ZICA

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS

CHARTERED ACCOUNTANTS EXAMINATIONS

_______________
LICENTIATE LEVEL
_______________
L2: MANAGEMENT ACCOUNTING
_________________
SERIES: JUNE 2012
___________________
TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS
__________________

INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO sections:

Section A: Two (2) Compulsory Questions.

Section B: Three (3) Optional Questions. Attempt any Two (2).

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. The marks shown against the requirement(s) for each question would be taken as an
indication of the expected length and depth of the answer.

6. All workings must be done in the answer booklet.

7. Present legible and tidy work.

8. Graph paper (if required) is provided at the end of the answer booklet.
SECTION A

Attempt both questions under this section

QUESTION ONE

Sesheke Limited, a manufacturing company uses traditional absorption costing to report its
monthly profits. The company has been approached by a new customer for a quotation.

It is expected that the total time to undertake the assignment is one week.

A technical report for the requirements has been completed at a total cost of K10 million
and its details are summarized below:

Machinery

The job will require two different types of machines as follows:

Machine X will convert the inputs. The process is anticipated to take 25 hours of machine
time. The running cost of machine X is K6,000 per hour. There is currently no unused time
on machine X. The company earns a contribution of K13,000 per machine hour on the
existing product.

Machine Y will be used to polish the product and package it. The job will require 25 machine
hours and these have a running cost of K4,000 per hour. There are currently 35 hours
unused on this machine.

Delivery cost

In order to transport the materials to the customer, a cost of K400,000 will be incurred.

Cost of supervision.

In order to do the work well, a supervisor will be needed. However, the company will use
the services of an existing supervisor in addition to his duties. The supervisor is currently
drawing a salary of K700,000 per week.

Labour

The company has already employed some people to produce the product, but some of the
production will require overtime working due to the availability of a particular machine that
is used on other work. The employees are normally paid K8,000 per hour. The order will
require 150 hours of work and 50 of these hours will be in excess of the employee’s normal
working week. A rate of K10,000 per hour is paid for these overtime hours. Employees are
paid using a hourly rate with a guaranteed minimum wage for their normal working week.

Material

Material A- 10,000 litres will be required. This material is in regular use by Sesheke Limited
and the company has 3,000 litres in inventory. These originally cost K1,400 per litre but the

2
current market price is K1,500 per litre.The resale price of the inventory held was K1,200
per litre.

Material B- This material need to be purchased at a cost of K8,000 per litre. 200 litres will be
required for this product but the supplier has a minimum order size of 250 litres. The
company does not currently see any other use for this material.

Fixed costs

Sesheke Ltd uses a traditional absorption costing system to attribute fixed overhead costs to
its products.

Profit mark up.

Sesheke Limited adds a 25% mark up on costs to arrive at the selling price.

Required:

(a) Prepare a statement showing the total relevant costs to help in the quotation and state
clearly the reasons for including and excluding each item indicated above
(20 marks)
(b) If the customer offered to pay K22.5 million should Sesheke Ltd accept or reject the
offer? (4 marks)
(c) State three key differences between financial accounting and management
accounting information. (6 marks)
(Total: 30 marks

QUESTION TWO

Donchi Kubeba is a company that manufactures a product called ”secret”. The company is
contemplating engaging a ZICA licentiate graduate to manage its budgets. The following
information is unveiled to you for the six months period ended 30th June 2012:

January February March April May June

Sales(units) 480 520 640 750 700 600

Production(units) 550 500 700 720 715 510

Additional data:

(i) The selling price per unit is set at K13,800 per unit for January, February and March
and K14,900 for April, May and June.
(ii) The sales policy is to receive 65% of the sales value in the month of sale and the
balance the month after sale.
(iii) Purchases for production are used in the month of purchase and paid for one month
after purchase. The cost per unit has been set at K8,300 for January and
February,K8,700 for March and April and K9,400 for May and June.

3
(iv) Wages and salaries have been set at K1.8 million for January and February,
K2.2 million for March and April and K2.5million for May and June. The policy is to
pay 75% in the month they are incurred and the balance the following month.
(v) Overheads are set at K1.3 million for January and are budgeted to rise by K60,000
per month thereafter up to and including June. Overheads are paid a month after
they are incurred.
(vi) Machinery costing K7.8 million is to be acquired in February and the same month an
initial cash deposit of 50% will be paid. The balance will be paid in four equal
instalments commencing in May 2012.
(vii) Depreciation on the machinery is to be 15% per annum on reducing balance method.
(viii) The company got an interest free loan amounting to K6.3 million in December 2011.
The entire loan is to be liquidated in June 2012.
(ix) The closing cash balance as at 31st December 2011 was K1.3 million.
(x) The company is contemplating sourcing a loan from STANBIC of K75 million to boost
its operations. It hopes to liquidate this loan from its ordinary activities within a year.

Required:

(a) Prepare a cash budget for Donchi Kubeba for the six months period ended 30 th June
2012. (20 marks)
(b) Comment on the results of Donchi Kubeba as shown by the budget you have
prepared in (a) above, and suggest possible strategies the company must put in
place to improve its cash position in the light of the plans to source a loan from
STANBIC. (10 marks)

(Total: 30 marks)

SECTION B

ATTEMPT ANY TWO (2) QUESTIONS

QUESTION THREE

Chisamba Lungu manufactures a single product, a leather boot that has a standard cost of
K160,000 per unit made up as follows:

Per unit K

Direct materials (15 metres @K6,000/metre) 90,000

Direct Labour (5 hours @ K8,000/hour) 40,000

Variable Overheads ( 5hours @ K4,000/hour) 20,000

Fixed overheads (5 hours @ K2,000/hour) 10,000

160,000

The standard selling price of a leather boot is K195,000. The monthly budget production and
sales was 1,300 boots.

4
Actual figures for the month of December 2011 are as follows:

Sales 1,400 boots @ K200,000 each.

Production 1,500 boots

Direct materials 23,500 metres @ K6,500 per metre.

Direct wages 7,000 hours @ K7,800 per hour

Variable overheads K25,600,000.

Fixed overheads K14,200,000

Required:

Prepare an operating statement that reconciles the budgeted profit and the actual profit.
(20 marks)
(Total: 30 marks)

QUESTION FOUR

Hichani Himonde manufactures components for use in typewriters. The business operates in
a highly competitive market where there are a large number of manufacturers of similar
components. The company is trying to establish a suitable selling price for its components.
The CEO has asked for your advice on the selling price that will maximize profit for the
period.

The current selling price of the components is K1,400,000 and weekly demand over the four
weeks period has been 8,000 components. An analysis of the market reflects that for every
K50,000 increase in selling price the demand reduces by 1,000 components per week and
for every K50,000 reduction in selling price demand increases by 1,000 components per
week. The direct material cost component is K270,000. Conversion costs and the
corresponding output levels have been collected for the last four weeks and they are as
follows:

Week Output volume (units) Costs(K`000)

1 9,400 7,000,000

2 7,600 5,668,000

3 8,500 6,334,000

4 7,300 5,446,000

No significant changes in cost behavior is expected over the next 12 weeks.

5
Required:

(a) Calculate the optimum (profit maximizing) selling price of the components for the
period.

P= a - bx, MR = a - 2bx (6 marks)

(b) State and explain two reasons why it may be inappropriate for Hichani Himonde to
use this theoretical pricing model in practice (4 marks)

(c) Write brief notes on the following pricing strategies:

(i) Loss leader pricing (2 marks)

(ii) Premium pricing (2 marks)
(iii) Price bundling (2 marks)
(iv) Price discrimination (2 marks)
(v) Market skimming pricing (2 marks)

(Total: 20 marks)

QUESTION FIVE

(a) Tumelo limited is a manufacturing company based in Kitwe district, Copperbelt

province. It manufactures a product called “TUTU”. Below is the data relating to
TUTU:

Per Unit (K)

Selling price 25,000

Direct materials 9,000

Direct Labour cost 6,000

Variable overhead 4,000

Fixed overhead cost 3,000

The total fixed cost per period was K60 million. The company has budgeted to sell
12,000 units of TUTU for the period.

Required:

(i) Calculate the Break Even Point (B.E.P) in units and in sales value (2 marks)
(ii) Calculate the Margin of safety (MOS) in units and percentage (2 marks)
(iii) Calculate the number of units to be produced if the company is targeting a
profit of K1.2 million (2 marks)
(iv) The Break Even Point in units if the selling price dropped by 5% but other
variables remained constant ( 2 marks)
(v) State four major limitations of Cost Volume Profit (CVP) Analysis (4 marks)

6
(b) Modern approaches to management accounting emphasizes the use of tools such as
target and Kaizen costing in order for an organization to compete favourably.

Compare and contrast Target and Kaizen costing (8 marks)

(Total: 20 marks)

END OF PAPER

7
 L2

SUGGESTED SOLUTIONS

JUNE 2012

SOLUTION ONE.

a) RELEVANT COST STATEMENT

K`000

Machinery X 325

Machinery y 100

Delivery cost 400

Cost of supervision 0

Technical report 0

Overhead 0

Profit mark up 0

Labour 500

Material A 15,000

Material B 2,000

18,325
Reasons for inclusion and exclusion.

Cost of technical report

This is a sunk cost or past cost and therefore irrelevant.

Machinery X

The opportunity cost of the lost income is the relevant cost of the products (K13,000
x 25) = K325,000

Machinery Y

The additional running cost of the machine is the relevant cost. (K4,000 x 25)
=K100,000

Delivery cost

8
This is a future cost caused by the work and it is therefore irrelevant to the decision.

9
 Cost of supervision

The supervisor`s salary will not be changed by the decision made and therefore the
relevant cost is zero.

Labour

The only relevant cost is overtime hours because the employees are guaranteed a
minimum wage.

Material A

This material is regularly used and must be replaced. Its relevant cost is the cost of
replacement. (10,000 x 1,500) = K15,000,000

Material B

This is the full purchase cost because there is no certainty that the remaining
inventory will have any future value.

Fixed costs

Fixed overheads absorbed is not relevant because it is not specific to this work

Profit mark up

Profit is not a relevant cost.

(b) Should Sesheke Limited accept or reject the offer of K22.5 million.
Since the cost of doing the job will be K18,325,000 the company should accept.
The profit of K4,175,000 will be made(K22,500,000- K18,325,000)

(c) Differences between Financial accounting and Management accounting

- Financial accounting information is used for both internal and external purposes
whereas Management accounting is for internal purposes only.

- The preparation of financial accounting is highly regulated by the accounting

standards whereas Management accounting is not.

- Financial accounting information is prepared usually at the year-end whereas

Management accounting is prepared on a frequent basis say weekly or monthly.

- Financial accounting uses historical/past information whereas management

accounting uses both past and future information.

- Financial statements are required by law whereas management accounts are not
required by the law.

- Financial accounting uses monetary information whereas management

accounting uses both monetary and non-monetary information.

10
 - Any other valid point is acceptable.
SOLUTION TWO

CASH BUDGET FOR THE SIX MONTHS PERIOD

JAN FEB MAR APRIL MAY JUNE

K`000 K`000 K`000 K`000 K`000 K`000

RECEIPTS

Sales(w1) 4,305.6 6,982.8 8,252.4 10,354.95 10,690.75 9,461.5

PAYMENTS

Purchases (w2) - 4,565 4,150 6,090 6,264 6,721

Wag and sal (w3) 1,350 1,800 2,100 2,200 2,425 2,500

Overheads (w4) - 1,300 1,360 1,420 1,480 1,540

Machinery - 3,900 975 975

Loan liquidation 6,300

1,350 11,565 7,610 9,710 11,144 18,036

Surplus/(deficit) 2,955.6 (4,582.6) 642.4 644.95 (453.25) (8,574.5)

Opening cash bal 1,300 4,255.6 (327) 315.4 960.35 507.1

Closing Cash bal 4,255.6 (326.6) 315.8 960.750 507.5 (8,067)

WORKINGS

(W1) Sales

Units sold 480 520 640 750 700 600

SP/unit 13.8 13.8 13.8 14.9 14.9 14.9

Sales value 6,624 7,176 8,832 11,175 10,430 8,940

65% 4,305.6 4,664.4 5,740.8 7,263.75 6,779.5 5,811

35% - 2,318.4 2,511.6 3,091.2 3,911.25 3,650.5

4,305.6 6,982.8 8,252.4 10,354.95 10,690.75 9,461.5

11
(W2) Purchases

Units 550 500 700 720 715 510

Cost per unit 8.3 8.3 8.7 8.7 9.4 9.4

Value 4,565 4,150 6,090 6,264 6,721 4,794

Payment - 4,565 4,150 6,090 6,264 6,721

(W3) Wages

1,800 1,800 2,200 2,200 2,500 2,500

75% 1,350 1,350 1,650 1,650 1,875 1,875

25% - 450 450 550 550 625

1,350 1,800 2,100 2,200 2,425 2,500

W4 Overheads

1,300 1,360 1,420 1,480 1,540 1,600

Payment due - 1,300 1,360 1,420 1,480 1,540

b) Comments on the cash budget

-The company started initially with a cash balance of K1.3m but now the projected
cash position as at 30th June shows a negative balance of K8.067 million. The
following are among other the suggestion the Company should embark on:

i) Insisting on prompt cash payments from the customers by introducing cash

discounts
ii) Collect a bigger amount in the month of sale say 75%
iii) Identify other sources of supplies that may be relatively cheaper than the
current ones
iv) Buy in bulk so as to access huge discounts on purchases
v) Introduce non fringe benefits to employees so as to avoid salary increment all
the time
vi) Avoid overtime working by employees
vii) The purchase of machinery could be deferred to a later period if not very
crucial to the operations

12
Considering the future cash position of the company it may not be advisable to
obtain a loan from STANBIC as it may not have the capacity to service the loan.
However, it may be possible if the company can negotiate for more favorable terms.

13
QUESTION THREE

RECONCILIATION OF BUDGETED PROFIT TO ACTUAL PROFIT

K`000

Budgeted profit(1,300 x 45,500

K35,000)

Sales variances :Price 7,000 (F)

: Volume 3,500 (F)

56,000

Cost variances F A

Material price 11,750

Material usage 6,000

Labour rate 1,400

Labour efficiency 4,000

Variable overhead expenditure 2,400

Variable overhead efficiency 2,000

Fixed overhead volume 2,000

Fixed overhead expenditure _______ 1,200

11,800 (18,950) (7,150)

48,850

14
Less closing stock (100x (16,000)
K160,000)

Actual profit 32,850

15
Workings

i)
Material price variance K`000

23,500 metres should cost x K6,000= 141,000

But did cost 152,750

11,750 (A)

ii) Material usage variance

1,500 boots should use X 15 m 22,500metres

But did use 23,500metres

1,000metres(A)

x K6,000

= 6,000( A)

iii) Labour rate variance

7000 hours should cost x K8,000 56,000

But did cost 54,600

1,400(F)

iv) Labour efficiency variance

1,500 boots should use x 5 hours 7,500 hours

But did use 7,000 hours

500 hours(F)

x K8,000

=4,000 (F)

v) Variable overhead expenditure variance

7,000 hours should cost x K4,000 28,000

16
 But did cost 25,600

2,400 (F)

vi) Variable overhead efficiency variance

500 hours x K4,000 2,000(F)

vii) Fixed overhead volume variance

Budgeted units 1,500

Actual units 1,300

200 units(F)

x K10,000

=2,000(F)

viii) Fixed overhead expenditure variance

Budgeted units @ std rate(1,300x 13,000
K10,000)

Actual cost 14,200

1,200(A)

ix) Fixed overhead efficiency

500 hours x K2,000 1,000 (F)

x) Fixed overhead capacity

Budgeted hours (1,300 x 5) 6,500

Actual hours 7,000

500 hours(F)

X K2,000

= 1000(F)

xi) Sales volume variance

Budgeted units 1,300

Actual units 1,400

17
 100 units(F)

x K35,000

= 3,500(F)

xii) Sales price variance

1,400 boots should have been for 273,000

But were sold for 280,000

7,000(F)

SOLUTION FOUR

(a) Profit maximizing selling price

Marginal cost K270,000 plus the labour and conversion costs.

The high low method will be used as follows:

High 9,400 units K7,000,000,000

Low 7,300 units K5,446,000,000

Difference 2,100 units K1,554,000,000

Variable cost of labour and conversion costs=K1,554,000,000/2100= K740,000.

Total variable cost K270,000+K740,000=K1,010,000.

Price at which demand will be nil

quantity demanded at current price

a= current price + X K change in price
Change in demand when price changes by x K

(8,000 x 4)
a = 1,400,000 + X 50,000
(1,000 x 4)

a = 1,400,000+(8 x 50,000)

a= 1,800,000.

Therefore: Price =K1,800,000 -50x

And Marginal revenue = K1,800,000 – 100x

Profit is maximized when MR = MC

18
1,800,000-100x =1,010,000

-100x=1,010,000-1,800,000

X= 7,900units

P= 1,800,000- 50 x

P= 1,800,000-50(7,900)

K1,405,000.

(b) The following are the reasons why it may be inappropriate to use this method
i) It is difficult to determine the effect that changes in price have on
quantity
ii) It is difficult to determine the price at which demand will be nil
iii) It ignores the effect on demand of issues other than price
iv) It ignores the actions of the competitors
v) It is difficult to accurately determine the variable element of labour
and conversion costs
vi) It ignores other factors such as inflation.
(c)

i) Loss leader pricing

Loss leader pricing is an aggressive pricing strategy wherein a store
sells certain goods below cost in order to attract customers. This may
attract more customers into the stores who may in turn buy other
goods.
ii) Premium pricing
Premium pricing is the aspect of differentiating a product so as to
charge higher prices.
Differentiation is the basis for charging higher prices.
iii) Price bundling

Is the practice of marketing two or more products/services in a single

package at a single price e.g insurance companies providing multiple
policies at one rate,
Hotels and retails business providing multiple products/services at
single rate.

iv) Price discrimination

Is the practice of charging different prices for the same product in

different places. The idea is to maximize on the revenue for the
organization.
v) Market skimming pricing

19
 Marketing skimming pricing is the method of charging higher prices
when a product is first launched on to the market. It is appropriate
when a product is brand new and the demand is inelastic.

SOLUTION FIVE

a)
i) Break even point (B.E.P)= Fixed cost/contribution per unit
Contribution per unit K6,000.
BEP in units
60,000,000/6,000
=10,000 units
BEP in sales value (10,000 units x K25,000)=K250,000,000.

ii) Margin of Safety (MOS)

Budgeted units – units at B.E.P

12,000-10,000
2000 units
iii) Number of units to achieve target profit of K1,200,000.

60,000,000  1,200,000
=
6,000
=10,200 units.
iv) Break even point if Selling price dropped by 5%.

Selling price/unit (K25,000x 0.95) K23,750

Variable cost/unit K19,000

Contribution per unit K4,750

BEP in units = 60,000,000/4750

12,632 units

v) Limitations of Cost Volume Profit(CVP) Analysis

- The selling price per unit is assumed to be constant throughout the

period
- The variable cost per unit is assumed to be constant throughout the
period
- The units produced and sold are assumed to be the same
- The fixed cost for the period is not constant as well
- Uncertainties in estimating or assigning values to variables such as
cost

20
b) Similarities and differences between Target costing and Kaizen costing
Similarities

- Both methods are aimed at cost reduction

- Both methods are aimed at increasing the profitability of an organization
- They are both modern approaches to costing and pricing
- They are both methods of enhancing value and competitiveness of an
organisation

Differences

- Target costing applies before production commences whereas Kaizen costing

applies when production has started

- Target costing involves huge cost reduction whereas Kaizen involves minimal
cost reduction

- Target costing is used when the company is unable to dictate the selling price
of its products whereas Kaizen can be used anywhere

- With target costing the selling price will be dictated by the survey conducted
whereas with kaizen the price will be influenced by how much costs are saved
by an organization.

21