Refining Process Account. (14 Marks)
Total: 20 Marks
QUESTION FOUR
Alibaba Ltd is a manufacturer of Lolypop Sweets whose standard variable cost is given below:
Direct materials (2 Kg @ Frw 3) 6
Direct labour (0.75 hours @ Frw 4) 3
The company treats fixed costs as period costs and therefore they are not charged to products.
The following information relates to the month of March 2013.
1/3/2013 31/3/2013
Stocks (all at standard cost) Frw Frw
Raw materials 12,000 6,000
Finished goods 36,000 42,500
The following information is available for the month of March 2013:
Frw
Sales @ Frw 20 per Sweet 200,000
Material purchases @ Frw 3.50 per kg 42,000
Direct labour cost (8,000 hours) 30,000
Material price variance (adverse) 21,000
The management is wondering whether they could have performed better.
Required:
Calculate the following variances in each case stating two possible causes:
a) Material usage variance (6 Marks)
b) Labour rate variance. (4 Marks)
c) Labour efficiency variance. (4 Marks)
d) Variable overhead expenditure variance. (3 Marks)
e) Variable overhead efficiency variance. (3 Marks)
(Total: 20 Marks)
QUESTION FIVE
For some time the L4Q Company has sold its entire output of canned goods to supermarket chains which
sell them as ‘own label’ products. One advantage of this arrangement is that L4Q incurs no marketing costs,
F2.1 Page 4 of 8
but there is continued pressure from the chain on price, and margins are tight. As a consequence, L4Q is
considering selling some of its output under the L4Q brand. Margins will be better but there will be substantial
marketing costs. The following information is available.
Current year’s results-2014 Forecast for 2015
(adjust to 2015 cost levels) (assuming all own label sales)
Sales (millions of 18 19
cans)
Sales 594 627
Manufacturing costs 430 445
Administration costs 120 120
Profit 44 62
For 2015 the unit contribution on L4Q brand sales is expected to be 33% greater than ‘own label’ sales, but
variable marketing costs of Frw 2 million per can and fixed marketing costs of Frw 40 million will be incurred.
Required:
(a) Calculate contribution per can and total contribution for 2015 assuming that all sales will be L4Q
brand. (7 Marks)
(b) Prepare a contribution breakeven chart for 2015 assuming that 50% of sales are ‘own label’ and 50%
are of the L4Q brand.
Note. The breakeven point and margin of safety must be shown clearly on the chart. (9 Marks)
(c) (i) Comment on the positions shown by the chart and your calculation. (2 Marks)
(ii) Discuss what other factors management should consider before making a decision (2 Marks)
(Total: 20 Marks)
QUESTION SIX
Kambi Ltd is a newly established company in Asia based in Nanaimo a town rich in minerals especially
copper. The company specializes in transportation and supplying of spare parts to Wansai Mining Ltd. The
Company has recently grown and is boasting of having about 100 employees. Because of the rapid growth it is
experiencing, management have thought it wise to establish two accounting departments namely management
accounting and financial accounting. The Company has engaged a consultant to design these two accounting
systems. The Chief Executive Officer however, is still not for the idea to have two separate departments as he
looks at it as a ‘cost’ and a duplication of duties. The meeting, however, resolved to have the consultant present
at the next meeting so that he could answer queries which may be raised.
Required:
a) As a consultant, prepare detailed notes for presentation to the meeting describing the five major
elements required for any accounting system to meet its objectives. (10 Marks)
b) To distinguish between management accounting and financial accounting for a company like Kambi
Ltd. (10 Marks)
(Total 20 Marks)
F2.1 Page 5 of 8
QUESTION SEVEN
a) Explain the meaning of the following terms in regard to the cost and financial accounting systems:
i) Integrated cost accounts (3 Marks)
ii) Interlocking cost accounts (3 Marks)
iii) Cost ledger control account (3 Marks)
iv) Cost ledger contra account (3 Marks)
b) The profit shown in the financial accounts of MRM Co Ltd for the year ended 31 October 2014 is Frw
18,592,000. The cost accounts for the same period reflected a profit of Frw 20,496,000. Comparison of
the two set of accounts revealed the following:
Stock Valuations Cost Accountants Financial Accountants
Raw Materials: Frw “000” Frw “000”
Opening stock 7,529
Closing stock 5,483 5,128
Finished goods:
Opening stock 13,291 12,905
Closing stock 11,430 11,131
Dividends and interest received of Frw 500,000 and Frw 52,000 respectively were reflected in the financial
accounts. The company disposed of a production machine costing Frw 5 million for Frw 0.25 million. It had
been depreciated to the extent of Frw 3 million.
Required:
Reconciliation of profit based on cost Accountant and profit based on financial Accountant for the
period. (8 Marks)
(Total 20 Marks)


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MONDAY: 8 JUNE 2015

INSTRUCTIONS:
writing).
2. This examination has seven questions and only five questions are to be
attempted.

F2.1 Page 1of 8
QUESTION ONE
(a) Explain the importance of management accounting in decision making process. (2 Marks)
(b) Bugarama Metals Ltd manufactures school desks using four different raw materials. Currently, they
have a huge order from government to supply a number of desks in Southern Province.
When manufacturing the desks, it is Bugarama Metals’ policy to hold inventory of finished goods at the
end of each month equal to 20% of the following month’s sales demand and it is expected that the
inventory at the start of the budget period will meet this policy.
Material : W 1.5 Kg @ Frw1.75/Kg
X 1 Kg @ Frw2.50/Kg
Y 2 Kg @ Frw3.25/Kg
Z 0.1 Kg @ Frw2.00/Kg
Labour 4 hours @ Frw4.00/hour
The inflation is expected to be 5% per month effective from February.
Budgeted selling price for each desk is Frw 125
Bugarama Metals Ltd is considering its budget for the year 2014 and has made the following estimates
of sales demand for the desks during the first 4 months of 2014
January February March April
200 Desks 150 Desks 300 Desks 225 Desks
At the end of the production process, the desks are tested and usually 5% of those tested are faulty
and are not replaced.
The raw material inventories are expected to be as follows on 1 January, 2014:
Material: W 500 Kgs
X 200 Kgs
Y 300 Kgs
Z 100 Kgs
The Management Accountant has stated that inventories are to be increased by 10% in January, and then
remain at their new level for the remainder of the year.
Labour is paid on an hourly rate based on attendance. However 20% of attendance time is considered to
be idle time and has not been included in the unit direct labour time shown above.
REQUIRED:
Prepare the following budget for the quarter from January 2014 to March 2014.
(i) Sales budget in quantity and value; (2 Marks)
(ii) Production budget in units; (4 Marks)
(iii) Raw materials usage budget in Kgs; (4 Marks)
F2.1 Page 2of 8
(iv) Raw materials purchases in Kgs and value (4 Marks)
(v) Labour requirements budget in hours and value (4 Marks)
(Total 20 Marks)
QUESTION TWO
The following data has been provided by a catering company that prepares banquets and parties for both
individuals and business functions throughout the year. The data indicates that overhead expenses vary with
the direct labour hours used.
Month Labour hours (X) Overhead costs (Frw.)(Y)
June 250 55,000
July 270 59,000
August 300 60,000
September 420 64,000
October 450 67,000
November 550 71,000
December 650 74,000
January 750 77,000
February 700 75,000
March 450 68,000
April 310 62,000
May 650 73,000
Total 5,750 805,000
a) Estimate the cost function using the high low method and linear regression (15 Marks)
b) Explain the differences in the answers you derived by the two approaches (5 Marks)
(Total 20 Marks)
QUESTION THREE
(a) Most organizations plan for materials to maximize profitability and to minimize material
misappropriations. In an attempt to control materials most organizations will maintain stores ledger
cards but when they are compared with the actual physical stock checks difference often arise.
REQUIRED:
Explain four possible reasons for the differences between stores ledger card and physical stock checks.
(4 Marks)
(b) Using a well labelled diagram explain the rationale underlying the economic order quantity.
(4 Marks)
(c) Explain the advantages of centralized system of maintaining stores. (4 Marks)
(d) Kabuga Limited produces a product “RWAS” which is used in manufacture of wide range of industrial
products. The main raw material used in the manufacture of the product is raw material K.
F2.1 Page 3of 8
The following information is available in relation to material K:
Annual requirement 144,000 units
Ordering costs Frw 12,500 per order
Annual holding cost per unit 20% of the purchase price
Purchase price per unit Frw. 500
Safety stock requirements None
REQUIRED:
(i) The economic order quantity (2 Marks)
(ii) The number of orders needed per annum (2 Marks)
(iii) Total cost of ordering and holding of material K per year (4 Marks)
(Total 20 Marks)
QUESTION FOUR
a) Distinguish between the following cost accounting terminologies:
i) By-Products and Joint products (2 Marks)
ii) Cost Unit and Cost Center (2 Marks)
iii) Products and Period Costs (2 Marks)
iv) Indirect and Direct costs (2 Marks)
b) Discuss FOUR limitations of Cost- Volume – Profit Analysis (4 Marks)
d) Consider the information provided below:
Raw materials 200 units each Frw. 800 160,000
Direct labor 500 units each Frw. 200 100,000
Direct expenses 50% of prime cost
Sales per unit 500,000
Fixed cost 3,585,000
REQUIRED:
i) Determine the break-even point in terms of units. (5 Marks)
ii) Determine the number of units to be sold to make a target profit of Frw. 10,000 (3 Marks)
(Total 20 Marks)

F2.1 Page 4 of 8
QUESTION FIVE
KUBAHO Ltd manufactures various types of garden hose and operates a method of remuneration based
on differential piecework.The output for each employee is expressed in standard units using the following
conversion factors:
Type of hose Rubber Nylon Plastic
Metres per standard unit 100 70 130
The differential piecework rates are as follows:
Weekly output per employee Time allowed
(Standard units)
(Minutes per standard unit)
First 180 units 10
181- 300 units 13
All units over 300 units 16
In addition an overtime premium is paid based on “time and one half ” with a basic week of 36 hours.
The total minutes earned from the differential scheme are paid for at Frw 250 per hour. If piecework earnings
are less than hours worked at the time rate then time earnings are paid.
The following data relates to week 10:
Output achieved (metres)
Employee Clock Hours
Rubber Nylon Plastic
MUSONI 36 2,000 3,500 10,920
GASANA 40 4,300 7,280 20,800
REQUIRED:
(i) Calculate the gross earnings for week 10 for each employee. (14 Marks)
(ii) Suggest why (i) management and (ii) workers might find such a remuneration method acceptable.
(6 Marks)
(Total 20 Marks)
QUESTION SIX
Mbare Company Limited specializes in the manufacture of industrial adhesives. The adhesive is made from a
solution of chemical powder X and liquid chemical Y. After manufacturing the adhesive, the company packs
it into plastic tubes before distributing it to the customers.
The standard prime cost of a tube of the adhesive is as follows:
Industrial adhesive
Materials: Frw. per tube
Powder X 150
Liquid chemical Y 60
Plastic tube 30
Direct labour: Mixing and pouring 180
Total standard prime cost 420
F2.1 Page 5 of 8
The standard material allowance for each tube of the adhesive is 20 Kg of chemical powder X, ¼ litre of liquid
chemical Y and one piece of plastic tube. The standard wage rate of mixing and pouring the chemicals is Frw.
450 per hour.
450,000 tubes of the adhesive were made during the month ended 30 April 2015. There was no work in
progress at the beginning or end of the month and the receipts and issues of materials during the month were
as shown below:
Powder Chemical X Liquid Chemical Y Plastic tube
Opening stock 150,000 Kg 20,000 litres 10,000 tubes
Purchases 1,000,000 Kg 60,000 litres 20,000 tubes
@Frw 70 per Kg @Frw 230 per litre @ Frw 40 each
60,000 litres 50,000 tubes
@Frw 250 per litre @ Frw 30 each
Issues 980,000Kg 105,000 litres 452,000 tubes
Employees working on the mixing and pouring of the chemicals worked a total of 20,500 hours during the
month ended 30 April 2015. They were paid gross wages amounting to Frw. 89,100,000.
It is the policy of the company to analyze variances from the standard prime costs.
REQUIRED:
(a) Materials price variance (6 Marks)
(b) Materials usage variance (6 Marks)
(c) Direct labour efficiency variance (2 Marks)
(d) Direct wages rate variance (2 Marks)
(i) Two possible causes of direct labour efficiency variance (2 Marks)
(e)
(ii) Two possible causes of direct material usage variance (2 Marks)
(Total 20 Marks)
QUESTION SEVEN
Discuss the distinction between volume based overheads absorption method and activity based method of
allocating overheads. (Total 20 Marks)

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MONDAY: 30 NOVEMBER 2015

INSTRUCTIONS:
1. Time Allowed: 3 hours 15 minutes (15 minutes reading and 3

hours writing).
2. This examination has seven questions and only five questions are
to be attempted.
3. Marks allocated to each question are shown at the end of the

question.

@ iCPAR
F2.1 Page 1of 8
QUESTION ONE
(a) Define the term ‘principal budget factor’. (2 Marks)
(b) Kigali Softener Ltd makes two Products, (A) and (B) in its manufacturing process, the unit variable costs
of production for a period are as follows;
Description (Frw) (Frw)
Direct materials 100 300
Direct labour (Frw 300/hour) 600 300
Variable overheads 100 100
800 700
The sales price per unit is Frw 1,600 for Product (A) and Frw 1,300 for Product (B). During September 2015,
direct labour available is limited to 10,400 hours. Sales demand in the same period is expected to be 6,000
units for product (A) and 10,000 Units for Product (B)
REQUIRED:
(i) Calculate the extent to which labour is a limiting factor of production (5 Marks)
(ii) Determine the contribution earned by each product per unit of the limiting factor (1 Mark)
(iii) Interpret the result you have got in question 1 (ii) above (1 Mark)
(iv) Determine the optimum production plan for a profit maximising production mix assuming that
monthly fixed costs are Frw 5,200,000 (7 Marks)
(c) VoxVoxy Ltd is currently facing a decision problem on whether to accept and undertake a new project.
25 hours of workforce will be needed for the project. VoxVoxy Ltd currently produces Product V whose
standard cost details are as shown below:
Standard Cost Card
Description Frw/Unit
Direct material (10 kg @ Frw) 200 2,000
Direct labour (10 hrs @ Frw ) 600 6,000
Selling price 12,000
Contribution 4,000
REQUIRED:
Determine the relevant cost of labour if:
(i) It must be hired from outside the organization. (1 Mark)
(ii) VoxVoxy Limited expects to have 5 hours spare capacity. (1 Mark)
(iii) It is in short supply. (2 Marks)
(Total 20 Marks)

F2.1 Page 2of 8
QUESTION TWO
(a) Distinguish between budgets and standards. (6 Marks)
(b) Cyangugu Manufacturing Co. Ltd has the following operating statement representing its actual and
budgeted performance for a period that ended 30 March 2015
Description Budgeted performance Actual performance Variance
No of units sold 1,280,000 1,440,000 160,000
(Frw) (Frw) (Frw)
Sales 2,048,000 2,142,000 94,000
Cost of sales:
Materials 336,000 288,000 48,000
Labour 480,000 576,000 (96,000)
Overheads 64,000 72,000 (8,000)
880,000 936,000 (56,000)
Fixed labour costs 200,000 188,000 12,000
Distribution Cost:
Fixed 144,000 166,000 (22,000)
Variable 288,000 306,000 (18,000)
Admin costs:
Fixed 368,000 352,000 16,000
Variable 96,000 108,000 (12,000)
1,096,000 1,120,000 (24,000)
Net profit 72,000 86,000 14,000
REQUIRED:
(i) Using flexible budget approach, prepare a revised operating statement so as to provide a more meaningful
interpretation of the variances (12 Marks)
(ii) Justify, with reasons, why the original operating statement provides limited information for management
use. (2 Marks)
(Total 20 Marks)
QUESTION THREE
Kibuye Ltd manufactures biscuits in three processes; 1, 2, and 3. During the year 2015, process 2 received
units of production from process 1 and after further processing transferred them to process 3. In relation to
process 2, 60 units valued at Frw 1,440 were transferred from process 1. Opening work in progress were 20
units valued as follows:
Description Value (Frw) % completion
In put material 70 100
Materials introduced 50 80
Labour 60 60
Overheads 90 40
F2.1 Page 3of 8
250 units were transferred out to process 3 valued as follows:
Value (Frw)
Materials introduced 120
Labour 80
Overheads 70
Closing stock of 40 units was at the following stages of completion:
% of completion
In put materials 100
Labour 60
Over heads 40
10 units were scrapped at the following stages of completion:
% of completion
Input materials 100
Labour 40
Over heads 20
The normal loss is 5% of production and the scrap units realized Frw.0.30 each.
REQUIRED:
Using FIFO valuation method:
(i) Compute the normal and abnormal losses. (3 Marks)
(ii) Prepare a statement of equivalent effective units and cost per unit. (7 Marks)
(iii) Prepare a statement of valuation. (5 Marks)
(iv) Prepare process 2 account. (5 Marks)
(Total 20 Marks)
QUESTION FOUR
Butare Shipping Ltd (BSL) produces two modern boat sizes; Kadogo and Jumbo to be used on the country’s
lakes. The company has provided the data relating to the projections for the year 2015 and 2016 as follows:
Budgeted costs for 2015
Cost Frw ‘000’
Direct materials 3,000
Direct labour 2,000
Fixed overheads 9,000
F2.1 Page 4 of 8
Details on 2015 sales are given as:
Kadogo Jumbo
Projected selling price per unit (Frw) 300,000 800,000
Projected sales volume (units) 40 20
Each unit of Jumbo boat takes twice the amount of materials as a Kadogo boat and twice as much labour.
Variable overheads are always absorbed in proportion to labour.
During 2016, it is proposed to launch a luxury version of Jumbo known as Jumbo Neeza which is expected to
sell at Frw 1,800,000 per unit.
The following direct costs/per unit are expected to be incurred:
Cost Frw
Materials 564,800
Labour 400,000
Fixed costs are to increase by 100% and the projected sales volumes for 2016 are:
Sales Units
Kadogo 45
Jumbo 30
Jumbo Neeza 10
REQUIRED:
Using marginal costing approach:
(a) (i) Calculate the direct cost per unit for 2015. (4 Marks)
(ii) Prepare a projected profit and loss account for 2015. (6 Marks)
(b) (i) Calculate the direct cost per unit for 2016. (2 Marks)
(ii) Prepare a projected profit and loss account for 2016. (6 Marks)
(c) Comment on the results revealed by (a)(ii) and (b) (ii). (2 Marks)
(Total 20 Marks)
QUESTION FIVE
(a) The budgeted overheads for a manufacturing company with two operational departments are as below:
Department L (Frw) M (Frw)
Total variable overheads 204,000 408,000
Total fixed overheads 120,000 240,000
Department L is Labour intensive with 120,000 labour hours and department M is capital intensive with
480,000 machine hours.
Actual labour hours worked in department L were 100,000 and actual machine hours in M were 400,000 If at
the end of the period, actual overheads incurred were Frw 300,000 and Frw 446,000 in L and M respectively.
F2.1 Page 5 of 8
REQUIRED:
(i) Overhead absorption rate for each department. (2 Marks)
(ii) Under/Over-Absorbed overheads for each department. (3 Marks)
(b) Give any five causes of under absorption or over absorption of overheads (5 Marks)
(c) A company has three production departments A, B and C and two service departments S and T.
The overhead distribution sheet shows the following:
Production department Frw ‘000’ Frw ‘000’
A 75,000
B 93,000
C 84,000 252,000
Service department
S 24,000
T 41,700 65,700
Total 317,700
The overheads of the service departments are distributed out on a percentage basis as below:
Departments A B C S T
Service department S (%) 30 20 40 - 10
Service department T (%) 40 15 25 20 -
REQUIRED:
(i) Using the algebraic/simultaneous equation method, calculate the total overheads for each service
department. (4 Marks)
(ii) Prepare the services overhead distribution sheet. (6 Marks)
(Total 20 Marks)
QUESTION SIX
(a) Muvandimwe Enterprises Ltd manufactures four products W, X, Y and Z, using the same
production methods and equipment. Details of the four products and related information for the month
of November 2015 are provided below:
Product W Product X Product Y Product Z Total
Production &sales (units) 40,000 30,000 10,000 20,000
Raw material usage (units) 10 10 5 8
Direct material cost (Frw) 100 150 200 120 12,900,000
Direct labour hours 1.5 1.5 3 1.5 165,000
Machine hours 2 3 2 1 210,000
Direct labour cost (Frw) 80 60 25 30
Number of production runs 10 11 5 24 50
Number of deliveries 15 8 12 15 50
Number of receipts 28 12 105 15 160
Number of production orders 30 20 30 20 100
F2.1 Page 6 of 8
Overhead costs were incurred as follows:
Overhead Frw
Set up costs 15,000
Machinery costs 1,800,000
Receiving costs 500,000
Packaging costs 300,000
Engineering costs 400,000
TOTAL 3,015,000
REQUIRED:
(i) Cost per activity according to the cost centre. (2 Marks)
(ii) Cost per activity per unit produced. (2 Marks)
(iii) Machine overheads. (2 Marks)
(iv) Share of each support activity cost per unit produced. (6 Marks)
(b)
iCPAR iCPAR Unit
iCPAR standard
iCPAR costs
iCPAR iCPAR using
iCPAR iCPAR activity based
iCPAR iCPAR costing.
iCPAR iCPAR (8iCPAR
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Marks)
iCPAR iCPAR iCPAR
(Total 20 Marks)
QUESTION SEVEN
(a) Write short notes on the following:
(i) Cost classification by function. (3 Marks)
(ii) Labor turnover ratio. (2 Marks)
(iii) Blanket over head rate and departmental over head rate. (2 Marks)
(iv) Margin of safety. (2 Marks)
(b) Explain four conditions for successful budgeting exercise. (4 Marks)
(c) Explain three features of a good incentive scheme in an organization. (3 Marks)
(d) Justify why there may exist discrepancies between physical stock units and units on stock records.
(4 Marks)
(Total 20 Marks)

F2.1 Page 7 of 8
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F2.1 Page 8 of 8
LEVEL 2 EXAMINATION
FRIDAY: 10 JUNE 2016

INSTRUCTIONS:

writing).
2. This examination has seven questions and only five questions are to
be attempted.

© iCPAR
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPARiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
F2.1 Page 1of 8
QUESTION ONE
(a) Explain four reasons why manufacturing and Non-manufacturing businesses are adopting activity-
based costing. (4 Marks)
(b) (i) Prefecture Industries Ltd (PIL) uses marginal costing approach in making its operating statements.
The operating statements for its two departments for the year ended 31 May, 2016, are given below:
Dept. A Dept. B
Details (Frw 000) (Frw 000)
Sales 365,000 480,000
Less marginal costs (285,000) (320,000)
Contribution 80,000 160,000
Dept. A Dept. B
(Frw 000) (Frw 000) Frw (000)
Budgeted production (units) 3,800 2,600
Total budgeted fixed costs 500,000
Over absorbed fixed overheads 80,000
Required:
(i) Profit or loss statement using absorption costing approach assuming that fixed costs
are apportioned on the basis of marginal costs. (10 Marks)
(ii) Explain three ethical roles of a management accountant in today’s business environment.
(6 Marks)
(Total 20 Marks)
QUESTION TWO
Karame Industries Ltd manufactures plastic containers. During the month of May, 2016 the company
purchased and issued to production the main raw material as follows:
Date Purchased (units) Issued (units) Rate (Frw)
1 5,000 1,500
2 3,000 1,400
6 3,000
7 2,000
10 6,000 2,000
15 5,000 2,200
20 8,000
22 2,000
27 5,000 2,000
28 7,000
31 4,000 2,200
Required:
(a) A stores ledger account using the last in first out (LIFO) method of stock valuation and determine
the value of closing stock as at 31 May, 2016. (11 Marks)
F2.1 Page 2of 8
(b) Umuseke Commercial Bank Ltd, operating in Rwanda since 2014, offers three products – deposits,
loans and ATM services to its clientele.
The bank has selected four activities for the 2016/17 budgeting process using activity-based costing. In
order to fix the prices of the above products, the bank intends to know the total cost per unit for the selected
activities. The following information has been availed to you to formulate the budget.
NO Activity Present costs Frw (000) Estimation for the budget period
1 A-Machine Maintenance 10,000 All fixed, no change
B-Rent 2,000 All fixed no change
C-Currency replenishment cost 3,000 Expected to double during the budget
period the activity is driven by the
number of ATM transactions.
2 ICT Processing 10,000 (Half of this amount is fixed and no
change is expected)
(The variable portion is expected to
increase to two times the current level)
(This activity is driven by the number of
computer transactions)
3 Issuing statements 18,000 Statements are expected to increase by 2
million.(For every increase of 1 million
statements Frw 1 million is the budgeted
increase) (This activity is driven by
number of statements)
4 Computer telephone enquiries 4,000 Estimated to increase by 200% during
the budget period. This activity is driven
by telephone minutes.
The activity drivers and their budgeted quantities are given below:
Deposits (000) Loans (000) ATM services (000)
NO. of ATM transactions 300 100 600
NO. of computer processing transactions 15,000 2,000 3,000
NO. of statements to be issued 3,500 500 1,000
Telephone minutes 3,600 1,400 3,000
The bank budgets for a volume of 60,000 deposit accounts, 20,000 loan accounts and 20,000 ATM services.
Required:
(i) Calculate the budgeted rate for each activity. (4 Marks)
(ii) Prepare the budgeted cost statement per activity for deposits and ATM. (5 Marks)
(Total 20 Marks)
QUESTION THREE.
(a) Umubano Medical Services (UMS) provides health care and other related services to Kigali residents
covered under a public health insurance plan. During 2015, UMS receives payment from the public
insurance plan each time any patient attends the health facility for consultation as shown below:
F2.1 Page 3of 8
Consultation involving Payment from public insurance plan (Frw)
No treatment 5,000
Minor treatment 10,000
Major treatment 20,000
In addition, the adult patients make a co-payment which is equivalent to the amount for the respective
category of treatment made by the insurance company. However, children and senior citizens are not
required to make any such payment.
UMS remains open for 7 days a week for 52 weeks in a year. Each physician treats 25 patients per day
although the maximum number could be 30 patients.
UMS receives a fixed income of Frw 55,000,000 per annum for promotion of health care products from the
manufacturers.
The budgeted annual expenditure of UMS is as follows:
Frw “000”
Materials & consumables (100% variable) 52,500
Staff salaries per annum per employee (fixed):
Physician 18,000
Assistants (nurses) 12,000
Administrative staff 6,000
Establishment & other operating costs (fixed) 30,000
The Non-financial information for a year include:
Category of staff and patients Number
A Physicians 10
Nurses 8
Administrative 5
B Patient mix (%)
Adults 50
Children 40
Senior citizens 10
C Mix of patients appointments (%)
Consultation requiring no treatment 30
Minor treatment 20
Major treatment 50
Required:
(i) Using traditional costing, prepare a profit statement. (10 Marks)
(ii) Calculate the contribution per patient. (2 Marks)
(iii) Calculate the break-even number of patients UMS should have. (2 Marks)
(iv) Determine the percentage of maximum capacity required to be utilized in order to break-even.
(2 Marks)
(b) Igihugu Corporation is a government parastatal that has recently recruited middle level managers. The
executive director is scheduled to address them on the corporation’s payroll procedures geared towards
elimination of ghost workers and has approached you, as a management accountant, for advice on this
matter.
F2.1 Page 4 of 8
Required:
Prepare a memo to the executive director highlighting any six payroll procedures in an organisation
(4 Marks)
(Total 20 Marks)
QUESTION FOUR
(a) Kabega Printery Ltd produces textbooks and had the following budgeted overheads for the year 2015
based on normal activity levels. Printing, cutting and binding departments are machine intensive while the
rest are labour intensive.
Department
iCPAR iCPAR iCPAR Budgeted
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPARoverheads FrwiCPAR
iCPAR iCPAR iCPAR (000) Overhead absorption basis (hours)
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Printing 8,000
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 2,000
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Cutting 4,000
Binding 6,000
Computer processing 3,000
Packing 2,000
Proofreading 1,000
Labelling 5,000 2,500
Selling and administration overheads were 10% of factory cost.
An order for 10,000 hard cover textbooks, made as Batch 99, incurred the following costs:
Materials Frw 265,900,000
Labour
iCPAR iCPAR iCPAR Hours
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Shop RateiCPAR
iCPAR iCPAR iCPAR iCPAR periCPAR
houriCPAR
(Frw)
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
120
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Printing
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 500
500
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Cutting
iCPAR iCPAR 1,000
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
200
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Binding
iCPAR iCPAR 2,000
150 Computer processing
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 1,000
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
130 Packing 1,000
200
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Proofreading
iCPAR iCPAR 1,500
100
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Labelling
iCPAR iCPAR 2,000
Frw 25,000,000 was paid for the hire of a loading machine to load textbooks. The time booking in the
packing shop was 700 machine hours.
Required:
(i) Overhead absorption rate for each department. (3 Marks)
(ii) Total cost for Batch 99. (5 Marks)
(iii) Cost per textbook (2 Marks)
(b) Byumba Transporters Ltd operates a large fleet of trailers and buses in the Great Lakes region. Each
month a cost of vehicle maintenance statement is prepared for the transport manager to facilitate control
and decision making. Data for the months of January to June 2015 have been availed to you as
follows:
F2.1 Page 5 of 8
Month Vehicle maintenance cost (Frw) Vehicle running time (hours)
January
CPAR iCPAR iCPAR 33,600
iCPAR iCPAR iCPAR iCPAR iCPAR 3,100
February 31,600
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 3,200
March 29,000
April 32,400
May 29,800
June 30,000
Required:
Using the method of least squares, analyse the vehicle data into fixed and variable costs. (10 Marks)
(Total 20 Marks)
QUESTION FIVE
(a) Umwezi Confectionaries Ltd bakes several bread products in Kigali. During the month of April, 2016,
process II received units from process I and after processing transferred them to process III. The data
below relates to process II.
Opening work in progress (WIP) 1,200 units
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Value Frw
iCPAR iCPAR ‘000’
iCPAR % Completion
Input material 144,000 100
Materials introduced
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 100,000 40iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR iCPAR iCPAR
Labour 68,000
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 30iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR iCPAR
Overheads 54,000
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 30
There were transfers in from process I of 6,900 units valued at Frw 152,000,000 and transfers out to Process
III were 7,000 units.
Materials, Labour and overheads were:
Frw
Materials introduced 79,000,000
Labor 44,000,000
Overheads 38,000,000
Closing WIP of 1,600 units were at the following completion levels:
%
Input material 100
Materials introduced
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 40
Labour 30
Overheads 30
600 units were scrapped at the following stages of completion:
%
Input material
100
Labour
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR30
Overheads
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR30
The normal loss was 5% of production and the scrapped units realized Frw 1,000 each.
F2.1 Page 6 of 8
Required:
(a) Calculate the value of:
Units of effective production (8 Marks)
(i) iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Closing WIP (1 Mark)
(ii)iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
(iii)Abnormal loss (1 Mark)
(iv) Complete production (1 Mark)
(b) Prepare process II account
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (4 Marks)
(c) Using a graphical illustration, distinguish between the traditional break-even chart and the contribution
break-even chart (5 Marks)
(Total 20 Marks)
QUESTION SIX
(a) Explain any four steps involved in decision making (4 Marks)
(b) Nzugi Ltd, a manufacturer of wooden doors, has faced stiff competition which has resulted into a
decline in profits over the recent past. The company directors are willing to pay the company management
accountant a bonus of 25% on any organizational cost saving made during the current production period
if the accountant advises management on a better way of reducing costs.
The accountant has come up with a cost analysis for both making the doors in-house and purchasing the
doors from a competitor. From the analyses made, the following information for the annual production of
10,000 doors is given.
The same doors could be bought from a competitor for Frw 70,000 per door.
Variable production costs per door:
Frw
Direct materials 30,000
Direct labour 10,600
Manufacturing overheads 10,000
The company pays Frw 20,900,000 as a lease payment per year for the building on which the company
offices are situated.
The company pays Frw 10,100,000 each year for leased factory equipment
The company has two production supervisors’ salaries amounting to Frw 72,000,000 per year. One of the
supervisors was hired recently and is paid Frw 40 million per year while the second supervisor earns Frw 32
million per year and has five years remaining on her contract.
REQUIRED:
Advice management on the best option between:
(i) Total cost of making the doors in-house and total cost of purchasing the doors from the competitor.
( 13 Marks)
(ii) Calculate the organizational saving or loss based on the decision advised above (3 Marks)
(Total 20 Marks)
F2.1 Page 7 of 8
QUESTION SEVEN
(a) Define the terms ‘standard material and standard labour cost’ (2 Marks)
(b) Explain steps involved in setting of standards for:
(i) Direct materials (4 Marks)
(ii) Direct labour (4 Marks)
(c) (i) Explain what is meant by Zero-Based Budgeting (ZBB) (1 Mark)
(ii) Explain any three steps involved in ZBB (3 Marks)
(iii) Explain any two disadvantages of using ZBB (2 Marks)
(d) Distinguish between a fixed budgetary system and flexible budgetary system (4 Marks)
(Total 20 Marks)
F2.1 Page 8 of 8
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
FRIDAY: 02 DECEMBER 2016
INSTRUCTIONS:
1.
iCPAR iCPARTime
iCPAR Allowed:
iCPAR iCPAR 3 hours
iCPAR 15iCPAR
iCPAR minutes
iCPAR (15 minutes
iCPAR reading
iCPAR iCPAR iCPARand
iCPAR3 iCPAR
hoursiCPAR
writing).
iCPAR iCPAR iCPAR iCPAR iCP
2.
This examination has seven questions and only five questions are to be attempted.
3.
iCPAR iCPARMarks allocated
iCPAR iCPAR to each
iCPAR iCPAR question
iCPAR are shown
iCPAR iCPAR at the
iCPAR iCPAR endiCPAR
iCPAR of the question.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
4.
iCPAR iCPARShow all your
iCPAR iCPAR workings.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
5.
iCPAR iCPARAll iCPAR
iCPAR Examination
iCPAR iCPAR rules
iCPAR iCPAR and
iCPAR regulations
iCPAR apply.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
@iCPAR
Page 1ofiCPAR
8 iCPAR iCP
F2.1
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Attempt any five
iCPAR iCPAR iCPARquestions
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPARQUESTION ONE iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR
(a) Zentico
AR iCPAR iCPAR Ltd deals
iCPAR iCPAR iCPAR in iCPAR
the production
iCPAR iCPAR on iCPAR
iron sheets
iCPARandiCPARtheiCPAR
company
iCPARhas provided
iCPAR iCPAR you
iCPARwith theiCPAR
iCPAR following
iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR
information foriCPAR iCPAR iCPAR
the month iCPAR iCPAR
of September, iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
2016:
Frw
TotaliCPAR
AR iCPAR iCPAR iCPAR fixediCPAR
cost iCPAR iCPAR iCPAR iCPAR 150,000,000
Selling iCPAR
price per iCPAR iCPAR iCPAR iCPAR iCPAR
iron sheet 20,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Cost per iron sheet:
Direct
AR iCPAR iCPAR iCPAR iCPARmaterial
iCPARcostiCPAR iCPAR iCPAR iCPAR iCPAR 5,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Direct iCPAR
labour iCPAR iCPAR iCPAR iCPAR iCPAR
cost 4,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Other
AR iCPAR iCPAR iCPAR variable
iCPAR iCPARcostiCPAR iCPAR iCPAR iCPAR iCPAR 6,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR REQUIRED:
(i) iCPAR
AR iCPAR iCPAR iCPAR Determine the company’s
iCPAR iCPAR iCPAR iCPAR break-even
iCPAR iCPARpoint/
iCPARsales in units
iCPAR iCPARand iCPAR iCPAR iCPAR (4
revenue.
iCPAR Marks)
iCPAR iCPAR iCPAR
(ii) iCPAR
AR iCPAR iCPAR iCPAR If theiCPAR
variable
iCPAR cost per iCPAR
iCPAR iron sheet
iCPARreduces by 10%,
iCPAR iCPAR iCPARselling
iCPARprice
iCPAR per ironiCPAR
iCPAR sheet iCPAR
increases
iCPARbyiCPAR
5% iCPAR
AR iCPAR iCPAR iCPAR iCPARand the
iCPAR total fixed
iCPAR costsiCPAR
iCPAR dropiCPAR
by 20%,
iCPARdetermine
iCPAR iCPAR the iCPAR
new break-even
iCPAR iCPAR point
iCPARofiCPAR
the company in iCPAR
iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (2
units. iCPAR iCPAR iCPAR
Marks)
AR iCPAR iCPAR iCPAR
(iii) iCPAR iCPARthe
Calculate iCPAR iCPAR iCPAR
company’s iCPAR
margin ofiCPAR
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in unitsiCPAR iCPAR
using the iCPAR iCPAR units
break-even iCPARobtained
iCPAR iCPAR iCPAR
above if iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
budgeted production is 40, 000 iron sheets. iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
(1 Mark) iCPAR
iCPAR
(b) Umubano Investments Ltd (UIL) budgets to sell 100,000 bottles of its product ‘power drink’. The
AR iCPAR iCPARvariable cost per
iCPAR iCPAR iCPARunitiCPAR
is Frw 10,000
iCPAR iCPAR and the company
iCPAR iCPAR iCPAR hasiCPAR
annual fixediCPAR
iCPAR cost iCPAR
of FrwiCPAR
40 million.
AR iCPARREQUIRED:
(i) iCPAR
AR iCPAR iCPAR iCPAR Determine the price
iCPAR iCPAR iCPARUIL
iCPARshould
iCPARcharge
iCPARiniCPAR
orderiCPAR
to break
iCPAR iCPAR iCPAR iCPAR iCPAR(2
even. Marks)
iCPAR iCPAR iCPAR
(ii) iCPAR
AR iCPAR iCPAR iCPAR ObtainiCPARtheiCPAR
number of units
iCPAR iCPARtoiCPAR
be sold in order
iCPAR iCPARto yieldiCPAR
iCPAR a profit after
iCPAR tax of
iCPAR FrwiCPAR
iCPAR 20 million
iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(2
using the selling price in (b) (i) above. Marks)
iCPAR iCPAR iCPAR
AR iCPAR(c) (i) iCPAR
iCPAR iCPAR WithiCPAR
graphical
iCPARillustrations,
iCPAR iCPAR explain the break-even
iCPAR iCPAR iCPAR iCPARpointiCPAR ofiCPAR iCPAR iCPAR iCPAR(5
a firm. Marks)
iCPAR iCPAR iCPAR
(ii) iCPAR
AR iCPAR iCPAR iCPAR Outline
iCPAR theiCPAR
assumptions
iCPAR iCPARof break-even
iCPAR iCPAR analysis usingiCPAR
iCPAR iCPAR the accountants’ iCPAR iCPAR (4
iCPAR iCPARmodel. Marks)
iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(Total iCPAR20 Marks)
iCPAR iCPAR iCPAR
AR iCPARQUESTION TWOiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR
AR iCPAR(a) KigaliiCPAR
iCPAR iCPAR Investments
iCPAR iCPAR Ltd iCPAR
(KIL)iCPARproduces
iCPAR pieces
iCPARthat
iCPAR areiCPAR
usediCPAR
in theiCPAR
gameiCPAR
of chess
iCPARnamely: Bishops,
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Kings and Pawns. The following information relates to the company for the year ended 30 June, 2016. iCPAR iCPAR iCPAR iCPAR iCPAR
Bishops Kings Pawns
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Frw ‘000’
iCPAR iCPARFrwiCPAR
‘000’iCPARFrw ‘000’
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
SalesiCPAR iCPAR iCPAR iCPAR iCPAR94,600
100,700 iCPAR iCPAR iCPAR
83,400 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Variable
AR iCPAR iCPAR iCPAR iCPAR costs
iCPAR iCPAR (80,400)
iCPAR iCPAR (76,200)
iCPAR iCPAR(67,000)
Contribution
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 20,300
iCPAR iCPAR18,400 16,400
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Fixed costs iCPAR iCPAR iCPAR
(11,600) iCPAR iCPAR
(21,300) iCPAR iCPAR
(14,100) iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Profit/loss
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR8,700 iCPAR iCPAR(2,900)
iCPAR iCPAR iCPAR 2,300 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Management
AR iCPAR iCPAR iCPAR iCPAR iCPAR of KIL is worried
iCPAR aboutiCPAR
iCPAR iCPAR the performance
iCPAR iCPAR of the company
iCPAR iCPAR iCPAR andiCPAR
is considering
iCPAR iCPAR dropping the iCPAR
iCPAR iCPAR
production
AR iCPAR iCPAR iCPAR iCPARof Kings.
iCPAR iCPAR If iCPAR
dropped,
iCPAR only 60%iCPAR
iCPAR of the fixediCPAR
iCPAR costsiCPAR
of Kings
iCPAR will be saved.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR PageiCPAR
2of 8 iCPAR iCPAR
F2.1
REQUIRED:
(i) iCPAR
iCPAR iCPAR iCPAR Using
iCPARrelevant computations,
iCPAR iCPAR iCPAR iCPAR determine
iCPAR iCPARwhether
iCPARKIL should
iCPAR iCPARstop producing
iCPAR iCPAR iCPAR iCPARMarks)
Kings.(4 iCPAR iCPAR iCP
(ii) iCPAR
iCPAR iCPAR iCPAR Given
iCPARthat Kings
iCPAR iCPAR and Bishops
iCPAR iCPARare substitutes
iCPAR with iCPAR
iCPAR iCPAR 70% effect
iCPARon sales,
iCPAR determine
iCPAR whether
iCPAR iCPAR theiCPAR iCP
iCPAR
decision iCPAR
in a (i) aboveiCPAR iCPAR
would iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
change. iCPAR iCPAR iCP
(3 Marks)
iCPAR iCPAR
(b) iCPAR iCPARLtd
Urubura iCPAR iCPAR iCPAR
specialises iCPAR iCPARofiCPAR
in production iCPARwhich
ice cream iCPAR iCPAR iCPAR
is parked in iCPAR
specialiCPAR iCPAR
tins and iCPAR
has iCPAR iCPAR iCP
provided
you with the following data relating to the month of August, 2016.
iCPAR iCPAR iCPAR Total output
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR642 tinsiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR
iCPAR iCPAR iCPAR Budgeted
iCPAR iCPARtimeiCPAR
per tiniCPAR iCPAR iCPAR 10 minutes
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Actual time taken for 642 tins 90 hours
iCPAR iCPAR iCPAR Rate periCPAR
iCPAR hour (wage rate) iCPAR iCPAR
iCPAR iCPAR Frw iCPAR
24,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Piece iCPAR
rate (wageiCPAR
rateiCPAR iCPAR iCPAR
per unit) FrwiCPAR
1,840iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
REQUIRED:
Calculate iCPAR
Urubura iCPAR
Ltd’s iCPAR
total wageiCPAR iCPAR
bill for iCPAR2016
August, iCPARusing:
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
(i) Halsey premium scheme (50% sharing). (2 Marks)
iCPAR iCPAR iCPAR iCPAR (ii)iCPAR Rowan scheme.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (2 Marks)
iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPAR iCPAR Straight
(iii) iCPAR iCPARpieceiCPAR
rate.iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
(1 Mark)
(iv) Time rate method.
(1 Mark)
(c) (i) Explain any five causes of labour turnover in organisations. (5 Marks)
(ii) iCPAR
iCPAR iCPAR iCPAR Distinguish
iCPAR iCPARbetween
iCPAR job evaluation
iCPAR and merit
iCPAR iCPAR iCPARrating
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (2 Marks)
iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (Total 20 Marks)
iCPAR iCPAR iCPAR iCP
QUESTION
iCPAR iCPAR iCPAR iCPARTHREE
(a) Distinguish
iCPAR iCPAR iCPAR iCPARbetween
iCPAR iCPAR absorption costing
iCPAR iCPAR andiCPAR
iCPAR marginal
iCPARcosting techniques
iCPAR iCPAR iCPARof costiCPAR
iCPAR iCPAR iCPARMarks)
accumulation.(4 iCPAR iCPAR iCP
(b) iCPAR
iCPAR iCPAR Maya iCPAR
International
iCPAR iCPAR Ltd iCPAR
(MIL)iCPARis iniCPAR
the process of finalising
iCPAR iCPAR its iCPAR
iCPAR iCPAR budgetiCPAR
for the
iCPARfinancial year iCPAR
iCPAR iCPAR endingiCPAR iCP
iCPAR iCPAR iCPAR
31 December, 2017 and has availed the following budget information to you for guidance before finaliCPAR iCP
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
approval of the budget.
The company has 2 service departments and 3 production departments and information regarding their
costs is
iCPAR iCPAR iCPAR given
iCPAR below:
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Total
iCPAR iCPARService
iCPARdepartments Production
iCPAR iCPAR iCPAR departments
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Frw ‘000’ Frw ‘000’ Frw ‘000’ Frw ‘000’ Frw ‘000’ iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Frw ‘000’
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR A iCPAR iCPAR B iCPARX iCPAR iCPARYiCPAR iCPAR ZiCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR Indirect
iCPAR wages
iCPAR iCPAR iCPAR395,300 iCPAR iCPAR 74,000
iCPAR iCPAR60,000
iCPAR iCPAR 77,000
iCPAR iCPAR 80,000
iCPAR iCPAR104,300
Consumable 150,000 20,000 16,000 40,000 27,000 47,000
iCPAR iCPAR iCPAR Power
iCPAR iCPAR iCPAR iCPAR iCPAR 44,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Rent andiCPAR
rates iCPAR iCPAR iCPAR60,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Machine depreciation 41,000
iCPAR iCPAR iCPAR Lighting
iCPAR iCPAR iCPAR iCPAR iCPAR 21,400iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Page 3ofiCPAR
8 iCPAR iCP
F2.1
Additional
AR iCPAR iCPAR iCPAR iCPARinformation:
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Total A iCPAR iCPAR
B iCPARX iCPAR iCPAR
Y iCPARZiCPAR iCPAR iCPAR iCPAR
Power usage (units) 346 47 24 84 76
115
ValueiCPAR
AR iCPAR iCPAR iCPAR of machinery
iCPAR iCPAR (Frw ‘000’)
iCPAR iCPAR401,000
iCPAR iCPAR 17,000 16,700
iCPAR iCPAR iCPAR146,000 174,600
iCPAR iCPAR 46,700
FlooriCPAR
area (miCPAR
2
) iCPAR iCPAR iCPAR iCPAR
50,000iCPAR iCPAR iCPAR
10,000 iCPAR16,000
12,000 iCPAR iCPAR iCPAR iCPAR
4,000 8,000iCPAR iCPAR iCPAR
Direct
AR iCPAR iCPAR iCPAR labour
iCPAR hours
iCPAR 30,000iCPAR iCPAR
iCPAR iCPAR iCPAR iCPAR - iCPAR iCPAR
- 11,000 12,000
iCPAR iCPAR 7,000
The overheads
AR iCPAR iCPAR iCPAR iCPAR iCPAR of services departments
iCPAR iCPAR iCPAR iCPAR areiCPAR
charged outiCPAR
iCPAR as under:
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Department
AR iCPAR iCPAR iCPAR iCPAR iCPAR X iCPAR Y iCPARZiCPARAiCPAR B iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
A iCPAR iCPAR 30%iCPAR iCPAR20%
30% iCPAR iCPAR
- iCPAR
20% iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
B iCPAR iCPAR
AR iCPAR iCPAR iCPAR 40%iCPAR30%
iCPAR20%
iCPAR10% - iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR iCPAR
AR iCPARREQUIRED:
Carry iCPAR
AR iCPAR iCPAR iCPAR out secondary
iCPAR iCPAR overheads apportionment
iCPAR iCPAR iCPAR iCPAR using
iCPAR the repeated
iCPAR iCPARdistribution iCPAR iCPAR(16
iCPAR iCPARmethod. Marks)
iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR
AR iCPARQUESTION FOUR
AR iCPAR(a) Explain
iCPAR iCPAR the iCPAR
iCPAR differences
iCPAR between management
iCPAR iCPAR iCPAR iCPAR accounting
financial
iCPAR iCPAR iCPAR iCPAR(10
accounting. Marks)
iCPAR iCPAR iCPAR
AR iCPAR(b) RusiziiCPAR
iCPAR iCPAR Ltd (RL)
iCPARmanufactures cement
iCPAR iCPAR iCPAR andiCPAR
iCPAR has provided you iCPAR
iCPAR iCPAR with the following
iCPAR information
iCPAR iCPAR about
iCPAR iCPAR its iCPAR
iCPAR
operations
AR iCPAR iCPAR iCPAR iCPARin the previous
iCPAR financial
iCPAR iCPAR iCPARyear.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR
Production/ salesiCPAR iCPAR(bags)
per week iCPAR iCPAR iCPAR iCPAR4,000 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
CostiCPAR
AR iCPAR iCPAR iCPAR of placing
iCPARan order
iCPAR for material
iCPAR iCPAR iCPAR(Frw)
iCPAR iCPAR2,400
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
CostiCPAR
AR iCPAR iCPAR iCPAR of each bagiCPAR
iCPAR of rawiCPAR
material
iCPAR(Frw)
iCPAR iCPAR iCPAR 25,000
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Cost of holding raw material was 5% iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
LeadiCPAR
AR iCPAR iCPAR iCPAR time iCPAR
(weeks) iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 6 - 8 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR
Maximum usageiCPAR
(bags)iCPAR iCPAR iCPAR iCPAR iCPAR4,200 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Minimum usage (bags) 140
REQUIRED:
Compute
AR iCPAR iCPAR the following
iCPAR iCPAR iCPAR iCPAR using the iCPAR
iCPAR aboveiCPAR
information:
AR iCPAR iCPAR iCPAR iCPAR (i)iCPAR Economic
iCPAR iCPAR order
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(4
quantity. Marks)
iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR (ii)iCPAR Re-order
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(2
level. Marks)
iCPAR iCPAR iCPAR
(iii) Maximum inventory level.
(2 Marks)
AR iCPAR iCPAR iCPAR iCPAR (iv)
iCPAR Number of orders
iCPAR iCPAR iCPAR to be made
iCPAR iCPARin iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(2
a year.
iCPAR Marks)
iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR
AR iCPARQUESTION FIVEiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR
Gicumbi LtdiCPAR
(GL)iCPAR iCPAR iCPAR iCPAR
is a manufacturing iCPAR iCPAR
company iCPAR iCPAR
specialising in theiCPAR iCPAR iCPAR
production iCPAR
of bags andiCPAR iCPAR iCPAR
prepares
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
budgets on a quarterly basis. The following information relates to the 2 quarter ending 30 June,
nd iCPAR iCPAR iCPAR iCPAR
2017.
4 of 8iCPAR iCPAR
F2.1
Sales WagesiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Overheads
iCPAR iCPAR iCPAR iCPARMonths
iCPAR iCPARBags Frw ‘000’
iCPAR iCPAR iCPAR iCPAR Frw iCPAR
‘000’ iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPARJanuary 550 iCPAR7,400
iCPAR iCPAR iCPAR iCPAR iCPAR4,400 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPARFebruary
iCPAR iCPAR iCPAR
600 iCPAR iCPAR
7,600 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
3,800
iCPAR iCPAR iCPAR iCPARMarch 750 iCPAR7,800
iCPAR iCPAR iCPAR iCPARApril 690 iCPAR8,000
May 780 8,400 4,800
iCPAR iCPAR iCPAR iCPARJune 900 iCPAR9,000
iCPAR iCPARAdditional
iCPAR iCPARInformation
iCPAR iCPAR : iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
1 iCPAR
iCPAR iCPAR iCPAR The company
iCPAR sells finished
iCPAR iCPAR iCPAR iCPAR bagsiCPAR
at a iCPAR
cost plus
iCPAR mark upiCPAR
iCPAR of 25% upon
iCPAR incurring
iCPAR total iCPAR
iCPAR iCPAR cost ofiCPAR iCP
iCPAR iCPAR iCPAR iCPAR production
iCPAR iCPAR of iCPAR
Frw 16,000 per bag.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR
2 iCPAR iCPAR
Cash iCPAR
sales areiCPAR
30% of iCPAR
totaliCPAR
sales,iCPAR
50%iCPARof theiCPAR
creditiCPAR
sales iCPAR iCPAR iCPAR
are collected afteriCPAR iCPAR and
one month iCPARtheiCPAR iCP
balance in the following month. iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR
3 iCPAR iCPAR iCPAR
Material iCPARare
purchases iCPAR iCPAR iCPAR
projected to be iCPAR iCPARatiCPAR
as follows Frw iCPAR
15,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
per unit.
iCPAR iCPAR iCPAR iCPARMonth
iCPAR iCPAR iCPARJanuaryiCPAR iCPAR February
iCPAR iCPAR MarchiCPAR April
iCPARMay
iCPAR June
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPARQuantity
iCPAR iCPAR(units) 550 iCPAR600
iCPAR iCPAR iCPAR iCPAR 750iCPAR690iCPAR 780 900 iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR
4 iCPAR
iCPAR iCPAR Credit purchases
iCPAR iCPAR iCPARare 40%
iCPARofiCPAR
the total
iCPAR purchases
iCPAR iCPAR payable
iCPAR after one
iCPAR month.
5 iCPAR
iCPAR iCPAR Wages
iCPARand overheads
iCPAR are paid
iCPAR iCPAR iCPARin the
iCPARmonth
iCPAR iniCPAR
whichiCPAR
they iCPAR
are incurred.
6 iCPAR
iCPAR iCPAR Cash balance
iCPAR iCPAR oniCPAR
1April, 2017
iCPAR is expected
iCPAR iCPAR iCPAR to beiCPAR
Frw iCPAR
2,000,000.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR
7 iCPAR iCPAR iCPAR
Machinery withiCPAR iCPARuseful
expected iCPARlife
iCPAR of iCPAR
5 yearsiCPARwilliCPAR iCPAR iCPAR
be acquired iCPAR iCPAR
in February and iCPAR iCPAR
paid in fouriCPAR
equaliCPAR iCP
installments of Frw 2,500,000 per month from March onwards. iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR
8 iCPAR iCPAR Ltd
Gicumbi iCPAR iCPAR
will iCPAR
receive iCPARtotaling
a grant iCPAR iCPARto FrwiCPAR iCPAR iCPAR
21,000,000 fromiCPAR iCPAR iCPARin
the Government iCPAR
threeiCPAR iCPAR iCPAR iCP
consecutive
equal
iCPAR iCPAR iCPAR installments
iCPAR iCPAR iCPAR from 1 April,
iCPAR iCPAR2017.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
9 iCPAR
iCPAR iCPAR Dividends at 10%
iCPAR iCPAR on iCPAR
iCPAR preference
iCPARshare
iCPARcapital of FrwiCPAR
iCPAR iCPAR 3,000,000
iCPAR will
iCPARbeiCPAR
paid iCPAR
on 1 May,
iCPAR2017.
10 iCPAR
iCPAR iCPAR A long-term
iCPAR iCPAR loan of Frw
iCPAR iCPAR6,000,000
iCPAR iCPAR is being
iCPARprocessed
the company’s
iCPAR iCPAR account will be
iCPAR iCPAR credited
iCPAR iCPARiniCPAR iCP
April. The borrowing rate is 10% per annum; monthly interest expense is on quarterly
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP basis effective
June,
iCPAR iCPAR iCPAR 2017.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
11 iCPAR
iCPAR iCPAR AlliCPAR
pricesiCPAR
and costs
iCPARare projected
iCPAR to remain
iCPAR iCPAR iCPAR constant.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
REQUIRED:
iCPAR iCPAR
(a) iCPAR iCPAR
Prepare iCPAR
a cash iCPARfor
budget iCPAR
GL iCPAR
for theiCPAR iCPAR iCPAR
2nd quarter endingiCPARon 30iCPAR
June,iCPAR
2017.iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
(16 Marks)
iCPAR iCPAR
(b) iCPAR iCPAR iCPAR
Distinguish iCPARthe
between iCPAR iCPAR iCPAR
following iCPARasiCPAR
concepts used iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
in budgeting:
iCPAR iCPAR iCPAR iCPAR iCPAR (i) iCPAR iCPAR
Activity- iCPAR
based iCPAR iCPAR
budgeting andiCPAR iCPAR
rolling iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
budgeting iCPAR iCPAR iCP
(2 Marks)
iCPAR iCPAR iCPAR iCPAR iCPAR (ii) iCPAR iCPAR budgets
Functional iCPAR iCPAR and iCPAR
masteriCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
budgets iCPAR iCPAR iCP
(2 Marks)
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (TotaliCPAR iCPAR iCPAR iCP
20 Marks)
Page 5 ofiCPAR
8 iCPAR iCP
F2.1
AR iCPARQUESTION
iCPAR iCPAR iCPARSIX iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPARUwimana
iCPAR iCPAR is sole
iCPAR proprietor dealing
iCPAR iCPAR iCPARin iCPAR
the manufacture
iCPAR iCPARofiCPAR
Ted bears. The following
iCPAR iCPAR iCPAR iCPARdataiCPAR
relates to the
iCPAR produc-
iCPAR iCPAR iCPAR
AR iCPARtion
iCPAR
andiCPAR
salesiCPAR
of heriCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Ted bears.
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Unit costiCPAR
(Frw)iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPARDirect material
iCPAR iCPAR iCPAR2 meters of wool
iCPAR iCPAR at Frw
iCPAR 625iCPAR
iCPAR per meter.
iCPAR iCPAR iCPAR iCPAR1,250iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPARDirect labouriCPAR
iCPAR iCPAR 4 hours at Frw
iCPAR iCPAR820 per iCPAR
iCPAR hour iCPAR iCPAR iCPAR iCPAR iCPAR 3,280iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Cost per unit 4,530
The budgeted selling price of each Ted bear is Frw 6,250.
200 Ted bears are expected to be produced and sold every month at Frw 6,550 per Ted bear. Actual results for
AR iCPARthe month
iCPAR iCPARof April, 2016 were
iCPAR iCPAR iCPARas follows:
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Ted bears
AR iCPAR iCPAR iCPAR iCPAR produced and iCPAR
iCPAR iCPAR sold (units)
iCPAR iCPAR iCPAR 180iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Material purchases (meters) iCPAR iCPAR iCPAR iCPAR400iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Total cost
AR iCPAR iCPAR iCPAR iCPAR ofiCPAR
purchases
iCPAR(Frw)
iCPAR iCPAR iCPAR280,000
DirectiCPAR
AR iCPAR iCPAR iCPAR labour (Frw)
iCPAR iCPAR iCPAR iCPAR iCPAR540,000 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Fixed costs (Frw) 320,000
REQUIRED:
(a) iCPAR
AR iCPAR iCPAR Determine the actual
iCPAR iCPAR iCPAR profit
iCPAR for the month
iCPAR of April,
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(6
2016. Marks)
iCPAR iCPAR iCPAR
( b) iCPAR
AR iCPAR iCPAR Calculate
iCPARthe following
iCPAR variances:
AR iCPAR iCPAR iCPAR iCPAR(i) iCPAR Material price.iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(2iCPAR
iCPAR iCPAR Marks)
iCPAR iCPAR
AR iCPAR iCPAR iCPAR(ii) iCPAR iCPAR iCPAR iCPAR
Material usage. iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
(2 iCPAR iCPAR
Marks)
AR iCPAR iCPAR iCPAR(iii) iCPAR iCPAR Sales
price. Marks)
iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR(iv) iCPAR iCPAR Sales
volume. Marks)
iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR(v) iCPAR iCPAR iCPAR
Labour rate. iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
(2 Marks)
AR iCPAR iCPAR(c) iCPAR
Explain
iCPARthe possible
iCPAR iCPARcauses
iCPAR of material
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR(4
iCPARvariances. Marks)
iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (Total
iCPAR20 Marks)
iCPAR iCPAR iCPAR
AR iCPARQUESTION
iCPAR iCPAR iCPARSEVEN iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Rusaro iCPAR iCPAR iCPARiniCPAR
Ltd specialises iCPAR iCPAR
the tailoring iCPARfor
of dresses iCPAR iCPAR
ladies iCPAR
which iCPAR
they sell iCPAR iCPAR
on retail iCPAR
basis. TheiCPAR iCPAR iCPAR
following
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
information is provided from their books of account for the month of August, 2016. iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR Frw ‘000’
AR iCPAR iCPAR iCPARSalesiCPAR
(1200iCPAR
dresses)
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 24,000iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Direct materials 1.5 meters at Frw 6000 per metre iCPAR iCPAR iCPAR iCPAR
10,800iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPARDirect labour
iCPAR iCPAR2hrs at Frw
iCPAR 2,000
iCPAR iCPARperiCPAR
hour iCPAR iCPAR iCPAR iCPAR 4,800iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPARVariable
iCPAR overheads
iCPAR iCPAR at Frw
iCPAR2,000
iCPAR per dressiCPAR iCPAR iCPAR iCPAR
iCPAR 2,400iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Contribution 6,000
AR iCPAR iCPAR iCPAR Fixed costiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
iCPAR (2,700)iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
AR iCPAR iCPAR iCPAR Profit
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR 3,300iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
During the month of August, the tailoring industry is usually in aiCPAR
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR and
recession iCPAR iCPAR iCPAR
customers iCPAR
tend to iCPAR
reduce.
AR iCPAR iCPAR iCPAR iCPARKwizera
iCPAR Secondary
iCPAR iCPARSchool has offered
iCPAR iCPAR to buyiCPAR
iCPAR iCPAR 1,500iCPAR
dresses for iCPAR
iCPAR their students
iCPAR iCPARat Frw 18,000
iCPAR iCPAR iCPAR
per dress
AR iCPAR iCPAR iCPAR iCPAR while
iCPAR Mazima Secondary
iCPAR iCPAR iCPAR School has offered
iCPAR iCPAR to buy
iCPAR iCPAR 1,000
iCPAR dresses
iCPAR iCPARatiCPAR
Frw 17,400 per dress.
With the
AR iCPAR iCPAR iCPAR iCPARavailable unutilized
iCPAR iCPAR iCPARcapacity,
iCPAR iCPARRusaro
iCPAR Ltd can iCPAR
iCPAR only take
iCPARupiCPAR
one ofiCPAR
the two
iCPARoffers butiCPAR
iCPAR not both.
iCPAR iCPAR
6 of 8iCPAR iCPAR
F2.1 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
REQUIRED:
(a) iCPAR
iCPAR iCPAR WithiCPAR
relevant
iCPARcalculations,
iCPAR iCPARadvise
iCPAR Rusaro Ltd on
iCPAR iCPAR which
iCPAR offer
iCPAR to accept.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (9 Marks)
iCPAR iCPAR iCP
(b) iCPAR
iCPAR iCPAR Gatare
iCPARLtd received
iCPAR iCPARan orderiCPAR
iCPAR fromiCPAR
Rubaya Primary
iCPAR iCPARSchool for 10,000
iCPAR iCPAR iCPAR benches of aiCPAR
iCPAR iCPAR standard size.
iCPAR TheiCPAR iCP
iCPAR
following costs iCPAR
wouldiCPAR iCPAR iCPAR
be incurred iCPAR iCPAR
to produce iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
the benches.
Direct iCPAR iCPAR
materials iCPARpieces
50,000 iCPAR iCPAR iCPAR
of timber at iCPAR iCPAR iCPAR
Frw 10,000 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
per piece
iCPAR iCPAR iCPAR Nails
iCPAR iCPAR iCPAR 10,000
iCPARkg at Frw
iCPAR iCPAR2,000
iCPARperiCPAR
Kg iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
Vanish iCPAR
2,000 iCPAR
litres at iCPAR iCPARper
Frw 7,000 iCPAR
litreiCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPARgo
Benches iCPAR iCPAR
through iCPAR
two iCPAR iCPAR
departments andiCPAR
each iCPAR iCPAR iCPAR
department iCPAR iCPAR
costs labour iCPAR iCPAR iCPAR iCPAR iCPAR iCP
as follows:
Department A: 1,000 hours at Frw 10,000 per hour.
iCPAR iCPAR iCPAR Department
iCPAR iCPAR B: iCPAR
10 men
iCPARworking for 30iCPAR
iCPAR iCPAR daysiCPAR
at Frw 25,000
iCPAR iCPARperiCPAR
worker per iCPAR
iCPAR day. iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPARAll variable
iCPAR iCPARoverheads are absorbed
iCPAR iCPAR at 10%
iCPAR iCPAR of the
iCPAR prime
iCPAR costiCPAR
iCPAR and the company
iCPAR incursiCPAR
iCPAR iCPAR a fixed production
iCPAR iCPAR iCPARcost iCPAR
per bench
iCPARequivalent
iCPAR iCPARto iCPAR
Frw 5,000.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
REQUIRED:
iCPAR iCPAR (i)iCPAR
Determine
iCPAR iCPARthe total
iCPARcost of production.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (5 Marks)
iCPAR iCPAR iCP
(ii) Determine the unit selling price that should be charged if Gatare Ltd targets a profit of 20% on cost.
iCPAR iCPAR iCPAR
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (2 Marks)
iCPAR iCPAR iCP
iCPAR iCPAR
(c) iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Define the following terms as used in cost classification:iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPAR (i) iCPAROpportunity
iCPAR iCPAR costs.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (1 Mark)
iCPAR iCPAR iCP
(ii) Sunk costs.
(1 Mark)
iCPAR iCPAR iCPAR iCPAR (iii)iCPARCommitted
iCPAR iCPARcosts.
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR (1 Mark)
iCPAR iCPAR iCP
iCPAR iCPAR iCPAR iCPAR (iv)iCPARCost
iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
object. iCPAR iCPAR iCP
(1 Mark)
(Total 20 Marks)
Page 7 ofiCPAR
8 iCPAR iCP
F2.1
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AR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
PageiCPAR
8 of 8iCPAR iCPAR
F2.1


FRIDAY: 09 JUNE 2017
INSTRUCTIONS:

writing).
2. This examination has seven(7) questions and only five(5) questions are
to be attempted.
4. Show all your workings.

5. All iCPAR Examination rules and regulations apply.

@iCPAR
F2.1 Page 1of 8
Attempt any five questions
QUESTION ONE
(a) BUTALEX Ltd specializes in production of sweets sold to both local and international markets. The
company uses sugar as its main raw material which is purchased and issued to production department in
bags of 50 Kg each. The following information relates to the purchase and issue of sugar during the month
of April 2017.
Date Transaction
1 April Opening stock was 2,000 bags valued at Frw 50,000 per bag.
1 April The company purchased 1,500 bag at Frw 52,000 per bag.
4 April 1,000 bags were issued to production.
6 April Purchased 1800 bags at Frw 50,500 per bag
8 April Issued 800 bags to production
12 April Issued 500 bags to production
12 April A purchase order of 4000 bags was sent to the supplier
15 April Received 2,500 bags at Frw 52,000 per bag from the supplier of which 500 bags were
rejected by the receiving departments
20 April A special order was accepted from a new customer for which 2,200 bags were used in
production
30 April A purchase of 900 bags at Frw 51,500 was made in the morning and later in the day
1,500 bags were issued to production.
REQUIRED:
i) Determine the quantity and value of closing inventory as at 30 April, 2017 using the Average cost
method (AVCO). (10 Marks)
ii) Give any six reasons why accounting material is necessary for BUTALEX Ltd. (3 Marks)
iii) Distinguish between perpetual stock taking and continuous stock taking. (2 Marks)
(b) (i) Define Cost accounting (1Mark)
(ii) Discuss any two ethical responsibilities of a management accountant. (4 Marks)
(Total 20 Marks)
QUESTION TWO
Gatanazi Clays Ltd (GCL) produces and designs quality clay products such as Chimney pots (C), Brick
masonry ovens (B) and Wine storage tiles (W). Traditionally the company has been charging overhead cost to
production using direct labour hours. Recently the accountant proposed that management should use Activity
Based Costing (ABC) system to charge overheads on to product cost since overhead costs are caused by
different activities. The activity centers and their related costs for the period are as follows:
Activity centers Activity drivers Cost Frw ‘000’
Material handling Materials movements 3,400
Scheduling and setups Number of setups 3,900
Utilities Machine hours 4,800
F2.1 Page 2of 8
The following information also relates to the company for the period:
Particulars Products
C B W
Units produced 5,000 250 380
Direct costs (Frw ‘000’) 12,000 30,000 42,000
Direct labour hours 85,000 90,000 120,000
Machine hours 60,000 80,000 100,000
Material movements 200 250 400
Number of setups 260 540 760
REQUIRED
(a) Determine the unit cost of each product using the:
(i) Proposed ABC system (12 Marks)
(ii) Traditional costing method (4 Marks)
(b) As a management accountant and considering the competitive environment under which GCL operates:
(i) Determine the selling price per unit, at a cost plus 25% markup, under ABC costing technique.
(2 Marks)
(ii) Explain any two challenges of using the traditional costing method. (2 Marks)
(Total 20 Marks)
QUESTION THREE
Kibeho Manufactures Ltd (KBL) produces and sells a single product “Washing Machine” which goes through
three production departments and two service departments. The information below relates to the production of
1000 units for the quarter ending 31March, 2017:
Details Production department Service departments Total
Machining Assembly Finishing Quality Control Maintenance
Frw Frw Frw Frw Frw Frw
Direct Material 15,467,000 4,672,400 2,410,600 22,550,000
Direct Labour 12,034,000 7,470,000 4,160,500 2,170,400 1,574,000 27,408,900
Indirect Labour 637,500 747,400 1,465,000 4,720,000 3,470,000 11,039,900
Overhead costs:
Rent 2,140,000
Depreciation 915,400
Insurance 314,600
Lighting & power 217,500
F2.1 Page 3of 8
Apportionment bases
Total Machining Assembly Finishing Quality control Maintenance
CPAR iCPAR iCPAR iCPAR iCPAR iCPAR
2 iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR iCPAR
Floor area (m ) 120 35 35 30 10 10
Asset NBV(Frw‘000’) 87,000 34,800 21,750 17,400 8,700 4,350
Power usage (%) 100 45 15 30 5 5
KBL has ascertained sharing of service department cost below:
Machining Assembly Finishing Quality control Maintenance
Quality control 25% 30% 40% - 5%
Maintenance 30% 30% 36% 4% -
REQUIRED:
(a) Perform primary and secondary overhead analysis using repeated distribution method. (18 Marks)
(b) Distinguish between over and under absorption of overheads. (2 Marks)
(Total 20 Marks)
QUESTION FOUR
(a) (i) Differentiate between a standard cost and standard costing. (2 Marks)
(b) (ii) Explain any two (2) advantages of standard costing to an organization. (2 Marks)
(c) Nviramuse Manufacturers Ltd (NML) deals in production of Premium Paint for both retail and wholesale.
The company has recently adopted standard costing in an attempt to effectively monitor production and
other relevant costs. The standard cost card for one tin of Premium Paint is as below:
Details Frw
Direct material 5 litres at Frw 1,000 per litre 5,000
Direct wages 4 hours at Frw 2,000 per hour 8,000
Variable overheads 1 hour at Frw 1,400 per hour 1,400
Total manufacturing cost Frw 14,400
Standard selling price 20,000
Budgeted output for the month of May 2017 was 14,000 tins but actual results for the period were as below:
1. Production and sales units totaled to 12,700 tins at a selling price of Frw.19,500 per tin
2. Labour hours paid for amounted to 58,000 hours of which 10% was idle time. The total cost for the
month amounted to Frw 100,800,000
3. Total variable overheads cost amounted to Frw 18,200,000
4. Materials consumed during the production process amounted to 71,400 liters at unit cost of Frw
900 per liter
F2.1 Page 4 of 8
REQUIRED:
(d) (i) Calculate relevant variances and prepare an operating statement for May 2017. (8 Marks)
(ii) Prepare a reconciliation of actual and budgeted operating statement. (4 Marks)
(e) Explain the factors that should be considered before investigating variances. (4 Marks)
(Total 20 Marks)
QUESTION FIVE
(a) Distinguish between interlocking and integrated systems of Cost Control Accounts. ( 2Marks)
(b) Gatsibo Steel Mills Ltd (GSML) specializes in production of Iron bars for quality construction. Provided
below are the balances extracted from the Cost Account ledger of GSML as at 1 April, 2017.
Details Frw “000”
Finished goods stock account 24,000
Store ledger control account 46,000
Cost ledger control account 200,400
Work- in- Progress account 134,500
The following additional data also relates to the month of April 2017
Details Frw “000”
Goods completed 416,700
Manufacturing expenses 74,000
Goods sold at cost 398, 700
Work in progress rejected 4,100
Selling and distribution expenses recovered 42,000
Manufacturing expenses recovered 62,000
Purchase of raw materials 213,400
Direct factory wages 102,000
Selling and distribution expenses 47,000
Sales 498,100
REQUIRED:
(i) Prepare the necessary ledger control accounts to record the above transactions. (14 Marks)
(ii) Prepare an extract of the Trial Balance as at 30 April, 2017. (2Marks)
(a) Explain any two advantages of an integrated cost control system (2 Marks)
(Total 20 Marks)
QUESTION SIX
(a) Gikongoro Supplies Limited (GSL) deals in production of butter that goes through a single process.
The company uses process costing to account for costs attributed to its product. During the month of
May, the following data was available regarding production of butter.
F2.1 Page 5 of 8
Units introduced to the process were 200,000 litres of which 80% were fully completed during the period.
The stages of completion for work in progress were as follows:
Material Labour Production overheads
Percentage (%) 80 70 30
Total costs incurred during the production period were:
Costs Frw ‘000’
Material 6,460
Labour 2,140
Overheads 720
REQUIRED:
Prepare statements of:
(i) Equivalent units (3 Marks)
(ii) Cost per unit (2 Marks)
(iii) Closing stock and finished goods (2 Marks)
(a) Prepare process account for GSL for May 2017 . (3 Marks)
(b) Turatsinze Soft Drinks Limited (TSDL) produces and sells ordinary Orange, Mango and Apple
juice packed in bottles of 500ml each. Each bottle of ordinary Mango, Orange and Apple Juice
sells at Frw 2,500, Frw 2,100 and Frw 3,400 respectively. The company’s budgeted production and
sales budget for July 2017 is as follows:
Mango Orange Apple
Production/ Sales (bottles) 40,000 54,000 30,500
To boost sales, TSDL is considering further processing its Juice as a way of attracting more customers. The
company has established that each bottle of Mango, Orange and Apple Juice can be further processed at a
unit cost of Frw 1,000, Frw 700 and Frw 720 respectively. After further processing, TSDL has established
that it can sell each bottle of super Mango, Orange and Apple juice at Frw 3,100, Frw 3,400 and Frw 4,700
respectively:
REQUIRED:
(i) Using relevant calculations, advise TSDL on the cost implications on further processing. (6 Marks)
(ii) Explain any four factors that are considered under “Make or Buy” decision decision. (4 Marks)
(Total 20 Marks)
F2.1 Page 6 of 8
QUESTION SEVEN
(a) Briefly explain the Marginal Costing Technique clearly bringing out its assumptions. (3 Marks)
(b) Karame Ltd (KL)produces and sells a single product called Beauty Lotion. The unit cost of production
for the firm is provided below:
Costs Frw
Direct Material 2,400
Direct Labour 3,100
Fixed overheads 1,200
Total Production cost 7,300
The fixed overheads calculation is based on a budgeted activity level of 10,000 units and budgeted
fixed manufacturing overheads of Frw.12 million for each quarter. The budgeted fixed selling and
administration overheads are Frw 15 million per quarter. The selling price for each unit of lotion is Frw
12,000. Production and sales for each quarter are given below:
Q1 Q2 Q3 Q4
Production (units) 10,000 12,000 8,000 9,000
Sales (units) 7,000 9,400 7,800 8,300
There was no opening stock in Quarter 1
REQUIRED:
(i) Prepare marginal costing profit statements for the 4 Quarters. (10 Marks)
(ii) Determine the selling price per unit of Beauty Lotion if KL uses Marginal Cost plus 20% pricing
strategy? (2 Marks)
(c) Explain any Five (5) arguments in favor of absorption costing. (5 Marks)
(Total 20 Marks)

F2.1 Page 7 of 8
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F2.1 Page 8 of 8
INSTRUCTIONS:
1. Time Allowed: 3 hours 15 minutes (15 minutes reading
and 3 hours writing).
2. This examination has seven (7) questions and only five (5)
questions are to be attempted.
3. Marks allocated to each question are shown at the end of
the question.
5. All iCPAR Examination rules and regulations apply.
@iCPAR
F2.1 Page 1 of 10
Attempt any five questions
QUESTION ONE
(a) Muhire Bakery Ltd (MBL), located in Huye in south province specialises in making
cakes of all sizes. The company employs 135 staff in the production department where it
pays each staff a basic rate of Frw 1,500 per hour. All staff work for 8 hours a day and 5
days a week. Due to the deteriorating performance of the economy, MBL is facing a
challenge of achieving its performance targets. The finance manager is now looking at
ways of reducing operational costs to enable the company sail through this difficult
period. Accordingly, he has proposed a reduction in overtime premium to 33% from 50%
of the basic wage rate per hour which MBL currently pays. You are further informed that
during the month of October, 2017 staff in the production department worked for 30,000
hours.
REQUIRED:
(i) Determine the basic pay for all the staff in the production department for the
month of October. (2 Marks)
(ii) With relevant computations, evaluate the impact of the finance manager’s
proposal on the overall operational costs of MBL. (3 Marks)
(iii) Identify the replacement costs of labour turnover and suggest ways of how they
can be prevented. (5 Marks)
(b) Job Smart 200 Ltd started operation in the repair and replacement of machine parts in
April, 2017. The company got its first job from Katsigazi Enterprises Ltd on 10 April,
2017. Material costs incurred on the job were Frw 552,000. This job required skilled
manpower which cost Frw 140,000. The company hired a specialised welding tool at
Frw 110,000. The customer agreed to pay the quoted price of Frw 1,000,000 for the job.
Job Smart 200 Ltd recovers factory overheads using a pre-determined rate based on 50%
of direct labour cost.
REQUIRED
Determine the profit earned on this job. (5 Marks)
(c) Turatsinze Ltd manufactures first-class furniture on order. In March, 2017 they received
an order from the Ministry of Education to the supply 10,000 desks to Ruhangye Primary
F2.1 Page 2 of 10
school located in south province. Turatsinze Ltd has estimated that this order will require
the following resources.
Budgeted Budgeted
overheads labour
Department Frw ‘000’ Hours
Production 18,000 2,000
Assembly 30,000 1,500
Materials Frw 36,000,000.
Labour 200 hours to be spent in production field at Frw 3,000 per hour.
250 hours to be spent in assembly shop at Frw 1,500 per hour.
Administration overheads are expected to be 30% of factory cost and Turatsinze Ltd will
hire a specialized hydro-tech machine for this assignment at Frw 1,500,000.
REQUIRED:
Determine the full cost per desk. (5 Marks)
(Total 20 Marks)
QUESTION TWO
(a) Nviramuse School Uniform Company (NSUC) manufactures school uniforms. One of its
largest contracts is with the Girls’ Private School Trust (GPST) which has 40 schools
across the country, all with the same school uniform design. After a recent review of the
uniform at the GPST schools, the school’s dress has been re-designed to incorporate a
dropped waistband. Each new dress now requires 2.2 metres of material, which is 10%
more than the previous style of dress required. However, a new material has also been
chosen by GPST which costs only Frw 3,500 per metre which is 5% cheaper than the
material used on the previous dresses. In October, 2017 a total of 54,560 metres of
material were purchased at Frw 3,500 per metre. The design of the new dresses has meant
that an advanced sewing technique needs to be used. Consequently, all staff required
training before they could begin production. The production manager expected each new
dress to take 10 minutes to make as compared to 8 minutes per dress for the old style.
NSUC has 24 staff, each of whom works 160 hours per month and is paid a wage of Frw
15,000 per hour. All staff worked all of their contracted hours in October on production
of the GPST dresses and there was no idle time. No labour rate variances arose in
October, 2017.
Activity levels for October, 2017 were as follows:
F2.1 Page 3 of 10
Units
Budgeted production and sales 30,000
Actual production and sales 24,000
The production manager at NSUC is responsible for all purchasing and production issues
which occur. NSUC uses standard costing and usually, every time a design change takes
place, the standard cost card is updated prior to the commencement of production.
However, the company accountant responsible for updating the standards has been on
sick leave for the last two weeks. Consequently, the standard cost card for the new dress
has not yet been updated.
REQUIRED:
(i) Analyse the material and labour efficiency variances into the component parts of
planning and operational variances in as much detail as the information allows for
the month of October, 2017. (8 Marks)
(ii) Assess the performance of the production manager for the month of October,
2017. (7 Marks)
(b) Butare Company Limited (BCL) manufactures three products; lotion, bathing soap and
herbal jelly. Demand for lotion and bathing soap is relatively elastic while that for herbal
jelly is relatively inelastic. Each product uses the same material and the same type of
direct labour but in different quantities. For many years, the company has been using full
absorption costing and absorbing overheads on the basis of direct labour hours. Selling
prices are then determined using cost plus pricing. This is common within this industry,
with most competitors applying a standard mark-up. Budgeted production and sales
volumes for lotion, bathing soap and herbal jelly for the next year are 200,000 units,
180,000 units and 240,000 units respectively. The budgeted direct costs of the three
products are shown below:
Lotion Bathing soap Herbal jelly
Direct materials 1,200 400 370
Direct labour (Frw 120 per hour) 1,500 520 540
In the next year, BCL expects to incur indirect production costs of Frw 137,740,000.
REQUIRED:
With relevant calculations, advise BCL on the selling price to charge for each unit of
product if it targets a profit of 20% on cost. (5 Marks)
F2.1 Page 4 of 10
(Total 20 Marks)
QUESTION THREE
(a) Rubanda Manufacturers Ltd (RML) deals in the production of juice that goes through 3
production departments and 2 service departments. The total primary overheads of these
departments for the year ended 30 June, 2017 are as follows:
Production departments: Frw "000"
P 240,500
Q 201,400
R 147,200
Service departments:
L 54,600
M 32,400
The overheads of service departments are charged out as under:

P Q R L M
Department L 20% 30% 40% - 10%
Department M 40% 25% 30% 5% -
REQUIRED:
Determine the secondary totals using simultaneous equations method. (8 Marks)
(b) Distinguish between the following cost concepts, using graphical illustrations where
appropriate:
(i) Direct and indirect costs. (1 Mark)
(ii) Fixed and variable costs. (2 Marks)
(c) Rwizi Ltd, a manufacturer of cosmetics has provided the following information for the
year ended 30 June, 2017
Stock 1 October, 2016: Frw "000"
Raw materials 45,200
Work in progress 22,000
Stock 30 September, 2017:
Raw materials 51,400
Purchase of raw materials 210,000
Carriage inwards 1,700
Advertisement 9,600
Power for factory works 16,400
Factory rent 24,000
Depreciation of factory machinery 11,240
Direct labour 77,200
F2.1 Page 5 of 10
Depreciation of delivery vans 8,400
Repairs of delivery vans 6,300
Office salaries 38,400
Raw material returns 4,100
Depreciation of office equipment 3,700
Salesmen’s commissions 45,210
REQUIRED:
Prepare a cost statement for Rwizi Ltd for the year ended 30 June, 2017. (9 Marks)
(Total 20 Marks)
QUESTION FOUR
The preparation of budgets is a lengthy process which requires great care if the ultimate budget is
to be useful for the purpose of management control in an organization.
REQUIRED:
(a) Explain the eight stages involved in the budgeting process. (8 Marks)
(b) Distinguish between the following budgeting concepts:
(i) Incremental budgeting and zero-based budgeting. (2 Marks)
(ii) Fixed budgets and flexible budgets. (1 Mark)
(c) Ruhaaro Ltd is a media company specialising in production of newspapers. The
company has just concluded its financial year ending 30 September, 2017 and management now
wants to discuss the company’s performance at its forthcoming executive committee meeting due
to take place next month. The original budget and actual performance for year ended 30
September, 2017 are provided below.
Fixed Actual
budget performance
Production/ sales (units) 250,000 300,000
Costs: Frw ‘000’ Frw ‘000’
Direct materials 60,000 85,000
Direct labour 40,000 45,000
Power (electricity) 12,000 14,600
Selling and distribution 27,000 40,400
Depreciation 10,000 12,000
Rent and rates 6,000 5,000
Office salaries 12,000 17,000
Total cost 167,800 219,000
1. Costs of direct materials, direct labour, and power (electricity) are assumed to vary with
output.
F2.1 Page 6 of 10
2. Selling and distribution costs consist of 40% fixed and the rest variable.
3. The company sells each newspaper at Frw 700 only.
4. All other costs are fixed.
REQUIRED:
As the management accountant of Ruhaaro Ltd, prepare the flexed budget and variance statement
that will be useful for management control purposes. (9 Marks)
(Total 20Marks)
QUESTION FIVE
(a) Define the ‘just-in-time’ (JIT) concept and outline any three of its principles. (5 Marks)
(b) Kengo Ltd uses 100,000 widgets per annum which cost Frw 20 each to purchase.
Ordering costs are Frw 300 per order and the company incurs a carrying cost of 15% of purchase
cost per annum. During the period of December, 2016 to November, 2017 the company made
the following orders for widgets:
Month No. of widgets
December, 2016 2,000
March, 2017 4,000
May, 2017 6,000
July, 2017 8,000
September, 2017 10,000
November, 2017 12,000
REQUIRED:
i) Determine the economic order quantity of widgets by Kengo Ltd for the period December,
2016 to November, 2017. (2 Marks)
ii) Determine the ordering costs and holding costs and the total of the two for each of the month
given. (8 Marks)
(c) Briefly explain the following terms as used in stock management and control:
(i) Re-order level. (1 Mark)
(ii) Maximum stock level. (1 Mark)
(iii) Minimum stock level. (1 Mark)
(iv) Physical stock. (1 Mark)
(v) Lead time. (1 Mark)
(Total 20 Marks)
F2.1 Page 7 of 10
QUESTION SIX
(a) Briefly explain any two causes of the differences in the profits reported by costing and
financial accounts.
(2 Marks)
(b) Amahoro Sugar Corporation Ltd produces sugar for both domestic and foreign markets.
For the year ended 30 September, 2017 the company reported a costing profit of Frw
3,339,600,000 whereas the financial profit for the same period was Frw 4,356,000,000. The
company’s financial trading, profit or loss statement for the year ended 30 September, 2017 was
as follows:
Frw "000" Frw "000"
Sales 72,600,000
Cost of sales:
Opening stock 10,164,000
Material purchases 40,656,000
Closing stock (11,616,000)
Materials consumed 39,204,000
Direct wages 17,424,000
Prime cost 56,628,000
Production overheads 5,082,000
Cost of goods sold (61,710,000)
Gross profit 10,890,000
Discounts received 1,089,000
Dividends received 1,306,800
Interest received 871,200
Gross income 14,157,000
Expenses:
Discounts allowed 580,800
Administration cost 3,993,000
Interest on loan 363,000
Selling & distribution 4,864,200 (9,801,000)
Net profit 4,356,000
The cost accounting records revealed the following information:
1. Opening stock on 1 October, 2016 was Frw 8,349,000,000 and the closing stock on 30
September, 2017 was valued at Frw 11,180,400,000
2. Production overheads absorbed were Frw 4,936,800,000
3. Selling and distribution overheads were absorbed at 7.5% of sales
4. Administration overheads were absorbed at 5% of sales.
5. Notional rent and interest on capital were Frw 580,800,000 and Frw 435,600,000
respectively.
F2.1 Page 8 of 10
REQUIRED:
Prepare a statement that reconciles the financial and costing profits using the above information.
(12 Marks)
(c) Amagara Enterprises Ltd (AEL) deals in ladies garments for low income earners. The
company is preparing its next financial year’s expenditure budget and is considering whether to
purchase the garments or to produce them internally. The requirements of producing each unit of
these garments internally are given as below:
Shoes Hand bags
Direct material (Frw) 1,000 2,400
Direct labour (hours) 4 6
Variable overheads as a percentage of direct labour cost 40% 50%
Fixed overheads (Frw) 500 500
1. AEL plans to incur Frw 300 per labour hour.
2. Akimana Ltd has offered to supply the above items at unit prices of Frw 2,400 and Frw
5,350 for a pair of shoes and hand bag respectively.
REQUIRED:
With relevant calculations, advise the management of AEL whether the above items should be
purchased from Akimana Ltd or produced internally.
(6 Marks)
(Total 20 Marks)
QUESTION SEVEN
(a) Outline the steps involved in making a product mix decision involving limiting factors.
(4 Marks)
(b) Gisenyi Ltd a recently incorporated soft drinks company produces 3 products namely
mineral water, mango juice and apple juice which are all packed in bottles of 2 litres
each. The company is reviewing its production plan for the financial year 2018 and has
provided the following information regarding the 3 products.
Mineral water Mango juice Apple juice
Unit selling price (Frw) 1,300 1,625 1,675
Unit variable cost (Frw) 815 1,050 1,000
Labour hours per unit 0.125 0.125 0.25
Estimated demand (bottles) 20,000 35,000 22,000
The total number of labour hours available is limited to 7,502 for the period.
REQUIRED:
Determine the:
F2.1 Page 9 of 10
(i) Optimum product mix the company should produce and sell in order to maximize returns
during the period. (8 Marks)
(ii) Contribution gained and lost because of the product mix selected in (b) (i) above.
(3 Marks)
(c) Explain the five steps followed in determining the cost per unit of a product or service
using activity-based costing technique. (5 Marks)
(Total 20 Marks)
F2.1 Page 10 of 10
CERTIFIED PUBLIC ACCOUNTANT(CPA)
FRIDAY: 8 JUNE 2018
INSTRUCTIONS:
1. Time Allowed: 3 hours 15 minutes (15 minutes reading and
3 hours writing).
2. This examination has seven questions and only five questions
are to be attempted.
question.
@iCPAR
F2.1 Page 1 of 8
QUESTION ONE
(a) With help of graphical illustrations, distinguish between the Accountants’ model and the Economists’
model of cost-volume-profit analysis.
(6 Marks)
(b) Safe Way Transporters Limited (SWTL) operates a fleet of buses along the Gisagara -Kamonyi
route. The company charges Frw 6,000 per passenger per trip and each bus trip averages to 65
passengers. SWTL incurs a variable cost of Frw 3,200 per passenger per trip and its annual fixed
costs are estimated at Frw 146,000,000. Since its incorporation, SWTL has been loss making but
recently it hired new station managers who are expected to turnaround this performance.
Budget estimates for the next accounting period indicate that SWTL is targeting a net profit after tax
of Frw 24,000,000 and intends to make a total of 1,100 trips. SWTL pays corporation tax at 30%
per annum.
REQUIRED:
Determine the:
(i) number of trips that SWTL should make in order to break even with the above target profit.
(2 Marks)
(ii) breakeven revenue assuming no target profit. (2 Marks)
(iii) margin of safety in revenue at the budgeted activity level. (2 Marks)
(c) Premium Suppliers Limited (PSL) is a small business unit in Kigali that operates both a butcher and
a diary supply business selling meat and milk to local customers in Kigali. PSL sells each kilogram
of meat at Frw 2,250 and each litre of milk at Frw 650.
The Management Accountant at PSL has, however, advised that the firm would make more revenue
if it starts further processing its products. It has been established that if further processed, a
kilogram of meat can be sold at Frw 2,950 while a litre of milk can fetch Frw 950.
PSL will however incur Frw 275 and Frw 70 to further process each kilogram of meat and each litre
of milk respectively. It is also estimated that the firm will need to hire 2 modern refrigerators at Frw
220,000 and Frw 180,500 for preserving meat and milk respectively, and would incur packaging
expenses of Frw 130 for each kilogram of meat and litre of milk further processed.
The cost data for PSL indicates that the firm’s daily average sales amount to 1,200 kilograms and
1,500 litres of meat and milk respectively.
REQUIRED:
With relevant calculations, advise Premium Suppliers Limited on which product(s) to further
process.
(8 Marks)
(Total 20 marks)
QUESTION TWO
(a) Explain the accounting treatment for the following under process costing:
(i) Normal loss (1 Mark)
(ii) Abnormal loss (1 Mark)
(iii) Abnormal gain (1 Mark)
F2.1 Page 2 of 8
(b) Huye Limited produces a single product, ‘Premium Wine’ and operates a process costing system to
track costs throughout the production process. The company has provided the following information
in respect to process 2 for the month of May, 2018.
Opening work in progress 20,000 litres with the following values and degrees of completion.
Cost element Frw ‘000’ Degree of completion
Input material 38,500 100%
Additional material 11,000 60%
Direct Labour 9,000 40%
Production overheads 4,200 20%
Units transferred from process 1 were 135,000 litres valued at Frw 540,000,000 and output
transferred to process 3 was 121,500 litres. Huye Limited incurred the following process costs
during the month.
Cost element Frw
Direct material 67,567,500
Direct labour 54,500,000
Production overheads 42,617,000
Units scrapped were 5,000 litres with the following degrees of completion.
Direct material 100%
Direct labour 40%
Production overheads 50%
Huye Limited normally provides for normal wastage at 2% of production and scrapped units are
realised at Frw 6,000 per litre. Closing stock during the period amounted to 30,000 litres with the
following levels of completion.
Direct material 60%
Direct labour 40%
Production overheads 15%
REQUIRED:
Using average cost method, prepare a statement of:
(i) equivalent production. (4 Marks)

(ii) cost per unit. (2 Marks)
(iii) closing stock. (2 Marks)
(iv) abnormal profit/ loss. (2 Marks)
(v) finished goods. (1 Mark)
(Note: Round off to 2 decimal places)
(c) Huye Limited operates a uniform employee remuneration structure for all its employees under which
it pays a bonus rate of 10% of the basic salary to each employee if the company exceeds its monthly
performance targets. The Chief Finance Officer has however advised that the company needs to
adopt either the Rowan or Halsey schemes of bonus payments in order to minimise operational costs.
The following details relate to three employees Kamanzi, Twinemanzi and Rusiira for the month of
May, 2018 (when the company did exceed target performance).
Kamanzi Twinemanzi Rusiira
Standard production time (hours) 300 300 300
Time taken to complete production (hours) 280 292 274
Wage rate per hour (Frw) 5,000 4,800 5,200
F2.1 Page 3 of 8
REQUIRED:
Advise management on the best bonus payment scheme to adopt.

(6 Marks)
(Total 20 Marks)
QUESTION THREE
(a) Rwagasana Beauty Products Limited (RBPL) manufactures a range of products including lotions,
jelly and perfumes which are packed in tins of 500 grams each. Over the years, the company has
been applying full costing absorbing production overheads on the basis of direct labour hours. The
company now wishes to adopt activity-based costing (ABC) as management is convinced that the
new system will give appropriate cost values that will help in proper product pricing.
The following per unit cost information has been obtained from the cost accounts of RBPL for the
month of May, 2018.
Super Jelly Premium Cream Herbal Jelly
Direct material (Frw) 1,200 1,450 850
Direct labour (Frw 250 per hour) 600 650 450
Production for the month was 8,000 tins, 10,000 tins and 6,000 tins for Super Jelly, Premium Cream
and Herbal Jelly respectively. RBPL incurred production over heads amounting to Frw 14,480,000
which are analysed as follows:
Frw
Machine running costs 4,400,000
Machine set up costs 4,240,000
Ordering costs 3,600,000
Material handling costs 2,240,000
14,480,000
RBPL has also provided the following additional information in respect to cost drivers:
Super Jelly Premium Cream Herbal Jelly
Total material movements 10 15 5
Order size (tins) 500 1,000 600
Per unit production runs 2 2 1
Number of set ups per unit 3 5 2
REQUIRED:
Using the ABC technique; determine the unit selling price of each product assuming RBPL targets a
profit of 20% on cost.
(16 Marks)
(b) (i) Explain any two causes of over and under absorption of overheads.
(2 Marks)
(ii) Describe the accounting treatment of over and under absorbed overheads.
(2 Marks)
(Total 20 Marks)
QUESTION FOUR
(a) (i) Explain any two features of relevant costs for decision making. (2 Marks)
(ii) Virunga Designers produces men’s suits for all age groups and has provided the following
cost and production data for the month of May, 2018.
F2.1 Page 4 of 8
Number of suits Total cost (Frw‘000’)
250 21,420
270 22,930
310 25,951
340 28,217
350 28,972
420 34,258
1,940 161,749
Due to the increased demand for Virunga Designers’ suits, management intends to increase
its production from 1,940 suits in May to 2,400 suits in June, 2018.
REQUIRED:
Using regression analysis, forecast the total cost for the month of June, 2018.
(8 Marks)
(b) Gusiira Furniture Works (GFW) specialises in production of high quality furniture for both export
and the domestic market. Among its products are office chairs which are sold at Frw 6,500 per
chair. The company currently operates at 80% capacity producing 20,000 chairs per year and incurs
the following costs per chair.
Cost element Frw ‘000’

Direct material 2,600
Direct labour 1,100
Variable production overheads 900
Additionally, GFW incurs fixed costs of Frw 16,700,000 per annum regardless of the level of output.
GFW has received an order from an investor in Burundi for the supply of 4,900 chairs at Frw 6,000
per chair. Kamanzi, a management accountant at GFW has advised that this order will increase
variable cost by 20% and would require hiring extra work force at Frw 1,200,000.
REQUIRED:
With relevant computations, advise GFW on whether to accept the offer. (6 Marks)
(c) Explain any four factors a firm needs to consider in a divestment decision.
(4 Marks)
(Total 20 Marks)
QUESTION FIVE
Umutetsi Ltd (UL) is a manufacturer of strong car tents which are sold at Frw 150,000 per tent. UL is in the
process of preparing its budgets for the third quarter of the financial year 2018 and has provided the
following cost data for the month of May, 2018.
Cost per tent Frw
Direct materials (6 metres at Frw 12,500 per meter) 75,000
Direct labour (5 hours at Frw 2,000 per hour) 10,000
Variable overhead 50% of direct labour
(i) Opening inventory is estimated to be 200 tents valued at Frw 150000 per tent.
(ii) Closing inventory of raw material and finished goods for each month is 10% and 20% of production
and sales demand for the following month respectively.
F2.1 Page 5 of 8
(iii) The marketing manager has estimated that during the third quarter of 2018, demand in July will be
500 tents which will grow at a rate of 20% per month but expected sales demand for the month of
October will be 860 tents.
REQUIRED:
Prepare the following functional budgets for the third quarter:

(i) Sales revenue (3 Marks)
(ii) Production (units). (6 Marks)
(iii) Production cost. (3 Marks)
(iv) Raw material utilization. (3 Marks)
(b) Explain any five objectives of budgeting in an organization. (5 Marks)
(Total 20 Marks)
QUESTION SIX
(a) Explain the meaning of the following types of standards:
(i) Basic. (1 Mark)

(ii) Current (1 Mark)
(iii) Ideal. (1 Mark)
(b) Premium Cakes Limited (PCL) is a reputable company that specialises in baking cakes of a standard
size. The company’s customer base comprises of the middle and low income earners. Their
standard cost card for each cake comprises of the following:
Cost element Frw
Direct materials:
Yeast (5 kg each Frw 1,500) 6,000
Sugar (0.5 kg each Frw 1,200) 600
Margarine (1 kg each Frw 1,200) 1,200
Direct labour 5 hours each Frw 1,000 per hour 5,000
The actual production and cost data for the month of April, 2018 was as follows:
Production 1,000 cakes
Material cost and utilisation:
Yeast 5,250 kg at Frw 7,612,500
Sugar 490 kg at Frw 1,250 per kg
Blue band 1,150 kg at Frw 1,050 per kg
PCL incurred Frw 5,240,000 for 4,800 direct labour hours. Total overheads incurred were Frw
2,000,000 but PCL had budgeted to incur overheads of Frw 2,600,000 out of which 40% was
variable. All overheads are absorbed based on direct labour hours.
REQUIRED:
Compute the following variances:
(i) Material usage. (2 Marks)

(ii) Labour rate. (2 Marks)
(iii) Labour efficiency. (2 Marks)
(iv) Variable overhead expenditure. (2 Marks)
(v) Variable overhead efficiency. (2 Marks)
(vi) Fixed overhead expenditure. (2 Marks)
F2.1 Page 6 of 8
(c) Explain the any five factors an organization needs to consider before investigating variances.
(5 Marks)
(Total 20 marks)
QUESTION SEVEN
(a) (i) Distinguish between marginal and absorption costing techniques.

(2 Marks)
(ii) Explain any four arguments in favour of the marginal costing technique.
(4 Marks)
(b) Gametex Limited manufactures three types of chess buttons, i.e. Rooks, Kings and Pawns which are
produced through a joint process. In May, 2018 the company incurred total joint process costs of
Frw 11,200,000 to produce the buttons. The normal wastage during the production process was 10%
and the following information relates to each type of buttons.
Buttons Units produced Unit selling price (Frw)
Rooks 111,200 47
Kings 37,500 55
Pawns 112,000 45
REQUIRED:
Prepare for Gametex Limited’s profit statements clearly showing profit from each type of buttons
using:
(i) Physical units method. (3 Marks)

(ii) Sales value method. (3 Marks)
(c) Rwizi Construction Company Limited (RCCL) entered into an agreement with Ngoma
District Local Government to construct a building to serve as district headquarters.
Construction work commenced on 1 January, 2018 and was estimated to take 12 months to
get completed. The following data relating to the construction work was extracted from the
books of RCCL for the month of April, 2018.
Particulars Frw‘000’
Agreed contract sum 2,500,000
Direct wages paid 200,000
Materials issued 1 January, 2018 475,000
Accrued direct wages 10% of direct wages paid
Materials returned to stores 15,000
Plant & equipment at cost 1 January, 2018 120,000
Direct expenses paid 14,750
Accrued direct expenses 1,400
Installation cost for plant & equipment 2,500
Value of plant & equipment t 30 April, 2018 112,000
Materials on site t 30 April, 2018 45,400
Value of work certified 30 April, 2018 725,500
Value of completed work pending certification 42,500
Cash received from Ngoma District Local Government 574,600
F2.1 Page 7 of 8
REQUIRED:
(i) Prepare for RCCL the contract account for the construction works for the four
months period ending 30 April, 2018.
(5 Marks)
(ii) Prepare an extract of the statement of financial position for RCCL as at 30 April,
2018.
(3 Marks)
(Total 20 marks)
END OF QUESTION PAPER
F2.1 Page 8 of 8
INSTRUCTIONS:
3 hours writing).
question.
Page 1 of 12
QUESTION ONE
(a) Explain any five roles of Management Accounting to a manufacturing firm. (5 Marks)
(b) Bakunda & Sons Clothing (BSC) is a textile manufacturer located in Southern province of
Rwanda. BSC processes cotton and silk into fine fabric and then to clothing of different
designs which are sold to customers through its distributors. BSC received an offer of making
dresses for two contestants of Miss Rwanda 2019. Normally BSC categorizes such special
orders as jobs and these jobs have been coded as JBOO1 and JBOO2.
BSC’s management accountant is still indifferent on the price that should be quoted for these
dresses. The following estimates have been availed:
JBOO1 JBOO2
Direct labour (hours) 2 3
Direct material: RWF RWF
Fabric 15,000 20,000
Yarn 3,000 5,000
Sewing threads 500 600
Buttons 200 300
Direct expenses 500 750
Production overheads of RWF 3,000 will be absorbed to jobs on the basis of direct labour
hours. Labour rate per hour is RWF 500 and BSC adds a 25% mark-up on cost in pricing its
products.
REQUIRED:
Determine the price that should be quoted by BSC for each job. (10 Marks)
(c) Ganza Restaurant (GR) employs Nirere and Ngeze as waiters but these employees are
complaining of low salaries whereas GR considers its weekly wage bill to be high compared
to sales.
In a bid to resolve these challenges, GR is considering remunerating these workers on either

the basis of hours worked or number of customers served. The following information has
been extracted from GR’s last week’s records:
Page 2 of 12
Nirere Ngenze
Actual hours worked 38 34
Hourly wage rate (RWF) 1,000 1,100
Minutes taken serving customers:
Local customers 252 720
Foreign customers 648 630
GR’s policy requires waiter to take only 12 minutes and 18 minutes when serving a local and foreign
customer respectively. GR plans to pay a waiter RWF 600 and RWF 900 for serving a local and
foreign customer respectively.
REQUIRED:
Identify the remuneration method that will reduce GR’s weekly wage bill. (5 Marks)
(Total 20 Marks)
QUESTION TWO
(a) With examples, distinguish between a profit center and an investment center. (2 Marks)
(b) Describe any three factors considered in designing an effective costing system. (6 Marks)
Page 3 of 12
(c) Toto Automobiles Company (TAC) is a car assembling plant located in Nyanza town. The car
passes through 3 assembling and 2 service sections before it is released to the market. The
following cost information has been extracted from TAC’s records for the year ending 30
September, 2018:
Assembling sections Service sections
Total Quality
A B C
Details cost control Stores
RWF RWF RWF RWF RWF

‘000’ ‘000’ ‘000’ ‘000’ ‘000’
Direct material 10,250 6,000 2,000 1,000 1,250 -
Direct labour 3,075 1,050 1,015 200 400 410
Power & lighting 1,025
Rent 1,640
Insurance 2,050
Depreciation 820
Canteen costs 1,640
Total 20,500
Kilowatts (units) 5,000 1,500 2,000 1,000 50 450
Area (m2) 15,000 4,000 6,000 2,000 500 2,500
Book value (machinery

RWF ‘000’) 50,000 20,000 20,000 5,000 3,000 2,000
No of employees 200 60 80 30 10 20
Page 4 of 12
Service department costs are applied as shown below:
Assembling sections Service Sections
A B C Quality control Stores
Quality control 30% 30% 30% - 10%
Stores 25% 35% 35% 5% -
REQUIRED:
Using repeated distribution method, reapportion service sections costs. (12 Marks)
(Total: 20 Marks)
QUESTION THREE
(a) Tech Designers Limited (TDL) deals in printing and designing of invitation cards for functions
such as weddings, ‘Gusaba’, conferences among others. TDL would like to establish the cost-
volume relation between factory overheads and the number of cards produced. The following
cost data relates to the last 8 months of 2018:
Month Number of cards Factory overheads (RWF)
January 1,500 36,000
February 1,250 38,000
March 1,280 40,000
April 1,650 42,000
May 2,350 56,050
June 2,400 48,800
July 3,000 59,000
August 2,800 56,000
REQUIRED:
Using the high - low method, determine the factory overheads when 2,000 cards are produced.
(4 Marks)
Page 5 of 12
(b) Safi Rural Electrification Company (SREC) deals in buying and distribution of solar products.
The company buys solar bulbs which are packed in boxes. Each box contains 50 bulbs. Opening
inventory was 100 boxes valued at 14,000,000 on 1 January, 2018. The following transactions
also occurred during the period of January to March, 2018.
Purchases/ receipt Issues/ sales
Date Quantity Price per box Date Quantity Selling

(RWF) price per
box (RWF)
10 January 100 150,000 22 January 300 170,000
20 January 200 155,000
3 February 300 160,000 10 February 300 180,000
28 February 200 154,000 15 March 200 190,000
13 March 250 153,000
REQUIRED:
Using the first in first out (FIFO) method, determine the value of:
Closing inventory as at 31 March, 2018. (8 Marks)
Cost of goods sold. (8 Marks)
Explain the limitations of FIFO method. (8 Marks)
(c) Explain any four roles of costing in a service sector. (3 Marks)
(Total: 20 Marks)
Page 6 of 12
QUESTION FOUR
(a) Real Tyres Limited (RTL) manufactures and sells tyres of a standard size. RTL sells each
tyre at RWF72, 000 which is considered a relatively affordable price by the local customers.
The following information relates to a six month’s period ended 31 October, 2018.
Production (tyres) 100,000
Sales 80% of production
Production costs: RWF ‘000’
Direct materials 2,400,000
Production overheads 920,000
Selling and distribution costs:
Salesmen’s commissions 180,000
Advertising 74,000
Administration costs:
Office salaries 245,700
Utilities 14,500
Rent for office space 72,000
General expenses 23,500
Production overhead costs are 60% variable but all selling, distribution and administration
costs are fixed.
REQUIRED:
(i) Prepare for RTL a statement of profit or loss for the period ended 31.October, 2018
using the marginal costing technique. (7 Marks)
(ii) Explain the impact of absorption and marginal costing techniques on profit.
(3 Marks)
(b) Explain any six weaknesses of using absorption costing as a traditional costing technique.
(6 Marks)
Page 7 of 12
(c) Explain steps involved in determining product costs using Activity based costing (ABC)
technique. (4 Marks)
(Total: 20 Marks)
QUESTION FIVE
(a) Kengo Dairy Distributors Ltd (KDDL) is a sole distributor of milk products in the 2 major
towns of Kibuye and Gisenyi in West Province. The company is considering dropping the
Kibuye route because it is making losses and the price cannot be raised or lowered because of
the stiff competition in the dairy market. The following information relates to the year ended
30 September, 2018.
Kibuye Gisenyi Total
RWF ‘000’ RWF ‘000’ RWF ‘000’
Sales 128,500 266,000 388,500
Variable costs 80,000 115,000 195,000
Contribution margin 48,500 151,000 199,500
Fixed costs:
Direct fixed costs 45,000 101,000 146,000
Common fixed costs 16,000 33,000 49,500
Total fixed costs 61,500 134,000 195,500
Net income (13,000) 17,000 4,000
Direct fixed costs of RWF 45,000,000 would be avoided if Kibuye route is dropped. Kibuye
route cannot be substituted and investment in assets cannot be reduced if this route is dropped.
REQUIRED:
(i) With relevant computations, assess the impact of dropping Kibuye route on the overall
profitability of KDDL.
(6 Marks)
(ii) Suppose all the fixed costs are avoidable, state with the help of necessary
computations, whether the advice in a (i) above would still stand. (4 Marks)
(b) Explain factors an organisation needs to consider in a ‘make or buy’ decision. (3 Marks)
Page 8 of 12
(c) Premium Distillers Limited (PDL) specializes in production of local brew that is sold on the
domestic market. The company has budgeted to produce 5,000,000 bottles of local brew in
the financial year ending 31 December, 2019. PDL uses a number of ingredients to improve
the concentration of the local brew which includes molasses which are purchased in batches
of 1,000 kilograms each from Ruhiire Sugar Factory (RSF). PDL’s management resolved to
implement the economic order quantity (EOQ) technique as measure to reduce costs arising
from inventory mismanagement.
RSF offers purchase discounts for bulky purchases and PDL is considering taking up this offer
as a cost reduction strategy. Below is a schedule of RSF’s offered purchase discounts:
Order quantity (batches) Discount allowed
0–9 Nil
10 – 19 5%
Above 19 10%
Producing a bottle of local brew requires 0.05 kg of molasses which are purchased at RWF
1,000 per kg. Normally PDL spends RWF 50,000 to place an order for molasses and holding
1 kg of molasses costs RWF 125 plus 12% of the purchase cost.
REQUIRED:
Determine the number of batches of molasses that PDL should order in bulk so as to
minimize inventory costs. (7 Marks)
(Total: 20 Marks)
QUESTION SIX
(a) Distinguish between the following budgeting terms:

(i) Incremental budgeting and activity-based budgeting. (2 Marks)
(ii) Rolling budgets and master budgets. (2 Marks)
(iii) Flexed budgets and fixed budgets. (2 Marks)
Page 9 of 12
(b) Rugaasi Poultry Feeds Limited (RPFL) deals in manufacture and supply of poultry feeds which
are packed and distributed in standard packets of 1 kg each. RPFL’s estimated sales demand
for the next period starting 1 January, 2019 is as follows:
Month January February March April May June
Sales (kg) 40,000 41,200 42,400 43,700 44,500 45,000
The following additional information is also relevant:

1. Selling price per kg of finished poultry feeds RWF 500.
2. 40% of the total sales are expected to be cash and the balance shall constitute credit sales.
60% of the credit sales are expected to be collected in the month following the sale while
35% will be collected two months later. RPFL estimates that 5% shall constitute bad debts
hence deemed uncollectable.
3. Production is estimated at 110% of the month’s sales units and the standard cost of each unit
of output is expected to be as follows.
Input material Quantities (kg) Price per kg (RWF) Total cost (RWF)
Maize bran 0.7 100 70
Silver fish 0.2 750 150
Sunflower 0.1 250 25
Total cost 245
4. 80% of purchased input material shall be on cash term basis and the balance shall be paid
the following month.
5. RPFL expects to have a total of 12 employees who shall be paid RWF 250,000 per month.
However, the manager in addition to his monthly salary, shall earn a monthly bonus
equivalent to 5% of his annual basic salary.
6. To improve sales, the company will acquire a second-hand delivery van worth RWF
11,500,000 to be paid in 2 consecutive equal instalments effective February 2019. The van
will be depreciated at 25% per annum effective April 2019.
7. RPFL intends to open up new outlets in the western province and as a result, the company
intends to acquire a one year 25% loan worth RWF 12,000,000 from Ruzoora Cooperative
in January, 2019 and the monthly loan instalment payments are expected to be RWF
1,250,000 effective February, 2019.
REQUIRED:
Prepare RPFL’s cash budget for the period of January to June, 2019.
(14 Marks)
(Total: 20 Marks)
Page 10 of 12
QUESTION SEVEN
a) Explain any five roles of setting standard costs in an organization. (5 Marks)
b) Comfort Beds Limited (CBL) manufactures bed covers and blankets which it supplies to both
domestic and foreign markets. It uses a just-in-time system and holds no inventories. In October
2018, CBL budgeted to produce 15,000 bed covers and 13,000 blankets and the standard cost
requirements of producing a unit of bed cover and blanket are provided below.
Details Bed covers Blankets
Material (Cotton) 2.5 metres at RWF 3,750 per metre 2 metres at RWF 3,750 per metre
Direct Labour 2 hours at RWF 2,150 per hour 1.5 hours at RWF 2,200 per hour
Production overheads 30% of direct labour 10% of material cost
The standard idle time for producing each unit of bed cover and blanket is included in the
respectively standard direct labour cost above at 5% of each respectively standard direct labour
cost. CBL’s budgeted selling price of each unit of a bed cover is RWF 17,500 and RWF 25,000
for a blanket.
Actual Production/Sales levels for bed covers and blankets for October, 2018 were 11,000 and
10,000 respectively. The actual cost of cotton in October, 2018 was RWF 4,000 per metre. 27,000
metres of cotton were used to make the bed covers while 21,500 metres were used to make the
blankets.
The actual time paid for in October amounted to 22,500 hours at RWF 2,000 per hour and 14,700
hours at RWF 2,250 per hour for bed covers and blankets respectively of which 10% was idle
time. The actual selling prices for each unit of bed covers and blankets were RWF 18,000 and
RWF 23,500 respectively.
REQUIRED:
Determine the following variances:
(i) sales price variance (2 Marks)
(ii) material Price variance (2 Marks)
(iii) material Usage variance (2 Marks)
(iv) labour rate variance (2 Marks)
(v) labour Efficiency variance (2 Marks)
Page 11 of 12
(vi) labour Idle time variance (2 Marks)
(c) Explain any three causes of cost variances in organisations (3 Marks)

(Total: 20 Marks)
Page 12 of 12
FRIDAY: 7 JUNE 2019
INSTRUCTIONS:
3 hours writing).
question.
F2.1 Page 1 of 8
QUESTION ONE
Daily Focus Limited (DFL) is a tabloid newspaper that started operations in Rwanda in June, 2015
with focus on the youths and sports. DFL imports its newsprint paper and other materials from South
Africa and Kenya respectively.
DFL operates a system that prepares both financial and cost accounts independently. A review of
their management accounts for quarter ended 31 March, 2019 revealed that the profit as per cost
accounts differed significantly from that as per financial accounts despite use of the same data set.
Management resolved to adopt a new system that integrates the financial and cost accounts.
The following is DFL’s list of balances as at 31 December 2018:
Debit Credit
Frw ‘000’ Frw ‘000’
Equity shares Frw 1,000 per share 5,000
Accumulated profit 1,200
Trade & other receivables 700
Trade & other payables 2,250
Property, plant & machinery 2,600
Stocks held in stores:
Newsprint 1,150
Cash and cash equivalents 2,000
The following information relates to the quarter that ended 31 March 2019:
Frw ‘000’
Newsprint purchased on credit 2,400
Labour costs incurred as a result of production 445
Manufacturing overheads recovered 160
Selling and distribution overheads paid in cash 212
Cost of finished goods 3,200
Factory cost of goods sold 3,200
Finished goods sold on credit 4,100
Collections from credit customers 610
Payments to suppliers 420
Newsprint issued to production is 60% of quarterly purchases.
Manufacturing overheads incurred are 40% of quarterly labour cost.
F2.1 Page 2 of 8
REQUIRED:
(a) Distinguish between interlocking accounting and integrated accounting systems. (2 Marks)
(b) Explain any two reasons why profit as per cost accounts differs significantly from profit as
per the financial accounts. (4 Marks)
(c) Using integrated accounting system, prepare DFL’s trial balance as at 31 March, 2019.
(14 Marks)
(Total 20 Marks)
QUESTION TWO
Bikindi Processing Factory (BPF) located in Nyabihu processes milk into different products. BPF
buys raw milk from the local dairy farmers and processes it into pasteurized milk and non-pasteurized
milk products which are then sold to supermarkets in Kibaye, Nyabihu and Gisenyi. BPF’s production
level is dependent on local dairy farmers’ supply capacity. BPF produces at optimum capacity of
250,000 litres of milk per quarter during peak seasons. Their production cost budget for the quarter
ended 31 March, 2019 based on production levels of 175,000 litres and 225,000 litres as shown below:
Production levels (litres) 175,000 225,000
Frw ‘000’ Frw ‘000’
Raw milk supplies 52,500 67,500
Direct labour 7,000 9,000
Variable production overheads:
Utilities 4,900 6,300
Maintenance 4,200 5,400
Other variable overheads 350 450
Fixed production overheads:
Depreciation 1,800 1,800
Indirect wages 800 800
Other fixed overheads 600 600
Actual production for the quarter was 200,000 litres and the production costs incurred were as
follows:
Details Frw ‘000’
Raw milk supplies 62,000
Direct labour 7,920
Utilities 5,400
Maintenance 4,900
Other variable overheads 419
Depreciation 1,750
Wages-indirect 830
Other fixed overheads 531
F2.1 Page 3 of 8
REQUIRED:
(a) Using flexible budgeting, prepare a product cost statement showing the variances for the
quarter ended 31 March, 2019. (10 Marks)
(b) Explain the difference between zero-based budgeting and incremental budgeting. (4 Marks)
(c) Explain any three limitations of budgeting. (6 Marks)

(Total 20 Marks)
QUESTION THREE
(a) Olive Industries Limited (OIL) has just commenced business in Kigali majoring in the
manufacture of radios and television sets. OIL received an order for production of 1,000
television sets of 32 inch type. OIL uses batch costing and has coded this order as B2019.
OIL uses two departments A and B to manufacture television sets.
The budgeted costs for B2019 are set out below:
Details Department A Department B

Direct material cost (Frw ‘000’) 99,500
Direct labour (hours) 8,000 12,000
Direct expenses (Frw ‘000’) 19,500 10,200
Factory overheads are absorbed on the labour hour basis. The overhead absorption rate is Frw
500. Each labour hour costs Frw 1,200 and Frw 1,400 for departments A and B respectively
and OIL uses a cost plus markup of 25% in setting prices
REQUIRED:
Determine the selling price of a television set. (6 Marks)
(b) Nvuye Distillers Limited (NDL) makes wine which goes through a single process. Materials
are always added at the start of the process. At the beginning of May 2019, NDL had opening
work in progress of 8,000 litres of wine which were 40% complete with the following costs
except materials that had been fully utilised.
Frw ‘000’
Materials 30,000
Conversion 12,000
Production overheads 4,200
During the month, NDL introduced additional 44,000 litres of material valued at Frw
123,200,000 to the process. NDL incurred conversion costs and production overheads
amounting to Frw 54,488,000 and Frw 22,480,000 respectively during the process. At the end
of the month, NDL had closing work in progress amounting to 6,400 litres which were 60%
and 40% complete with respect to conversion and production overheads respectively.
F2.1 Page 4 of 8
REQUIRED:
Using the first in first out (FIFO) method, prepare for NDL for the month of May 2019: a
(i) Statement of equivalent production. (3 Marks)
(ii) Statement of cost per litre. (2 Marks)
(iii) Statement of closing stock. (2 Marks)
(iv) Process account. (3 Marks)
(c) Explain any four advantages of job costing to an organisation (4 Marks)

(Total 20 Marks)
QUESTION FOUR
(a) Sibomana is a commercial farmer in Gakenke dealing in fruit growing on a large scale.
Sibomana grows oranges, passion fruits and apples which are sold in kilograms. He applies
fertilizers for the fruits to grow well. Sibomana has estimated that the budgeted quantity of
fertilizers available for the period ending 31 July 2019 is 7,000 litres.
The following information is also available for the three types of fruits.
Details Oranges Passion fruits Apples

Total sales revenue (Frw ‘000’) 3,750 4,500 5,400
Total variable cost (Frw ‘000’) 2,400 3,600 3,840
Fertilizers required per kg produced (litres) 0.25 0.5 2
Estimated sales demand (kg) 2,000 4,000 2,400
REQUIRED:
(i) Calculate the shortfall in fertilizer requirements. (2 Marks)
(ii) Determine the production mix that will maximise contribution. (6 Marks)
(iii) Determine the contribution lost as a result of the production mix in (i) above.
(2 Marks)
(iv) State any four features of relevant costs. (4 Marks)
F2.1 Page 5 of 8
(b) Iradukunda Junior School (IJS) is in its second year of operation with both pre-primary and
primary levels. IJS made losses in the previous academic year though management believes
that these losses will be for a short while. Management has just laid the strategies on how to
attract more pupils. The management accountant was tasked to find the number of pupils each
level will need to breakeven as this will be the initial target for the marketing team.
The following information relates to the year that ended 31 December 2018.
Pre-Primary Primary
Number of Pupils 100 120
Frw ‘000’ Frw ‘000’
Revenue (school fees collections) 15,000 12,000
Variable cost 9,000 8,400
Fixed cost 12,000 9,000
REQUIRED:
(i) Determine the number of pupils required for each level to breakeven. (3 Marks)
(ii)
Determine the total revenue if the school targets a profit of Frw 1,000,000 and Frw
900,000 in Pre-primary and Primary levels respectively. (3 Marks)
(Total 20 Marks)
QUESTION FIVE
Burera Paints Limited (BPL) specialises in the production of wall paint that it packs in 4 litre tins.
The paint is mainly sold to customers in Northern Province although BPL plans to expand to the
Southern Province.
BPL’s projected production/ sales output for the month of April 2019 was 10,000 tins and the relevant
budgeted costs for each tin produced was as follows.
Material requirements:
kg Price per kg (Frw)

Titanium dioxide 2 1,000
Solvents 1.5 1,500
Resin 0.5 2,000
Producing a litre of paint requires 0.5 labour hours at Frw 2,000 per labour hour but 10% of labour
hours are anticipated to be idle. Variable production overheads are absorbed at 60% of labour cost.
BPL budgeted to operate at full capacity in April 2019 and the budgeted selling price per tin was Frw
15,000.
The actual performance results for the month were as follows:
Production (tins) 11,000

Sales (tins) 9,800
Selling price per tin (Frw) 14,800
BPL used 0.75 labour hours at Frw 1,800 per labour hour to produce a litre of paint during the month
but 8% of the labour hours were idle.
F2.1 Page 6 of 8
Material usage and applicable costs:
kg Price per kg (Frw)
Titanium dioxide 18,000 1,200
Solvents 17,000 1,450
Resin 6,000 1,800
The actual variable production overheads were Frw 36 million.
REQUIRED:
(a) Calculate the following variances for the month of April 2019.
(i) Material price and Material usage. (4 Marks)

(ii) Labour rate, Labour efficiency and Labour idle time. (5 Marks)
(iii) Sales price and Sales volume. (4 Marks)
(iv) Variable overheads expenditure and Variable overheads efficiency. (2 Marks)
(b) Explain any five factors that BPL should consider before investigating variances. (5 Marks)
(Total 20 Marks)
QUESTION SIX
Kabera Manufacturers Limited (KML) makes three products, Gumboots, African sandals and Canvas.
A traditional product costing system is being used at present, but the company is considering
immediate adoption of activity-based costing (ABC) system.
Details of the three products per pair for the last quarter are as follows:
Gumboots African sandals Canvas
Labour hours 3 2 5
Direct material (Frw) 3,000 1,000 1,000
Selling price (Frw) 7,100 4,000 9,750
KML’s budgeted production for June 2019 was 650, 1,000 and 210 pairs of Gumboots, African
sandals and Canvas respectively.
The estimated direct labour cost per hour is Frw 500 while production overheads are estimated at Frw
4 million. They are absorbed on the basis of labour hours. In addition, they are anlaysed as follows:
Set up costs 10%

Material handling costs 18%
Machining costs 60%
Inspection costs 12%
The following total activity volumes are associated with each product line for the quarter
Gumboots African Sandals Canvas
No. of set ups 16 18 6
No. of movement of materials 37 7 56
No. of inspections 6 56 3
Machine hours 4 5.3 10
F2.1 Page 7 of 8
REQUIRED:
(a) Determine each product’s profit per carton using:
(i) Absorption costing technique. (5 Marks)
(ii) Activity based costing system. (12 Marks)
(b) Explain any three advantages of using Just in time (JIT) system. (3 Marks)
(Total 20 Marks)
QUESTION SEVEN
Kirezi Beauty Cosmetics (KBC) imports and supplies body perfumes to residents in Gisagara
province. These perfumes are sold in standard size of 300 ml per bottle. KBC sells each body
perfume at Frw 12,500 after incorporating a markup of 20%.
The weekly sales demand and relevant costs for the month of May 2019 are provided as below:
Week Sales (bottles) Total cost (Frw ‘000’)

1 120 1,390
2 200 2,150
3 140 1,580
4 240 2,530
700 7,650
KBC has resolved to increase its selling price per bottle of the body perfume by 4% in June 2019
owing to the ever increasing demand for its perfumes. The expected sales for June 2019 were
projected at 840 bottles.
REQUIRED:
(a) (i) Using regression analysis, determine KBC’s profit in the month of June 2019.
(8 Marks)
(ii) Using computations, show the effect on KBC’s profit if selling price and variable cost
per unit reduced by 4% and 5% respectively? (3 Marks)
(b) Rubavu Millers Limited (RML) specialises in production and supply of wheat flour in the
Western Province. RML has experienced a lot of staff exists since its incorporation in 2017.
The human resource records for RMLs for year 2018 revealed that the company had 200
employees at the start of the year and 310 employees at 31 December, 2018.
During the year 2018,the number of employees who resigned from the company were 40 and
management decided to recruit 150 employees in the same period of which 40 employees
were specifically recruited as replacements for those who departed the company.
RML dismissed 60 employees in 2018 on account of staff ethical issues as they were found
guilty of misappropriation of funds worth Frw 13,750,000 collected from sale of wheat flour.
REQUIRED:
(i) Using flux method, determine the labour turnover rate for RML for year 2018.
(2 Marks)
(ii) Explain any three problems associated with high labour turnover to organisations like
RML. (3 Marks)
(iii) Discuss any four ethical responsibilities of management accountan ts.
(4 Marks)
(Total: 20 Marks)
F2.1 Page 8 of 8
FRIDAY : 06 DECEMBER 2019
INSTRUCTIONS:

2. This examination has seven questions and only five
questions are to be attempted.
3. Marks allocated to each question are shown at the end
of the question.
F2.1 Page 1 of 8
QUESTION ONE
Kilimanjaro company sells clothes for different categories of people. Most of the clothes are
sold on local market (Rwanda) and are known on the name “made in Rwanda”. As management
accountant you are provided with the data for the preparation of operating statement.
Budgeted sales and production for the month of November 2019 are 200 units.
Standard cost for each unit of product Frw
Direct material 10kg @Frw 50/kg 2,650
Direct labour 15 hrs @ Frw 9/hr 135
Variable overhead 10 hrs @ Frw 0.5/hr 50
Fixed overhead 10 hrs @ Frw 10/hr 100
Selling price 1,000
Actual data for the month of November 2019
Production 190 units sold at Frw 1.150 each unit

Direct material 580 kgs @ Frw 15,000 (total cost)
Direct labour 3,000 hrs @ Frw 5/hrs, this includes 400 hrs noted as idle.
Fixed overhead Frw 12,000
Variable overhead Frw 1,500
REQUIRED:
By using the calculated variances prepare the reconciliation operating statement for the
month of November 2019. (14marks)
b) Nyaruguru Tea Factory processes tea green leaf from farmers and supports farmers by
providing inputs at the lowest possible price. To achieve this, the company implements
Zero Based Budgeting. In the next tea planting season, they plan to plant tea on 250
hectares, and each hectare requires 14,000 seedlings on a well prepared land. The following
assumptions have been prepared by the Finance Manager and were agreed upon during the
management meeting.
F2.1 Page 2 of 8
Assumptions:
- Exchange rate $1=Rwf 920
- Fertilizer required 27,000 kg and 30% of this will be used in tea nursery development,
the rest will be sold to farmers. The company charges a mark-up of 5% on all inputs
sold to farmers.
- Fertilizer application in tea nurseries amounted to Rwf 900,000
- Recruitment of 8 workers with a gross amount of Rwf 100,000 per month, all
employees’statutory deductions inclusive.
- Death rate of 10%. The company assumes that 10% of the prepared seedlings will die
during the 12 months of maintenance and the company pays Rwf 5 per cutting. one
cutting is used to develop one seedling
The company contracted Munini Tea Cooperative to maintain its tea nurseries, the
tubing and sheeting are included in the contract amount of Rwf 140,000,000.
- The Rwandan fertilizer accepted to sell to Nyaruguru Tea factory NPK fertilizer at
$0.5/kg payable in advance.
REQUIRED:
Calculate the total costs required to develop the tea nurseries. (6 marks)
(20 marks)
QUESTION TWO
a. Mr. Eddy started a company called Eddy Ltd that operates a shop with different products.
Up to November 2019 he was not making profit. He approached you as a management
accountant expert to know when he will be making profit. The following information were
availed to you for the support.
• Total sales Rwf 800,000,000
• Total units Kgs 40,000,000
• Variable cost Rwf 400,000,000
• Fixed cost Rwf 70,000,000
F2.1 Page 3 of 8
REQUIRED:
(i) Calculate the breakeven point in value and the sales volume he would sale to break
even. (6 marks)
(ii) He wishes to make a profit of Rwf 20 million, advice with the help of calculation, how
much to sell in order to earn this profit. (3marks)
(iii) Calculate the margin of safety if the actual sales is Frw 9,250,000. (3 marks)
b. Mr Eddy has attended the investors meeting and some of them opted to use a bonus scheme
to their staff. Enumerate four (4) advantages and four (4) disadvantages of a group bonus
scheme to Mr. Eddy in his business. (8 marks)
(20 marks)
QUESTION THREE
Kadogo company Ltd (KC Ltd) provides goods to its clients in Kigali. It purchases these Goods
(beans, Rice, and sweet Potatoes) in Ruhengeri and re-sale them in Kigali. It has been
approached by Mr Murenzi who wishes to bring in his shop located at kimihurura of 300 kgs
of sweet potatoes and 400 kgs of beans. KC ltd is keen on contracting this service and wish to
be competitive so that Mr Murenzi do not give it to Mr kazungu who is a competitor in the
business. The following information were revealed by KC ltd in relation to this contract
• Two cars will be required. Each car is rented Frw 150,000 per trip, sweet potatoes will be
carried in 5 trips while beans is 6 trips, each car cost Rwf 70,000 of fuel per trip. KC Ltd
has one car and currently is not in use. It will be used for beans transportation. The rental
cost includes fuel and a driver.
• Each car driver is paid normal salary of Frw150, 000 per month. However, when he is going
to have a trip out of Kigali is paid an indemnity of Frw 20,000 per trip.
• Cost of beans is Frw 250/kg while sweet potatoes is Frw 150/kg at Ruhengeri
• Every driver needs to communicate with KC ltd head office, KC ltd driver uses telephone
which was bought Frw100,000 last year
• The company will need 700 bags to fill in the goods. These bags are already in store and
were bought at Rwf 40 each last year. The cost of the bags increased by 10% this month.
Required:
i. Determine the relevant cost and the minimum cost of the contract. (10 marks)
ii. Explain why you included or excluded each cost in the contract price. (10 marks)
(20 marks)
F2.1 Page 4 of 8
QUESTION FOUR
a. Kacyiru stock company Ltd (KSC ltd) operates stock management. Goods are produced
from Europe and America. The director of finance (DF) has provided to you as
storekeeper the following information.
• On 2nd February he brought in stock of 24 units @ Frw 100 each
• On 22nd February he purchased 20 units @ Frw150 each
• On 23rd Feb he sold 10 units
• On 1st March he again sold 15 units
• On 15th March he purchased 30 units @ Frw 250 each
• On 20th March he sold 15 units
• On 5th May he purchased 20 units @ Frw 180 each
• On 30th May he sold 3 units
Prepare the store ledger card using LIFO method for the last 5 months up to 31st May 2019.
(12 Marks)
b. KSC Ltd want to keep inventory cost at a possible minimum cost. Total raw materials are
30,000 units at Frw 24 each. Other inventory associated costs are :
• Ordering cost Frw 12 per order
• Holding cost Frw 2 per unit / year
REQUIRED
i. Using economic order quantity, calculate the total inventory cost. (4 marks)
ii. Determine four (4) factors to be considered in determination of maximum stock level.
(4 Marks)
(20 marks)
QUESTION FIVE
Kigali Arena Hotel (KAH) is a new hotel located in Gasabo district, Rwanda. It offers hotel
services which include restaurant, sports, hostel etc. The Managing Direct of KAH has been
approached by Radisson Blu to manage its hotel and offer the management fees in return. The
Managing Director of KAH has provided to you the following information in regard to this
offer. He wants to know if this service is made internally would be beneficial than being
outsourced.
F2.1 Page 5 of 8
If made internally
Sports restaurant rooms
Frw (M) Frw(M) Frw (M)
- Direct material cost 14 7 3
- Direct labour cost 4 2 4
- Other cost 3 1 2
- Revenue 30 12 9
- Fixed cost 2 2 3
(Figures are in million)
If outsourced, the following are the quoted management fees that KAH would pay to
Radisson blu.
Frw (M)
- Sports 22
- Restaurant 14
(Figures are all in million Rwandan francs/Frw)
However, for the rooms, the contract states that Radisson will provide to KAH a fixed sum of
4 million. The revenue that Radisson will collect in the rooms will not be accounted to KAH.
REQUIRED:
a. Advise KAH whether to continue to make and provide these services internally or getting
into contract with Radisson blu. Note that if services are provided by Radisson blu, the
fixed cost will also be covered. (15 marks)
b. Discuss Five (5) factors that needs to be considered by KAH before hiring the services
from Radisson blu. (5 marks)
(20 marks)
F2.1 Page 6 of 8
QUESTION SIX
Gitega company produces three products; X, Y and Z, and uses similar materials. Previously,
the company has been using traditional absorption costing method to allocate overheads to its
products. The company wants to go with the modern environment and adopt the new method,
activity based costing. The financial data for the financial year ended 31/12/2018 are as
follows:
X Y Z
- Total sales (units) 30,000 24,000 36,000
- Selling price /units(Frw) 15 24 26
- Raw materials (kg/units) 4 6 8
- Direct labour hours /units 0.1 0.2 0.5
- Machine hours / unit 0.2 0.4 0.5
- Number of production runs 32 20 10
- Number of suppliers order 48 30 50
- Number of sales to wholesalers 70 40 40
The overhead costs were as follows: (Frw)

- Machine set up costs 35,000
- Machine running costs 10,000
- Supplies order costs 25,000
- Sales to wholesales costs 40,000
The cost of raw materials was Frw 4 per kg and the direct labour cost was Frw 15 per hour.
This is applicable to all products.
REQUIRED:
i. Calculate the cost per unit for all products using both ABC and tradition all
method. (10marks)
ii. Explain four (4) reasons why ABC may be preferred to traditional absorption
costing ( 4 Marks)
iii. Discuss three (3) assumptions of marginal costing. (6marks)
(20 marks)
F2.1 Page 7 of 8
QUESTION SEVEN
During the ICPAR annual seminar and the 10th universally which took place at Serana kivu
Hotel, there was an argument on the budget preparation. Some of the people who attended were
from public and others from private sector. Public sector staff stated that incremental budget is
no longer usable while others said that it should always be used instead. Some from private
sector stated that budget is not needed, a just in time approach can resolve all the issues in
budgeting.
a. Discuss issues that can rise during the budget preparation in public compared to private
sector. (8marks)
b. Explain four (4) problems associated with the use of expected value in budget
preparation. (8marks)
c. Explain the term incremental budgeting and zero-based budgeting. (4marks)
(20 marks)
F2.1 Page 8 of 8
INSTRUCTIONS:

questions should be attempted.
3. Marks allocated to each question are shown at the end of
the question.
4. Show all your workings where necessary.
F2.1 Page 1 of 8
QUESTION ONE
(a) Kabatesi Manufacturing Company Limited (KMC Ltd) is a company located in Western
Province, Rwanda that produces T-Shirts for Men and Women. It is a normal practice for the
company management to produce a budget to be tabled to the Board of Directors by 31st
December each year. Bosco Abizera, The Head of Finance and Administration, has sent to the
chief accountant, Eric Niyomugabo, the expected expenses for the Financial Year 2021 for
budget preparation.
The expenses for budget production of 5,000 units in a factory are provided below:
S/N Description Cost per unit /Rwf

1 Direct Material 50
2 Direct Labour 25
3 Variable Overheads 20
4 Fixed Overheads (100,000) 10
5 Variable Expenses-Direct 5
6 Costs allocated to selling (10% Fixed) 13
7 Distribution Expenses (20% fixed) 7
8 Fixed General Expenses (Rwf 50,000) 10
Total 140
Required:
As an accountant working under the supervision of Bosco Abizera, prepare for him a budget
for the Production of 8000 units, 6000 units and Calculate the cost per unit at both levels
(15 Marks)
(b) On 30th June 2020, The Chief Executive Officer (CEO) chaired all staff meeting for Manasseh
and Sons Company Limited (MSC Ltd). One of the main issues raised by the staff was on how
incentives were prepared and shared amongst the staff. It was not the first time this was questioned
to the company’s management. The CEO and senior team of MSC Ltd are much struggling on
setting incentive scheme.
F2.1 Page 2 of 8
Required:
As a management Accountant at Manasseh and Sons Company Limited, you are requested
to advise the CEO on the above issue by providing five (5) key principles of a Good Incentive
Scheme to contractual and permanent staff. (5 Marks)
(Total :20 Marks)
QUESTION TWO
(a) Gasabo Rice Company (GRC) is a company fully owned by Three Brothers: Karake Bob, Issa
Manzi and Hassan Sassi. All of them graduated from Production Industry Engineering and
never had chance to learn Management Accounting. Company owners want to do business
revamping and they want to change from Job Costing to Batch Costing. This will be one of the
major points to be discussed during the next board of directors meeting.
Required:
As the Head of Finance and Administration at GRC, you are required to highlight five (5)
key differences between Job Costing and Batch Costing to the company’s owners during the
next board meeting. (10 Marks)
(b) Batch No 465 required 10 Kgs of materials in stores which cost Rwf 15/Kg, and also a special
component had to be bought at a cost of Rwf 1,000. 30 Hours labor were spent on the Batch where
the employees were paid at Rwf 90/Hour. In addition, 3 Hours were spent by supervisor who is
paid at Rwf150/Hour. Overheads are absorbed at the rate of Rwf40/Labor hour.
Required:
Calculate the total absorption cost of the Batch No 465. (10 Marks)
(Total :20 Marks)
F2.1 Page 3 of 8
QUESTION THREE
Kayonza Nile Company Limited (KNC Ltd) was established in 2014 and was set to provide clean
water access to over 335,000 individuals, Schools, Businesses and Farmers in Rwanda and Across
the Borders in DRC, Burundi and Uganda.
KNC Ltd is a social enterprise committed to eradicating water scarcity by providing appropriate
equipment such as water pump, water bottle and etc. KNC Ltd offer an attractive portfolio of
services and products targeting to service all water scarce areas and encounter within available
budget. KNC Ltd has been making loss over the past six years and want to correct this by resetting
an appropriate selling price. The company want to start the process by assessing the breakeven
point.
Umwari Carine is the Chief Accountant to the company, she previously determined that the fixed
costs of KNC Ltd consists of Tax equivalent to Rwf 15 million, rent for Rwf 45 million and
remuneration of Rwf 40 million. The variable costs associated with producing one bottle of water
is Rwf 20 per unit. The bottle of water is sold at a premium price of Rwf 120.
Required:
i) What does it mean “Break-even Point”? (2 Marks)

ii) Determine the Breakeven point of KNC Ltd. (3 Marks)
iii) Draw the Graph Highlighting the Breakeven Point. (10 Marks)
iv) Provide a detailed Explanation for the Graph of the Breakeven Point. (5 Marks)
(Total :20 Marks)
QUESTION FOUR
The YOKOHAMA Rubber Company Limited (YRC Ltd) is a tire company manufacturer based in
Tokyo, Japan. The company was founded and began its operations on October 13, 1917, in a joint
venture between Yokohama cable manufacturing and B.F Goodrich. In 1969 the company
expanded to the United States of America as Yokohama Tire Corporation.
YRC Ltd received a request from AKAGERA MOTORS Rwanda to provide a quotation for an
order for the supply of 1000 custom made tires required for industrial vehicles. YRC Ltd is facing
F2.1 Page 4 of 8
high competition from its business rivals and is therefore hoping to secure the order by quoting the
lowest price. YRC Ltd plans to quote at 15% above its relevant cost.
Here under is the computation of total costs in regarding the order.
Item Amount/Rwf Description

Gum 120,000 The order requires special type of Gum.
Only 20% of Gum is currently available in stock. The Gum was
purchased two years ago at the cost of Rwf 20,000. If the rubber
is not used on this order, it will have a scrap value of Rwf 10,000.
Remaining quantity shall have to be procured at the price of Rwf
100,000.
Lubricant 80,000 All the required quantity of lubricant is currently available in
stock. The cost of oil that will be used on the order is Rwf 80,000.
Currently the market value of the required quantity of lubricant is
Rwf 82,000. If lubricant is not used on the order, it could be used
in the production of other tires.
Extra ingredients 30,000 All other materials will have to be procured.
Direct Labor 120,000 Rwf 120,000 represents the cost that would be paid to direct labor
in respect of the time that they work on the order.
If direct labor is not utilized on this order, they remain idle for the
entire time. Direct labor is paid idle time equal to 30% of the
normal pay in order to retain them.
Casual worker 70,000 This represents the share of factory supervisor’s salary for the
supervisor payroll number of days in which production for the order will take place.
Depreciation of 20,000 This represents the manufacturing equipment’s depreciation for
equipment the number of days in which production for the order will take
place.
Lease rental of 150,000 This represents the share of lease rentals of the factory plant for
factory plant the number of days in which production for the order will take
place.
Energy 80,000 The order would require 3,000 units of electricity which is
expected to cost Rwf 80,000.
Total 670,000
F2.1 Page 5 of 8
Required
i) In business and accounting, what is the difference between relevant and irrelevant
costs? (5 Marks)
ii) Calculate the relevant cost for the order and on each cost provide explanations of why
it was taken as relevant cost for YRC Ltd.’s quotation Akagera Motors Rwanda
(15 Marks)
(Total :20 Marks)
QUESTION FIVE
a. What is the Economic order Quantity (EOQ)? (4Marks)

b. Sina Gerard Enterprise-Urwibutso is owned and managed by Mr. Sina Gerard. It is oriented
towards agro-processing industry sector. The company is located at Nyirangarama in Rulindo
District, Northern Province. The enterprise has steady demand of 15,000 units per year for one
of its products called Agashya. The enterprise purchases the product from its supplier at a cost
of Rwf 100 each. The incremental cost to process an order is Rwf 150 and its incremental
annual cost to hold the product in inventory is Rwf 20 per unit.
Required:
Calculate the Economic order Quantity (EOQ). (6 marks)

c. Why do most companies prefer to use FIFO over LIFO in inventory management?
(10 marks)
(Total :20 Marks)
QUESTION SIX
With a heritage of over 30 years changing the Rwandan Landscape, CIMERWA is a Rwanda’s
only integrated cements producer. The production plant is located in Bugarama, Rusizi District in
South West border of Rwanda. This is the only cement company in Rwanda that mines raw
materials, Produces the clinker concentrate, packs and sells cement for general and civil
construction. Some of CIMERWA products are exported to neighboring countries such as DRC
and Burundi.
F2.1 Page 6 of 8
The following table describes the production cost for the plant on a new introduced High-Quality
Cement to be used on only for the construction of Railway from Nairobi, Kenya to Bukavu, Congo
via Gitarama, Rwanda.
Item description Standard/Budget Actual

Material Price Rwf 8 per kg Rwf 6 per kg.
Quantity 200 Kgs 150 Kgs
Hours 250 300
Hour Rate Rwf 8 Rwf 7
Output 100 Kgs 80 Kgs
Fixed Overhead Rate per Hour Rwf 12 Rwf 11.67
Fixed Overhead Rate per unit Rwf 30 Rwf 43.75
Fixed Overhead Rwf 3,000 Rwf 3,500
Sales Price per unit Rwf 50 Rwf 65
(a) Calculate the following variances:
1. Material cost. (2Marks)
2. Material usage. (2Marks)
3. Labor cost. (2Marks)
4. Labor rate. (2Marks)
5. Variable overhead. (2Marks)
6. Sales. (2Marks)
7. Sales volume. (2Marks)
(b) Indicate six (6) advantages of material control at CIMERWA. (6 Marks)
(Total :20 Marks)
QUESTION SEVEN
(a) Rwanda Environment Management Authority (REMA) is responsible for developing a Green
Economy approach for the country’s economic transformation with the framework of the
second Phase of the Economic Development and Poverty Reduction Strategy (EDPRS II)
running from 2013 through to 2018.
F2.1 Page 7 of 8
Required:
As a Management Accountant, what are six (6) benefits of having an environmental

management systems (EMS)? (12 Marks)
(b) The traditional role of the management accountant has been to exercise control and for this
reason they have been largely independent of the operational managers. More recently
management accounting has focused more on business support.
Required:
Provide the main reasons for the change in the management accountant’s role. (8 Marks)
(Total :20 Marks)
F2.1 Page 8 of 8
DATE: FRIDAY 30, APRIL 2021
INSTRUCTIONS:
1. Time Allowed: 3 hours 15 minutes (15 minutes reading and 3

hours writing).
Should be attempted.
question.
F2.1 Page 1 of 8
QUESTION ONE
a) Budget control is the practice of establishing budgets which identifies the areas of responsibility
for individual managers and of regularly comparing actual results to expected results.
(i) Referring to the above statement, explain at least 5 purposes of budget control
(2.5Marks)
(ii) Explain the following types of budgets and give at least 2 advantages of using each one
of them:
- Activity based budgeting. (1.5 Marks)
- Zero based budgeting. (1.5 Marks)
b) Horizon Limited is a company incorporated in Rwanda and deals in real estate development. The
below data relates to forecasted and actual sales of completed apartments for the fourth months
of 2019.
Actual sales:
Months No of apartments Amount- Frw

January 12 135,000,000
February 12 135,000,000
March 14 150,000,000
April 14 150,000,000
Forecasted sales
Months No of apartments Amount- Frw

May 16 175,000,000
June 22 250,000,000
July 22 250,000,000
August 22 250,000,000
i) Accounts Receivable: 50 percent of total sales are for cash. The remaining 50% will be collected
equally during the following two months- (the firm incurs a negligible bad debt loss).
ii) Cost of construction: 70% of sales. 90% of this cost is paid in the following month.
iii) Selling, general and administrative expenses: Frw 1,500,000 per month plus 10% of sales. All
these expenses are paid for during the month of incurrence.
iv) Interest payments: an interest payment on Frw 275,000,000 of bonds outstanding (12% coupon)
is paid during July. An annual Frw 95,000,000 sinking fund payment is also made at that time.
v) Dividends: A Frw 15,000,000 dividend payment will be declared and made in July.
vi) Capital expenditures: Frw 90,000,000 will be invested in plant and equipment in June.
vii) Taxes: Income tax payments of Frw 1,500,000 will be made in July.
viii) The company wishes to maintain at all times a minimum cash balance of Frw 40,000,000.
ix) On 30 April 2019, the company had a balance of Frw 40,000,000 on its bank accounts.
F2.1 Page 2 of 8
Required:
A) Prepare a cash budget for Horizon Ltd, indicating receipts and disbursements for May, June
and July. (13.5 Marks)
B) Determine whether or not borrowing will be necessary during the period, and if it is, when
and how much. (1 Mark)
(Total: 20Marks)
QUESTION TWO
a) Rwanda General services Limited has three production departments and two services departments.
The following relates to budgeted factory overheads for the year ended 31 December 2019:
Production departments Services department Total

A B C 1 2
Frw Frw Frw Frw Frw Frw
96,000 84,000 60,000 30,000 36,000 306,000
The service department 1 provides the services to other departments in the following percentages.
A: 40%, B: 20%, C: 30%, and 2: 10%
The service department 2 provides the services to the rest of the departments in the following
percentages: A: 35%, B: 35%, C:20%, 1: 10%
Required:
a) Reapportion the service department costs to production taking into account that the service
departments serve one another. (6 Marks)
b) Klaus Jobbing Rwanda Limited deals in bricks manufacturing. On 1 December 2019, this
company had one uncompleted job in its factory. The following information relates to the job card
N4500 for the uncompleted work:
Particulars Amount “Frw”

Direct material 630,000
Direct labour (120 hours) 350,000
Factory overhead 240,000
Total 1,220,000
During the month, three new jobs were started in the factory, and the costs of production were as
follows:
Direct materials issued to: “Frw”

Job N4500 2,390,000
Job N4501 1,680,000
Job N4502 3,950,000
F2.1 Page 3 of 8
Job N4503 4,420,000
Damaged stock written off during the month 2,300,000
Materials transfers between jobs were as follows:
Job N4502 to Job N4501 250,000
Job N4500 to Job N4502 620,000
Materials returned to store:
From Job N4500 870,000
From Job N4503 170,000
Direct labor hours recorded
Job N4500 430 hours
Job N4501 650 hours
Job N4502 280 hours
Job N4503 410 hours
The cost of labour hours during the period was Frw 3,000 per hour and production overhead is
absorbed at the rate of Frw 2,000 per direct labour hour. Production overhead incurred during the
period amounted to Frw 3,800,000. Completed jobs were delivered to customers and invoiced Frw
5,500,000 for N4500, Frw 8,000,000 for N4502 and Frw 7,500,000 for N4503.
During the period, administration and marketing are added to the cost of sales at the rate of 20% of
factory cost.
Required:
i) Prepare the job accounts for each job during the month ended 31 December 2019.
(10 Marks)
ii) Prepare the profit/ loss statement on each completed job. (3Marks)
iii) Determine the factory cost for the uncompleted job. (1Mark)
(Total: 20Marks)
QUESTION THREE
a) Safintra Rwanda Limited is a manufacturing company dealing in production of roofing iron sheets
and other roofing materials. The production of iron sheets passes through 3 distinct processes to
get to the final stage. The data below relates to the process 2 during quarter 2 of the year ended 31
December 2019. In the month of March 2019, process 1 closed with some work in progress of 200
units valued at Frw 1,500,000 with completion stages being 20% for materials, 40% for labour and
50% for overhead
During quarter two, 1,250 units were received valued at FRW 5,000 per unit. The following costs
were incurred as well:
Particulars Amount “Frw”
Materials added 5,000,000
Labour 5,450,000
Overhead 3,000,000
At the end of quarter two, 80 % of units received were processed and finished. The rest were still in
process and completed at 90% for materials, 75% for labour and 80% for overheads
F2.1 Page 4 of 8
Required:
Assuming the company uses FIFO in process accounting, you are required to show:
i) Statement of equivalent production units. (5 Marks)
ii) Statement of valuation. (5 Marks)
iii) Cost to be transferred to Process 3. (1Mark)
b) The management of ABC Limited uses the clocking in and out system to record for labour hours
that are used to record payroll and account for employees’ wages. They have approached you to
help them prepare the payroll for the month of December 2020. The following information has
been provided to you:
Employee Employee Number of Rate of pay per Salary advances

Number names hours worked hour (Frw) paid
5011 Ganza 180 8,000 500,000
5012 Rurangwa 160 7,000 470,400
5013 Rugamba 200 7,500 530,500
5014 Muhoza 190 8,000 490,700
5015 Mugwaneza 210 9,500 1,008,900
5016 Shema 180 7,000 679,900
5017 Ishimwe 170 6,000 400,700
5018 Rwibutso 190 7,500 745,000
1) Normal working hours are 180 per month. Overtime payable for extra hours is calculated at the
rate of 30% above the normal pay rate
2) PAYE to be deducted is 25% applicable to any excess of Frw 30,000 for the total monthly
employee’s wage
3) RSSB to be deducted at the rate of 15% for each employee
4) Welfare fund contribution is Frw 40,000 for each employee
Required:
In a tabular format, determine each company’s employee net pay for the month of December
2020. (9 Marks)
(Total:20Marks)
F2.1 Page 5 of 8
QUESTION FOUR
a) Over the years, regression analysis has stood out as one of the powerful statistical tools used in
sensitivity analysis, business management decisions and research.
(i) As a CPA candidate, explain what is regression analysis in the context of management
accounting. (1 Mark)
(ii)Explain at least 4 assumptions of regression analysis. (4 Marks)
b) The following data relates to the Maraba Company Limited (MCL) for the month of June 2020:
Dates Output (units) Total cost (Frw)

5 June 2020 60 5,100
10 June 2020 45 5,450
15 June 2020 50 6,050
20 June 2020 40 5,400
25 June 2020 60 6,850
30 June 2020 35 6,200
Required:
(i) Determine fixed costs and variable cost. (7 Marks)

(ii) Write down the cost equation in the form of Y= a+bx. (1 Mark)
c)(i) Explain the term break even chart and at least 3 limitation of using it in decision marking.
(2 Marks)
(ii) East African Promoters (EAP) is organizing a VIP concert at Kigali Arena in 2022 where everyone
who will attend the concert will be served with dinner. EAP agreed with Radisson Blue to deliver
meals at a cost of Frw 23,000 per spectator. EAP will pay the following costs as well prior to the
beginning of the concert:
- To Kigali Arena: Frw 4,567,300
- To Nyundo live music Band of 25 singers: Frw 700,400 per each singer
The entrance fee will be 25% markup on the cost of the meal
Required:
The EAP manager has approached you to help him determine the following:
1. Breakeven tickets and sales value. (4 Marks)
2. How many tickets will EAP sell to realize a profit of 3,750,000? (1 Marks)
(Total: 20Marks)
F2.1 Page 6 of 8
QUESTION FIVE
a) Marginal costing and Absorption costing are two main costing techniques that are used in the
business environment
i.Explain the 3 arguments against the use for each costing technique. (3Marks)
ii.With aid of examples, explain at least 4 assumptions of marginal costing. (4Marks)
b) Terimbere Limited is a company incorporated in Rwanda and produces a single product namely
“Ubuntu orange”. Its Cost Manager has prepared the following cost structure based on the normal
level of output of 60,000 units:
Particulars Cost per unit (Frw)

Material cost 8,000
Direct labour 6,000
Selling & distribution cost 4,000
Fixed manufacturing overheads 8,000
Total 36,000
At the beginning of the year 2017, the company had opening stock amounting to 20,000 units whose
value is based on the above cost structure. The budgeted selling and administration overheads amount
to Frw 200 million per year. The company sells the products at Frw 50,000 per unit. The table below
presents data related to production and sales for each year:
2017 2018 2019 Total
Production (units) 45,000 60,000 40,000 145,000
Sales (units) 50,000 55,000 60,000 165,000
Required:
i) Prepare the statement of profit or loss for Terimbere Limited based on Absorption and
Marginal costing techniques principles for the three years 2017 to 2019. (10 Marks)
ii) With reference to the work done above, explain reasons as to why profits under these two
techniques always differ (3 Marks)
(Total: 20Marks)
QUESTION SIX
a) A company produces two products A and B in a joint process at a joint cost of Frw 900,000. At
split off point 1000 units of A and 500 units of B are produced and sales value are Frw 550,000
for A and Frw 450,000 for B. The two products can be further processed at a cost of Frw 300,000
for A and Frw 200,000 for B. The selling price per unit in this case is Frw 1,800 for A and Frw
1,400 for B
F2.1 Page 7 of 8
Required:
i) Using physical quantity method, determine the total cost for the product A and B.
(7 Marks)
ii) Using sales value method, determine the total cost for the product A and B. (5Marks)
iii) Using Net realizable value method, determine the total cost for the product A and B
(5Marks)
b) In exercising their duties, Management Accountants have an obligation to maintain the highest
standards of ethical responsibility and professionalism. This is not only required by the profession,
but also by most organizations to preserve their reputation and public image.
Required:
As a future Management Accountant, explain the standards guiding ethical conduct of
Management Accountants as per the Institute of Management Accountants. (3 Marks)
(Total: 20Marks)
QUESTION SEVEN
a) Explain the following terms as used in standard costing:

i) Basic standards. (1 Mark)
ii) Ideal standards. (1 Mark)
iii) Expected standards. (1 Mark)
iv) Current standards. (1 Mark)
b) Define the term variance analysis and explain at least 4 causes of variances. (4 Marks)
c) CIMERWA Limited was planning to produce a brand-new cement namely- CIMER24 in
September 2020. The Management of the company expected that one unit of the new brand
cement would take 4 hours in production process and the expected fixed overhead amounts to be
Frw 20 million. The standard fixed overhead cost will be Frw 20,000 per 4 hours. This unit will
cost Frw 30,000 of direct labour during the 4 hours in production and requires 20 kilograms of
gypsum at Frw 2,700 per kilo. At the end of the month, actual overhead expenditure was Frw
20.45 million and the company produced 910 units in 4,500 hours at a total labor cost of Frw 36
million. These units consumed 17,900 kilograms of gypsum at a cost of Frw 45 million.
Required:
Determine
(i) Fixed overhead variance. (2 Marks)
(ii) Overhead expenditure variance. (2 Marks)
(iii) Direct labour rate variance. (2 Marks)
(iv) Direct labour efficiency variance. (2 Marks)
(v) Direct material price variance. (2 Marks)
(vi) Direct material usage variance. (2 Marks)
(Total:20Marks)
F2.1 Page 8 of 8
F 2.1: MANAGEMENT ACCOUNTING
DATE: FRIDAY, 27 AUGUST 2021
INSTRUCTIONS:

questions should be attempted.
3. Marks allocated to each question are shown at the end
of the question.
F 2.1 Page 1 of 8
QUESTION ONE
a) Define what management accounting is and discuss its nature and scope. (5 Marks)
b) The Telecom factory company deals in production of ream papers and it is currently
operating at 40% capacity producing 10,000 units of ream papers per year. The data
provided below relates to the cost of production of one ream of paper:
- Material Frw 10,000
- Labour Frw 3,000
- Overheads: Frw 5,000 (60% fixed)
The selling price is Frw 20,000 per ream. If the production capacity of the factory is increased
to 50%, the selling price will drop by 3%. At 90% capacity, both selling price and direct
material will decrease by 5%.
Required:
Prepare a flexible budget showing the profits/ losses at 40%, 50% and 90% capacity
utilisation. (10 Marks)
c) Discuss the role of budgeting in a manufacturing company. (5 Marks)
(Total: 20 Marks)
QUESTION TWO
Price Global Company Limited has two service departments and two production departments.
The services departments support production departments in its daily operations.
The following cost information relates to the 3 months’ period ended 31 March 2021
Details Total Services department Frw Production department Frw
Frw A B M N
Indirect wages 65,000 30,000 10,000 15,000 10,000
Consumables 100,000 30,000 10,000 10,000 50,000
Power 50,000
Rent and rates 30,000
Depreciation 10,000
i) Below data relates to consumption of power, value of machinery, space occupied by each
department and direct labour hours
Details Total Services department Production department
A B M N
Power consumption
50 5 15 10 20
(units)
Value of machinery Frw) 500,000 50,000 150,000 50,000 250,000
Floor area (m2) 50,000 10,000 12,000 8,000 20,000
Direct labour hours 30,000 - - 20,000 10,000
F 2.1 Page 2 of 8
ii) The overhead of services department are charged as follows:
Department A B M N
A 0% 20% 30% 50%
B 10% 0% 60% 30%
Required:
(a) Carry out a secondary overhead apportionment using Repeated distribution method
(10Marks)
(b) Differentiate standard costing from standard cost. (2Marks)
(c) Describe the procedures for standard cost setting. (4Marks)
(d) Explain at least 4 types of standard costing. (4Marks)
(Total: 20 Marks)
QUESTION THREE
a) Muhanga Jobbing Rwanda Limited is a manufacturing company incorporated in the
Republic of Rwanda. On 1 December 2020, the company had one uncompleted job in its
factory. The following information relates to the job card No 4500 for uncompleted work:
S/N Particulars Amount ”Frw”
1 Direct materials 630,000
2 Direct labour (120 hours) 350,000
3 Factory overhead 240,000
Total 1,220,000
During the month, three new jobs were started in the factory and the cost of production were
as follows:
Direct materials issued to: “Frw”
Job N4500 2,390,000
Job N4501 1,680,000
Job N4502 3,950,000
Job N4503 4,420,000
Damaged stock written off during the month 2,300,000
Materials transfers between jobs were as follows: “Frw”
Job N4502 to Job N4501 250,000
Job N4500 to Job N4502 620,000
Materials returned to store: “Frw”
Job N4500 870,000
Job N4503 170,000
Direct labour hours recorded
Job N4500 430 hours
Job N4501 650 hours
Job N4502 280 hours
Job N4503 410 hours
The cost of labour hours during the period was Frw 3,000 per hour and production overhead
is absorbed at the rate of Frw 2,000 per direct hour. Production overhead incurred during the
period amounted to Frw 3,800,000. Completed jobs were delivered to customers and invoiced
Frw 5,500,000 for N4500, Frw 8,000,000 for N4502 and Frw 7,500,000 for N4503.
F 2.1 Page 3 of 8
During the period, administration and marketing overheads amounted to Frw 3,200,000 and
they are added to the cost of sales at the rate of 20% of factory cost
Required:
i) Prepare the job accounts for each job during the month ended 31 December 2020.
(6 Marks)
ii) Prepare the profit/ loss statement on each completed job. (4 Marks)
iii) Determine the factory cost for the uncompleted job. (2 Marks)
b) Imena milk industries Limited deals in production of milk. Over the past two years, it saw
its sales stagnant, something that triggered the management to put more efforts in
advertising its products on different media platforms whilst expecting increase in sales.
Below are the cost of advertisement and associated sales unit for the past six months:
Month Advertisement cost(Frw) Sales units

January 800,000 4000
February 500,000 3000
March 350,000 1000
April 1,000,000 6000
May 850,000 5000
June 1,300,000 7000
July 1,100,000 6000
August 1,600,000 8000
i) Using High low method, estimate the total cost function and calculate unit variable
cost and unit fixed cost. (4 Marks)
ii) Estimate the total cost function using linear regression analysis and calculate how
much cost will be incurred when sales units are 1000. (4 Marks)
(Total: 20 Marks)
QUESTION FOUR
a) Umurava company Limited manufactures three products namely X,Y,Z and you are
provided with the following information:
Sales forecasts
Product Quantity Price per unit
X 4,000 300
Y 1,000 120
Z 3,500 340
Materials used in the production of the above products are Material A costing Frw 7 per unit,
Material B costing Frw 6, and Material C costing Frw 4
Units of quantities used in each product are given below
Product A B C
X 4 2 4
Y 3 3 2
Z 2 1 1
F 2.1 Page 4 of 8
Below information regarding stocks have been also provided to you:
Finished stocks
Product X Y Z
Opening inventory 1,000 2,000 500
units
Closing inventory 1,500 1,650 400
units
Material stocks
Material A B C
Opening inventory 16,000 10,000 12,000
units
Closing inventory 32,000 20,000 10,000
units
Required:
i) Sales budget in quantity and value. (3 Marks)
ii) Production budget in units. (5 Marks)
iii) Material utilisation budget. (3 Marks)
iv) Purchase budget in quantity and value. (5 Marks)
b) Rubavu Hills Limited manufactures a single product G with a single score of labour. The
sales budget and finished goods budget for the year ended 31 December 2020 are as
follows:
Sales units: 1,500 units at a selling price of Frw 600 per unit
Opening stock- finished units 300 units
Closing stock – finished units 190 units
The standard direct labour hours for the product G is 3 hours. The budgeted productivity ratio
for director labour is 75% only.
The company employs 40 direct workers who are expected to work an average of 120 hours
each in the period under consideration.,
Required:
i) Prepared a Direct labour budget (4 Marks)
(Total: 20 Marks)
QUESTION FIVE
a) (i) With aid of typical examples, differentiate production overheads from
administrative overheads. (3 Marks)
(ii) Explain 4 types of functional costs that a manufacturing company is likely to
incur as it carries out its daily operations. (2 Marks)
F 2.1 Page 5 of 8
b) A company manufactures a single product M in two consecutive processes A and B. At
the beginning of the quarter ended 31 December 2020 there was work in progress valued
at Frw 24,000; Frw 14,000 and Frw 4,000 for material, labour and overheads respectively.
During the quarter, the following units and costs were added
- Material: Frw 60,000 (2000 units)
- Labour: Frw 33,500
- Overheads: Frw 15,000
The normal loss is estimated to be nil
As at 31 December 2020, there were 460 incomplete units at the following degrees of
completion:
- Material: 100%
- Direct labour: 65%
- Overheads: 55%
The company uses weighted average cost method in its valuation of inventory
Required:
i) Statement of equivalent production units. (4 Marks)
ii) Statement of cost. (5 Marks)
iii) Statement of evaluation. (3 Marks)
iv) Process account. (3 Marks)
(Total: 20 Marks)
QUESTION SIX
a) Majyambere Hardware Company Limited (MHC Ltd) has been operating in Muhanga
district for the last 3 years. The owner of the company Mr Majyambere has recently asked
his accountant who is your former classmate when the company will start making profit.
However, since the accountant was not able to respond to his boss’s question, he has
approached you as a friend to help him answer the question.
Below are data relating to the company’s operations in 2020 provided to you for reference
purposes.
Sales:
Particulars Amount (Frw)
Sales 15,000,000
Direct material 3,250,000
Variable overhead cost 3,500,000
Administration expenses 1,050,000
25,500,000
1) Selling and distribution cost is Frw 2.3 million, Frw 1 million being variable cost
2) The following changes are expected to occur during the year:
- Variable selling and distribution expenses will reduce by 5% due to efficiency in sales
staff
- Variable overhead will reduce by 3%
F 2.1 Page 6 of 8
- Material cost will increase by 2% due to increase in inflation rate in the country
- Labour cost will increase by 4%
- The selling price will be reduced by 3% to attract many customers
- The closing stock will be nil at the end of the period
Required:
i) Calculate the breakeven point in sales using the above provided data. (6 Marks)
ii) Determine the margin of safety in sales value for the year. (2 Marks)
iii) Considering the amount of investment and its cost, Majyambere would like to
make a profit of Frw 2.25 million. Advise how much sales to make in order to get
this profit (2 Marks)
iv) Prepare a summary of operating statement to show the net profit. (2 Marks)
v) Discuss limitations of CVP analysis. (5 Marks)
b) Vision Company requires 1000 units of a component in a manufacturing process in the

upcoming year which costs Frw 50 each. The items are available locally and the lead time
is 7 days. Each order costs Frw 50 to prepare and process while holding cost is Frw 15
per unit per year for storage and opportunity cost of capital is 10% of ordering cost.
(i) Required: How many units should be ordered each time an order is placed to
minimise inventory costs? (2 Marks)
(ii) Calculate the re-order level. (1 Mark)
(Total: 20 Marks)
QUESTION SEVEN
a) Compare and contrast management accounting and financial accounting. (8 Marks)
b) Umucyo Company Limited produces soft drink products including juice, milk, and water.
Over the past years the company has been applying full costing absorbing production
overheads on the basis of direct labour hours. The management of the company wishes to
adopt activity-based costing (ABC) as they are convinced that it will give them
appropriate cost values
The following cost per unit information has been obtained for the month of May 2020
Particulars Juice Milk Water

Direct material (Frw) 1,500 1,450 550
Direct labour (Frw 250 per hour) 400 150 450
Production for the months was 5000 units, 10,000 units and 2000 units for Juice, milk and
water respectively. Production overhead is Frw 14,480,000 which is analysed as follows:
Machine running costs Frw 4,400,000

Machine set up costs Frw 4,240,000
Ordering costs Frw 3,600,000
Material handling costs Frw 2,2400,000
Additional information in respect of cost drivers
F 2.1 Page 7 of 8
Juice Milk Water
Total material movement 10 15 5
Order size 500 1,000 600
Per unit production runs 2 2 2
Number of set ups 3 5 2
Required:
(i) Determine the unit selling price of each product using ABC technique assuming the
company targets a profit of 20% on cost. (9 Marks)
(ii) Discuss the steps of ABC system. (3 Marks)
(Total: 20 Marks)
F 2.1 Page 8 of 8
CPA AND CAT PAST PAPER QUESTIONS REFERENCE
TOPIC CPA QUESTIONS CAT QUESTIONS
1. NATURE AND PURPOSE • June 2014 Q 1 a (i) • June 2014 Q 1 a (i)
OF COST AND • Dec 2018 Q1 a • Dec 2015 Q5b: Roles of
MANAGEMENT • Dec 2018 Q2b Factors to be Mgnt Accounting
ACCOUNTING considered in a good costing
system
• Dec 2018 Q3c Roles of
costing
2. COST CLASSIFICATION • June 2013 Q1 a and b • June 2014 Q1 (ii)
• Dec 2018 Q2 a Profit centre
&investment centre
3. COST ESTIMATION • Dec 2018 Q3a High low • Dec 2014 Q3a: High Low
• Dec 2013 Q7 Regression • Dec 2015 Q5 a & b High
• June 2015 Q2 High Low & Low
Regression • Nov 2016 Q2 a High Low
• June 2016 Q4b: least square
4. MATERIALS • Dec 2018 Q3b FIFO • June 2018 Q5b LIFO
• Nov 2017 Q5 EOQ, Holding • Nov 2017 Q5c EOQ, HC
Costs and Ordering Costs &OC
• Dec 2016 Q4b Stock Levels • June 2016 Q6d Discounting
• June 2016 Q2 LIFO • June 2015 Q3a Reorder
• June 2015 Q3d Stock Levels Levels
• June 2014 Q1b EOQ • June 2014 Q1b Reorder
levels
5. LABOUR • June 2018 Q2c Halsey & • June 2014 Q2b &C
Rowan Remuneration Methods
• Dec 2017 Q1a Basic pay & • Dec 2014 Q6b L. Turnover
overtime & incentive schemes –
• Dec 2016 Q2 b&C Theory
Remuneration Methods & • June 2016 Q4c Incentive
Bonuses Schemes- Halsey & Rowan
• June 2014 Q2b Overtime
• June 2014 Q2 c
• Dec 2018 Q1 c
6. OVERHEADS • Dec 2018 Q2c step 1&2 • Dec 2014 Q5a Step 1
• Dec 2016 Q3 Step 1 & 2 • June 2017 Q3b Step 2
• June 2017 Q3 Step1 &2 • June 2018 Q1c Step 2
• Dec 2017 Q3 Step 2
7. MARGINAL COSTING • Dec 2014 Q1 a, b &c • June 2014 Q3
AND ABSORPTION • June 2013Q5 MC & AC, • June 2017 Q5
COSTING Reconciliation • June 2015 Q2b
• June 2017 Q7 MC • Dec 2014 Q2
• Dec 2013 Q4b • June 2018 Q7b (ii)
• Dec 2018 Q4a • Nov 2016 Q4
8. ACTIVITY BASED • Dec 2018 Q4c steps in ABC • Nov 2017 Q2

COSTING • Dec 2014Q2 • June 2016 Q3
• Jun 2017 Q2 • June 2015 Q4
• June 2014 Q4
• June 2018 Q3a
9. CVP ANALYSIS • June 2013 Q6 • Nov 2017 Q1
• June 2015 Q4d • June 2016 Q7
• June 2018 Q1a&b • June 2014 Q6
• June 2016Q5c Trad & Cont • June 2015 Q6
BEP • Nov 2016 Q7
• Dec 2015 Q7b economist vs
Accountant approach
10. DECISION MAKING • Dec 2018 Q5a &b Shut • Dec 2015 Q2 Limiting
down, factors to consider in factors
make or buy • Nov 2016 Q4b Accept or
• Nov 2015 Q1b limiting reject
factors • June 2017 Q4b
• Dec 2017 Q7 limiting factors Discontinuing
• June 2018 Q 1c &Q4 Accept • Nov 2017 Q6 sub contracting
or reject • June 2018 Q3 profit max
• June 2013 Q7 Shut down
• Dec 2016 Q2 a shut down
11. JOB, BATCH AND • Dec 2017 Q1 b &c • June 2016 Q4b Job costing
SERVICE COSTING • June 2013 Q4a&b Job • June 2018 Q6 c
costing
• Dec 2018 Q1b
12. PROCESS COSTING • June 2017 Q6 Closing WIP • Nov 2017 Q4b Basic process
• Dec 2013 Q2 FIFO accounts
• Nov 2015 Q3 FIFO • Dec 2015 Q1 Basic process
• June 2016 Q5b Opening WIP accounts
• June 2018 Q2 AVCO • June 2015 Q1 FIFO
• June 2018 Q7b Joint costs • June 2018 Q2 FIFO
• June 2017 Q7b joint costs
13. BUDGETING • Dec 2017 Q4 Flexed budgets • Nov 2016 Q3 Functional
• June 2018 Q5 Functional budgets
budgets • June 2018 Q6b functional
• June 2014 Q5 Cash budgets budgets
• Dec 2013 Q5 Cash budgets • Dec 2015 Q3 cash budget
• Nov 2015 Q2b Flexible • June 2016 Q1 Flexible
budgets budget
• June 2016 Q2 ABC • June 2017 Q2 Zero based
• Dec 2018 Q6 a &b cash budget
budget
14. STANDARD COSTING • June 2014 Q3 reconciliation • Nov 2017 Q7b
• June 2018 Q6 • June 2018 Q4
• Dec 2013 Q3 b&c • Dec 2015 Q4
• June 2017 Q4
• Dec 2014 Q4
• Dec 2018 Q7 b

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SCHOOL OF PROFESSIONAL AND

KIGALI AND MUSANZE CAMPUS

MANAGEMENT ACCOUNTING COURSE OUTLINE

LECTURER: CHARLES KOMBO OMANYO

Aim: to develop knowledge and understanding of the application of management Accounting

1. The nature and purpose of cost and management accounting

7. Marginal and Absorption costing

CHAPT 1: NATURE AND PURPOSE OF COST ACCOUNTING

Cost Accounting is also defined as that part of management accounting which

Data and Information

Qualities of Good Information

8. Easy to use: information should be communicated in a way which is clear and

Managerial process of planning, control and Decision making

The functions of a manager include:

2. The control of the operations of the enterprise

Purpose and role of cost and management accounting

4. Decision Making: cost accounting information assists in the making of

5. Resource allocation decisions: for example product pricing in determining

6. Performance evaluation: cost accounting information is used to measure and

7. Motivation: Motivation involves influencing human behaviour so that the

8. Communication: To communicate means to make known, impart or transmit

Difference between financial and Cost & Management Accounting

Management Accounting: This is the part of accounting that provides special-

Management Accounting Financial Accounting

CHAPT 2: COST CLASSIFICATION

Management will require information to make decisions on a variety of issues, each of

1. Classification by the elements of the costs

Remember, a cost is simply a quantification or measurement of the economic sacrifice

overheads to specific products is done through cost allocation and apportionment.

o Semi-variable/ semi-fixed/ mixed costs:

Level of activity level of activity

6. Product or service and Period costs

7. Avoidable and Unavoidable costs

8. Controllable and Uncontrollable costs

CHAPT 3: COST ESTIMATION

Methods of Cost Estimation

Linear regression analysis

Establishing a linear function

Month Output (units) Total cost ($)

NOTE: Where care is needed

Visual Fit (Scatter Graph) Method

Material Purchase Procedure

1. Economic Order Quantity (EOQ)

Reorder Level = Maximum Consumption × Maximum Lead Time

3. Minimum Stock Level

4. Maximum Stock Level

5. Average Stock Level

Average Inventory = Q + Buffer Inventory

3. Weighted Average Cost Method (AVCO)

Issue price = Total Value of Stock Held

Accounting for Materials

Reasons for holding stocks

Stock out Costs

1. Direct labour costs:

Basic pay (Direct cost) = $10

Overtime pay ($15)

Overtime premium (indirect cost) = $5

Overtime premiums are indirect cost (overheads) unless;