SUGGESTED SOLUTIONS

A4 – COST ACCOUNTING
MAY 2024

QUESTION 1

Multiple chole questions

1(a) (i) D
(ii) B
(iii) A
(iv) B
(v) B
(vi) D
(vii) B
(viii) D
(ix) B
(x) A

1(b) (i) FALSE

(ii) TRUE
(iii) TRUE
(iv) TRUE
(v) FALSE

1(c) (i) D
(ii) F
(iii) J
(iv) K
(v) M

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 QUESTION 2

a) The short notes of the following and one example:

(i) A cost that is composed of a mixture of fixed and variable components is known as a
semi-variable cost. It is also known as a mixed cost. A good example of a semi-
variable cost is the telephone bill.

(ii) Cost that are fixed for a given level of activity but in due course changes by a constant
amount at some point is a semi fixed cost or stepped fixed costs. A stepped fixed cost
or semi fixed costs remains the same up to a certain level of activity or a certain period
of time, then changes and again remains constant up to a new activity level or a period
of time. A good example is a salary of managerial staff of a company.

b) The calculation of the following:

(i) Prime cost per unit of the finished product will be calculated as follows:
(3 marks)

Details Total cost Units Cost per unit

produced Col B/Col C
COLUMN A COLUMN B COLUMN C COLUMN D
Direct material costs 500,000,000 500 1,000,000
Direct wages costs 1,200,000,000 500 2,400,000
Direct expenses 300,000,000 500 600,000
Prime cost per unit 4,000,000

(ii) Overhead cost per unit of the finished product will be calculated as follows:
Total cost Units Cost per unit
Details produced Col B/Col C
Column A Column B Column C Column D
Indirect wages 150,000,000 500 300,000
Administrative overheads 345,000,000 500 690,000
Selling and distribution 202,500,000 500 405,000
overheads
1,395,000
Overhead cost per unit

(iii) Total cost per unit of the finished product.

The total cost per unit of the finished product =Prime cost per unit
+0verhead cost per unit of finished product
Total cost per unit of finished = 4,000,000 + 1,395,000
Total cost per unit of finished product = 5,395 ,000

(c) The calculation of Economic Order Quantity EOQ will be calculated as follows:

EOQ = (2DC0/Ch)1/2

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 Where:

D=Annual demand=5,000 tins

Co-ordering costTZS250,000
Ch – Holding costs = TZS20,000
EOQ = (2* 5,000 * 250,000/20,000)1/2
EOQ=353.55 tins
EOQ=354 tins

(d) The calculation of sales revenue variance:

Sales revenue variance = Actual sales revenue-budgeted sales revenue for actual output.
(18,000 x 100,000)
Sales revenue variance = (18,000 units * TZS 102,000) – (W1 & W2) TZS 1,800,000,000
Sales revenue variance = TZS 36,000,000 F

WI-Budgeted per unit selling price

Budgeted per unit selling price = Total budgeted sales revenue/budgeted units
Budgeted per unit selling price = 2,000,000,000/20,000 units Budgeted per unit selling
price = TZS100,000 per unit

W2-Budgeted sales revenue for actual sales

Budgeted sales revenue for actual sales=Actual sales in units * Budgeted per unit selling
price
Budgeted sales revenue for actual sales=18,000 units * TZS 100,000
Budgeted sales revenue for actual sales=TZS1,800,000,000

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 QUESTION 3

(a) Cash Budget for the six months ending June 2024

Particulars January February March April May June

Tshs Tshs Tshs Tshs Tshs Tshs
000 000 000 000 000 000
Opening Balance 400 915 1,050 675 360 590
Cash sales 150 200 200 300 250 200
Total receipts form debtors 1,125 735 615 585 780 780

1,675 1,850 1,865 1,560 1,390 1,570

Cash payments

Purchases 640 640 960 800 640 960

Wages and salaries 120 160 200 200 160 140

Excise deposit 200

Capital expenditure 120

Interest 30

Closing Balance 915 1,050 675 360 590 320

Qn 3 (b) Sales price variance (Standard price x Actual units) — (Actual price x Actual units)

(Tshs132.00 x 5,640 units) -Tshs810,750

744,480 - 810,750
66,270 Favourable

(ii) Sales volume contribution variance

(Standard contribution* * Actual units) — (Standard contribution Budgeted units)

(Tshs 49.50 5,640 units) - (Tshs 49.50 6,000 units)

Tshs279, 180 - Tshs297,000
= Tshs l 7,820 Adverse

**Standard contribution = Tshs 132.00 — Tshs82.50 = Tshs49.50

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 (iii) Direct material price variance (Standard price Actual usage) — (Actual price Actual
usage)
(Tshs16.90 x 14,730 kilos) - Tshs279,870
Tshs248,937 - Tshs279,870
= Tshs30,933 Adverse
(iv) Direct material usage variance (Standard price Standard usage) — (Standard price
Actual usage)
Tshs16.90 (6,380 x 2.5 kilos)] - (Tshs16.90 x14,730 kilos)
Tshs 269,555 - Tshs248,937
= Tshs20,618 Favourable

(v) Direct labour rate variance (Standard rate Actual hours) — (Actual rate Actual hours)
(Tshs l 8.80 x 8,535 hours) – Tshs 153,630 = Tshs l60,458 – Tshs l53,630. = Tshs
6,828 Favourable)

(vi) Direct labour efficiency variance (Standard rate Standard hours) — (Standard rate
Actual hours)

(Tshs l8.80( (6,380) 1.25 hours) – (8.80 (8,535 hours)

Tshs149,930 -Tshs 160,458
= Tshs 10,528 Adverse

QUESTION 4
a) A report on CVP
To: ABC Ltd Management
From: Management Accountant

RE: REPORT ON COST-VOLUME-PROFIT (CVP) ANALYSIS

The meaning of Cost-Volume-Profit (CVP) analysis and explain its
components: Cost-Volume-Profit (CVP) analysis is a management accounting
technique used to study the relationship between costs, volume of production or
sales, and profits. Its components include:

• Costs: Fixed costs (remain constant regardless of production or sales volume)

and variable costs (change proportionally with production or sales volume).
• Volume: The level of production or sales activity.
• Profit: The difference between total revenue and total costs.
Discussion on the importance of CVP analysis in profit planning and
decision making for ABC Ltd:
CVP analysis is crucial for ABC Ltd. as it helps in:
• Determining the breakeven point where total revenue equals total costs, aiding
in setting profit targets.
• Analysing the contribution margin per unit, which guides decisions on product
mix and pricing strategies.
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 • Evaluating different production or sales scenarios to identify profitable
opportunities and optimize resource allocation.
Explain how CVP analysis can aid in setting sales targets and pricing
strategies:
CVP analysis allows ABC Ltd. to:
• Calculate the required sales volume to achieve desired profit levels, assisting in
setting realistic sales targets.
• Determine the impact of pricing changes on contribution margin and overall
profitability, supporting effective pricing strategies.

How CVP analysis can be used for scenario analysis and risk
management at
ABC Ltd.:
CVP analysis helps ABC Ltd. in:
• Conducting scenario analysis by modelling different sales or cost scenarios to
assess their impact on profits.
• Identifying risks associated with changes in sales volume, costs, or pricing,
enabling proactive risk management strategies.
• Provide recommendations on how ABC Ltd. can effectively use CVP analysis
to improve its financial performance and operational efficiency:
ABC Ltd. can improve its financial performance and operational efficiency by:
• Conducting regular CVP analysis to monitor performance against targets and
identify areas for improvement.
• Using CVP insights to make informed decisions on pricing,
production levels, cost control, and resource allocation.
• Integrating CVP analysis into the budgeting and planning process to align
financial goals with operational strategies.
Note:
A student can provide any other relevant discussion that highlight a comprehensive
overview of how ABC Ltd. can benefit from Cost-Volume-Profit (CVP) analysis and how
it can be effectively utilized for profit planning, decision-making, setting sales targets,
pricing strategies, scenario analysis, risk management, and overall improvement in
financial performance and operational efficiency.

(b) The calculation of how many units that the company must produce and sell
during the year at break-even point
Break-even point = Total fixed costs/Contribution margin per unit
Break-even point = TZS 105,000,000/ (W1) TZS 7,000
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 Break-even point=15,000 units

WI= Contribution
Contribution = Selling price per unit-total variable costs (Raw material per unit+ Labour
cost per unit + variable overhead per unit)
Contribution = TZS 30,000 – TZS (12,000 + 7,000 + 4,000)
Contribution = TZS7,000

Therefore, Mwaka Company should produce 15,000 units so that there will be no
profit or loss for the year.

(c) The calculation of margin of safety of the product:

Margin of safety = Actual sales or expected sales volume - break-even point volume
We have been given the actual sales or expected sales volume = 20,000 units
We have not been given the Break-even point in units
Break-even point in units = Total fixed costs/Contribution margin per unit
Break-even point in units = TZS 18,000,000 /(WI,W2 & W3) TZS 500
Break-even point in units = 12,000 units
Therefore, margin of safety = 20,000 units-12,000 units
Margin of safety=8,000 units

(d) Description what is a limiting factor:

• A limiting factor is a factor of production (or of any other activity)
that is in short supply and that prevents an organisation from
expanding its production (or activities) and maximising its profit.
• It refers either to a scarce resource needed for production or to a limited market demand
for the items produced.
• The most common limiting factors for organisations are the demand for their products
and services, availability of materials, labour supply, and machine capacity etc. The
scarcity of most of the factors of production (or activities) may be a short term
phenomenon which can be overcome in the long run.

_______________ ▲ _______________

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