Subject: INTRODUCTION TO MANAGEMENT ACCOUNTING

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  • 20 Marks

IMAC – MAR 2024 – L1 – Q5 – Forecasting | Standard Costing and Variance Analysis

Calculate daily variations using moving averages and explain interrelationships between material price and usage variances, and labor rate and efficiency variances.

a) BB Importers Ltd has been importing electrical gadgets through the port of Takoradi over the past ten years. Management is aware that the business has been facing seasonal fluctuations but there is no scientific basis for the determination of such variations that can be used to predict future revenue. As a newly recruited Cost Accountant, you have been provided with some past daily sales performance over a three-week period. Details of the sales performance are shown below:

Sales Monday Tuesday Wednesday Thursday Friday
Week 1 780 830 890 850 850
Week 2 880 930 990 950 950
Week 3 980 1030 1090 1050 1050

Required:
Using daily moving averages, calculate the daily variation for the company. (15 marks)

b) The reasons for variances might be connected, and two or more variances may arise from the same cause. For example, a favorable variance and an adverse variance might have the same cause.

Required:
Explain the interrelationships between:
i) Material price and usage variances (2.5 marks)
ii) Labor rate and efficiency variances (2.5 marks)

 

b) Interrelationship between variances

  • Material price and usage variances: It may be decided to purchase cheaper
    materials for a job in order to obtain a favourable price variance. This may lead to
    higher materials wastage than expected and therefore, adverse usage variances
    occur. If the cheaper materials are more difficult to handle, there might be some
    adverse labour efficiency variance too. If a decision is made to purchase more
    expensive materials, which perhaps have a longer service life, the price variance
    will be adverse but the usage variance might be favourable. (2.5 marks)
  • Labour rate and efficiency variances: If employees in a workforce are paid higher
    rates for experience and skill, using a highly skilled team should incur an adverse
    rate variance at the same time as a favourable efficiency variance. In contrast, a
    favourable rate variance might indicate a high proportion of inexperienced
    workers in the workforce, which could result in an adverse labour efficiency
    variance and possibly an adverse materials usage variance (due to high rates of
    rejects). (2.5 marks)
  • 20 Marks

IMAC – MAR 2024 – L1 – Q3 – Job Costing

Explain decision-making levels within an organization, sources of management accounting information, and factors for an effective job costing system.

a) Management accounting is the provision of financial and non-financial decision-making information to managers.

Required:
i) Explain the decision-making levels within an organization and state an example each of the kind of decision taken at the various levels. (9 marks)
ii) Explain TWO (2) sources of management accounting information and state an example each of the information to be obtained. (6 marks)

b) One form of specific order costing methods that seeks to attribute costs to jobs is known as job costing.

Required:
Enumerate THREE (3) factors that are necessary to ensure an effective and workable job costing system. (5 marks)

a)
i) Decision-Making Levels within an Organization:

  1. Strategic Level:
    • Description: This level involves long-term decision-making that impacts the overall direction of the organization. Decisions are made by top management, including the board of directors and senior executives.
    • Example: A decision to enter a new market or to discontinue a product line is made at this level.
  2. Tactical Level:
    • Description: This level involves medium-term decisions that translate the strategies set at the strategic level into actionable plans. Middle management is typically responsible for these decisions.
    • Example: A decision regarding the allocation of resources among different departments or projects to achieve the organization’s strategic goals is made at this level.
  3. Operational Level:
    • Description: This level involves short-term decisions focused on the day-to-day operations of the organization. Operational decisions ensure that the organization runs efficiently on a daily basis.
    • Example: A decision to reorder inventory or to schedule shifts for production workers is made at this level.

(3 points @ 3 marks each = 9 marks)

ii) Sources of Management Accounting Information:

  1. Internal Sources:
    • Description: Information obtained from within the organization, including accounting records, production schedules, and human resource records.
    • Example: Accounting records provide detailed information on costs, revenues, and profitability, which are used to monitor financial performance and make operational decisions.
  2. External Sources:
    • Description: Information obtained from outside the organization, such as market research, industry reports, government publications, and competitor analysis.
    • Example: Industry reports can provide benchmarking data that helps the organization assess its performance relative to competitors.

(2 points @ 3 marks each = 6 marks)

b) Factors Necessary for an Effective and Workable Job Costing System:

  1. Accurate Cost Allocation: A robust system must accurately allocate direct and indirect costs to specific jobs. This requires well-defined cost centers and an effective method for apportioning overheads.
  2. Detailed Documentation: Comprehensive documentation of all job-related costs, including materials, labor, and overheads, is essential to ensure accurate cost tracking and reporting.
  3. Timely and Accurate Data Entry: The system must ensure that all job-related data is entered promptly and accurately to provide real-time information for decision-making and cost control.

(3 points @ 1.67 marks each = 5 marks)

  • 20 Marks

IMAC – MAR 2024 – L1 – Q2 – Budgeting

Explain the steps in the annual budgeting process, conditions for successful budget implementation, and identify short-term investment options available to Komba Ltd.

Komba Ltd is a manufacturing company that wants to allocate some funds for short and long-term investments. To support this purpose, Komba Ltd is organizing its annual budget preparation for the coming year. Some senior management of the company are wondering what the budgeting process is about and would be interested in having a better understanding of the annual budgeting process.

Required:
As the cost accountant of Komba Ltd:
a) Explain FIVE (5) steps to be involved in the annual budgeting process. (10 marks)
b) State FIVE (5) conditions for a successful implementation of a budgeting process. (5 marks)
c) Explain TWO (2) short-term investments available to Komba Ltd. (5 marks)

 

 

 

 

a) Stages in the preparation of the annual budget:

  •  Identify the key factor– the principal budget factor is often described as the key
    factor that may constraint output. The sales budget is considered a key factor that
    may limit the organization’s ability to achieve a greater output. As a result, the
    manufacturing organization must determine the amount of goods to be sold in
    each financial year in terms of unit and value. This would culminate in the
    preparation of the sales budget and other functional budgets.
  • Prepare the functional budget – after the determination of the key factor which
    ought to be the sale unit and value, the next stage in the annual budgeting process
    is to prepare the functional budgets. The functional budgets must be prepared
    within the constraints set up by the key budget factor. In addition to the sales
    budget, the organization should prepare the production budget, material usage
    budget, material purchase budget and cost of goods sold budget within the ambit
    of the constraint.
  • Submit functional budgets for approval – the functional budgets are usually
    coordinated by the budget committee which must make sure that they are both
    realistic and consistent with the objectives of the budget. The budget committee is
    a group of people responsible for the coordination of the annual budget and one
    of such duties is to review and approve the functional budgets submitted by the
    functional managers.
  • Prepare the master budget – after the approval of the functional budgets by the
    budget committee, these budgets are summarized into one single financial
    estimate called, the master budget. The master budget is presented in the form of
    budgeted income statement; budgeted financial position and cash budget for the
    planned financial year.
  • Review and approval by the Governing Board – the master budget and the
    supporting functional supply estimates should be submitted to the board of
    directors for approval. The board after it has approved of the master budget then
    the budget becomes an executive order that authorizes functional managers to
    spend according to the expenditure limit.
  • Communicate the approved budget – after the approval of the master budget by
    the governing board, such decision by the board is then communicated to the
    functional managers responsible for implementation of the annual budget.
    (5 points @ 2 marks each = 10 marks)

b) Conditions for a successful implementation of a budgeting process

  • Set Clear Goals and Priorities: A successful budgeting strategy begins with setting
    clear and achievable financial goals. Determine where you want your business to
    be in the short and long term. Whether it’s increasing revenue, expanding to new
    markets, or launching a new product, your budget should align with these
    objectives. Prioritize your goals to allocate resources appropriately, ensuring each
    expenditure supports your growth trajectory.
  • Create a Comprehensive Budget: Developing a comprehensive budget is the
    cornerstone of effective financial management. Start by analyzing historical
    financial data to understand your revenue streams and expenses. Categorize
    expenses into fixed (rent, utilities) and variable (marketing, inventory) costs.
    Consider creating a master budget that includes operating, capital, and cash
    budgets. A master budget provides a holistic view of your financial position and
    guides your spending decisions across all aspects of your business.
  • Embrace Zero-Based Budgeting: Zero-based budgeting (ZBB) is a proactive
    approach where you allocate funds based on the needs of each budgeting period
    rather than relying on previous budgets. With ZBB, every expense must be
    justified from scratch, promoting resource efficiency and cost optimization. This
    method encourages regular review and scrutiny of expenses, helping you identify
    areas where you can cut costs or reallocate funds to more strategic initiatives.
  • Monitor and Adjust Regularly: Creating a budget is the first step; consistently
    monitoring and adjusting it is crucial for success. Set up regular intervals to review
    your actual financial performance against the budgeted figures. If you find
    discrepancies, dig deeper to understand the reasons behind them. Were your
    assumptions accurate? Did unexpected expenses arise? Adjust your budget to
    reflect these insights and align your financial strategy with reality.
  •  Foster a Culture of Accountability: Budgeting is a team effort. Involve key
    stakeholders and departments in the budgeting process to gather insights and
    build a sense of ownership. Encourage department heads to manage their budgets,
    providing them with tools to track spending and stay within their allocated
    amounts. Regularly communicate financial updates to your team, showcasing
    progress towards goals and addressing challenges. An accountable culture ensures
    that everyone is aligned with the budget’s objectives and actively contributes to
    the company’s financial health.
    A successful budgeting strategy isn’t just about numbers; it’s a roadmap to
    sustainable business growth. By setting clear goals, creating a comprehensive
    budget, embracing innovative budgeting techniques like zero-based budgeting,
    monitoring and adjusting regularly, and fostering a culture of accountability,
    you’ll manage your finances effectively and position your business for long-term
    success. Remember, a well-implemented budget isn’t a constraint; it’s a tool that
    empowers you to make strategic decisions that fuel your business’s growth
    journey.      (5 points @ 1 mark each = 5 marks)

c) Short term investments:

  • Savings accounts and interest earnings deposits–banks might allow a business
    to place short-term cash in a savings account. In the same way, banks do not allow
    companies to use a savings account as a normal current account with frequent
    deposits and withdrawals for the purpose of investment this is so because this will
    disrupt the cashflow projections of the bank for further investment purposes.
  •  Money market investment–it is also possible for companies or individuals to
    purchase treasury bills and certificates of deposit. Treasury bills are short term
    debt instruments issued by the government. They are usually issued by the
    government for a fixed period of time, say three months or 91 days or possible six
    months and redeemed at the end of the period/maturity. They are a risk-free
    instrument since the central government has credibility and capacity to redeem its
    short-term obligations when due. CDs are issued by banks and a certificate of
    investment issued to the holder of the investment – as a right to ownership of a
    deposit of cash with the bank plus interest redeemable at a fixed future date.
  • Long term investment traded as short-term securities – bonds traded in the bond
    markets often have a higher return than short term investments, because there is a
    greater risk for the investor. Bondholders can sell their investment in the secondary
    bond market if they need to convert the investment back to cash. However, risk is
    pervasive in the market, bond proceeds can fall if bond yields in the market rise.
    Bond proceeds can also fall if the credit rating of issuer falls.
    (Any 2points @ 2.5 marks each = 5marks)
  • 20 Marks

IMAC – MAR 2024 – L1 – Q1 – Cost and Cost Behaviour

Calculate total cost, unit cost, and profit per unit for a batch of 5,000 units and determine real fixed and variable costs after adjusting for inflation.

a) Atimbila Ltd manufactures a product that goes through various workshops. The following budgeted overheads for the year 2023, based on normal activity levels, have been provided:

Workshop Budgeted Overheads (GH¢) Overhead Absorption Base
Forming 360,000 30,000 labour hours
Machining 860,000 50,000 machine hours
Welding 400,000 36,000 labour hours
Assembly 300,000 20,000 labour hours

Selling and administrative overheads are 25% of factory cost.

An order for 5,000 units of the product (Batch 3391) incurred the following costs on 31 August 2023:

  • Materials: GH¢62,140
  • Labour:
    • 1,280 hours forming shop at GH¢10.50 per hour
    • 4,520 hours machining shop at GH¢11 per hour
    • 900 hours welding shop at GH¢10.50 per hour
    • 1,750 hours assembly shop at GH¢9.60 per hour
  • An amount of GH¢1,050 was paid for the hire of a special X-ray equipment for testing the welds. The time booking in the machine shop was 6,430 machine hours. Selling price was GH¢150 per product.

Required:
i) Compute the total cost of the batch. (10 marks)
ii) Calculate the unit cost per product. (1 mark)
iii) Determine the profit per product. (1 mark)

b) The following cost and production data relates to the operations of Mawuga Ltd over a two-year period:

Year Production (units) Total Costs (GH¢)
2022 50,000 1,700,000
2023 54,000 1,835,400

Between 2022 and 2023, there has been a 5% cost inflation.

Required:
i) Calculate the real fixed and variable costs. (6 marks)
ii) Estimate what the total costs will be in 2024 if it is expected that there will be 4% cost inflation and output will be 56,000 units. (2 marks)

 

  • 20 Marks

IMAC – NOV 2023 – L1 – Q5 – Forecasting | Standard Costing and Variance Analysis

Determine the trend and seasonal variation in sales using moving averages and calculate factors for estimating direct material costs.

a) A company operates from Monday to Friday. Sales data for the most recent three weeks as well as the moving total are as follows:

Day Sales Moving Total
Day 1 78
Day 2 83
Day 3 89 420
Day 4 85 430
Day 5 85 440
Day 6 88 450
Day 7 93 460
Day 8 99 470
Day 9 95 480
Day 10 95 490
Day 11 98 500
Day 12 103 510
Day 13 109 520
Day 14 105
Day 15 105

Required:
i) State the length of the cycle. (2 marks)
ii) Using the moving averages, establish the trend of the historical data above. (6 marks)
iii) Calculate the seasonal variation for each day of the week. (7 marks)

b) The value of variances as a control technique for management depends on the reliability and accuracy of the standard costs. If the standard costs are inaccurate, comparisons between actual cost and standard cost will have no meaning.

Required:
Explain TWO (2) factors to be considered by the purchasing department in estimating the direct material costs per unit of raw material. (5 marks)

  • 20 Marks

IMAC – NOV 2023 – L1 – Q4 – Accounting for Inventory and Labour | Standard Costing and Variance Analysis

Calculate closing inventory using FIFO and compute direct material price and usage variances for Prekese and Kakaduro.

a) The following data has been extracted from the books of ABC Ltd for the month of October 2023.

Date Description
2/10/2023 Bought 200 units @ GH₵100 per unit
5/10/2023 Bought 150 units @ GH₵120 per unit
8/10/2023 Issued 120 units
12/10/2023 Bought 100 units @ GH₵90 per unit
20/10/2023 Issued 140 units
24/10/2023 Bought 300 units @ GH₵150 per unit
28/10/2023 Issued 210 units

Required:
Using the FIFO method, calculate the value of the closing inventory. (10 marks)

b) Identify FOUR (4) pieces of information that can be seen on an invoice. (5 marks)

c) Preka body lotion is a product produced from the combination of two materials: prekese and kakaduro. Preka body lotion has a standard direct material cost as follows:

Material Quantity (kg) Cost per kg (GH₵) Total Cost (GH₵)
Prekese 6 15 90
Kakaduro 10 10 100

During period one, 1,000 units of Preka body lotion were manufactured, using 11,700 kilograms of prekese and 10,000 kilograms of kakaduro, costing GH₵98,600 and GH₵78,000 respectively.

Required:
Calculate the following variances for prekese and kakaduro:
i) The direct material price variance (2.5 marks)
ii) The direct material usage variance (2.5 marks)

a) ABC Ltd – Calculation of Closing Inventory Using FIFO Method

Date Receipt/Issued Balance
2/10/2023 200 @ GH₵100 200 @ GH₵100 = GH₵20,000
5/10/2023 150 @ GH₵120 200 @ GH₵100 = GH₵20,000
150 @ GH₵120 = GH₵18,000
Total = GH₵38,000
8/10/2023 Issued 120 @ GH₵100 80 @ GH₵100 = GH₵8,000
150 @ GH₵120 = GH₵18,000
Total = GH₵26,000
12/10/2023 100 @ GH₵90 80 @ GH₵100 = GH₵8,000
150 @ GH₵120 = GH₵18,000
100 @ GH₵90 = GH₵9,000
Total = GH₵35,000
20/10/2023 Issued 140 80 @ GH₵100 = GH₵8,000
60 @ GH₵120 90 @ GH₵120 = GH₵10,800
100 @ GH₵90 = GH₵9,000
Total = GH₵19,800
24/10/2023 300 @ GH₵150 90 @ GH₵120 = GH₵10,800
100 @ GH₵90 = GH₵9,000
300 @ GH₵150 = GH₵45,000
Total = GH₵64,800
28/10/2023 Issued 210 20 @ GH₵150
280 @ GH₵150 = GH₵42,000
Total = GH₵42,000

Closing Inventory:

  • 280 units @ GH₵150 per unit = GH₵42,000
    (10 marks)

b) Information That Can Be Seen on an Invoice:

  1. Payment Due Date: The date by which the payment is expected.
  2. Unique Invoice Number: A specific number that identifies the invoice.
  3. Description of Products/Services Sold: Details of what has been purchased.
  4. Quantity and Price of Each Product/Service: The amount and cost per unit of the items listed. (4 points @ 1.25 marks each = 5 marks)

c)
i) Direct Material Price Variance

Material Calculation Variance (Favorable/Adverse)
Prekese (11,700 kg × GH₵15) – GH₵98,600 GH₵76,900 Favorable (F)
Kakaduro (10,000 kg × GH₵10) – GH₵78,000 GH₵22,000 Favorable (F)

Prekese Price Variance:

  • 11,700 kg should have cost GH₵175,500, but did cost GH₵98,600
  • Variance = GH₵76,900 Favorable (F)

Kakaduro Price Variance:

  • 10,000 kg should have cost GH₵100,000, but did cost GH₵78,000
  • Variance = GH₵22,000 Favorable (F)
    (2.5 marks)

ii) Direct Material Usage Variance

Material Calculation Variance (Favorable/Adverse)
Prekese (1,000 units × 6 kg) – 11,700 kg = 5,700 kg GH₵85,500 Adverse (A)
Kakaduro (1,000 units × 10 kg) – 10,000 kg = 0 kg No Variance

Prekese Usage Variance:

  • 1,000 units should have used 6,000 kg, but did use 11,700 kg
  • Variance = 5,700 kg × GH₵15 = GH₵85,500 Adverse (A)

Kakaduro Usage Variance:

  • 1,000 units should have used 10,000 kg, but did use 10,000 kg
  • Variance = 0 kg (No Variance)
    (2.5 marks)
  • 20 Marks

IMAC – NOV 2023 – L1 – Q3 – Scope of Management Accounting

Discuss changes in the business environment affecting management accounting, differences between financial and management accounting, and the benefits of a cost and management accounting system.

a) Management accounting can be described as the process of supplying the managers and employees in an organization with relevant information, both financial and non-financial, for making decisions, allocating resources, monitoring, evaluating, and rewarding performance.

Required:
In relation to the description of management accounting provided above:
State THREE (3) important changes that have taken place in the business environment that have influenced management accounting practice. (3 marks)

b) Financial Accounting and Management Accounting share important similarities since both are based on financial information and other quantitative information about business operations.

Required:
Identify FOUR (4) differences between financial accounting and management accounting. (4 marks)

c) Mr. Osei Nyarko, an engineer by training, established Kotmat Ltd three years ago with five employees. His only source of information concerning the performance of Kotmat Ltd has been the half-yearly financial statements, which he receives ten weeks after the end of each half-year. A proposal has been submitted to Mr. Osei Nyarko to install a cost and management accounting system.

Required:
i) Identify FOUR (4) benefits Mr. Nyarko will derive from installing a cost and management accounting system. (4 marks)
ii) Enumerate FOUR (4) types of information which could be obtained from the cost and management accounting system that cannot be obtained from the current system. (4 marks)

**d) State and explain TWO (2) useful pieces of information generated by marginal and absorption costing systems. (5 marks)

a) The important changes in business environment:
 globalization of world trade;
 deregulation in various industries;
 changing product life cycles;
 advances in manufacturing and information technologies;
 focus on environmental and ethical issues;
 a greater emphasis on value creation; and
 the need to become more customer driven.
(Any 3 points @ 1 mark each

  • 20 Marks

IMAC – NOV 2023 – L2 – Q2 – Budgeting

Discuss the contents of a budget manual, explain incremental and zero-based budgeting, and prepare budgeted profit and loss statement and financial position for Chico Ltd.

a) As organisations become larger and more complex, it is no longer possible for just one person to prepare a budget. Instead, budgeting across the organisation must be carefully coordinated among various actors. As a result, there is the need for a budget manual irrespective of the type of or approach to budgeting.

Required:
i) State FIVE (5) contents of a budget manual. (5 marks)
ii) Write short notes on the following:

  • Incremental budget. (2.5 marks)
  • Zero-Based Budget. (2.5 marks)

b) Chico Ltd, a newly established manufacturing company with branches across Africa is preparing its first annual budget. The following information is relevant:

Sales forecast for each month:

Month Sales Forecast (GH₵)
January to June 20,000
July to December (and thereafter) 22,000
  • Gross profit margin: 20%
  • Credit given to customers: 2 months
  • Credit taken from suppliers: 2 months
  • Closing inventory: 3 months of demand
  • Monthly operating expenses: GH₵1,222

At the start of the budget period, a non-current asset with a cost of GH₵120,000 and a useful life of 6 years was purchased and transferred to one of its branches. In addition, a cash amount of GH₵80,000 was provided for the operations of Chico Ltd.

Required:
Prepare the budgeted statement of profit or loss and budgeted statement of financial position for Chico Ltd. (10 marks)

  • 20 Marks

IMAC – NOV 2023 – L1 – Q1 – Marginal Costing and Absorption Costing

Prepare profit statements for January and February 2023 using marginal costing and absorption costing methods.

Alokome Plc is a company that produces and sells one product “Iga”. Information relating to the operations of Alokome Plc for the first two months of 2023 is as follows:

i) Iga sells for GH₵500 per unit.
ii) There were no inventories of Iga at the end of December 2022.
iii) Other relevant information is as follows:

Cost Element GH₵
Direct material and wages 220
Variable production overhead 30

Budgeted and actual costs per month:

Cost Element GH₵
Fixed production overhead 990,000
Fixed selling and administrative expenses 400,000
Variable selling expenses 12.5% of sales

Normal capacity: 110,000 units per month

Number of units produced and sold:

Month Sales (units) Production (units)
January 128,000 140,000
February 110,000 102,000

Required:
Using the information above, prepare in a columnar form profit statements for January and February 2023 using:
a) Marginal costing (10 marks)
b) Absorption costing (10 marks)

a) Alokome Plc – Profit Statement for January and February 2023 (Marginal Costing)

January (GH₵’000) February (GH₵’000)
Sales revenue 64,000 55,000
Less: Variable cost of sales:
Beginning inventory – 3,000
Production cost 35,000 25,500
Ending inventory (3,000) (1,000)
Variable cost of production 32,000 27,500
Variable selling expenses 8,000 6,875
Variable cost of sales (40,000) (34,375)
Contribution 24,000 20,625
Less: Fixed costs
Fixed production overhead (990) (990)
Fixed selling and admin. expenses (400) (400)
Profit 22,610 19,235
(Marks are evenly spread using ticks = 10 marks)

b) Alokome Plc – Profit Statement for January and February 2023 (Absorption Costing)

January (GH₵’000) February (GH₵’000)
Sales revenue 64,000 55,000
Less: Full cost of sales:
Beginning inventory – 3,108
Production cost 36,260 26,418
Ending inventory (3,108) (1,036)
Full cost of production 33,152 28,490
Gross profit (Notional) 30,848 26,510
Adjustment for under/over absorption of fixed prodn o/head 270 (72)
Gross profit (Actual) 31,118 26,438
Less: Selling and administrative expenses:
Variable selling expenses (8,000) (6,875)
Fixed selling and admin. expenses (400) (400)
Profit 22,718 19,163
(Marks are evenly spread using ticks = 10 marks)

Workings:

Calculation GH₵
Variable production cost per unit
Direct material and wages 220
Variable production overhead 30
Total 250
Calculation GH₵
Fixed production overhead per unit 9
Full production cost per unit
Direct material and wages 220
Variable production overhead 30
Fixed production overhead per unit 9
Total 259

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