THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF BUSINESS AND ECONOMICS (FBE)

DEPARTMENT OF ACCOUNTING AND FINANCE

BACC/BAIT
ACU 08102: MANAGEMENT ACCOUNTING

TUTORIAL QUESTIONS

Cost Accounting Techniques

Instructor: CPA. Prof. Zawadi Ally

Office: Block C. Room. H.0008

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QUESTION 1
ABC Company produces and sells one product only which sells for Shs 5,000 per unit. There
were no inventories at the end of May and other information is as follows.

Standard cost per unit Shs

Direct material 1,800
Direct wages 400
Variable production overhead 300
Budgeted and actual costs per month
Fixed production overhead 9,900,000
Fixed selling expenses 1,400,000
Fixed administration 2,600,000
Variable selling expenses 10% of sales value
Normal capacity is 11,000 units per month
The number of units produced and sold was
June (units) July (units)
Sales 12,800 11,000
Production 14,000 10,200

Required
Show the profit statements for the month of June and July under:
(a) Marginal costing
(b) Absorption costing

QUESTION 2
The Chief executive of GM Company has received the following Income Statement for the month
of May 2023 which was prepared on a marginal costing basis.

GM COMPANY
INCOME STATEMENT FOR THE MONTH OF MAY 2023

Shs
Sales 24,000,000
Less: Variable cost of Goods sold 12,000,000
Contribution Margin 12,000,000
Less: Fixed Manufacturing costs at budget 6,000,000
Gross Margin 6,000,000
Less: Fixed selling and Administrative costs 4,000,000
Net Income before tax 2,000,000

The following notes were attached to income Statement

Shs
• The unit sales price for May 2023 averaged 2,400

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 • The unit Manufacturing costs were
• Variable costs 1200
• Fixed costs applied 400
• Total costs 1600
• The unit fixed manufacturing overhead is based upon a normal monthly production of
15,000 units
• Variables costs per unit have been stable throughout the year.
• Production for May 2023 was 4,500 units in excess of sales
• The inventory at May 30th 2023 consisted of 8,000 units.

Being the first time, the chief executive was presented with an Income Statement prepared on
marginal costing basis; he was not very comfortable with the results and keep on wondering
what the net income would have been under the absorption costing basis.

REQUIRED
(a) Present the May 2023 Income Statement on an absorption costing bases
(b) Reconcile and explain the differences in net income between the two costing bases

QUESTION 3
The following information relates to Product XA, for quarter three, which has just ended.

Production Sales Fixed overheads Variable costs

(Units) (Units) (Shs ‘000’) (Shs’000’)
Budget 40,000 38,000 300,000 1,800,000
Actual 46,000 42,000 318,000 2,070,000

The selling price of product XA was Shs 72,000 per unit

The fixed overheads were absorbed at a predetermined rate per unit. At beginning of quarter three,
there was an opening stock of product G of 2000 units valued at Shs 25,000 per unit variable costs
and Shs 5,000 per unit fixed overheads.

REQUIRED
(a) Calculate the fixed overhead absorption rate per unit for the last quarter
(b) Present profit statements using FIFO using
▪ Absorption costing
▪ Marginal costing
▪ Reconcile and explain the difference between the profits or losses
(c) Using the same data present similar statements to those required in part (b), using the
AVCO method of valuation, reconcile the profit or loss figures, and comment briefly
on the variations between the profits or loss in (b) and (c)

QUESTION 4
BM Company sells a single product at a price of Shs 1,400 per unit. Variable manufacturing costs
of the product are Shs 640 per unit. Fixed manufacturing overheads, which are absorbed into the
cost of production at a unit rate (based on normal activity of 20 000 units per period), are Shs

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9,200,000 per period. Any over- or under-absorbed fixed manufacturing overhead balances are
transferred to the income statement at the end of each period, in order to establish the company
profit.

Sales and production (in units) for two years are as follows:

2022 2023
Sales 15,000 22,000
Production 18,000 21,000
The company profit in 2022 was reported as Shs 3,580,000.

REQUIRED:
(a) Prepare an income statement to identify the company profit for year 2023 using the existing
absorption costing method.
(b) Determine the company profit that would be reported in year 2023 if marginal costing was
used.
(c) Explain, with supporting calculations:

(i) The reasons for the change in manufacturing profit between year 2022 and 2023 where
absorption costing is used in each period;
(ii) Why the company profit in (a) and (b) differs.

QUESTION 5
Marginal costs are those costs that are incurred only if a job or activity is performed. Marginal
costs are important in decision making
Required
Discuss briefly, five arguments against marginal costing

QUESTION 6
ABC Ltd makes and sells one product, which has the following standard cost
Shs
Direct labour 3 hours at Shs 6 per hour 18
Direct materials 4 kilograms at Shs 7 per kg 28
Production overhead variable 3
Fixed 20
Standard production cost per unit 69

Normal output is 16,000 units per annum. Variable selling, distribution and administration
costs are 20 percent of sales value. Fixed costs are Shs 180,000 per year. There is no unit
in finished goods stock at 1 October 2022. The fixed overhead expenditure is spread evenly
throughout the year. The selling price per unit is Shs 140 Production and sales budgets are
as follows.

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 Six months ending Six months ending
31 March 2023 30 September 2023
Production 8,500 7,000
Sales 7,000 8,000

REQUIRED
Prepare profit statements for each of the six-monthly periods, using the following methods of
costing.
(a) Marginal costing
(b) Absorption costing

QUESTION 7
Lodi Lofa Ltd budgeted to make and sell 10,000 units of its product in 2021. The selling price is
Shs 10 per unit and the variable cost Shs 4 per unit. Fixed production costs were budgeted at Shs
50,000 for the year. The Company uses absorption costing and budgeted and absorption rate of
Shs 5 per unit. During 2021, it became apparent that sales demand would only be 8,000 units. The
management, concerned about the apparent effect of the low volume of sales on profits. The
company decided to increase production for the year to 15,000 units. Actual fixed costs were still
expected to be Shs 50,000 in spite of the significant increase in production volume.

REQUIRED
Calculate the profit at an actual sales volume of 8,000 units using the following methods
(a) Absorption costing
(b) Marginal costing

QUESTION 8
AB Motors Ltd assembles and sells motor vehicles. It uses an actual costing system, in which unit
costs are calculated on a monthly basis. Data relating to the month of March, 2023 is as given
below:

Particulars Units Shs

Opening inventory 150
Production 400
Sales 520
Variable cost data
Manufacturing costs per unit 10,000
Distribution costs per unit sold 3,000
Fixed cost data
Manufacturing costs 2,000,000
Marketing costs 600,000

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 The selling price per motor vehicle is Shs 24,000
REQUIRED
(a) Prepare an income statement for AB Motors Ltd under
(i) Variable costing
(ii) Absorption costing
(b) Clearly explain the difference between (a) (i) and (ii) above for the month of
March
QUESTION 9
The Management of the Company intended to have two income statements, one based on variable
costing and based on absorption costing for decision purpose. In order to prepare these statements,
the following information was assembled and handled to you for the necessary action:

(i) Opening stock at the beginning of the operating period consisted of 25,000 finished units
and 5,000 units in process that were 100% completed with respect to raw materials, and
20% completed with respect to conversion.
(ii) During the operating period ended, the company transferred 230,000 units to the
warehouse. in the same period the company sold 210,000 units each at Shs 4,200. The
expenditure in the same period, did not differ from expectations expect for reasons of
operating volume change. The company targeted to produce and sell 240,000 units

The expenditure in question included the following:

Shs
Unit direct materials cost 500
Unit direct labour cost 600
Unit variable factory overhead cost 400
Annual fixed factory cost 98,000,000
Annual fixed administration cost 250,000,000
Annual fixed distribution cost 100,000,000

REQUIRED
(a) Indicate the equivalent production units to which overhead was applied in the
period ended
(b) Prepare two Statements of income, one based on variable costing and another
based on absorption costing
(c) Reconcile the income difference

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QUESTION 10
The following budgeted profit statement has been prepared using absorption costing principles
January to June 2010 July to Dec. 2010
Shs’000” Shs’000’ Shs’000’ Shs’000’
Sales 540 360
Opening stock 100 160
Production costs:
Direct materials 108 36
Direct labour 162 54
Overhead 90 30
460 280
Closing stock (160) (80)
Cost of goods sold (300) 200
Gross profit 240 160
Production overhead:
(Over)/ Under absorption (12) 12
Selling costs 50 50
Distribution costs 45 40
Administration costs 80 (163) 80
Net profit 77 (22)

Sales units 15,000 10,000

Production units 18,000 6,000

The members of the management team are concerned by the significance change in profitability
between the two six-month periods. As management accountant, you have analysed the data upon
which the above budget statement has been produced, with the following results.
• The production overhead cost comprises both a fixed and a variable element the latter
appears to be dependent on the number of units produced. The fixed element of the cost is
expected to incurred at a constant rate throughout the year
• The selling costs are fixed
• The distribution cost comprises both fixed and variable elements; the latter appears to be
dependent on the number of units sold. The fixed element of the cost is expected to be
incurred at a constant rate throughout the year.
• The administration costs are fixed
REQUIRED
(a) Present the above budgeted profit statement in marginal costing format
(b) Reconcile each of the six-monthly profit/loss values respectively under marginal and
absorption

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QUESTION 11
BM Limited is considering its plans for the year ended 31 December 2022. It makes and sells a
single product, which has budgeted costs and selling price as follows:

Shs
Selling price 45
Direct materials 11
Direct labour 8
Production overhead:
Variable 4
Fixed 3
Selling overhead:
Variable 5
Fixed 2
Administration overhead:
Fixed 3

Fixed overhead cost per unit is based on a normal annual activity level of 96,000 units. These costs
are expected to be incurred at a constant rate throughout the year.
Activity levels during January and February 2022 are expected to be:

January (units) February (units)

Sales 7,000 8,750
Production 8,000 7,750

Assume that there will be no stocks held on 1 January 2022

REQUIRED:
(a) Prepare in columnar format, profit statements for each of the two months of January and
February 2022
(i) Absorption costing
(ii) Marginal costing
(b) Reconcile and explain the reasons for any differences between the marginal and absorption
profits for each month which you have calculated in your answer to (a) above

QUESTION 12
Your General manager has been cautioned about using absorption costing income statements
evaluating profits because this will always report relatively high profit if the manager produces
more output than what that manager has been able to sell due to planning errors. Following this
advice, he asked the Management Accountant to provide him with information that would assist
to verify the validity of the advice he received

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This is the information received

YEAR 1 YEAR 2
Production budget 146,880 units 180,000 units
Production attained 161,000 units 153,000 units
Sales attained 153,000 units 160,000 units
Shs Shs Shs Shs
Revenue 1,530,000,000 1,600,000,000
variable factory costs 1,071,000,000 1,120,000,000
Sales commission 61,200,000 64,000,000
Total variable costs 1,132,200,000 1,184,000,000
Contribution margin 397,800,000 416,000,000
Fixed costs:
Production 183,600,000 183,600,000
Administration 120,000,000 120,000,000
Distribution 80,000,000 80,000,000
Total fixed cost 383,600,000 383,600,000
operating profit 14,200,000 32,400,000

In a frenzy of anger, the General Manager demoted the Management Accountant for failing to
provide complete report and he has now assigned you to do this job.
REQUIRED
(a) Identify and explain the missing information that made the General Manager angry?
(b) Prepare an alternative statement of income and show how its profits differ from the profit
that has is reported in the statement of income that was prepared by Management Accountant
(c) Reconcile the income differences and add brief notes that will enable the General Manager
to understand that absorption costing distorts the reported income if inventory level change.

QUESTION 13
ABC Company is proposing the introduction of an activity Based Costing (ABC) system as a basis
for much of its management accounting information. As a recently graduated as CPA holder and
appointed by the company as management and cost accountant, one of your duties is the
successfully implementation of the proposed new costing system.

REQUIRED
(a) Briefly describe how ABC is different from a traditional absorption approach and explain why
it was developed
(b) Describe the likely stages involved in the design and operation of an ABC system
(c) Describe four broad categories of activities identified in an activity-based costing system
(d) Discuss the advantages and limitations on this approach.

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QUESTION 14
Having attended a CPA review class on Activity Based Costing (ABC), you decide to experiment
by applying the principles of ABC to the four products currently made and sold by your company.
Details of the four products and relevant information are given below for one period

Product A B C D
Output in units 120 100 80 120
Cost per units in (Shs 000)
Direct material 40 50 30 60
Direct labour 28 21 14 21
Machine hours (per unit) 4 3 2 3

The four products are similar and are usually produced in production runs of 20 units and sold in
batches of 10 units.
The production overhead for the period has been analysed as follows:
Shs 000
Machine department costs (rent, business rates, depreciation and 10,430
supervision)
Set- up costs 5,250
Store receiving 3,600
Inspection/quality control 2,100
Materials handling and dispatch 4,620

You have ascertained that cost drivers to be used are as listed below for the overhead costs shown:
Cost Cost Driver
Set up costs Number of production runs
Stores receiving control Requisitions raised
Inspection/Quality control Number of production runs
Materials handling and dispatch Orders executed

The number of requisitions raised on the store was 20 for each product and the number of orders
executed was 42, each order being for a batch of 10 of a product.
REQUIRED
(a) Calculate the total costs for each product if all overhead costs are absorbed on a machine
hour basis.
(b) Calculate the total costs for each product, using ABC
(c) Calculate and list the unit product costs from your figure in (a) and (b) above, to show the
differences: and comment briefly on any conclusions which may be down which could
have pricing and profit implications

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QUESTION 15
BM Ltd manufacture three products A, B and C. Data for the period just ended is as follows;
Product A B C
Output in units 20,000 25,000 2,000
Shs/unit Shs/unit Shs/unit
Direct material cost 5,000 10,000 10,000
Total production overheads Shs 190m
Information for overhead absorption on a labour hour’s basis
A B C
Labour hours per unit 2 1 1
Labour is paid at the rate of Shs 5,000 per hour

Information for activity-based costing

Cost data
Shs ‘000’
Machining 55,000
Quality control & Set-up costs 90,000
Receiving 30,000
Packing 15,000
190,000

Cost driver data A B C

Machine hours/unit 2 2 2
No. of production runs 10 13 2
No. of components receipts 10 10 2
No. of customer orders 20 20 20

REQUERED
Calculate the total cost per unit for each product using
(a) Traditional absorption costing assuming production overheads are absorbed on the basis of
labour hours
(b) Activity based costing

QUESTION 16
ABC Manufacturing Company is a well-known firm for production and selling of soap products
in Tanzania. The company produces two types of soaps known as Lux and life Boy.

According to the production manager, the company applies overhead on the bases of direct labour
hours throughout the factory and the company anticipate that overhead costs and direct labour
hours for the upcoming year are shs 3,200,000 and 50,000 hours respectively.

Information about the company’s products is as follows:

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 Lux Life Boy
Estimated production volume 3,000 units 4,000 units
Direct material cost Shs 56 per unit Shs 84 per unit
Direct labour per unit 6 hours @ Shs 30 per hour 8 hours @ shs 30 per hour

The Company overhead cost of shs 3,200,000 can be identified with three major activities: order
processing shs 500,000, machine processing shs 2,400,000 and product inspection shs 300,000.
These activities are driven by number of orders processed, machine hours worked and inspection
hours respectively. Data relevant to these activities are as follows:

Orders Processed Machine Hours Worked Inspection Hours

Lux 640 32,000 8,000
Life Boy 360 48,000 12,000
Total 1,000 80,000 20,000

REQUIRED
(a) Compute the overhead absorption rates that would be used for order processing, machine
processing, and product inspection in activity-based costing system
(b) Assuming use of activity-based costing, compute the unit production costs of Lux and Life
Boy soap if the expected production volume is attained
(c) Compute
(i) How much overhead costs would be applied to a unit of Lux and life Boy if the
company would have used traditional costing and applied overhead solely on the
basis of direct labour hours?
(ii) Using the answer in (i) above, show which of the two products would be under
costed or over costed by this procedure
(d) State the major limitations of activity-based costing

QUESTION 17
HQ Manufacturing company produces three types of juices in its plant located in the Vingunguti
area: Tropical juices, Orange juices, and Pineapple juice. The company operates in a highly
competitive market, and the management team is faced with uncertainty and risks related to market
demand, production costs, and economic conditions. In response to uncertainty and risks
environment and market pressures, recently HQ Manufacturing Company has invested heavily in
advanced information technology in its manufacturing costing systems and, as a result, has
significantly reduced the size of its labour force to minimize its cost structure. Previously the
company allocated all its overhead costs by employing direct labour hours, but the company is
considering implementing Activity Based Costing (ABC) in its costing system. HQ manufacturing
company’s management accountant has produced the following cost analysis.

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 Product Production Annual direct Direct Material Selling price
(Units) labour hours Cost (TZS per (TZS per unit)
unit)
Tropical juices 2,000 200,000 400 4,000
Orange juices 1,600 220,000 600 6,000
Pineapple juice 400 80,000 900 8,000

All direct labour is paid at TZS 5 per hour. The company employs the Just in Time system.

The management accounting generates the following three cost drivers for overhead costs
• Deliveries to supermarkets – the number of deliveries of juices to markets
• Set-ups – the number of times the assembly line process is re-set to accommodate a
production run of a different type of juices
• Purchase orders – the number of purchase orders.
.
Product Number of deliveries to Number of set-ups Number of
Supermarkets purchase orders
Tropical juices 100 35 400
Orange juices 80 40 300
Pineapple juice 70 25 100

The annual overhead costs incurred by the company during the year are as follows:
Overhead Costs TZS
Ordering Costs 3,600,000
Delivering costs to Supermarkets 2,400,000
Set-up costs 6,000,000

REQUIRED:
Calculate the total profit on each of HQ Manufacturing company’s three types of products using
each of the following cost techniques to attribute overheads:
a) The existing method based on labour hours
b) The activity-based costing (ABC)
c) Comment on why the activity-based costing (ABC) system is considered to present a fair
valuation of the product cost per unit

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