KENYA METHODIST UNIVERSITY

DEPARTMENT OF ACCOUNTING, FINANCE AND ECONOMICS STUDIES

_____________________________________________________________
MANAGERIAL ACCOUNTING ACCT 321

DLM ASSIGNMENT
eric.matu@kemu.ac.ke
1.
Brama Enterprises Co. Ltd had the following actual data for the year 2007 and 2008 regarding its finished
goods.
2007
2008
Opening inventory
Nil
6,000
Production
26,000
20,000
Sales
20,000
22,000
Ending inventory
6,000
4,000
Additional information:
i) The basic production data at standard costs for the two years were:
Direct materials
Shs 40
Direct labour
Shs 32
Variable factory overhead
Shs 6
Standard variable cost/unit
Shs 78
ii) Fixed manufacturing overheads were budgeted at Shs 192,000 at a normal production volume of
12,000 units.
iii) Budgeted selling price was Shs 140 per unit.
iv) Selling & administrative expenses were budgeted at Shs 14 per unit sold while fixed costs were
160,000 per year.
v) There were absolutely no variances from any standard variable costs or budgeted selling prices or
budgeted fixed costs in the two years.
vi) There was no beginning or ending inventories of work-in-process.
Required:
a) Prepare an income statement for both the years 2007 and 2008 under:
i) Variable costing method
(12 Marks)
ii) Absorption costing method
(12 Marks)
b) Reconcile the difference in income (if any) between the variable costing and absorption costing net
income figures
(4 Marks)

DLM Assignment

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2.
At the beginning of 2004, Beal Company adopted the following standards:

Direct Material (3 Kg @ 2.50 per Kg)

Direct Labour (5 hours @ shs. 7.50 per hour)
Factory Overhead:
Variable (shs.3.00 per direct labour hour)
Fixed (shs.4.00 per direct labour hour)
Standard cost per unit:

7.50
37.50
15.00
20.00
80.00

Normal Volume per month is 40,000 direct labour hours. Beals January 2004 budget was based
on normal volume. During the month, Beal produced 7,800 units with records indicating the
following:
Direct materials purchased
Direct materials used
Direct labour
Factory Overhead

25,000 kgs @shs.2.60

23,100 kgs
40,100 hours @ shs.7.30
Shs.300,000

Required:
a) Prepare a flexible budget for January 2004 production costs, based on actual production
of 7,800 units.
(6 marks)
b) Compute the six variances with reference to materials, labour and variable overhead.
(18 marks)

3.
The Vernom Corporation, which produces and sells to wholesalers a highly successful line of
summer lotions and insect repellents, has decided to diversify in order to stabilize sales
throughout the year. A natural area for the company to consider is the production of winter
lotions and creams to prevent dry and chapped skin. After considerable research, a winter products
line has been developed. However, because of the conservative nature of the company management,
Vernoms president has decided to introduce only one of the new products for this coming season.
If the product is a success, further expansion in future years will be initiated.
The product selected (called Chap-off) is a lip balm that will be sold in a lipstick-type
tube. The product will be sold to wholesalers in boxes of 24 tubes for shs. 8 per box. Because of
available capacity, no additional fixed charges will be incurred to produce the product.
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However, a shs.100,000 fixed charge will be absorbed by the product to allocate a fair share of the
companys present fixed costs to the new product.
Using the estimated sales and production of 100,000 boxes of Chap-off as the standard
volume, the accounting department has developed the following costs:
shs.
Direct labor
Direct materials
Total overhead

2.00 per box

3.00 per box
1.50 per box

Total

6.50 per box

Vernom has approached a cosmetics manufacturer to discuss the possibility of purchasing the tubes
for Chap-off. The purchase price of the empty tubes from the cosmetics manufacturer would be
shs.0.90 per 24 tubes. If the Vernom Corporation accepts the purchase proposal, it is estimated that
direct labor and variable overhead costs would be reduced by 10 percent and direct material costs
would be reduced by 20 percent:
a) Should the Vernom Corporation make or buy the tubes? Show calculations to support your
answer.
(5 marks)
b) What would be the minimum purchase price acceptable to the Vernom Corporation for the
tubes? Support your answer with an appropriate explanation. (4 marks)
c) Instead of sales of 100,000boxes, revised estimates show sales volume at 125,000boxes. At
this new volume, additional equipment, at an annual rental of shs. lO,OOO, must be
acquired to manufacture the tubes. However, this incremental cost would be the only
additional fixed cost required even if sales increased to 300,000 boxes. (The 300,000 level is
the goal for the third year of production.) Under these circumstances, should the Vernom
Corporation make or buy the tubes? Show calculations to support your answer.
(4 marks)
d) The company has the option of making and buying at the same time. What would be your
answer to question 3 if this alternative was considered? Show calculations to support your
answer
(4 marks)
4.
Having attended a Management Accounting course on Activity Based Costing (ABC), you decide to
experiment by applying the principles of ABC to four products currently made and sold by your company.
Details of the four products and relevant information are given below for one period.
Product

Output in units
Cost per unit (Kshs):
Direct Material
Direct labour

120

100

80

120

40
28

50
21

30
14

60
21

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Machine hours/unit

The four products are similar and are usually produced in production runs of 20 units and sold in batches of
10 units.
The production overhead is currently absorbed using a machine hour rate, and the total production overhead
for the period has been analyzed as follows:
Kshs

Machine department costs (rent, business rates,

Depreciation and supervision)
Set-up costs
Stores receiving
Inspection/quality control
Materials handling and dispatch

10,430
5,250
3,600
2,100
4,620
26,000

You have ascertained that the cost drivers to be used are listed below for the overhead costs shown:

Cost

Cost Driver

Set up costs
Stores receiving
Inspection/quality control
Materials handling and dispatch

Number of production runs

Requisitions raised
Number of production runs
Orders executed

The number of requisitions raised on the stores was 20 for each product and the number of orders executed
was 42, each order being for a batch of 10 of a product
Required
i.
Calculate the total cost for each product if all overhead costs are absorbed on a machine hour basis
(8 marks).
ii.
Calculate the total cost for each product using activity based costing (10 marks)
iii.
Calculate and list the unit product costs from your figures in item (I) and (II) above (12 marks).

DLM Assignment

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KENYA METHODIST UNIVERSITY

Programme: BACHELOR OF BUSINESS ADMINISTRATION
Course :ACCT 321: MANAGERIAL ACCOUNTING

General Objective:
The purpose of this course is to introduce the students to the managements use of accounting information for
purposes of planning and control of an organizations business activities. The course is intended to equip the
students with fundamental accounting techniques of planning and control as used in a businesss/organizations
accounting practices.

Expected Learning Outcomes:

By the end of the course, the student should be able to:
1.
2.
3.
4.
5.

Analyse the concept of cost through cost estimation and its management in terms of volume and profit
Evaluate advanced costing techniques in addition to traditional costing methods
Describe and explain costs for short-term decision making
Compare and contrast fixed vs flexible budgets-together with the budgetary planning process
Discuss the concept of standard cost and Variance Analysis as a performance measurement tool

Week

Topics

Content

THE NATURE
AND PURPOSE
OF
MANAGEMENT
ACCOUNTING

Introduction to
management
accounting
Management use of
accounting information

Differences between
Financial accounting and
Management Accounting

2-3

DLM Assignment

COST Behaviour &

Cost behavior

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Time
(Hours)
3

Week

Topics

ESTIMATION

Content

Time
(Hours)

Objective of cost
estimation
Cost estimation
methods

Introduction to CVP
Break even
analysis
Sensitivity Analysis
Profit planning

COST VOLUME
PROFIT
ANALYSIS AND
PROFIT
PLANNING

Production
COSTING systems

Absorption costing
Marginal costing
Reconciliation

6-7

Advanced Costing
Techniques

Activity based costing

Target costing
Throughput costing
Life cycle costing

CAT

9-10

DECISION
MAKING

11

Budgeting

standard costs
Variance
analysis
Investigating
variances.
13-14

DLM Assignment

Relevant costs/
Make or buy decisions
Sell or process
Add or drop product
line
Special orders
Utilization of scarce
resources
Introduction &
Objectives
Fixed & Flexible
budgets

VARIANCE
ANALYSIS

End of trimester
exams

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Recommended Readings:
1. Drury C: Management and Cost Accounting, Book power Publishing, current Edition
2. Horngren C.T and Foster, C; Cost Accounting A Managerial Emphasis, 8th Edition
3. Horngren, C.T and Sunder G. L: Introduction to Management Accounting, Prentice- Hall, 7th Edition.

Evaluation:
CAT
Assignment
Final Exam

DLM Assignment

15%
15%
70%

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