FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS

EXAMINATION
_____________________________________________________________________________________

BACHELOR OF COMMERCE DEGREE PART 2 SEMESTER 2

MANAGEMENT ACCOUNTING AC218

COST AND MANAGEMENT ACCOUNTING AC207

DATE JUNE 2015

DURATION 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. ANSWER ALL QUESTIONS

2. START EACH ANSWER ON A FRESH PAGE

3. SHOW ALL WORKINGS, WHERE APPLICABLE

Page 1 of 7
QUESTION 1

The budgeted Statement of Financial Position data of ZvinhuZvakaFire Ltd as at 01

Book Value

Non-Current Assets $

Land and Buildings 500 000

Machinery and Equipment 185 000

Motor Vehicles 175 000

860 000

Current Assets

Inventory of Raw Materials 100 units 4 320

Inventory of Finished Goods 110 units 10 450

Trade payables (November $ 7 680, December $ 10 400) 18 080

Cash at Bank 22 000

54850

Total Assets 914 850

Represented by:

Ordinary Share Capital (fully paid) $1 Shares 500 000

Share Premium 210 000

Returned Earnings 200 950

Total Equity 910 950

Current liabilities

Trade Payables 3 900

914 850

Page 2 of 7
NB: inventory of finished goods is valued at marginal cost

The estimates for the next four month period are as follows:

January February March April

Sales Units 190 100 188 170

Production Units 170 120 160 150

Purchase of Raw Material Units 185 140 190 160

Wages and Variable Overheads

@ $ 125/Unit $10 000 $15 000 $12 500 $12 375

Fixed Overheads $5 000 $5 000 $5 000 $5 000

The company intends to sell each unit for $340 and has estimated that it will have to
pay $85 per unit for raw materials. One unit of raw materials is needed for each unit of
finished product.

All sales and purchases of raw materials are on credit. Trade payables are allowed two
months credit and suppliers of raw materials are paid after one month’s credit. The
wages, variable overheads and fixed overheads are paid in the month in which they are
incurred.

Cash from a loan secured on the land and buildings of $650 000 at an interest rate of
12% p.a is due to be received on 1 February. Machinery costing $880 000 will be
received on 01 January with half of the cost payable in March and the balance to be
paid in June.

The loan interest is payable half yearly from July onwards. An interim dividend to 31
March of $35 000 will be paid in April. Additional 225 000 shares are to be issued to the
public in March at $1.85 and shares are expected to be fully paid by the end of March.

Depreciation for the four months including that on new machinery is:

Machinery and equipment $138 000

Motor Vehicles $62 000

The company uses the FIFO method of stock valuation. Ignore taxation.

Page 3 of 7
Required:
(a) Calculate and present the raw materials budget and finished goods budget in
terms of units, for each month from January to April inclusive. (5 marks)
(b) Calculate the corresponding sales budget, the production cost budget and the
budgeted closing trade receivables, trade payables and inventories in terms of
values. (5 marks)
(c) Prepare and present a cash budget for each of the four months (6 marks)
(d) Prepare a forecast statement of profit and loss account for the four months
ending 30 April. (9 marks
(e) Prepare a statement of financial position as at 30 April. (6 marks)
(f) Advice the company about possible ways in which it can improve its cash
management.
(4 marks)

(TOTAL MARKS:35)

QUESTION 2

(a) Explain why Net Present Value is considered technically superior to Payback and
Accounting Rate of Return as an investment appraisal technique even though the latter
are said to be easier to understand by management. Highlight the strengths of the Net
Present Value method and the weaknesses of the other two methods. (5 marks)

(b) Your company has the option to invest in projects T and R but finance is only
available to invest in one of them.
You are given the following projected data:

Project T R

$ $

Initial cost 70 000 60 000

Profits: Year 1 15 000 20 000

Year 2 18 000 25 000

Year 3 20 000 21 000

Year 4 32 000 10 000

Year 5 18 000 8 000

Year 6 10 000

Page 4 of 7
You are told:
(1) All cash flows take place at the end of the year apart from the original investment in
the project which takes place at the beginning of the project.
(2) Project T machinery is to be disposed of at the end of year 5 with a scrap value of
$10 000.
(3) Project R machinery is to be disposed of at the end of year 6 with a nil scrap value.
(4) The company’s policy is to depreciate its assets on a straight line basis.
(5) The discount rate to be used by the company is 14%.

Required:
(i) Calculate accounting Rate of Return for the two machines under
consideration. (4 marks)
(ii) Calculate for projects T and R:
(a) Payback period
(b) Net present value,
(c) Internal Rate of Return (IRR) and advice which project should be
invested in, stating your reasons. (13marks)
(iii) Explain what the discount rate of 14% represents and state two ways how it might
have been arrived at. (3 marks)

(TOTAL MARKS: 25)

Zvamaida investments LTD undertook a contract for $19 500 000 with effect from 01
July 2013. On 30 June 2014, when the accounts were closed, the following details
relating to the contract were gathered:
$
Materials 13 456 000
Wages paid 382 000
General expenses 132 500
Plant purchased 540 000
Material at site (30/06/14) 320 000
Wages accrued (31/06/14) 83 000
Cash received 10 000 000
Work certified 8 700 000
Work not certified at cost 1 690 000
Depreciation on plant is at the rate of 25% on cost per annum

The contact contained an escalation clause which reads as follows:

Page 5 of 7
 “In the event of increase in both the material cost and the wage cost by more
than 15%, the contract price would increase by 28% of the increase in both the
material cost and the wage cost beyond 15%.”

It was found that, since the date of signing the agreement, both the material cost and
the wage cost increased by 35%. The value of the work certified did not take into
account the effect of the escalation clause.

Required:

(a) You are required to calculate the amount of the escalation clause.
(8 marks)
(b) You are required to prepare the contact account. (12 marks)
(TOTAL MARKS: 20)

QUESTION 4

KUPFUMA Limited makes and sells a single product ‘Mutaku-taku’ for which the
standard cost isas follows:
$Per unit
Direct materials 6 kilograms at $15.00 per kg 90.00
Direct labour 7 hours at $17.00 per hour 119.00
Variable production overhead 5 hours at $2.00 per hour 10.00
Fixed production overhead 5 hours at $20.00 per hour 100.00
319.00

The variable production overhead is deemed to vary with the hours worked.
Overhead is absorbed into production on the basis of standard hours of production and
the normal volume of production for the period just ended was 40 000 units (100 000
standard hours of production). The selling price per unit was budgeted at $405.00.

For the period under consideration, the actual results were:

28 000 units
Production of ‘Mutaku-taku’ ($)
Direct material used – 176 000 kg at a cost of 2 940 000
Direct labour cost incurred – for 176 000 hours worked 4 351 200
Variable production overhead incurred 172 000
Fixed production overhead incurred 2 430 000

All the units were sold and total sales amounted to 11 144 000

Page 6 of 7
You are required:
(a) To calculate and show, by element of cost, the standard cost for the output for
the period; (3 marks)
(b) To calculate and list all the relevant variances and reconciles the budgeted
profit with the actual profit; (15 marks)
(c) To comment briefly on the usefulness to management of statements such as
that given in your answer to (b) above. (2 marks)
(TOTAL MARKS: 20)

END OF EXAM

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