TECHNICAL UNIVERSITY OF MOMBASA Faculty of Business & Social Studies

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1 TECHNICAL UNIVERSITY OF MOMBASA Faculty of Business & Social Studies DEPARTMENT OF BUSINESS STUDIES UNIVERSITY EXAMINATIONS FOR MASTERS OF BUSINESS ADMINISTRATION BAC 5102: MANAGEMENT ACCOUNTING INSTRUCTIONS: SUPPLEMENTARY/SPECIAL EXAMINATIONS SERIES: MARCH 2013 TIME: 3 HOURS Answer any FOUR questions. This paper consists of Five printed pages QUESTION 1 a) Beirut Ltd manufactures a chemical product called BRT. The company operates a first-in-time production system, so no stocks of any kind are held. In December of last year the company prepared a budget for the 1 st quarter of The budget that sales for the quarter would be 5,000 units of BRT and that the contribution per unit would be as follow: Selling price per unit of BRT Direct labour 92 sh. 11 per hour Direct materials sh. 5 per kg) Total variable cost per unit of BRT Contribution per unit of BRT The actual outcome for the 1 st quarter of 2013 different from the budget in a number of respects: Actual sales were 6,000 units of BRT at a price of sh. The total amount of direct wages paid was sh. 124,550. This was in respect of 10,600 labour hours. A total of 23,100 kgs of direct materials were purchased at a price of sh per kg 2014 Technical University of Mombasa Page 1

2 i) Using variance analysis to reconcile the budgeted and actual total contributing for the 1 st quarter of (4 marks) ii) Assume that the budgeted for material consumption was erroneous. The right quantity should have been 3.8kgs per unit at a cost of sh. Using this information calculate direct material variances. (8 marks) iii) Explain the reasons for preparing a variance analysis. (4 marks) b) Manuko Co. Ltd is trying to set up the selling price for one of its products and three prices are order consideration. These are sh. 4 sh. 5.3 sh the following information is also provided Alternative prices S Conditions: Best possible Most likely Most possible Fixed costs Variable cost per unit 16,000 14,000 10,000 20, ,000 12,500 8,000 12,500 12,000 6,000 Advice the company on the best prices to set using: i) Maximax decision rule (3 marks) ii) Maximin decision rule (2 marks) iii) Minimax decision rule (2 marks) QUESTION 2 a) Demand function for a firm is given by p Q P is the price of the product, Q is the quantity demanded, and the total cost (C) is given by 2 C 5 4Q 0.6Q i) All what price and quantity will the firm have maximum profit? (5 marks) ii) If the firm aims at maximizing sales, what price should it charge? (8 marks) b) Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000 units in the coming year. At this level of activity his unit variable costs are budgeted at sh. 50 and his unit fixed costs at sh. 25. His sales manager estimates that the demand for the product would increase by 1,000 units for every decreased of sh. 1 in unit selling price (and vice versa) and that at a unit selling price of sh. 200 demand would be nil. Information about two price increases has just been received from suppliers. One is for materials (which are included in Alvis Kiptoo s variable costs) and one is for fuel (which included in his fixed 2014 Technical University of Mombasa Page 2

3 costs). Their effect will be to increase both the variable and fixed costs by 10% each over the budgeted figures. Alvis Kiptoo aims at maximizing profits from his business: i) Calculate before the cost increases the budgeted levels of 100,000 units (7 marks) ii) Calculate the level of sales at which profits would be maintained after the increases. Assuming selling prices remains the same as in (a) above. (5 marks) QUESTION 3 Basic analysis Ltd produces and sells one product only, the BBT, the standard cost for one unit being as follows: Direct material A 10Kg at sh. 20 per kg Direct material B 5 litres at sh. 20 per kg Direct wages 5 hours at sh. 6 per hour Fixed production overhead Total standard cost Shs The fixed overhead included in the standard cost is based on an expected monthly output of 900 units. During April year 1 the actual results were as follows: Production Material A Material B Direct wages Fixed production overhead 800 units 7,800kgs used, costing sh. 159,900 4,300 units used, costing sh. 23,650 4,200 his worked for sh. 24,150 47,000 a) Calculate price and usage variances for each material. (10 marks) b) Calculate labour rate and efficiency variances. (5 marks) c) Calculate fixed production overhead expenditure and volume variances. (10 marks) QUESTION 4 a) The Calalunya Co. is a manufacturer of clothing that sells its output directly to clothing retailers, one of its department manufactuerer s swelters. The department has a production capacity of 50,000 swelters per month. Because of the liquidating of one of the major customer, the company has excess capacity for the next quarter. Currently, monthly production and sale volume is at 70% of the company s capacity at a selling price of sh. 40 per sweaters. Expected costs and revenues for the next month at an activity level of 35,000 units are as following: Direct labour Direct materials Variable manufacturing overheads Technical University of Mombasa Page 3

4 Manufacturing non-variable overheads Marketing and distribution costs Total costs Sales Profit ,155 1, Catalunya is expecting an up-surge in demand and considers that the excess capacity is temporary. Nakumatt has offered to buy for its staff 20,000 sweater each month for the next three months at sh. 25 per sweater. Nakumatt would collect the sweaters from Catalunya factory thus saving Catalunya marketing and distributing expenses. However Nakumat requires its logo to be inserted on the sweaters and Catalunya has predicted this to cost sh. 2 per smatter. Showing all your workings advice Catalunya on whether to accept or reject the Nakumat order. (13 marks) b) The Super Bright Co. sells two products Bwerty and slander. The financial controller has prepared the following information based on the sales forecast for the period. Budgeted units Unit selling price Unit variable cost Unit contribution Total sales revenue Less total variable cost Contribution Less direct avoidable fixed cost Contribution fixed costs , , , , , , ,000 90,000 30,000 60,000 Common fixed costs 50,000 i) Calculate the break-even point in units for each product. ii) Assuming the current sales mix is to remain, calculate the breakeven point for the units for the organization. (12 marks) QUESTION 5 Lulu s Ltd manufactures and distributes furniture in the county of Mombasa. The company currently faces a challenge on transport management. The company owns a lorry which has a capacity of 100 table or 300 chairs or any combination of the two products where the space freed by moving a table allows three chairs to be stacked in. the maximum demand for these products is 70 tables and 240 chairs. The company s margin from each table sold is sh. 100 and the margin from each chair sold is sh. 50. a) Advice the company on the best combination and calculate the profit at the best level. (15 marks) 2014 Technical University of Mombasa Page 4

5 b) Team Kubwa is planning a music event in TUM hall. TUM has given team kubwa two options on hiring the hall i.e pay TUM sh. 13 for each spectator and sh. 4,000 for hiring the venue or pay sh. 2,000 to hire the venue for the night and sh. 23 per spectator. Team Kubwa will also pay sh. 2,000 to the band that will perform that night and sh. 2 per spectator to the firm that provides the security for the event. The spectators will pay ticket price of sh. 75 to attend the event. Team Kubwa expects 250 spectators. Advice Team Kubwa on which hiring option to take. (2 marks) 2014 Technical University of Mombasa Page 5