THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) SOLUTION: COST AND MANAGEMENT ACCOUNTING, NOVEMBER, 2014

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Lilian Skinner
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1 SOLUTION 1 (a) definition of capital employed - Definition of income (returning) - Where investments are made at different times and getting unrelated representative being difficult (b) Conditions - Top management support - Training - Sound organization structure - Proper standard costing system - Active participation of employees - Budget manual availability - Functional budget committee availability - Setting of budget objectives - Strategic plan (c) Problems of BEA - Basic assumptions limitation - Where variables change we need more advanced modules, sensitivity, simulation etc - In multiple products the weighted contribution of the paths may not relate to the use of FC. (d) (a) (i) Cost Control This is usually carried out by the formal comparison of actual results with those planned. Example: budget, standard cost etc and investigating the variances for corrective measures. (ii) Cost Reduction An attempt to reduce cost below the previously accepted norm a standard without reducing, the quality or effectiveness. It is not carried out frequently example could be carried out during the financial crisis of a firm. Page 1 of 11

2 (b) Conditions for effective budgetary - Top management support - Training - Sound organizational structure - Proper standard costing system - Active participation of the managers - Investigation and reporting of all budget variances - Functional budget committees - Budget manual - Budget objective - Strategic planning SOLUTION 2 (a) Quantity sold 2,000 3,000 4,000 5,000 6,000 7,000 SP , , , , , ,000 VC 56,000 84, , , , ,000 Contribution 344, , ,000 26, , ,000 FC 110, , , , , ,000 Profit 234, , , , , ,000 Page 2 of 11

3 (b) Objectives of transfer pricing - For effective divisional performance measurement: Divisions with products / services not having external market values can be effectively evaluated by placing values on their products/services. - Ensure efficiency in the use of resources: Divisions under the transfer pricing system cannot press in their inefficiency into other divisions by pricing the products/services for what can be obtained in the market. - It offers the opportunity to divisional needs to justify their costs when it comes to negotiation in prices - Motivation - To ensure divisional autonomy - Movement of profits (c) Methods of transfer pricing - Market price this is where the product can be sold in the external market. The supplying division may sell to consider if the price offered by the receiving division is low. - Variable cost this is where there is external market but the supplying division does idle capacity on where this product does no external market and must be known by the receiving division. - Adjusted market price this is where there is external market but the supplying/ receiving divisions may gain by selling/buying from a client within the group. Page 3 of 11

4 SOLUTION 3 Standard contribution Actual contribution Selling price 20 Actual selling price Marginal cost 12 Standard marginal cost (i) (ii) (iii) Total variable overhead variance: Actual variable overhead cost 15,000 Standard overhead cost absorbed on Actual production achieved (5,000 x 2 x 2) 20,000 5,000F Variable overhead expenditure: Variance: Actual overhead expenditure 15,000 Actual variable overhead absorption rate (8,200 x 2) 16,400 1,400F Variable overhead efficiency variance Standard overhead cost of production achieved (5,000 x 2 x 2) 20,000 Actual hours V. D. A. R. (8,200 x 2) 16,400 3,600F (2) Material Cost Variance Actual material cost 22,500 Standard cost of material for Production Achieved (5,000 x 4) 20,000 2,500A VDExp 1,400 F MP 2,500 A LRV 3,600 A SPV 10,000 F VDEff 3,600 F MU - LEV 3,600 F SVV 4,000 F TVO 5,000 F TMC 2,500 A TLC - TSV 14,000 F Page 4 of 11

5 Material Price Variance Actual material cost 22,500 Standard cost of actual material (5,000 x 10 x 0.4) 20,000 2,500A Material Usage Variance Actual material standard price 5,000 x 10 x ,000 Standard material standard price 5,000 x 10 x ,000 Nil (3) Total Labour Cost Variance Actual labour cost 20,000 Standard cost of labour for Production achieved 5,000 x 4 x 2 x 2 20,000 Nil Labour Rate Variance (SR AR) AH (2 20,000) 8,200 8,200 = 16,400 20,000 = 3,600A Labour Efficiency Variance (SH AH) SR (10,000 8,200) 2 (1,800) 2 = 3,600F Labour Rate Variance = 3,600A Labour Efficiency Variance = 3,600F Total labour cost Variance Nil SR Standard Rate AR Actual Rate SH- Standard Hour AH- Actual Hour Page 5 of 11

6 (4) (i) Total Sales Variance Actual quantity Actual contribution 5,000 x 10 = 50,000 Budgeted quantity standard contribution 4,500 x 8 = 36,000 14,000F (ii) Sales Price Variance Actual quantity Actual selling price 5,000 x 22 = 110,000 Actual quantity budgeted selling price 5,000 x 20 = 100,000 10,000F (iii) Sales Volume Variance Actual sales standard contribution 5,000 x 8 = 40,000 Budgeted sales standard contribution 4,500 x 8 = 36,000 4,000F Sales Price Variance 10,000F Sales Volume Variance 4,000F Total Sales Variance 14,000F Page 6 of 11

7 SOLUTION 4 (a) Original position Total contribution = 99,000 = 0.45 Total sales 220,000 ATM Ltd b/e = total fixed cost = 4,500 = 100,000 CS ratio 0.45 Margin of safety = estimated sales breakeven sales Estimated sales = 220, ,000 x 100 = 54.5% 220,000 (ii) Chief Executive s Suggestion If material cost reduces to 40,000 from the present level of 51,000 total contribution will increase by a corresponding amount that is from 99,000 to 110,000 given a revised CS ratio 110,000 = ,000 The revised b/e point allowing for the 12,000 increase in total fixed cost 45, ,000 = 114, Margin of safety = (220, ,000) x ,000 = 48.2% (iii) Marketing Director s Suggestion If sales volume increases and there is no increase in variable cost as proportion of sales, the CS ratio under this option will be the same as for the original data that is However, total fixed cost will increase resulting in a revised breakdown point of: B/E 4, ,500 = 150, Page 7 of 11

8 Margin of safety Sales volume from 220,000 to (220,000 x 1.2) = 264, , ,000 x 100 = 43.2% 264,000 (b) A summary of the indicators calculated to: Original Chief Director s Marketing Director s Estimates Suggestion Suggestion B/E 100, , ,000 Margin safety 54.5% 24% 43.2% (c) Factors to consider - The possibility of reducing cost other than materials. For example can fixed be reduced. - Reduction in selling price to increase demand - The accuracy of the estimates which have been used - What developments are likely to occur in ATM Ltd s market in the period under review example competition Original CEO MOO C/S Ratio BE Pt 100, , ,000 MOS 54.5% 24% 43.2% 4,500 57,000 27, Page 8 of 11

9 SOLUTION 5 Kwegyirba Ltd: Cash Budget for six months ending 30 th June, 2014 JAN FEB MAR APR MAY JUNE Bal b/f 16,000 50,000 20,000 20,000 20,000 20,000 Receipts Debtors 40,000-60,000 72,000 96,000 96,000 Total 56,000 50,000 80,000 92, , ,000 Overdraft 25,000 25,000 - (25,000) (24,000) 75, ,000 (1,000) 116,000 92,000 Payments Motor car , Creditors - 48,000 48,000 64,000 64,000 64,000 Salaries/wages 4,000 4,000 4,000 4,000 4,000 4,000 Rent - 1,000 1,000 1,000 1,000 1,000 Gen. expenses 2,000 2,000 2,000 2,000 2,000 2,000 Total 6,000 55,000 85,000 71,000 71,000 71,000 Budgeted income statement for the six months ending 30/6/14 Sales 516, ,000 = 1,092,000 Purchases 352, ,000 = 736, ,000 Less: expenses Salaries & wages 24, ,000 Rent 6, ,000 General expenses 12, ,000 Depreciation (2,500 or 3,000) Net profit 42,750 = 86,500 or 87, ,250 = 296,500 or 270,000 Page 9 of 11

10 JULY AUG SEPT OCT NOV DEC JAN 2015 Bal 21,000 46,000 71,000 96, , , ,000 at start Receipt 96,000 96,000 96,000 96,000 96,000 96, , , , , , ,000 - Payments Debtor 64,000 64,000 64,000 64,000 64,000 64,000 Sal/Wages 4,000 4,000 4,000 4,000 4,000 4,000 Rent 1,000 1,000 1,000 1,000 1,000 1,000 Gen. Exp. 2,000 2,000 2,000 2,000 2,000 2,000 71,000 71,000 71,000 71,000 71,000 71,000 Page 10 of 11

11 Workings JAN FEB MAR APR MAY JUN TOTAL Sales 60,000 72,000 96,000 96,000 96,000 96, , ,000=1,092,000 Debtor ,000 72,000 96,000 96, ,000 Purchases 48,000 48,000 64,000 64,000 64,000 64, , ,000=736,000 Creditors - 48,000 48,000 64,000 64,000 64,000 MU (30,000 3,000 or 2,500) 27,000 or 27,500 Debtors 192,000 Cash 171, ,000 Creditors 64,000 Rent due 1,000 Profit related 270,000 or 269,500 Page 11 of 11

Common stock prices 1. New York Stock Exchange indexes (Dec. 31,1965=50)2. Transportation. Utility 3. Finance

Common stock prices 1. New York Stock Exchange indexes (Dec. 31,1965=50)2. Transportation. Utility 3. Finance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 000 97 98 99 I90 9 9 9 9 9 9 97 98 99 970 97 97 ""..".'..'.."... 97 97 97 97 977 978 979 980 98 98 98 98 98 98 987 988