Title: Guidance to E-tivities and Assessment Questions
Course: BAC300: Management Accounting I (PEBL) > Section: Guidance to E-tivities and Assessment Questions

Lesson 1 Guidance

E-tivity 1.1

1.1 (a) Outline the key components of management accounting

- Planning
- Decision making
- Control

E-tivity 1.2

(a) Summarise the key roles of management accounting as highlighted by the presenter.

Stewardship accounting, long-term and short-term planning, developing management information system; maintaining optimum capital structure, participating in management process; control and decision-making.

E-tivity 1.3

(a) Read on the scope of management accounting on pp 10-17 and then use a diagram to illustrate the scope of management accounting and post on discussion forum 1.3

Management accounting has a wide and unified structure. It consists of: full cost accounting, differential accounting and responsibility accounting.

Lesson 2 Guidance

E-tivity 2.1

(a) Compare your pre-lesson activity answers with what is outlined as the functions of management accounting in the text that you have read.

Planning, control, evaluation, communication, directing, financial and non-financial.

E-tivity 2.2

(a) Explain how each of the internal users utilizes accounting information

Internal users are: executive directors, managers, accountants, auditors, supervisors, and any other personnel. External users are: financial advisors, external auditors, lenders etc

E-tivity 2.3

(a) Using a table distinguish between management accounting and financial accounting.

Communication Through Reporting | Financial Accounting | Management Accounting
Users of reports | External users: stockholders, creditors, regulators | Internal users: managers, officers, employees.
Types of reports | Statements of financial position, Statements of financial income, and Statements of financial position Statements cash flows. | Internal reports: Job cost sheet, cost of goods manufactured, products cost reports, etc.
Frequency of reports | Quarterly, annually | As frequently as needed
Purpose of reports | Helps external users make decisions in terms of credit terms, investments, and other decisions | Assists in internal users in planning and control decision’s making process.
Focus of reports | Pertains to the whole entity. | Pertains to departments, sections and functions of the entity.
Nature of reports | Monetary | Monetary and non-monetary.
Verification of reports | Audited | No independence auditing

Lesson 3

E-tivity 3.1

(a) Outline the various types of costs

By time when computed:

Historical (sunk) costs

Standard (planned) cost.

By financial costing/accounting period

Revenue costs

Capital costs

Deferred Revenue

By Responsibility

Controllable costs

Uncontrollable costs

By identification with stock

Product costs

Period costs

By tracing costs to end products

Direct costs

Indirect costs

By function

Production costs

Administrative costs

Selling and Distribution costs

By Behaviour

Fixed costs

Variable costs

Semi-variable costs

Degree of averaging

Total costs

Average unit costs

E-tivity 3.2

(a) Explain the cost behavior patterns

Behavior of costs describes how costs react whenever a change is made on the level of operations. Business managers are concerned with how costs are likely to react whenever a decision affecting business operations is made.

E-tivity 3.3

(a) A manufacturer incurs sh. 3 per units when production output is 10,000 units and sh. 2.50 when output is at 20,000 units. Calculate the total fixed cost.

 Total fixed cost sh.10, 000

 (b)  A firm produces and sells single product. The fixed cost of production in a month is sh.50, 000 and variable cost per unit is sh.20. If 3,000 units are produced in a month. Calculate: (i) total variable cost (ii) total cost of production.

 Total variable cost sh. 60,000; total production cost sh. 150,000

Lesson 4 Guidance

E-tivity 4.1

(a) Explain cost volume profit analysis

Is a model used to examine the level of cost to break-even or to level of cost achieve certain of profits? CVP used in evaluation of past firm performance and prediction of the future result if a given decision is taken.

(b)  Evaluate components of the cost volume profit analysis.

- Activity level. This is the total number of units sold in the measurement period.
- Price per unit. This is the average price per unit sold, including any sales discounts and allowances that may reduce the gross price. The price per unit can vary substantially from period to period based on changes in the mix of products and services; these changes may be caused by old product terminations, new product introductions, product promotions, and the seasonality of sales for certain items.
- Variable cost per unit. This is the totally variable cost per unit sold, which is usually just the amount of direct materials and the sales commission associated with a unit sale. Nearly all other expenses do not vary with sales volume, and so are considered fixed costs.
- Total fixed cost. This is the total fixed cost of the business within the measurement period. This figure tends to be relatively steady from period to period, unless there is a step cost transition where management has elected to incur an entirely new cost in response to a change in activity level.

E-tivity 4.2

 (a) Using the data below determine; Contribution margin, Profit/Volume ratio and Break-even-points units and revenue for ABC Limited is producing a single product:

       Selling price  sh. 50

       Variable cost per units sh. 30

       Fixed cost of production sh. 50,000

- Contribution margin Sh. 50 – Sh. 30 = Sh. 20
- Profit/Volume ratio 20/50 = 2/5
- Break-even-point units = sh. 50,000/sh. 20 = 2,500 units
- Break-even-point revenue = sh. 50,000/(2/5) = sh. 125,000

(b) Rift Limited is manufacturing a single product with the following details:

Material cost     sh. 40

Labour cost sh. 60

Direct overheads sh. 30

Factory overheads sh. 20

Selling price sh. 300

Fixed cost of production sh. 300,000

You are required to determine:

(i) Total variable cost per unit

(ii) Contribution margin

(iii) Profit/Volume ratio

(iv) Break-even-points units and revenue

- Total variable costs 40+60+30+20 = sh. 150
- Contribution margin sh 300-sh. 150 = sh. 150
- Profit volume ratio = sh. 150/sh. 300 = ½ = 0.5
- Break-even-point units = sh. 300,000/sh. 150 = 2,000 units
- Break-even-point revenue = sh. 300,000/(0.5) = sh. 600,000

(c) ABC is producing a single product with the following information:

Selling price per unit sh. 500

Material cost per unit sh. 100

Labour cost per unit sh.100

Direct expenses sh. 50

Factor Overheads sh. 50

Fixed Cost of production sh. 50,000

You are required to calculate:

(i) Contribution margin.

(ii) P/V ratio.

(iii) Break-even-points volume and revenue.

(iv) Volume and Revenues to achieve desired profits of sh.30, 000.

- Contribution margin = sh. 200
- P/V ratio= 2/5
- Break-even-points volume and revenue. Volume = 250units, revenue= sh. 125,000
- Volume and Revenues to achieve desired profits of sh.30, 000. Volume = 400 units, revenue= sh. 200,000

E-tivity 4.3

(a) Power Limited is producing a single product with the following information:

       Selling price  sh. 30

       Variable cost per unit sh. 20

       Fixed cost of production sh. 10,000

Desired profit                             sh. 20,000

       You are required to calculate:

(i) Contribution margin

(ii) Profit/Volume ratio

(iii) Break-even-points volume and revenue

(iv) Sales volume and revenue for desired profit

(v) Margin of safety volume and revenue

(vi) Margin of safety ratio

- Contribution margin sh. 30- sh. 20 = sh. 10
- Profit volume ratio 10/30 = 1/3
- Break-even-points volume and revenue:
- Volume = sh. 10,000/sh.10 = 1,000 units, revenue = sh,10,000/(1/3) = sh. 30,000
- Sales volume and revenue for desired profit:

Volume = sh30, 000/ sh. 10 = 3,000 units; Revenue = sh. 30,000/ (1/3) = sh. 90,000

- Margin of safety volume and revenue:

Volume = 3,000 units – 1, 000 units = 2,000 units

Revenue = sh. 90,000 – sh. 30,000 = sh. 60,000

- Margin of safety ratio = 2,000 units/3,000 units = 60%

Or sh.60,000/sh.90,0000 = 60%

(b) Calculate the margin of safety and margin of safety ratio when fixed cost, variable cost and sales are shillings: 300,000; 600,000 and 1,000,000 respectively.

Margin of safety sh. 250, 000 margin of safety ratio 25% or 1/4

E-tivity 4.4

(a) Evaluate the break-even sales for the following data for a company producing three products with brand names X, Y and Z by calculating weighted Profit/Volume ratio and Break-even point

Products | Sales (sh.) | Variable Costs (sh.
X | 500,000 | 200,000
Y | 300,000 | 150,000
Z | 200,000 | 100,000
Total | 1,000,000 | 450,000

Total fixed Cost sh. 250,000

Products | Sales (sh.) | Variable Costs (sh.) | Contribution (sh.)
X | 500,000 | 200,000 | 300,000
Y | 300,000 | 150,000 | 150,000
Z | 200,000 | 100,000 | 100,000
Total | 1,000,000 | 450,000 | 550,000

Combined P/V = sh. 550,000/sh.1, 000,000 = 0.55

Break-even-point= sh. 250,000/0.55 = sh. 454, 545.45

(b) Evaluate the break-even sales for a firm producing four products with brand names A, B, C and D. by calculating weighted Profit/Volume ratio and break-even point

Products | Sales (sh.) | Variable Costs (sh.)
A | 100,000 | 60,000
B | 80,000 | 40,000
C | 60,000 | 20,000
D | 50,000 | 10,000

Total fixed Cost sh. 40,000

Products | Sales (sh.) | Variable Costs (sh.) | Contribution (sh.)
A | 100,000 | 60,000 | 40,000
B | 80,000 | 40,000 | 40,000
C | 60,000 | 20,000 | 40,000
D | 50,000 | 10,000 | 40,000
Total | 290,000 | 130,000 | 160,000

Combined P/V = sh.160,000/sh.290,000 = 0.552

Break eve point = sh. 40,000/0.552= sh. 72,500

E-tivity 4.5

(a) Construct a break-even chart to determine the break-even point to indicate; loss area, profit area and margin of safety.

1. Selling Price per units sh.100
2. Variable cost per unit sh.50.
3. Fixed cost sh.6,000,000
4. The actual sales during the period were 180,000 units.

Units | Fixed Cost | Variable Cost | Total cost | sales
0 | 6,000,000 | 0 | 6,000,000 | 0
20,000 | 6,000,000 | 1,000,000 | 7,000,000 | 2,000,000
40,000 | 6,000,000 | 2,000,000 | 8,000,000 | 4,000,000
60,000 | 6,000,000 | 3,000,000 | 9,000,000 | 6,000,000
80,000 | 6,000,000 | 4,000,000 | 10,000,000 | 8,000,000
100,000 | 6,000,000 | 5,000,000 | 11,000,000 | 10,000,000
120,000 | 6,000,000 | 6,000,000 | 12,000,000 | 12,000,000
140,000 | 6,000,000 | 7,000,000 | 13,000,000 | 14,000,000
160,000 | 6,000,000 | 8,000,000 | 14,000,000 | 16,000,000
180,000 | 6,000,000 | 9,000,000 | 15,000,000 | 18,000,000

(b) Use contribution margin technique to verify your results.

- Contribution = sh. 100 – sh. 50 = sh. 50
- P/V ratio = ½
- Break-even- point = sh. 6,000,000/ ½ = sh. 12,000,000

Lesson 5 Guidance

E -tivity 5.1

a) Discuss the relevant costs for decision making.

Relevant costs are defined as the monetary number of resources which influence decision making. This category of costs falls within the marginal costing techniques. Marginal costing technique is a useful tool in providing information for decision making.

E -tivity 5.2

(a) Evaluate short terms decisions:

(i) Sell-further process decision

(ii) Make-buy decision

(iii) Add-eliminate decision

(iv) Operate-shut down decisions

(v) Short term use of scarce resources

(vi) Joint outputs of common processing operations

E-tivity 5.3

(a) A business sells own made wooden spoons at Sh.10 a piece in Nairobi after   spending Sh. 2 for material and sh. 6 for labour. An outlet in Kampala Uganda is offering sh. 9 apiece.

Do you think the offer should be accepted? Give two reasons for your answer.

Accept the offer since there is:

- contribution of sh. 1 and
- opportunity for opening a new market

(b) A limited operating at 40% capacity and is considering closing down its factory for one year, after which time the demand for its product is expected to increase substantially. The following data applies.

              Sh.

Sales value at 40% capacity 120,000

Variable costs of sales at 40% capacity    80,000

Fixed costs  100,000

Fixed costs which will remain if the factory is closed amount to sh. 40,000. The cost of closing down operation will amount sh. 8,000

Prepare a statement to show the best course of action without closing

Sales sh. 120,000

Variable sh.   80,000

Contribution sh.   40,000

Less fixed cost sh.  100,000

Loss sh.   60,000

Prepare a statement to show the best course of action with closing

Fixed cost sh. 40,000

Closing cost sh.   8,000

Total cost sh. 48,000

Shut down is the best option

(c) B limited operates at normal capacity. it manufactures 400,000 units of a product per year. The units cost manufacturing at normal capacity is as follows:

               Sh.

Direct materials  15.60

Direct labour    4.20

Variable overheads    5.00

Fixed overheads    8.00

Selling price  42.00

During the next three months, only 20,000 units can be produced and sold. Management plans to shut down the plant, estimating that the manufacturing overhead can be reduced to sh. 148,000 for the quarter when the plant is not operating; the fixed overhead costs are incurred at uniform rate throughout the year. Additional costs of plant shutdown for 3 months are estimated at sh. 28,000.

Examine if the plant should shut down for 3 months with relevant calculations

Sales 20,000 x 42.00 sh. 840,000

Manufacturing overheads sh. 656,000

Contribution sh. 184,000

With shut down operations:

Manufacturing overhead sh. 148,000

Additional shut down cost sh.   28,000

Total cost sh. 176,000

The shutdown is a better option

Lesson 6 Guidance

E-tivity 6.1

(a) Define the key terms in capital budgeting.

- Exchange of cash for future benefits
- Funds invested in long term assets
- Value of a business will increase in future

(b) Outline key components of capital budgeting.

- Long term decisions
- Capital intensive decisions
- Acquisition of long term assets.
- Conversion of current assets-cash to long term assets

e)Explain the nature of capital budgeting.

- Exchange of cash for future benefits
- Funds invested in long term assets
- Value of a business will increase in future

E-tivity 6.2

(a) Explain capital budgeting decisions

- Expansion decisions
- Diversification decisions
- Modernization decisions
- Replacement decisions

E-tivity 6.3

(a) Discuss the importance of capital budgeting.

- Involving large amount of funds
- Holding funds for a long period
- Difficult exit strategies
- Give the direction and rate of the firm growth
- Complex decisions dealing with the future

Lesson 7 Guidance

E-tivity 7.1

(a) Explain steps in capital budgeting

Steps in capital budgeting
1. | Have a good idea/realise the need for  project
2. | Look for suitable projects
3. | Identify and consider alternatives
4. | Perform capital budgeting appraisal
5. | Analyse alternatives and identify feasible alternatives
6. | Choose the project to undertake
7. | Invest in the project
8. | Review the project with expected cash flows

E-tivity 7.2

(a) Explain criteria of selecting capital budgeting techniques.

- Determining the required rate return.
- Determination of cash inflows and cash outflows
- Determination of net cash flows
- Application of appropriate capital budgeting rules

E-tivity 7.3

(a) Management has invested in a project for the last 3 years. The expected return from the project is 30%, they want continue investing in the similar project in the next 5 years. The cost of investment is sh. 1,000,000 with no terminal value.  The annual profits before taxes and depreciation for the project are expected to be as follows:

Years | 1 | 2 | 3 | 4 | 5
Profit BTD sh. | 300,000 | 360,000 | 400,000 | 440,000 | 400,000

The project is to be depreciated at a rate of 10% diminishing return and the company is within 30% tax bracket.

(i) Calculate Accounting Rate of Return (ARR %)

(ii) Advice on the decision management should make.

Years | PBDT sh. | Depreciation | Profit before tax | tax @ 30% | Profit after Dep.& tax
1 | 300,000 | 100,000 | 200,000 | 60,000 | 140,000
2 | 360,000 | 90,000 | 270,000 | 81,000 | 189,000
3 | 400,000 | 81,000 | 319,000 | 95,700 | 223,300
4 | 440,000 | 72,900 | 367,100 | 110,130 | 256,970
5 | 400,000 | 65,610 | 334,390 | 100,317 | 234,073
Total |  |  | 0 |  | 1,043,343
Average |  |  |  |  | 208,668.60
ARR = 208,668.60/500,000 |  | 42% |  |

Accept project proposal since ARR>required rate of return

(b) A five-star hotel is considering investing in two mutually exclusive projects in Nyali or Malindi. The estimated cost of investment in either of the project is sh. 10,000,000 and required rate of return is 10% per annum. The projects are expected to generate cash inflows as follows in sh:

Years | 1 | 2 | 3 | 4 | 5 | 6 | 7
Nyali | 2,500,000 | 3,000,000 | 3,600,000 | 4,200,000 | 3,800,000 | 3,500,000 | 2,800,000
Malindi | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000 | 2,500,000

Evaluate the two projects using:

(i) Payback period (PBP)

(ii) Discounted payback period (DPBP)

(iii) Net Present Value (NPV)

(iv) Profitability Index (PI)

(v) Internal Rate of Return (IRR)

Payback period: |  | Nyali 3.21 years
 |  |  | Malindi 4 years
Discounted payback period : | Nyali 3.45 years
 |  |  | Malindi 4 .4 years
Profitability Index |  | Nyali = 2.127
 |  |  | Malindi = 1.59
IRR |  |  | Nyali = 28.37%
 |  |  | Malindi = 23.27%

Lesson 8 Guidance

E-tivity 8.1

(a) Define standard costing.

Part of the costing that is concerned with the pre-determination of costs and revenues of a business

(b) Explain nature of standard costing.

Standard costing is a system of costing which enables businesses to set their standard outcomes in terms of cost as well as revenue.  It is a system of ascertaining the costs whereby statistics are prepared to show standard costs. Managers need to know both standard and actual costs.

(c) Explain objectives of standard costing system.

- It helps to implement budgetary control system in operation;
- It helps to ascertain performance evaluation.
- It supplies the ways to utilise properly material, labour and also overhead which will be economic in character.
- It also helps to motivate the employees of a firm to improve their performance by setting up a ‘standard’.
- It also helps the management to supply necessary data relating to cost element to submit quotations or to fix up the selling price of a firm.
- It also helps the management to make proper valuations of inventory (viz., Work-in- progress, and finished products).
- It acts as a control device to the management.
- It also helps the management to take various corrective decisions viz., fixation of price, make-or-buy decisions etc. which will be more beneficial to the firm

E-tivity 8.2

(a) Define the term standard cost.

Standard costs are pre-determined costs. Standard costs seek to establish the cost of product, operations or process under standard operating conditions eliminating the influence of abnormal changes in process.  Additional materials are available in the links provided.

(b) Explain types of standards.

- Basic standard: standard established for use over a long period from which the current standard is developed.
- Ideal standard: a standard which can be attained under most favourable conditions, with no allowance of normal losses, waste and machine downtime.
- Attainable standard: a standard which can be attained if a standard unit of work is carried out efficiently, machines properly operated and materials properly used.
- Current standard: a standard established for use over a short period of time

(c) Explain preparation of standard cost.

Standard costs comprise two estimates which are, multiplied to produce standard cost of the output unit. These two estimates are:

1. A physical measure of the resources required for each unit of output.
2. The price expected to be paid for each unit of the resource.

(i) Standard direct material cost

This based on quantity of standard direct material and Standard price of direct materials.

(ii) Standard direct labour cost

This is based on standard labour hours and standard labour rate.

(iii) Overheads standards

Standard costs for overheads are normally based on budgets. They are classified under variable and fixed.

E-tivity 8.3

(a) Outline more importance of standard costing.

The fundamental importance of standard costing to management is the analysis of variances.

Lesson 9 Guidance

E-tivity 9.1

(a) Explain the following cost variances and their sub-variances:

(i) Material cost variances

(ii) Labour cost variances.

(iii) Overhead variances

- Difference between total standard material cost and total actual material cost
- Difference between total standard Labour cost and total actual Labour cost
- Difference between total standard overhead cost and total actual overhead cost

E-tivity 9.2

(a) The following from ABC limited for producing a single product:

 | Standard Quantity | Actual quantity
Material usage per unit | 4kgs | 3kgs
Price per kg | Sh. 14 | Sh. 15

Actual output 1,000 units

Calculate:

(i) Material cost variance

(ii) Material usage variance

(iii) Material price variance

- Material cost variance

Total standard material cost for actual output= 4 kgs  x  Kshs 14 x 1,000 units = Kshs 56,000

Total Actual material cost for actual output=  3 kgs x Kshs 15 x 1,000 units = Kshs 45,000.

Material cost variance = Kshs 56,000-Kshs 45,000 Kshs. 11,000 Favourable

- Material usage variance

Total standard material usage cost for actual output= 4 kgs x Kshs 14 x 1,000 Units= Kshs 56,000.

Total actual material usage cost for actual output = 3 kgs x Kshs 14 x 1,000 Units= Kshs 42,000.

Material Usage Variance = Kshs 56,000-Kshs 42,000 = Kshs 14,000 Favourable

- Material price variance

Total standard material price for actual output = Kshs14 x 3kgs x 1,000 units = Kshs 42,000

Total actual price for actual output = Kshs15 x 3kgs x 1,000 units = Kshs 45,000

Material Price Variance = Kshs 42,000- Kshs 45,000 = Kshs 3,000 Adverse

Material cost Variance = Material Usage Variance + Material Price Variance

Kshs 11,000 F              = Kshs 14,000 F + Kshs 3,000 F

(b) The following from ABC limited for producing a single product:

 | Standard Labour hours | Actual Labour hours
Labour hour per unit | 5 | 4
Wage rate per hour | Sh. 20 | Sh. 22

Actual output 1,000 units

Calculate:

(i) Labour cost variance

(ii) Labour efficiency variance

(iii) Labour rate variance

(iv) Idle time variance

- Labour cost variance

Total standard labour cost = Standard Hours x Standard Wage Rate x Actual Output

Total standard labour cost = 5 Hours x Kshs 20 x 1,000 units = Kshs 100,000

Total actual labour cost = Actual Hours x Actual Wage Rate x Actual Output

Total actual labour cost = 4 Hours x Kshs 22 x 1,000 units = Kshs 88,000

Labour cost variance = Kshs 100,000-Kshs 88,000 = Kshs. 12,000 Favourable

- Labour Efficiency Variance (LEV)

Total standard labour cost for actual output= 5 Hours x Kshs 20 x 1,000 units = Kshs 100,000

Total actual labour cost for actual output = Actual Hours x standard Wage Rate x Actual output.

Total actual labour cost for actual output = 4 Hours x Kshs 20 x 1,000 units = Kshs 80,000.

Labour Efficiency Variance = Kshs 100,000 - Kshs 80,000 = Kshs 20,000 Favourable

Testing

 Labour cost Variance = Labour rate variance + Labour Efficiency Variance

LCV = LRV+LEV

Kshs 12,000 Favourable = Kshs 8,000Adverse + Kshs 20,000 Favourable

- Labour Rate Variance (LRV)\

Total standard wages for actual output = Standard Wage Rate x Actual Hours x Actual Output

Total standard wages for actual output = Kshs 20 x 4 Hours x 1,000 units = Kshs 80,000

Total actual wages for actual output = Actual Wage Rate x Actual Hours x Actual Output

Total actual wages for actual output = Kshs 22 x 4 Hours x 1,000 units = Kshs 88,000

Labour rate variance = Kshs 80,000-Kshs 88,000 = Kshs. 8,000 Adverse

Testing

Labour cost Variance = Labour rate variance + Labour Efficiency Variance

LCV = LRV+LEV

Kshs 12,000 Favourable = Kshs 20,000 Favourable + Kshs 8,000Adverse

- Idle time variance

Idle time Variance = Idle time x Standard Wage Rate per hour x Actual Output

Given illustration above, assume there is idle time of 1 hour during the production process. Though actual hours are 4 hours per unit, there is 1 hour per unit in which the labour is idle.

Idle time variance = 1 Hour x Kshs 20 x 1,000 units = Kshs 20,000

(c) The following information extracted from highway Limited related to variable factory overheads;

Standard hours allowed           2 hours per unit

Standard cost allowed            sh.3 per direct labour hour

Actual production                  80 units

Actual direct labour hours     165 hours

Actual overheads incurred      sh.518

Calculate:

(i) Variable overhead cost variance

(ii) Variable factory overhead efficiency variance

(iii) Variable factory overhead spending variance

- Variable Overhead Cost Variance = (sh.6×80)-sh.518

              = sh.480-sh.518=sh. 38 A (unfavourable)

sh. 6   =  (standard hours Standard Variable Overhead Cost per hour) = 2×sh.3

- Variable Factory Overhead Variance  = {(Actual Output × Standard Hours per unit) –Actual Hours} × Standard variable Fixed Overhead Rate

            =    (80×2-165) × Rh. 3= sh. 15A (unfavourable)

Variable Factory Overhead Variance   = ( output standard machine per unit – Actual machine used)× Standard variable Fixed Overhead Rate

- Variable factory overhead spending variance

 Variable factory overhead spending variance= (Actual hours Worked × Standard variable overhead rate per hour ) - Actual variable factory  overhead costs = (165×sh.3) – sh.518 =sh.495 – sh.518

          = sh. 23 A (unfavourable)

- Thus Variable Overhead Cost Variance = Variable Factory Overhead Variance  + Variable factory overhead spending variance

sh. 38 A = sh.15A +sh.23 A( all unfavourable)

E-tivity 9.3

(a) Explain sales variance.

The purpose of calculating sales variances is to show their effect when a comparison is made between budget and actual profit. There are two causes of sales variances: a difference in selling price and a difference in sales volume

(b) Outline the sub-variances of sales variance.

- Sales variance
- Sales price variance
- Sales volume variance

(c) A Limited has the following data regarding its sales for a Month.

Budgeted sales 2,500 units

Budgeted selling price sh. 22 per unit

Actual sales 2,400 units

Actual selling price sh. 20 per unit

Calculate:

(i) Sales variance

(ii) Sales price variance

(iii) Sales volume variance.

- Sales Variance (Sales Revenue Variance)

Sales variance is the difference between standard sales revenue and actual sales revenue

Standard Sales Revenue = Budgeted Sales x Budgeted Selling Price

= 2,500 units x sh. 22= sh. 55,000

Actual Sales Revenue = Actual Sales x Actual Selling Price

= 2,400 units x sh. 20 = sh. 48,000

Sales Variance = sh. 55,000 – sh. 48,000 = sh. 7,000 Favourable

- Sales price variance

Sales price variance = (Actual Selling Price – Standard Selling Price) x Actual Quantity

= (sh. 22 – sh. 20) x 2,400 units = sh. 4,800 Favourable

- Sales Volume Variance

Sales Volume Variance = (Actual Volume – Standard Volume) x Standard Selling Price.

 = (2,400units – 2,500 units) x Kshs 22 = sh. 2,200 Favourable

(d) B Limited has the following data regarding its sales for the Month of January.

Budgeted sales 5,000 units

Budgeted selling price sh. 25 per unit

Actual sales 5,200 units

Actual selling price sh. 26 per units

Calculate:

(i) Sales variance

(ii) Sales price variance

(iii) Sales volume variance.

- Sales Variance (Sales Revenue Variance)

Sales variance is the difference between standard sales revenue and actual sales revenue

Standard Sales Revenue = Budgeted Sales x Budgeted Selling Price

= 5.000 units x sh. 25= sh. 125,000

Actual Sales Revenue = Actual Sales x Actual Selling Price

= 5,200 units x sh. 26 = sh. 135,200

Sales Variance = sh. 125.000 – sh. 135,200 = sh. 10,200A Adverse

- Sales price variance

Sales price variance = (Actual Selling Price – Standard Selling Price) x Actual Quantity

= (sh. 25 – sh. 26) x 5,200 units = sh. 5.200 Adverse

- Sales Volume Variance

Sales Volume Variance = (Actual Volume – Standard Volume) x Standard Selling Price.

 = (5,200units –5 000 units) x Kshs 25 = sh. 5,000 Adverse

Lesson 10 Guidance

E-tivity 10.1

1. Using the following data

Standard Mix | Actual Mix
Materials | Kilograms | Prices | Materials | Kilograms | Prices
X | 50 | 2 | X | 60 | 3
Y | 30 | 3 | Y | 40 | 4
Z | 20 | 4 | Z | 10 | 5
Total | 100 |  |  | 110 |

Determine:

a) Material cost variance

b) Material usage variance

c) Material price variance

d) Material mix variance

e) Material yield variance

(a) Material Cost Variance (MCV)

This is the difference between total standard material cost for actual output and total actual materials cost for actual output

Total standard material cost for actual output= Standard Quantity x Standard Price x Actual Output.

Total actual material cost for actual output= Actual Quantity x Actual Price x Actual Output.

Materials | Standard | Actual
Kilograms | Prices | Total | Kilograms | Prices | Total
X | 50 | 2 | 100 | 60 | 3 | 180
Y | 30 | 3 | 90 | 40 | 4 | 160
Z | 20 | 4 | 80 | 10 | 5 | 50
Total | 100 |  | 270 | 110 |  | 390

Total standard material cost for actual output = Kshs 270

Total actual materials cost for actual output = Kshs 390

Material Cost Variance = (Kshs 270- Kshs 390)= Kshs 120 Adverse

(b) Material Price Variance (MPV)

Total standard material price for actual output = Standard Price x Actual Quantity x Actual Output

Total actual material price for actual output = Actual Price x Actual Quantity x Actual Output

Materials | Standard Price Kshs | Actual Quantity Kgs | Total Kshs | Actual Price Kshs | Actual Quantity Kgs | Total Kshs | Variance Kshs
X | 2 | 60 | 120 | 3 | 60 | 180 | 60 A
Y | 3 | 40 | 120 | 4 | 40 | 160 | 40 A
Z | 4 | 10 | 40 | 5 | 10 | 50 | 10 A
Total | 280 |  | 390 | 110 A

Total standard material price for actual output = Standard Price x Actual Quantity x Actual Output = Kshs 280

Total actual material price for actual output = Actual Price x Actual Quantity x Actual Output = Kshs 390

Material Price Variance = (Kshs 280 – Kshs 390) = Kshs 110 Adverse

(c) Material  Usage Variance (MUV)

Total standard material usage cost for actual output= Standard Quantity x Standard Price x Actual output.

Total actual material usage cost for actual output = Actual Quantity x Standard Price x Actual output.

Materials | Standard Quantity Kgs | Standard Price Kshs | Total Kshs | Actual Quantity Kgs | Standard Price Kshs | Total Kshs | Variance Kshs
X | 50 | 2 | 100 | 60 | 2 | 120 | 20 A
Y | 30 | 3 | 90 | 40 | 3 | 120 | 30 A
Z | 20 | 4 | 80 | 10 | 4 | 40 | 40 F
Total |  |  | 270 |  |  | 280 | 10 A

Total standard material usage cost for actual output= Standard Quantity x Standard Price x Actual output = Kshs 270

Total actual material usage cost for actual output = Actual Quantity x Standard Price x Actual output = Kshs 280

Material Usage Variance = (Kshs 270 – Kshs 280) = Kshs 10 Adverse

Material Cost Variance = Material Price Variance + Material Usage Variance

MCV = MPV + MUV

Kshs 120 Adverse = Kshs 110 Adverse + Kshs 10 Adverse

(d) Material Mix Variance (MMV)

(i) Determine standard mix of materials X:Y:Z

50:30:20 = 5:3:2

(ii) Determine Total Actual Quantity used = 60 Kgs + 40 Kgs + 10 Kgs = 110 Kgs

(iii) Determine standard mix for Actual Quantity used by using the following formula

= Total Actual Quantity x Proportion of standard mix.

Material X = = 55 kgs

Material Y = = 33 kgs

Material Z = = 22 kgs

Total 110 kgs

(iv) Material Mix Variance (MMV)

(Standard mix for Actual Materials - Actual mix for Actual Materials) x Standard Material Price

Or

(Standard mix for Actual Materials x Standard Material Price - Actual mix for Actual Materials x Standard Material Price)

Materials | Standard mix for Actual Quantity kgs | Actual mix for Actual Quantity kgs | Standard Price Kshs | Variance Kshs
X | 55 | 60 | 2 | 10 A
Y | 33 | 40 | 3 | 21 A
Z | 22 | 10 | 4 | 48 F
Total | 110 | 110 |  | 17 F

Material Mix Variance = Kshs 17 Favourable

(e) Material Yield Variance (MYV)

This is the difference between expected yield and actual yield. It is the difference between actual materials used and standard materials for average weighted standard price.

Material Yield Variance (MYV) = (Actual Quantity – Standard Quantity) x Weighted Average Standard Price.

Materials | Standard Quantity kgs | Actual Quantity kgs | Standard Price Kshs | Total Standard Price Kshs
X | 50 | 60 | 2 | 100
Y | 30 | 40 | 3 | 90
Z | 20 | 10 | 4 | 80
Total | 100 | 110 |  | 270

Weighted Average Standard Price = Kshs  = Kshs 2.70

Material Yield Variance (MYV) = (110 kgs – 100 kgs) x Kshs 2.70 = Kshs 27 Adverse

Material Usage Variance = Material Mix Variance + Material Yield Variance

Kshs 10 Adverse = Kshs 17 Favourable + Kshs 27 Adverse

a) A company produces a single product using the flowing mixture of materials

Standard mix | Actual mix
Materials | Materials (Kgs) | Prices (Kshs) | Materials | Materials (Kgs) | Prices (Kshs)
X | 10 | 10 | X | 11 | 11
Y | 8 | 8 | Y | 9 | 10
Z | 5 | 6 | Z | 6 | 5

Actual output 1,000 units

Determine

a) Material cost variance

b) Material usage variance

c) Material price variance

d) Material mix variance

e) Material yield variance

E-tivity 10.2

(a) Standard labour hours and rate for production of a product are provided as follows:

Category of labour                Hours.                     Rate/hour

                                                                                   Sh.

Skilled                                        5                             15

Unskilled                                    8                              5

Semi-skilled                               4                              7.5

Actual Data:

Output                                       1,100 units

Skilled                                        4,500 hours.            20

Unskilled                                 10,000 hours.            4.5

 Semi- skilled                             4,200 hours.            7.5

Evaluate:

(i) Labour cost variance

(ii) Labour efficiency variance

(iii) Labour rate variance

(iv) Labour mix variance

(v) Labour yield variance

(b) From the following information of manufacturing a product

 | Standard | Actual
Categories | Number | Hours | Hour Rate (sh.) | Number | Hours | Hour Rate (sh.)
Skilled | 10 | 3 | 50 | 15 | 4 | 60
Semi-skilled | 20 | 6 | 30 | 25 | 8 | 35
Unskilled | 30 | 10 | 20 | 40 | 12 | 18

Evaluate:

(i) Labour cost variance

(ii) Labour efficiency variance

(iii) Labour rate variance

(iv) Labour mix variance

(v) Labour yield variance

E-tivity 10.3

(a) Sky Limited budgets to sell the following products in the first quarter of the year.

Standard Mix | Actual Mix
Products | Quantity | Prices | Quantity | Prices
X | 500 | 3 | 400 | 4
Y | 400 | 2 | 500 | 1
Z | 100 | 5 | 50 | 4
Total | 1,000 |  | 950 | 110

Calculate:

(i) Sales Variance

(ii) Sales Price Variance

(iii) Sales Volume Variance

(iv) Sales Mix Variance

(b) The standard profit and actual profits are as follows:

Standard Profit | Actual Profit
Products | Units | Profit Sh. | Total Profit sh. | Units | Profit sh. | Total Profit sh.
A | 400 | 8 | 3,200 | 300 | 8 | 2,400
B | 600 | 6 | 3,600 | 700 | 6 | 4,200
C | 1,000 | 4 | 4,000 | 1,200 | 4 | 4,800
 | 2,000 |  | 10,000 | 2,200 |  | 11,000

Calculate:

(i) Sales variance

(ii) Sales mix variance

(iii) Sales quantity

Lesson 11 Guidance

E-tivity 11.1

(a) Define budget.

A budget is defined as statement of expression of future intentions

E-tivity 11.2

(a) Explain the importance of budgets.

- Authorization
- Planning
- Forecasting
- Communication and co-ordination
- Motivation
- Evaluation

E-tivity 11.3

(a) Explain various classifications of budgets.

1. Based on time

- Long-term Budget: The budget designed by the management for a long-term, i.e. three to ten years is called as long-term budget.
- Short-term Budget: As the name suggests, the budget which is prepared for a period ranging from 1 to 2 years, is called short-term budget.

1. Based on Capacity

- Fixed Budget: The budget created for a fixed activity level, i.e. the budget remains constant regardless of the level of activity, is called as fixed budget.
- Flexible Budget: The budget which changes with the change in the level of activity is a flexible budget. It identifies the fixed cost, semi-variable cost and variable cost, to show the expected results at different volumes.

1. Based on Scope

- Functional Budget: The budget which is concerned with the business functions is called as functional budget. It can be further classified as:

ü Sales Budget: Sales budget is used to determine the quantity of anticipated sales and the expected selling price per unit.

ü Production Budget: It is prepared to indicate the production for the specified period and is expressed in the units of outputs produced.

ü Materials Budget: The budget prepared to show the quantities of direct material and raw material required to manufacture the finished product.

ü Purchase Budget: Purchase budget is designed to estimate the quantity and value of different items to be bought at different points of time, considering the production schedule and inventory required.

ü Cash Budget: The budget highlights the cash needed by the business in a specified period, taking into account all the receipts and payments of the business.

- Apart from those discussed above, there are other functional budgets also, i.e. plant utilization budget, direct material usage budget, factory overhead budget, production cost budget, cost of goods sold budget, selling and distribution cost budget, administration expenses budget, etc.
- Master Budget: Once all the functional budgets are created, then the financial officer will prepare a master budget. It is an integrated budget that reflects the estimated profit and loss and financial position using Budgeted Profit & Loss Account and Budgeted Balance Sheet of the concern.

1. Based on Receipts and Expenditure

- Capital Budget: The budget takes into account the estimated capital receipts and expenditure of the business for a specified period.
- Revenue Budget: The budget that covers all the revenue receipts and expenses of a particular financial year is a revenue budget.

Lesson 12 Guidance

E-tivity 12.1

(a) Explain the budget setting process.

Budgeting is an important activity for almost all businesses and therefore should be carried out with extreme care. Part of the budget setting process involves:

(i) Selection of the person to lead the budgeting process.

(ii) Identification of the objectives.

(iii) Description of the key/limiting factor.

(iv) Collection of data relating to the key or limiting factor.

(v) Proposing a budget for the key factor and

(vi) Budget preparation.

(b) Outline the key steps in budget setting process.

- Budget formulation
- Budget approval
- Budget Execution
- Budget oversight

E-tivity 12.2

(a) ABC Limited manufactures three types of products which are used in boosting human immune system. The budgeted sales of the products known as A, B and C. are as follows:

         Product                      Output                          Price (sh.)

A           6,000                              120

B           9,000                               150

C           8,000                               180

The inventories of those products are as under:

              Product                      Opening inventories             Closing inventories

A                2,500                        2,000

B                3,000                        1,500

C                2,000                        1,000

You are required to prepare:

(i) Sales budget

(ii) Production budget

(i) Prepare the sales budget

Products | A | B | C |
Opening inventories | 2,500 | 3,000 | 2,000 |
Add output | 6,000 | 9,000 | 8,000 |
Units available for sale | 8,500 | 12,000 | 10,000 |
Less closing stock | 2,000 | 1,500 | 1,000 |
Sales in units | 6,500 | 10,500 | 9,000 |
Price | 120 | 150 | 180 |
Sales Kshs | 780,000 | 1,575,000 | 1,620,000 | 3,975,000

(ii) Prepare the production budget

Products | A | B | C | Total
Opening inventories | 2,500 | 3,000 | 2,000 |
Add output | 6,000 | 9,000 | 8,000 |
Units available for sale | 8,500 | 12,000 | 10,000 |

(b) Lakes Limited sells lenses for sh.45 each and is estimating sales of 15,000 units in January and 18,000 in February. Each lens consists of 2 kilograms of silicon costing sh. 2.50 per kilograms, 3 litres of solution costing sh.3 per litre, and 30 minutes of direct labour rate of sh. 18 per hour. Desired inventory levels are:

 | Jan.31 | Feb. 28 | Mar. 31
Beginning inventory finished goods | 4,500 | 4,900 | 5,000
Direct materials: silicon | 8,500 | 9,100 | 9,200
Direct materials: solution | 11,200 | 12,000 | 13,000

You are required to prepare:

(i) Sales budget

(ii) Production budget

(iii) Direct material budget for silicon and solution

(iv) Direct labour budget

(c) From the following information extracted from the financial books of Kitengela Limited, prepare a month by month cash budge from July 20XX to December 20XX.

- Trading budget                               sh. 000             sh. 000

Sales (Cash received one in arrears)                             9,600

Cost of sales:

Paid one month in arrears                        7,200

Paid in the month the of purchase            1,152

Depreciation 576 8,928

Gross profit 672

- Capital budget

Payment of new plant              sh. 000

July                                                 96

August                                          200

September                                   104

November     400

Increase in stock     160

Total 560

- New issue shares in October      240
- Statement of financial position as at 1^st July,20XX

Assets sh. 000

Fixed assets                 5,760

Stock                                800

Debtors                         1,680

Cash 320

Total Assets 8,560

Capital and Liabilities

Capital and reserves                                6,840

Taxation payable in December 20XX       440

Creditors 1,280

Total Capital and Liabilities 8,560

(d) Explain how to construct flexible budgets.

E-tivity 12.3

(a) Analyze budgetary control process.

Budgetary controls are the measures that are put in place by business managers to ensure that policies and responsibilities relating to the budgets are achieved. Predetermination or estimation of revenues and expenses could be one method of budgetary control. The estimates are compared with actual results at the end of period noting any deviations for possible action.

(b) Outline the key components in budgetary control process.