Wednesday, March 6, 2019

ACC 301- COST AND MANAGEMENT ACCOUNTING FOR SWUN STUDENTS


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

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