UNIVERSITY OF NAMIBIA

MANAGEMENT ACCOUNTING 1A

TEST 1 – 22 MARCH 2011

QUESTION 1 (4 marks – 7 minutes)

Financial Accounting Management Accounting

• Statements are useful to external • Reports are useful for internal

users users/management

• Groups costs by expense nature or • Uses variable and relevant cost to

function to arrive at cost of sales and determine product cost and a basis
gross and net profits for management decisions

• Financial reports are periodic and • Reports are frequent, based on

based on formal external statutes informal management needs and
decision-relevant costs

• Reports are based on accurate • Reports are mostly future-orientated

historical costs and accrual concept and based on cost estimates,
standards and cash flows

• Is reactive and reports overall results • Proactively seeks to maximise

and overall financial product contribution and Value
information/analysis Added Management (VAM) (cost-
benefit analysis)

• Follows rules, standards and • Records, measures, determines and

conventions to fairly present financial analyses costs and revenues towards
position and results to shareholders effective situation-specific decision
making and performance evaluation

• Financial reports ignores risk • Risk forms part of all management

decisions

QUESTION 2 (15 marks – 27 minutes)

Administr Transp
A B C ation ort

Materials 60 50 100 30 10
Foreman's wages 28 20 25 32 45
Insurance 7 8 5 2 5
Water & electricity 0 10 15 5 7

Service overheads - - - 20 10
Rent 50 40 37 10 20
Total 145 128 182 99 97

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Allocation of admin dept.
overheads 29.70 24.75 24.75 -99.00 19.80
174.70 152.75 206.75 0.00 116.80
-
Allocation of transport dept. 116.80
overheads 27.482 48.094 41.224 0.000 0

202.182 200.844 247.974 - -

Total in thousands 202,182 200,844 247,974
Machine hours 40,000 50,000
Labour 30,000
Rate per hour in N$ 5.055 6.695 4.959

QUESTION 2 (continues)

Overhead
Allocation

Product X - 300
units
300 x 2 (machine hours) x 3,
Department A N$5.055 033.00
300 x 1 (labour hours) x 2,
Department B N$6.695 008.50
300 x 3 (machine hours) x 4,
Department C N$4.959 463.10

9,504.60

Product Y- 500
units
500 x 2 (machine hours) x 5,
Department A N$5.055 055.00
500 x 3 (labour hours) x 10,
Department B N$6.695 042.50
500 x 5 (machine hours) x 12,
Department C N$4.959 397.50
2
7,495.00

QUESTION 3 (6 marks – 11 minutes)

EOQ =

Where: Where:
A = Demand for the year S = Annual sales in units
Cp = Cost to place a single order OR F = Fixed costs of placing and receiving an order
Ch = Cost to hold one unit inventory for a year C = Carrying cost of one unit of inventory
for one year
* = ×

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EOQ = Square root of 2*100,000*150
5
EOQ = Square root of N$6,000,000

EOQ = 2,449.49 or 2,450 units

On the assumption that one cannot order a fraction of a unit.

• Underlying Assumptions of Economic Order Quantity:

- The ordering cost is constant.
- The rate of demand is constant
- The lead time is fixed
- The purchase price of the item is constant i.e. no discount is available
- The replenishment is made instantaneously; the whole batch is delivered at once.

QUESTION 4 (6 marks – 11 minutes)

Just in time is a ‘pull’ system of production, so actual orders provide a signal for when a product
should be manufactured. Demand-pull enables a firm to produce only what is required, in the correct
quantity and at the correct time.
This means that stock levels of raw materials, components, work in progress and finished goods can
be kept to a minimum. Supplies are delivered right to the production line only when they are needed

Advantages of JIT
- Lower stock holding means a reduction in storage space which saves rent and insurance costs
- As stock is only obtained when it is needed, less working capital is tied up in stock
- There is less likelihood of stock perishing, becoming obsolete or out of date
- Avoids the build-up of unsold finished product that can occur with sudden changes in demand
– Less time is spent on checking and re-working the product of others as the emphasis is on getting
the work right first time

Disadvantages of JIT
- There is little room for mistakes as minimal stock is kept for re-working faulty product
- Production is very reliant on suppliers and if stock is not delivered on time, the whole production
schedule can be delayed
- There is no spare finished product available to meet unexpected orders, because all products are
made to meet actual orders – however, JIT is a very responsive method of production.

QUESTION 5 (16 marks – 29 minutes)

Cost analysis

Direct labour (for the learning effect)

Cumulati Learni
Batches ve ng
Batches Effect
1 1 100%
1 2 80%
2 4 64%

Batch of 5,000 units takes 10,000 hours.

Average time if 20,000 units (4 batches) are produced = 64%
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Therefore the average time for 20,000 units = 64% x 10,000 = 6,400 hours

Total time for 20,000 units = 4 (batches) x 6,400 = 25,600 hours

Variable labour cost = 25,600 x N$5 (calculate as N$10/2 hours)

= N$128,000

Not required: Variable labour cost per unit is N$128,000/20,000 = N$6.40

Fixe labour cost = 20,000 x N$15

= N$300,000

QUESTION 5 (continues)

Variable Costing Absorption Costing

statement Statement
N$
1,800,00
N$ Sales 0
1,800,0
Sales 00
1,272,00
Product cost 0
Product cost 648,000 Direct material 400,000
Direct material 400,000 Direct labour 128,000
Variable Manufacturing
Direct labour 128,000 overheads 120,000
Variable Manufacturing Fixed Manufacturing
overheads 120,000 overheads 624,000
Selling costs 90,000
1,062,0
Contribution 00 Gross profit 528,000

Fixed costs Fixed costs

Selling costs (both fixed and
Manufacturing overheads 324,000 variable) 200,000
Selling costs 110,000 Administration costs 80,000
248,00
Administration costs 80,000 0
Fixed labour 300,000
248,00
Profit 0

Bonus marks are awarded for: Legibility (1 mark)

Demonstrating the understanding of principles (1 mark)
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Use of language, relevant arguments and assumptions (1 mark)

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