TUTORIAL QUESTIONS AND SUGGESTED SOLUTIONS
ILLUSTRATION 1
State five roles of the Management Accountant.
SUGGESTED SOLUTION
It is the duty of Management Accountant to:
i. Plan a
profitable future for the business.
ii. Install
and maintain an accounting system to monitor the performance of the business.
iii. Identify potential problems.
iv. Record transactions by producing accounting
statements.
v. Generate
information to meet the following requirement:
a. Allocating costs between costs of goods sold and
inventories for internal and external reporting.
b. Helping managers make better decision.
c. Planning,
control and performance measurement.
ILLUSTRATION 2
Moribatise Ajepeaiye, an able Electrical Engineer,
was informed that he was going to be promoted to Assistant Plant Manager.
Moribatise was elated but uneasy. In particular, his
knowledge of Accounting was sparse. He had taken one course in Financial
Accounting but had not been exposed to the Management Accounting that his
superiors found helpful.
Moribatise planned to enrol in Management Accounting
course at Southwestern University as soon as possible.
Meanwhile, he asked Mosorire Moyege, an Assistant
Financial Controller to state ten of the principle distinctions between
Financial Accounting and Management Accounting using some concrete factors.
As an Assistant Financial Controller, prepare a
written response to Moribatise Ajepeaiye.
SUGGESTED SOLUTION
From: Mosorire Moyege (Assistant Financial
Controller)
To:
Moribatise Ajepeaiye (Assistant Plant Manager)
Subject:
TEN DISTINCTION BETWEEN FINANCIAL
ACCOUNTING AND
MANAGEMENT ACCOUNTING
INTRODUCTION
Financial Accounting is defined as the
classification and recording of the monetary transactions of an entity in
accordance with established concepts, principles, accounting standards and
legal requirements and their presentation by means of profit or loss and other
comprehensive income, statement of financial position and cash flow statements
during and at the end of the reporting period.
Management Accounting can be defined as the
applications of professional knowledge and skill in the preparation and
presentation of accounting information in order to assist management in the
formulation of policies and in planning and control.
Distinction between Financial Accounting and
Management Accounting are stated or elucidated in the table below:
|
S/N
|
FACTORS
|
FINANCIAL
ACCOUNTING
|
MANAGEMENT
ACCOUNTING
|
|
1
|
Users
|
Financial Accounting reports are used
by both management (internal) and outsiders such as government, investors,
creditors, public and so on.
|
The users of management accounting
reports are mainly internal i.e management.
|
|
2
|
Rules and Regulations
|
Financial Accounting reports adhere
strictly to statutory requirements such as CAMA 1990, professional
pronouncement (ICAN) and accounting standards (IAS, IFRS).
|
Management Accounting report need not
adhere strictly to these rules and regulations.
|
|
3
|
Degree of Details
|
Financial Accounting report may show
the total profit made by an organisation by laying more emphasis on the
department, branch, segment or division that contributes to the profit.
|
Management Accounting reports are much
more detailed than Financial Accounting reports.
|
|
4
|
Time Focus
|
Financial Accounting reports are
historical.
|
Management Accounting reports are
futuristic,
|
|
5
|
Period of preparation of reports
|
Financial Accounting reports are
usually rigidly prepared for periods such as monthly, quarterly, semi-annual
or annually.
|
Management Accounting report can be
prepared anytime the management
of the organisation need it.
|
|
6
|
Objective
|
The objective of Financial Accounting
report is stewardship.
|
Management Accounting reports are used
for planning, controlling and decision.
|
|
7
|
Taxation
|
Financial Accounting is prepared for
taxation purposes.
|
Management Accounting is not prepared
for taxation purposes.
|
|
8
|
Dual concept
|
Financial Accounting is based on the
dual concept of debit and credit.
|
In Management Accounting, this is not
necessary.
|
|
9
|
Estimates and Approximation
|
The use of estimates and
approximations are reduced to the bearest minimum.
|
Management Accounting reports entails
usage of estimates and approximations.
|
|
10
|
Monetary and Non-Monetary Concept
|
Financial Accounting reports are
expressed in monetary terms.
|
Management Accounting reports are
expressed in monetary and non-monetary terms.
|
………………………………
Mosorire Moyege
(Assistant Financial Controller)
ILLUSTRATION 3
(a) Write
short note on the following:
(i) Budget Committee
(ii) Zero Based Budget
(iii) Flexible Budget
(b) Below is
the budget of maintenance department of Ajepeaiye Nigeria Limited which is
currently
working at 80% capacity.
N`000
Variable
Costs:
Direct
Labour 60,000
Direct
Materials 48,000
Other direct
expenses 56,000
Mixed Costs:
Indirect
labour 30,000
Maintenance 24,000
Other
supplies 32,000
Discretionary
fixed costs:
Training
cost 15,000
Committed
fixed costs:
Depreciation 15,000
280,000
In addition to the above information, you are to
note the following:
Indirect labour 60%
fixed
Maintenance Expenses 50%
fixed
Other supplies 40%
variable
You are required to prepare a flexible budget at
60%, 70% and 100% capacities.
SUGGESTED SOLUTION
(a)
(i) Zero Based Budget: This implies
starting the budget from zero situation and
justifying each segment of the budget rather than merely adding to
historical budgets or actual .
(ii)
Flexible Budget: This is one designed to adjust the budget cost levels to suit
the level of activity actually attained.
(iii) Budget Committee: This is normally chaired
by the Chief Executive of the organisation, with departmental heads or senior
managers as members.
(b)
AJEPEAIYE NIGERIA LIMITED
FLEXIBLE BUDGET AT 60%, 70%, 80% AND
100% Capacity
|
60%
|
70%
|
80%
|
100%
|
|
|
|
N`000
|
N`000
|
N`000
|
N`000
|
|
Variance Cost:
|
||||
|
Direct Labour (w.1)
|
45,000
|
52,500
|
60,000
|
75,000
|
|
Direct Material (w.2)
|
36,000
|
42,000
|
48,000
|
60,000
|
|
Other Direct Expenses (w.3)
|
42,000
|
49,000
|
56,000
|
70,000
|
|
Mixed Costs:
|
||||
|
Indirect Labour (w.4)
|
27,000
|
28,500
|
30,000
|
33,000
|
|
Maintenance (w.5)
|
21,000
|
22,500
|
24,000
|
27,000
|
|
Other Supplies (w.6)
|
28,800
|
30,400
|
32,000
|
35,200
|
|
Discretionary Fixed Costs:
|
||||
|
Training
|
15,000
|
15,000
|
15,000
|
15,000
|
|
Committed Fixed Costs:
|
||||
|
Depreciation
|
15,000
|
15,000
|
15,000
|
15,000
|
|
Total Cost
|
229,800
|
254,900
|
280,000
|
330,200
|
Workings:
60% 70% 100%
1. Direct Labour = 60,000
X 60 60,000 X 70 60,000
X 100
80 80 80
=
N45,000 N52,500 N75,000
2.
Direct Material = 48,000 X 60 48,000
X 70 48,000 X 100
80 80 80
=
N36,000 N42,000 N60,000
3.
Other Direct Expenses= 56,000 X 60 56,000
X 70 56,000 X 100
80
80 80
= N42,000 N49,000 N70,000
4.
Indirect Labour:
Fixed
= 60% x N30,000 = N18,000
Variable
= 40% x N30,000 = N12,000
60% 70% 100%
N`000 N`000 N`000
Fixed
Cost 18,000 18,000 18,000
Variable
Cost (12,000x60) 9,000 (12,000x70) 10,500 (12,000x100) 15,000
80 27,000 80 28,500 80
33,000
5.
Maintenance:
Fixed
= 50% x N24,000 = N12,000
Variable
= 50% x N24,000 = N12,000
60% 70% 100%
N`000 N`000 N`000
Fixed
Cost 12,000 12,000 12,000
Variable
Cost (12,000x60) 9,000 (12,000x70) 10,500 (12,000x100) 15,000
80 21,000 80 22,500 80
27,000
6.Other
Supplies:
Fixed
= 60% x N32,000 = N19,200
Variable
= 40% x N32,000 = N12,800
60% 70% 100%
N`000 N`000 N`000
Fixed
Cost 19,200 19,200 19,200
Variable
Cost (12,800x60) 9,600 (12,800x70) 11,200 (12,800x100) 16,000
80 28,800 80 30,400 80
35,200
ILLUSTRATION
4
The corporate planning manager of Motiriri Limited is
in the process of preparing the 2016 plan for his organisation, just having
obtained the requisite import licence. The following data have been gathered:
|
Finished Goods:
|
||||||||
|
Products
|
Opening Stock
|
Closing Stock
|
Sales
|
|||||
|
A
|
8,000
|
6,000
|
30,000
|
|||||
|
B
|
18,000
|
10,000
|
20,000
|
|||||
|
C
|
7,000
|
15,000
|
50,000
|
|||||
|
Labour Requirement:
|
||||||||
|
Products
|
Hours per unit
|
Rate per unit
|
||||||
|
A
|
5
|
3.20
|
||||||
|
B
|
3
|
6.00
|
||||||
|
C
|
2
|
3.50
|
||||||
|
Materials:
|
||||||||
|
Usage in production
|
Rate per unit
|
|||||||
|
Type
|
Price
|
A
|
B
|
C
|
||||
|
1
|
3.00
|
3
|
1
|
-
|
||||
|
2
|
2.00
|
4
|
-
|
3
|
||||
|
3
|
2.50
|
-
|
6
|
3
|
||||
|
4
|
4.00
|
5
|
-
|
-
|
||||
|
5
|
1.00
|
-
|
7
|
3
|
||||
Production overhead is applied at the rate of X N3
per direct labour hour.
You are required to prepare:
(a)
Production
budget
(b)
Direct
materials purchase budget
(c)
Direct
labour budget
(d)
The
cost of finished goods
(e)
If
a profit of 1/3 of the selling price is desired, for how much
should each unit be sold?
SUGGESTED SOLUTION
(a) MOTIRIRI LIMITED
PRODUCTION BUDGET
|
A
|
B
|
C
|
|
|
Sales
|
30,000
|
20,000
|
50,000
|
|
Add closing stock
|
6,000
|
10,000
|
15,000
|
|
36,000
|
30,000
|
65,000
|
|
|
Less opening stock
|
8,000
|
18,000
|
7,000
|
|
Production Budget
|
28,000
|
12,000
|
58,000
|
(b) MOTIRIRI LIMITED
DIRECT MATERIAL PURCHASE BUDGET
|
PRODUCT
|
|
A
|
|
|
|
B
|
|
|
|
|
Material
|
Unit
|
Material
|
Unit
|
Production
|
Cost
|
Material
|
Unit
|
Production
|
Cost
|
|
Type
|
Price
|
Required
|
Cost
|
Budget
|
Budget
|
Required
|
Cost
|
Budget
|
Budget
|
|
|
N
|
N
|
N
|
N
|
N
|
||||
|
1
|
3
|
3
|
9
|
28,000
|
252,000
|
1
|
3
|
12,000
|
36,000
|
|
2
|
2
|
4
|
8
|
28,000
|
224,000
|
-
|
-
|
-
|
-
|
|
3
|
2.5
|
-
|
-
|
-
|
-
|
6
|
15
|
12,000
|
180,000
|
|
4
|
4
|
5
|
20
|
28,000
|
560,000
|
-
|
-
|
-
|
-
|
|
5
|
1
|
-
|
-
|
-
|
-
|
7
|
7
|
12,000
|
84,000
|
|
TOTAL DIRECT MATERIAL PURCHASE BUDGET
|
1,036,000
|
|
300,000
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
PRODUCT
|
|
C
|
|
|
|
|
Material
|
Unit
|
Material
|
Unit
|
Production
|
Cost
|
|
Type
|
Price
|
Required
|
Cost
|
Budget
|
Budget
|
|
|
N
|
N
|
N
|
||
|
1
|
3
|
-
|
-
|
-
|
-
|
|
2
|
2
|
3
|
6
|
58,000
|
348,000
|
|
3
|
2.5
|
3
|
7.5
|
58,000
|
435,000
|
|
4
|
4
|
-
|
-
|
-
|
-
|
|
5
|
1
|
3
|
3
|
58,000
|
174,000
|
|
TOTAL DIRECT MATERIAL PURCHASE BUDGET
|
957,000
|
||||
|
|
|
|
|
|
|
(c
) MOTIRIRI LIMITED
DIRECT LABOUR BUDGET
|
Product
|
Budgeted
|
Hour/ Unit
|
Budgeted
|
Rate/ Hours
|
Budgeted
|
|
Units
|
Hours
|
Labour Cost
|
|||
|
N
|
N
|
||||
|
A
|
28,000
|
5
|
140,000
|
3.2
|
448,000
|
|
B
|
12,000
|
3
|
36,000
|
6
|
216,000
|
|
C
|
58,000
|
2
|
116,000
|
4
|
406,000
|
|
Total
|
292,000
|
1,070,000
|
(d)
MOTIRIRI LIMITED
COST OF FINISHED GOODS
|
Cost Element
|
|
Product
|
|
|
|
|
A
|
B
|
C
|
Total
|
|
|
N
|
N
|
N
|
N
|
|
Materials
|
1,036,000
|
300,000
|
957,000
|
2,293,000
|
|
Labour
|
448,000
|
216,000
|
406,000
|
1,070,000
|
|
Overhead (w.1)
|
420,000
|
108,000
|
348,000
|
876,000
|
|
Total Production Cost
|
1,904,000
|
624,000
|
1,711,000
|
4,239,000
|
|
Unit produced
|
28,000
|
12,000
|
58,000
|
|
|
Cost per unit
|
N68
|
N52
|
N29.50
|
Working:
Calculation
of overheads:
Products
A (140,000 x N3) =
N420,000
B (36,000 x N3) =
N108,000
C (116,000 x N3) = N348,000
Total N876,000
(e) MOTIRIRI LIMITED
SELLING PRICE
|
A
|
B
|
C
|
|
|
N
|
N
|
N
|
|
|
Costing per unit(as calculated in (1d)
|
68
|
52
|
30
|
|
Profit (1/3 of selling price)
|
34
|
26
|
14.75
|
|
Selling Price
|
102
|
78
|
44
|
ILLUSTRATION 5
Aseye Limited Operate a standard absorption costing
system to control the manufacturing cost of single product. The following
standards have been set.
N/Unit
Direct Materials 2kg @ N6/kg 12
Direct Labour 1 hour @ N7/hr 7
Variable overhead 1 hour@ N9/hr 9
Total production cost 28
The fixed overhead standard cost per unit is based
on a budgeted monthly production of 4,000 units actual results for most recent
month were:
Production 4,300
units
Direct material cost N56,000
for 9,000kg
Direct labour cost N32,800
for 4,600hrs
Variable overhead N35,000
Only 4,000 hrs were worked
No material inventory held
Required: Calculate all relevant variances.
SUGGESTED SOLUTION
ASEYE LIMITED
(i) DIRECT MATERIAL COST VARIANCE
=( Standard cost based on actual output
- Actual Cost)
= ( 2 x 6 x 4,000 - 56,000 x 4,3000 )
9,000
=
48,000 - 26,756
=
N21, 244 F
(ii) DIRECT MATERIAL PRICE
=
( Standard Price - Actual Price ) Actual Quantity
= ( 6
- 56,000) 4,300
9,000
=
( 6 - 6.22) 4,300
= (0.22)
4,300
=
N956 A
(iii) DIRECT MATERIAL USAGE VARIANCE
= ( Standard usage based on actual
output - Actual Usage ) Standard Price
= ( 2 x 4,000 -
4,300) 6
= ( 8,000 -
4,3000) 6
= (3,700 ) 6
= N22,200 F
(iv) DIRECT LABOUR COST VARIANCE
=( Standard cost based on actual output
- Actual Cost)
= ( 1 x 7 x 4,000 -
32,800)
= (28,000 – 32,800)
=
N4,800 A
(v) DIRECT WAGE RATE VARIANCE
=
( Standard Rate - Actual Rate ) Actual Labour Hours
= ( 7 - 32,800)
4,600
4,600
=
( 7 – 7.13) 4,600
= (0.13) 4,600
= N600 A
(vi) DIRECT LABOUR EFFICIENCY
VARIANCE
=
( Standard Labour Hour - Actual Labour Hour) Standard Rate
= ( 1 x 4,000 -
4,600) 7
= (4,000- 4,600) 7
= (600) 7
= N4,200 A
(vii) VARIABLE OVERHEAD COST VARIANCE
=( Standard cost based on actual output
- Actual Cost)
= (1 X 9 X 4,000 -
35,000)
= (36,000 – 35,000)
= N1,000 F
ILLUSTRATION 6
Brits Nigeria Limited manufactures local bread,
using two chemical pounds Mang and Dang. The standard materials usage and cost
of unit of bread are as follows:
N
Mang 6kg @ N3 per kg 18
Dang 12kg @ N4 per kg 48
66
At particular period, 100 units of bread were
produced from 700kg of Mang and 1,140kg of Dang.
Required:
Calculate the materials usage, mix and yield
variances.
SUGGESTED SOLUTION
BRITS NIGERIA LIMITED
(i) MATERIAL
USAGE VARIANCE
|
Chemical
|
Standard
|
Actual
|
Difference
|
Standard
|
Material
|
|
Quantity
|
Quantity
|
Price
|
Usage
|
||
|
Allowed
|
Used
|
Variance
|
|||
|
|
(kg)
|
(kg)
|
N
|
N
|
|
|
Mang
|
600
|
700
|
(100)
|
3
|
(300) A
|
|
Dang
|
1,200
|
1,140
|
60
|
4
|
240 F
|
|
1,800
|
1,840
|
(40)
|
60
A
|
(ii)
MATERIAL MIX VARIANCE
|
Chemical
|
Actual
|
Actual
|
Difference
|
Standard
|
Material
|
|
Quantity
|
Quantity
|
Price
|
Mix
|
||
|
at Actual
|
at Standard
|
Variance
|
|||
|
|
Proportion
|
Proportion
|
N
|
N
|
|
|
Mang
|
700
|
613
|
(87)
|
3
|
(261) A
|
|
Dang
|
1,140
|
1,227
|
87
|
4
|
348 F
|
|
1,840
|
1,840
|
0
|
87
F
|
||
(iii) MATERIAL YIELD VARIANCE
|
Chemical
|
Standard
|
Actual
|
Difference
|
Standard
|
Material
|
|
Quantity
|
Quantity
|
Price
|
Mix
|
||
|
required for
|
Standard
|
Variance
|
|||
|
|
actual production(kg)
|
Mix (kg)
|
N
|
N
|
|
|
Mang
|
600
|
613
|
(13)
|
3
|
(39)
A
|
|
Dang
|
1,200
|
1,227
|
(27)
|
4
|
(108)
A
|
|
1,800
|
1,840
|
(40)
|
(147) A
|
ILLUSTRATION 7
Alashela Nigeria Limited manufactures the following,
with the standard labour hours.
Products:
A 20
minutes
B 45
minutes
C 30
minutes
D 25
minutes
The following information were further provides:
Product Budgeted
output (units) Actual output
(units)
A 45,000 48,000
B 70,000 62,000
C 53,000 58,000
D 64,000 53,000
Actual hours recorded was 100,000 direct labour
hours.
Required to complete:
(i) Activity ratio (ii)
Efficiency ratio (iii) Capacity ratio
SUGGESTED SOLUTION
ALASHELA NIGERIA LIMITED
(I) Activity Ratio = Standard
Hours x 100
Budgeted Hours 1
= 113,583 x 100
120,667
= 94.1%
This means that the actual level of production
is less than budgeted level by 5.9%.
(ii) Efficiency Ratio = Standard Hours x 100
Actual Hours 1
= 113,583 x 100
100,000 1
= 113.583
= 114%
This means that the actual level
of production was achieved in less time than standard by working at a rate which
was nearly 14 % above normal level of efficiency.
(iii) Capacity Ratio = Actual Hours worked x 100
Budgeted Hours 1
=
100,000 x 100
120,667 1
= 82.9%
This means that the actual hour
worked were less than the budgeted hour by 17.1%.
Workings:
1. Standard hours equivalent to
actual production:
Standard
Hours
A = 20 x 48,000 = 16,000
60 1
B = 45 x 62,000 = 46,500
60
1
C = 30 x 58,000 = 29,000
60
1
D = 25 x 53,000 = 22,083
60
1 113,583
2. Budget in terms of Standard
Hours
Budgeted
Hours
A = 20 x 45,000 = 15,000
60 1
B = 45 x 70,000 = 52,500
60
1
C = 30 x 53,000 = 26,500
60
1
D = 25 x 64,000 = 26,667
60
1 120,667
ILLUSTRATION 8
Efura Nigeria Limited has provided below its
operating and maintenance costs for the last four months:
Months/year Production(Units) Cost (N)
June 2017 12,000 194,000
July 2017 14,000 220,000
August 2017 15,000 222,000
September 2017 16,000 230,000
You are required to use High and Low Method to
calculate:
i.
Variable
cost per unit and the fixed cost for the period.
ii.
Express
the company`s operating and maintenance costs in linear equation form:
Y
= a + bx
iii.
What
is the expected costs for the last three months of 2017 when the planned
activity
level were:
October
2017 17,200
November
2017 25,500
December
2017 37,400
SUGGESTED SOLUTION
i. High and
Low Method
Production
(Unit) Cost (N)
High 16,000 230,000
Low 12,000 194,000
Difference 4,000 36,000
Variable cost per unit (b) = Difference in Cost
Difference in Production (Unit)
Variable cost per unit (b) = 36,000
4,000
Variable cost per unit (b) = 9
Fixed Cost = Total Cost – Variable Cost
Use High point method, we have
Fixed Cost = 230,000-9 ( 16,000)
Fixed Cost
=230,000-144,000
Fixed Cost =
N86,000
ii. Y = a
+ bx
Y = 86,000 + 9 X
iii. Expected
costs for October 2017 when the activity level is 17,200 :
Y =
86,000 + 9 X
Expected Cost (Y) = 86,000 + 9 (17,200)
Expected Cost (Y) = 86,000 + 154,800
Expected Cost (Y) = N240,800
Expected
costs for November 2017 when the activity level is 25,500:
Y =
86,000 + 9 X
Expected Cost (Y) = 86,000 + 9 (25,500)
Expected Cost (Y) = 86,000 + 229,500
Expected Cost (Y) = N315,500
Expected costs for December 2017when the activity level is 37,400:
Y = 86,000 + 9 X
Expected Cost (Y) = 86,000 + 9 (37,400)
Expected Cost (Y) = 86,000 + 336,600
Expected Cost (Y) = N422,600
ILLUSTRATION 9
(a) Enumerate ten stages in decision making process.
(b) List five merits of Corporate Planning and three
demerits of Corporate Planning.
(c ) Write short note on:
i.
Planning ii. Control
SUGGESTED SOLUTION
(a) Ten
stages in decision making process are elucidated below:
i. Identify
that there is a problem.
ii. Collect
all necessary information on all aspects of the problem.
iii. Evaluate the relevance of the information
obtained.
iv. Define
the objective
v. Find out
the alternative courses of action.
vi. Evaluate
these alternatives.
vii. Make decision with regard to the course of
action to be adopted.
viii. Mobilise the resources required.
ix.
Implement the objective
x. Find out
if the problem has been solved
(b) Five
merits of Corporate Planning are:
i.
Clarifying policies, strategies and providing the essential framework
for realistic
operational budgeting and planning.
ii. Providing
strategies to avoid sub-optimality as operational planning helps to co-ordinate
the
different aspects of the organisation.
iii. Assisting to achieve in greater job security.
iv Improving
management team because executives are forced to think ahead of time.
v Exposing
weaknesses in the company`s information flow and assisting to improve the
system.
Three demerits of Corporate Planning are:
i. The
process may absorb a considerable amount of management time and involve a lot
of
bureaucracy.
ii. It may lead to the formulation of unrealistic
objectives, which may act as a disincentive to
the
employees.
iii. It may make the organisation inflexible and
less capable of responding of changes.
(c) i. Planning: This is one of the functions
of management and is concerned with the future.
ii. Control:
This is concerned with the efficient use of resources to achieve determined
objective or a set of objectives, contained within a plan.
ILLUSTRATION 10
Bamishaye Nigeria Limited produces and sells Red Soft
Drinks. The standard direct cost per crate is as follows:
Material:
100 litres of concentrated juice at N2.00 per litre.
200 litres of carbonated water at N2.50 per litre
10 labour hours at N9.00 per hour.
The budgeted monthly production and sales is 500
crates and the selling price is N1,000 per crate.
The following details relate to October 2017, when
510 crates of Red Soft Drinks were produced and sold:
N
Sales 506,500
Materials used:
Concentrated juice- 51,600 litres 102,500
Carbonated water- 101,500 litres 258,800
Labour:
5,000 hours cost 45,750
Required:
(a)
Compute
the price and usage variance for each material.
(b)
Calculate
the wage rate and efficiency variances.
(c)
Comment
briefly upon the information revealed by each of the variances you have
computed.
SUGGESTED SOLUTION
(a) i. Material Price Variance = ( Standard Price- Actual Price) Actual
Quantity
Concentrated Juice
Carbonated
Water
N
N
Actual Quantity X Standard Price
(51,600 X 2) 103,200 (101,500 X 2.5) 253,750
Actual Quantity X Actual Price
(51,600 X 102,500) 102,500 (101,500 X 258,800) 258,800
51,600 700 F 101,500 5,050 A
Total Material Price Variance = 700 F
+ 5,050 A = N4,350 A
ii. Material
Usage Variance = ( Standard Quantity-
Actual Quantity) Standard Price
Concentrated Juice Carbonated Water
N N
Standard Quantity X Standard Price
(510 X 100 X 2) 102,000 (510 X200 X 2.5) 255,000
Actual Quantity X Standard Price
(51,600 X 2 )
103,200 (101,500 X 2.5) 253,750
1,200 A 1,250 F
Total Material
Variance = 1,200 A + 1,250 F = N50 F
(b) i. Wage Rate Variance = (Standard Rate – Actual
Rate) X Actual Hours
N
Standard Rate X Actual Hour
( 9 X 5,000) 45,000
Actual Rate X Actual Hours
( 45,750
X 5,000) 45,750
5,000
750 A
ii.
Efficiency Variance
(Standard Hours- Actual Hours) Standard Rate
N
Standard Rate X Standard Hours
(9 X 510 X10) 45,900
Standard Rate X Actual Hours
( 9 X 5,000) 45,000
900 F
(c ) Comments
Material Price
Variance
Concentrated juice gave a favourable variance while
Carbonated water gave adverse. It could be due to any of the following:
i. Unexpected
change in the price of materials.
ii. Faulty determination of standard price.
Material Usage
Variance
Concentrated juice gave an adverse variance while
Carbonated water gave an almost compensating figure of favourable variance.
Considered in total, the net effect could be misleading, but considered
separately, we may be able to discover the following:
i. The use of
employees with varying levels of experience in production leading to either
minimum
or excess wastages.
ii. The use of either better or inferior quality
material.
iii. The condition of the machinery used in
production would have an effect on materials consumption and waste generation.
Wage Rate
Variance
The adverse variance recorded here may be due to paying
higher rates than anticipated, or the use of skilled labour where unskilled
labour was earlier planned for.
Labour
Efficiency Variance
This gave a favourable variance, if skilled labour
was used instead of unskilled, the favourable efficiency variance could be the
result.
ILLUSTRATION 11
(a) What do you understand by cash budget?
(b) Enumerate four benefits to be derived from the
preparation of detailed cash budget.
(c ) Foyegbe Nigeria Limited is operating a system
of flexible budgetary control.
The budget for the year 2016 is as
follows:
Level
of Activity
80% 90% 100%
800Units 900Units 1,000Units
Prime
Cost 16,000 18,000 20,000
Variable
Selling Overhead 2,400 2,700 3,000
18,400 20,700 23,000
Selling
Variable Selling Overhead:
Distribution 3,600
3,800 4,000
Other
Fixed Overhead 5,000 5,000 5,000
Total
Cost 27,000 29,500 32,000
You are required to present the above to the
management, separating the semi-variable overhead to variable and fixed, and
also include the cost of attaining 120% level of activity. Fixed costs remain
unchanged.
SUGGESTED SOLUTION
(a) Cash
budget is a summary of the company`s expected cash inflows and outflows over a
given
period of time.
(b) Four
benefits to be derived from the preparation of detailed cash budget are:
i. It
provides early signals of potential deficit or surplus in order to take
appropriate action.
ii. It
enables financial feasibility of plans to be ascertained.
iii. It indicates the financial effects of policies
within a firm.
iv. It provides a base for monitoring actual
activity. The frequent comparison of actual cash
flow with
budgeted cash flow will enable up-to-date information to be incorporated into
budget
revisions.
(c ) FOYEGBE NIGERIA LIMITED
FLEXIBLE BUDGET
FOR THE YEAR 2016
80% 90% 100% 120%
800
Units 900 Units 1,000 Units 1,200 Units
N N N N
Prime Cost 16,000 18,000 20,000 24,000
Variable Overhead 2,400 2,700 3,000 3,600
18,400 20,700 23,000 27,600
Variable Selling 1,600 1,800 2,000 2,400
Total Variable Cost 20,000 22,500 25,000 30,000
Fixed Cost 7,000 7,000 7,000 7,000
Total 27,000 29,500 32,000 37,000
Workings:
Calculation of variable and fixed cost using high or
low point method:
Quantity Cost (N)
High 1,000 4,000
Low 800 3,600
Difference 200 400
Variable Cost per unit = Difference
in Cost
Difference in Quantity
Variable Cost per unit =
400 = N2
200
Using the high point method:
Fixed Cost =
Total Cost- Total Variable Cost
Fixed Cost = 4,000 – 2(1,000)
Fixed Cost = 4,000- 2,000 = N2,000
ILLUSTRATION 12
(a) What do you understand by Cost-Volume-Profit
Analysis Technique?
(b) List five
each usefulness and assumptions of Cost-Volume-Profit Analysis
Technique.
(c) The
following information has been summarised from the records of Alajeju
Limited.
Period
1 Period 2
N N
Sales 30,000 38,000
Profit 800 2,300
You are required to calculate using any assumption reasonable thought:
(i)
The
Profit/ Volume Ratio
(ii)
The
Loss when sales are 24,000
(iii)
The
Profit when sales are 60,000
(iv)
The
sales required to earn a profit of N4,000
(v)
The
Break-Even Point
(vi)
The
Margin of safety for period 1 and period 2.
SUGGESTED SOLUTION
(a) Cost-Volume-Profit Analysis Technique is a
technique which determines the combined effect of both cost and revenue
function of changes in the level of activity.
It is known as Beak-Even Analysis which is used to
measure the effect on profit as a result of changes in both revenue and cost
function.
(b) The usefulness of Cost-Volume-Profit Analysis
are:
i. It is
very helpful in budget planning.
ii. It helps
in selling price and volume decisions.
iii. It can be used to determine the approximate
product mix.
iv. It can be used to quantify the effects of cost
reduction programmes.
v. It is an
effective control method which can be used on forecasting or estimating future
profits.
The following are the assumptions of
Cost-Volume-Profit Analysis:
i. Volume is
the only independent variable affecting revenue or cost function.
ii. All costs
could be categorised into either variable cost or fixed cost.
iii. There is only one product or constant mix of
product.
iv. Variable cost per unit is assumed to be
constant.
v. The fixed
cost remains unchanged.
(c ) Let F= Total Fixed Cost
C= P/V Ratio
X = Sales in naira
P/V graph has an equation given by:
Profit = CX -
F
Using the data for the period 1 and period 2.
800 =
30,000C – F eq.(i)
2,300 =
38,000C – F eq.(ii)
Subtract eq.(i) from eq. (ii) , we have
1,500 = 8,000C
C = 1,500 =
0.1875
8,000
Substitute for C= 0.1875 in eq.(i), we have
800 = 30,000 (0.1875) – F
800 = 5,625 – F
F = 5,625 – 800
F = 4,825
(i)
The
Profit/Volume Ratio = Total Sales – Total Variable Cost
Total Sales
The
Profit/Volume Ratio = 30,000– (0.8125)30,000
30,000
The
Profit/Volume Ratio = 30,000– 24,375
30,000
The Profit/Volume Ratio =
5,625
30,000
The Profit/Volume Ratio =
0.1875
Workings:
Period
2 Period 1 Difference
N N N
Sales 38,000 30,000 8,000
Profit 2,300
800 1,500
Cost 35,700 29,200 6,500
Variable Cost/Unit
= Total Difference in Cost
Total Difference in Sales
Variable Cost/Unit
=
6,500 = 0.8125
8,000
(ii)
The
Loss when sales are N24,000
Loss = CX- F
Loss = 24,000(0.8175) – 4,825
Loss = 4,500- 4,825
Loss = N325
(iii)
The
profit when sales are N60,000
Profit = CX- F
Profit = 60,000(0.1875) – 4,825
Profit = 11,250- 4,825
Profit = N6,425
(iv)
The
sales required to earn a profit of N4,000.
Profit = CX- F
4,000 = 0.1875 X – 4,825
4,000 + 4,825 = 0.1875 X
8,825 =0.1875 X
X
= 8,825
0.1875
X = 47,067
Sales required to earn a profit of
N4,000 is N47,067
(v)
The
Break-Even Point = Total Fixed Cost
Contribution Margin Ratio
Contribution Margin Ratio = Selling
Price- Variable Cost
Selling
Price
Contribution
Margin Ratio = 30,000-0.8125(30,000)
30,000
Contribution
Margin Ratio =30,000-24,375
30,000
Contribution
Margin Ratio = 5,625
30,000
Contribution Margin Ratio = 0.1875
The Break-Even Point = 4,825
0.1875
The Break-Even Point =
N25,733
(vi)
The
margin of safety for period 1 and period 2.
Period 1 Period
2
N N
Budgeted Sales 30,000 38,000
Less
Break –Even Point 25,733 25,733
Margin
of Safety 4,267 12,267
BEST OF LUCK IN YOUR FORTHCOMING EXAMINATION!
PATRIOT ODUNARO B.J.
08038454008
