INSTITUTE OF CHARTERED ACCOUNTANTS IN MALAWI JUNE 2017 TC9 COSTING & BUDGETARY CONTROL EXAMINER S REPORT GENERAL COMMENTS The performance of students in the June 2017 examinations was not very different from that of December 2016. Some candidates did not attempt all the five questions either due to lack of knowledge on those questions or they failed to manage their time properly. In fact, in one isolated case, a candidate indicated that s/he had run out of time and could not finish writing I know this question but time.. Some candidates had difficulties with calculations to the extent of answering just those parts of the question that required explanations/definition of terms, leaving out the calculation parts. Unfortunately it is not possible in this subject for someone to pass based on definitions/explanations only as these do not carry up to half of the marks as per nature of the subject. There were a lot of cancellations and blank pages in some answer booklets signifying that either the candidates were not sure of what they were writing or did not even know what to write. Interestingly, in some instances, some candidates crossed out correct answers only to write wrong ones later! Question 1 The question was about Activity Based Costing (ABC). Part (a) was on advantages of ABC. Most candidates did well. A few had problems, mistaking the advantages of ABC with those of absorption costing while others were just providing general answers like used for decision making yet information in management accounting is used for decision making. Instead of giving advantages of ABC, others were simply describing ABC. Part (b) was about disadvantages of ABC. Most candidates did well. 1
Key problems were in part (c) onwards and some candidates just left out those items. In (c)(i)(1) candidates were supposed to calculate the overhead absorption rate which was also going to be used in (c)(i)(2). Most candidates got this right but failed to use the rate in (c)(i)(2) to allocate the overheads. They ignored the absorption rate thereby getting the overhead values wrong and subsequently the unit costs wrong. In (c) (ii) candidates were required to calculate unit costs using ABC. There were two key problems noted. First was failure by candidates to calculate the rates per cost driver. This was key in calculating the unit costs. Secondly was the omission of the direct costs in calculating the unit costs. Some candidate left out the direct costs when summing up the total costs to get the unit costs per product. Some candidates had calculated the overheads per product and cost driver pretty well but missed the last part by excluding the direct costs. Candidates are reminded that unit cost includes all costs direct and overheads. Question 2 This question was about inventory valuation. Part (a) on inventory valuation methods was well done by most candidates. However, other still mentioned FIFO despite the fact that the question had required inventory valuation methods other than FIFO. This showed lack of understanding of the question. In some cases, some candidates mentioned replacement cost and next in first out (NIFO) as two different methods. These are the same; the words are used interchangeably. Part (b)(i) was on stock valuation using FIFO. This was well done by most candidates. Unfortunately some candidates applied LIFO and not FIFO. In (b)(ii) on valuation of stock to be included in the company s statement of financial position, the key problem was on the valuation of stock at net realizable value, where the repairs cost of K3 per unit were not taken into account. In (b)(iii), the key problem was treatment of stock written off as uninsured loss. This was supposed to be treated as an expense for the period and not as part of cost of sales, which is the way most candidates treated it. In some cases, some candidates did not even calculate the value of stock written off such that in 2
preparing the profit statement, they ended at gross profit and not net profit. They therefore lost marks. Question 3 The question was about budgeting. Part (a)(i) on uses of budgets was well done by most candidates although others were giving advantages of a cash budget which was a requirement for question 5(b)(i). In part (a)(ii) on disadvantages of incremental budgets, some candidates were able to give only two disadvantages and not three as required while selected candidates gave general disadvantages of a budget or budgeting and not specifically disadvantages of an incremental budget. Candidates are reminded of the need to answer test items as required. Part (b) on sales budget was not a problem to most candidates. Issues were in (ii) to (iv). In part (b)(ii) on production budget in units, some candidates were adding opening stock and subtracting closing stock instead of doing the opposite. This resulted in failure to get parts (iii) and (iv) on component usage and production cost budget respectively right, since inputs to these parts came from the production budget in units. Some candidates failed to demonstrate understanding of the timing of sales and production schedules especially for the period January to March. They did not recognize that October December of the previous year had data which was feeding into the January March period. Increase in costs was omitted in some cases. Some candidates wasted time by calculating the production cost per unit. This made the whole process longer as they again needed to multiply this by the number of units to prepare the production cost budget. 3
Question 4 The question centered on decision making. The first part, (a), on definition of limiting factor, most candidates were using the very same words in defining the term. For example, they wrote a limiting factor in anything that limits Candidates are reminded that they need not use the same words in defining the word. Part (b)(i) on contribution per unit for each of the components was well done by most candidates. Selected few had problems in allocating the selling overhead which was 10% of the selling price while others calculated total contribution or contribution per hour, not contribution per unit. By failing to correctly calculate the contribution per unit, ranking of the products was equally affected. In (b)(ii) some candidates lost marks for not clearly indicating the number of units to be produced for each product so as to maximize profits. They just indicated the number of hours to be allocated to each of them. That was incomplete. For calculations in (iii) and (iv), some candidates were calculating the profit per product. The requirement was at company level and not at component level. As a result, fixed overheads, which were at company level, were duplicated in the calculations thereby messing up everything. Question 5 Items in this question were from various topics, all theoretical with no calculations involved. Part (a) (i) on definition of margin of safety, was well answered by most candidates. A few were simply saying difference between sales and breakeven point without making specific reference to budgeted sales. Part (a)(ii) on assumptions behind CVP was equally well done by most candidates. In some cases, however, candidates were repeating the same assumptions by just putting them differently. Part (a)(iii) on situations where marginal costing can be 4
used as a decision making aid, some candidates were mentioning advantages of marginal costing or features thereof. Part (b) (i) was on the definition of advantages of preparing cash budgets. Some candidates gave uses of budgets in general and not advantages of cash budgets specifically. For example, they were giving controlling, performance evaluation, planning, etc as answers. In worst case scenarios, they were giving decision making as advantage. In part (b) (ii) on why there are differences between profit and cash balance at a period end, some candidates were giving general answers. For example, they wrote some expenses in the cash flow are not in the income statement. While this may sound correct, it is not specific. It is the specific expenses/items that would bring the difference and not just any other. Finally in (c) on types and uses of standards, candidates did not have major problems. They therefore performed fairly well. Conclusion It was evident that in some cases candidates did not understand the questions while in others they displayed lack of preparedness. Candidates are reminded of the need to always ensure that they clearly understand the questions before attempting them. Preparation should as well be in all areas of the syllabus including calculations definitions and explanations. Candidates gave general answers even in situations where they were supposed to contextualize their answers and be more specific with the requirement. This is discouraged. 5