THE INSTITUTE OF FINANCE MANAGEMENT

FACULTY OF BUSINESS AND ECONOMICS (FBE)

DEPARTMENT OF ACCOUNTING AND FINANCE

BACC/BAIT
ACU 08102: MANAGEMENT ACCOUNTING

TUTORIAL 2

Cost Management Concepts and Cost Behaviour

Instructor: CPA. Prof. Zawadi Ally

Office: Block C. Room. H.0008

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QUESTION ONE
ABC Manufacturing Ltd. produces a single product. The company’s management is assessing
various cost components to improve cost efficiency. They need to understand different cost
concepts, particularly how to classify costs as fixed, variable, direct, and indirect.
Case Scenario:
During the last financial year, the company incurred the following costs for a production run of
10,000 units:
• Direct materials: TZS 50,000,000
• Direct labour: TZS 40,000,000
• Factory rent: TZS 20,000,000 (fixed cost)
• Utilities: TZS 10,000,000 (40% fixed, 60% variable)
• Depreciation on equipment: TZS 5,000,000
• Sales commission: TZS 2,000 per unit sold
• Administrative salaries: TZS 15,000,000
REQUIRED:
a) Classify each cost into the appropriate categories (fixed, variable, direct, or indirect) and
justify your classification.
b) Explain how understanding cost concepts can benefit ABC Manufacturing Ltd. in its
decision-making process.

QUESTION TWO
XYZ Company produces customized furniture. The company wants to develop a cost
classification system to help managers better analyze and control costs. The following costs are
incurred in a typical production month:
• Wood for production
• Factory manager’s salary
• Machine maintenance costs (fixed component)
• Glue and varnish for finishing products
• Production supervisor's wages (fixed component)
• Quality control inspection costs (per unit produced)
REQUIRED:
a) Classify these costs according to cost behaviour (fixed, variable, semi-variable) and
function (direct or indirect). Provide explanations for each classification.
b) Discuss how accurate cost classification assists in budgeting, planning, and variance
analysis.

QUESTION THREE
LMN Corp is implementing activity-based costing (ABC) to better understand the true cost of its
products. Management has identified the following activities and drivers for a product line:
• Machine setup: Number of setups
• Quality inspections: Number of inspections

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 • Packaging: Number of units packed
• Delivery: Number of deliveries made
REQUIRED
a) Explain how each activity’s cost driver impacts the production cost and how it should be
managed.
b) Discuss the importance of cost drivers in activity-based costing and how identifying
accurate cost drivers can enhance cost control in LMN Corp.

QUESTION FOUR
ABC Clean Ltd. manufactures water filters. Due to seasonal demand fluctuations, the company
experiences variations in cost behaviour. They wish to analyze costs for efficient budgeting. The
following monthly data is available:
• Sales volume varies from 1,000 to 5,000 units.
• Direct materials per unit: TZS 10,000
• Labor per unit: TZS 5,000
• Factory lease: TZS 3,000,000 per month
• Electricity: TZS 1,500,000 (50% variable, 50% fixed)
REQUIRED
a) Differentiate between fixed, variable, and semi-variable costs in ABC Clean Ltd. and
provide examples based on the data.
b) Explain why understanding cost behavior is critical for budget planning and cost control,
especially in seasonal industries.

QUESTION FIVE
PQR Services Ltd. is trying to estimate its service costs. Management considers using the high-
low method and regression analysis to predict future costs. The following data represents costs
over six months:
• Highest activity level: TZS 18,000,000 (at 1,000 hours)
• Lowest activity level: TZS 10,000,000 (at 500 hours)
REQUIRED:
a) Using the high-low method, calculate the estimated fixed and variable costs for PQR
Services Ltd.
b) Discuss the advantages and limitations of both the high-low method and regression
analysis in cost estimation. When should each method be used?

QUESTION SIX
DEF Ltd. recently introduced new equipment in its assembly line. They expect a 90% learning
rate as workers become more efficient with each production batch. The first batch took 10 hours
to complete.

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REQUIRED:
a) Calculate the time expected to complete the fourth batch using the learning curve
formula.
b) Explain how the learning curve concept can be integrated into DEF Ltd.'s cost control
and budgeting processes.

QUESTION 7
Discretionary costs are troublesome because managers usually find it difficult to separate and
quantify the results of their use in the business, as compared with variable and other fixed costs.’
You are required to discuss the above statement and include in your answer the meaning of
discretionary costs, variable costs and fixed costs; give two illustrations of each of these three
named costs.

QUESTION 8
The administrator of Azalea hospital would like cost formula linking the costs involved in
admitting patients to the number of patients admitted during a month. The admitting department’s
costs and the number of patients admitted during the immediately preceding eight months are given
in the table below

Months Number of Admitting

Patients Department Costs TZS
Admitted
May 1,800 14,000,000
June 1,900 15,200,000
July 1,700 13,700,000
August 1,600 14,000,000
September 1,500 14,300,000
October 1,300 13,100,000
November 1,100 12,800,000
December 1,500 14,600,000

REQUIRED
a) Use high-low method to establish the fixed and variable components of admitting costs
b) Express the fixed and variable components of admitting costs as a cost formula in the linear
equation form Y= a + bX

QUESTION 9
(i) Costs may be classified in a number of ways including classification by behaviour, by
function, by expense type, by controllability and by relevance.

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 (ii) Management accounting should assist in EACH of the planning, control and decision-
making processes in an organization.
REQUIRED
Discuss the ways in which relationships between statements (i) and (ii) are relevant in the design
of an effective management accounting system

QUESTION 10
Bakhresa Group, a leading manufacturing firm, implements new machinery, expecting the
production team to improve efficiency over time. The learning curve is estimated at 85%.
REQUIRED:
a) Explain the learning curve effect in Bakhresa’s production and how it impacts labor costs
over time.
b) Discuss how learning curve information can be used in Bakhresa Group’s budget
planning and competitive strategy.

question 11
ABC Ltd manufactures a variety of products at its industrial site in Nairobi. One of the products,
the LT, is produced in a specially equipped factory in which no other production takes. For
technical reasons the company keeps no stocks of either LTs or the raw material used in their
manufacture. The costs of producing LTs in the special factory during the past four years have
been as follows:

2022 2023 2024 2025(estimated)

TZS TZS TZS TZS
Raw materials 70,000 100,000 130,000 132,000
Skilled labour 40,000 71,000 96,000 115,000
Unskilled 132,000 173,000 235,000 230,000
Power 25,000 33,000 47,000 44,000
Factory overheads 168,000 206,000 246,000 265,000
Total production costs 435,000 583,000 754,000 786,000
Output (units) 160,000 190,000 220,000 180,000

The costs of raw materials and skilled labour have increased steadily during the past four
years at an annual compound rate of 20%, and the costs of factory overheads have increased

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 at an annual compound rate of 15% during the same period. Powers prices increased by
10% on 1 January 2025 and 25% on 1 January of each subsequent year, all costs expect
power are expected to increase by a further 20% during 20ch alloc13. Power prices are due
to rise by 25% on 1 January 2026. The directs of ABC Ltd are now formulating the
company’s production plan for 2026 and wish to estimate the costs of manufacturing the
product LT. the finance director has expressed the view that the full relevant cost of
producing LTs can be determined only if a fair share of general company overheads is
allocated to them. No such allocation is included in the table of costs above.

REQUIRED

(a) Use linear regression analysis to estimate the relationship of total production costs to
volume for the products LT for 2026 (ignore general company overheads and do not
undertake a separate regression calculation for each item of costs)
(b) Discuss the advantages and limitations of linear regression analysis for the estimation
of cost-volume relationships
(c) Comment on the view expressed by the finance director
Ignore taxation

QUESTION 12

a) Explain the learning curve concept and the importance of recognizing the effects of the
learning curve when preparing performance reports
b) It is argued that many areas of modern technology, the ‘’ learning curve’’ effect is
diminishing significance. An ‘experience curve’ effect would still be present and possibly
strengthened in importance. However, the experience curve has little to do with the short
term standard setting and product costing

REQUIRED

Discuss the validity of the above statement in particular the assertion that ‘’ experience
curve’’ has little relevance to costing
(c) Explain the extent to which the application of experience curve theory can help an
organization to prolong the life cycle of its products or services.

QUESTION 13

ABC Co provides skilled labour to the building trade. They have recently been asked by a builder
to bid for a kitchen fitting contract for a new development of 600 identical apartments. ABC has
not worked for this builder before. Cost information for the new contract is as follows:

Labour for the contract is available. ABC expects that the first kitchen will take 24 man-hours to
fit but thereafter the time taken will be subject to a 95% learning rate. After 200 kitchens are fitted

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the learning rate will stop and the time taken for the 200th kitchen will be the time taken for all the
remaining kitchens. Labour costs TZS 15 per hour.

Overheads are absorbed on a labour hour basis. HC has collected overhead information for the
last four months and is shown below:

Hours worked Overhead cost TZS

Month 1 9,300 115,000
Month 2 9,200 113,600
Month 3 9,400 116,000
Month 4 9,600 116,800
ABC normally works around 120,000 labour hours in a year.
ABC uses the high low method to analyze overheads.
The learning curve equation is y = axb where b= Log LR/Log2 =–0.074
REQUIRED:
a) Describe FIVE factors, other than the cost of labour and overheads mentioned
above, that ABC should take into consideration in calculating its bid.
b) Calculate the total cost including all overheads for HC that it can use as a basis of
the bid for the new apartment contract.
c) If the second kitchen alone is expected to take 21·6 man-hours to fit demonstrate
how the learning rate of 95% has been calculated.
QUESTION 14
Big Choose Chairs (BCC) manufactures and sells executive leather chairs. They are
considering a new design of massaging chair to launch into the competitive market in
which they operate.
They have carried out an investigation in the market and using a target costing system have
targeted a competitive selling price of TZS 120 for the chair. BCC wants a margin on
selling price of 20% (ignoring any overheads).
The frame and massage mechanism will be bought in for TZS 51 per chair and BCC will
upholster it in leather and assemble it ready for dispatch.
Leather costs TZS 10 per metre and two metres are needed for a complete chair although
20% of all leather is wasted in the upholstery process.
The upholstery and assembly process will be subject to a learning effect as the workers get
used to the new design.
BCC estimates that the first chair will take two hours to prepare but this will be subject to
a learning rate (LR) of 95%.
The learning improvement will stop once 128 chairs have been made and the time for the
128th chair will be the time for all subsequent chairs. The cost of labour is $15 per hour.

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 The learning formula is shown on the formula sheet and at the 95% learning rate the value
of b is –0·074000581.
REQUIRED:
a) Calculate the average cost for the first 128 chairs made and identify any cost gap
that may be present at that stage.
b) Assuming that a cost gap for the chair exists suggest four ways in which it could be
closed.
c) The production manager denies any claims that a cost gap exists and has stated that
the cost of the 128th chair will be low enough to yield the required margin.
d) Calculate the cost of the 128th chair made and state whether the target cost is being
achieved on the 128th chair.
QUESTION 15
a) Explain the theory of the Learning curve
b) Indicate the areas where learning curves may assist in management accounting
c) Illustrate the use of learning curves for calculating the expected average unit cost of
making:
a machine
8 machines

Using the data given below

Data
Direct labour needed to make the first machine 1,000 hours
Learning curve 80%
Direct labour Cost TZS 3.00 per hours
Direct Materials Costs TZS 1,800 per machine
Fixed cost for either size order TZS 8,000