Preparation paper 5

Vitu production Limited has a production capacity of 200,000 units per annum. Experience suggests a normal capacity of utilization of 90%. Standard variable costs are TZS 11,000 per unit, whereas the annual fixed costs are TZS360,000,000. Variable selling costs stand at TZS 3,000 per unit, and annual fixed selling costs are TZS 270,000,000. The unit selling price is at TZS 20,000.

In the year just ended (30th June 2024), the production was 160,000 units and sales were 150,000 units. The closing inventory at 30th June 2024 was 20,000 units. The actual variable production costs for the year were TZS 35,000,000 higher than the standard. The company uses FIFO method in inventory valuation.

REQUIRED:

1. Calculate the profit of Vitu Production Limited for the year using:
   1. Absorption costing method (7 marks)
   2. Marginal costing method (7 marks)
2. Explain the differences in profits obtained in (a) above. (3 marks)
3. Comment on the relative strength of marginal costing over absorption costing. (3 Marks)

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You are provided with the following details of Matechi products for respective months up to December 2025:

1. Estimated sales and expenses are as follows:

2. 20% of the sales are on cash and the balance on credit.
3. The firm has a gross profit margin of 25%.
4. 50% of the credit sales are collected in the month following the month of sales, 30% in the second month and 20% in the third month. The sales for April 2025 were TZS.160,000,000.
5. Materials for the sale of each month is purchased one month in advance on a credit of two months.
6. The time lag for payment of wages and salaries is one-third of a month while the time cage for payment of miscellaneous expenses is one month.
7. TZS.40,000,000 bonds will be issued in July 2025.
8. The company maintains a minimum cash balance of TZS.40,000,000. Funds can be borrowed at 12% per annum in multiples of TZS.1,000,000, the interest being payable on a monthly basis.
9. Cash balance at 30th June 2025 is expected to be TZS.60,000,000.

REQUIRED:

1. Prepare a cash budget for each of the months July to December 2025 for Matechi products. (14 marks)
2. Explain six (6) usefulness of cash budgets in performance management. (6 marks)

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The Mabogini furniture company in Moshi makes a variety of furniture products. It uses standard cost and a flexible budget to aid planning and control. Budgeted variable overheads at 22,500 direct labour hour level is TZS 13,500,000.

As a recent CPA graduate, you have been recruited by the Mwendapole company and your first assignment is to establish the effective cost control system in the company. During April 2024 the company had an adverse variable overhead efficiency variance of TZS 575,000. Material purchases were TZS 120,950,000. Actual direct labour costs incurred were TZS 70,350,000. The direct labour usage variance was TZS 2,550,000 adverse. The actual average wage rate was TZS 200 lower than the average standard wage rate.

The company uses a variable overhead rate of 20% of standard direct labour cost for flexible budgeting purposes. Actual variable overhead for the month was TZS 15,375,000.

REQUIRED: Compute the following:

1. Standard direct labour cost per hour (4 marks)
2. Actual direct labour hours worked (4 marks)
3. Total direct labour price variance (4 marks)
4. Total flexible budget for direct labour costs. (4 marks)
5. Variable overhead spending variance (4 marks)

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Ebwele Limited manufactures a standard product and the following report has been prepared in respect of a recent month:

Variable overheads are applied at a rate per direct labour hour.
The direct labour hour rate was increased by Tshs. 200 per hour from the beginning of the month, the market price of direct materials was Tsh. 2,100 per kg. During the month. The budget figures were not adjusted in respect of any changes arising from these factors.
The company uses variable costing method.

REQUIRED:
Using the information provided, prepare a detailed analysis of the sales and cost variances for the period and a statement reconciling, the budgeted and actual profit figures. Your analysis should distinguish between planning and operating variances.
(20 marks)

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ABC Company has been experiencing adverse variances in its performance. In search of a solution. Mr. Kessy, the Director of Finance of the Company has suggested that the causes of variance be investigated. Miss Eddy, an experienced management accountant is skeptical about investigating the variances. She claims that, the variance may be investigated only to find that the causes of the variance is out of control, requiring additional cost to correct it. “We cannot afford doing the investigation now”, she concludes.

The director has engaged you as an independent consultant and has provided you with the following information:

• Cost of investigation shs. 420,000
• Cost of correction if out of control shs. 600,000
• The present value of extra costs over the planning horizon before any control Action shs. 1,800,000
• Probability of the process being out of control is 25%

REQUIRED:

1. Advice the director as to whether, basing on the information provided, it is desirable to investigate the causes of the variance.
2. By how much should the probability of the process being out of control change for a decision in (a) above to change?
3. You are given the following details on production, labour and fixed overheads for the Karanje manufacturers Ltd.

Standard time per unit of a product is 10 hours and the actual labour hours worked during the month were 11,000 hours.

REQUIRED:

1. Fixed overheads cost variance (2 marks)
2. Fixed overheads expenditure variance (2 marks)
3. Fixed overheads volume variance (2 marks)
4. Fixed overheads capacity variance (2 marks)
5. Fixed overheads efficiency variance (2 marks)

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