NOVEMBER 2019 PROFESSIONAL EXAMINATIONS

INTRODUCTION TO MANAGEMENT ACCOUNTING (PAPER 1.4)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The paper is a new course introduced in November 2019, therefore no reference and
comparison could be made with the same previously administered ones. The paper
covered all relevant topics of the syllabus and the questions were standard and
comparable to other accountancy examining bodies.
The actual marks allocated to the questions in the paper were significantly in line with
the syllabus as follows:

Table 1: Actual mark allocation compared to that of the syllabus

Actual Syllabus
Allocation allocation Difference
Scope of management accounting 15 15 -
Cost Elements 14 15 (1)
Costing Techniques 25 25 -
Forecasting Techniques 15 15 -
Budgeting 20 20 -
Performance differences 11 10 1
Total marks 100 100 0

From Table 1 above marks were allocated fairly and appropriately to the actual
examination questions in line with that of the syllabus. This was evident with respect
to the main and sub-questions. Only difference of 1 mark could be found with respect
to Cost elements and Performance Difference.

It was also found that marks allocated to questions were commensurate with the
amount of work and time required.
Areas where questions were ‘too loaded’ or ‘too generous’: With respect to the ‘too
generous’ questions, in Question 3a(ii) candidates were asked to state two (2) features
of control system used at tactical level of management in a commercial entity for five
(5) marks, that is, 2.5 marks each for 2 features. The fair marks should have been 1½
each. Apart from the above-mentioned question all other questions were fairly
weighted in terms of marks and the amount of work required.

PERFORMANCE OF THE CANDIDATES

The general performance was below average with the following reasons:
 Many candidates could not answer Question 3a(i) very well and even significant
number of candidates deviated from the question by stating and explaining the
qualities of information instead of features.

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 With respect to Question 3a(ii), many candidates could not understand this question
on the features of control systems; candidates did not do very well.
 High performers were evenly spread across all centres as almost all the centre
envelops had high performers;
 Low performers were also spread in all centres but certain centres registered more
low performers than the others;
 There were no signs of copying at a particular centre identified

Preparedness of candidates:
 There was an indication that the candidates did not prepare adequately for the paper
because they either could not attempt Question 1 on Job costing or did extremely bad
due to inadequate knowledge in the job costing which was the easiest among the
costing methods.
 Similarly, reasonable number of candidates did not do well in Question 5(a) on
seasonal variation using quarterly moving average. They could not do calculation up
to Average (Trend), Variation and Table of summary of variations.

NOTABLE STRENGTH AND WEAKNESS OF CANDIDATES

 The strong performance of few candidates depended on the volume of knowledge
and skill in approaching specific questions like Job costing, Standard costing, costing
of labour and budgeting. All of the strong performers exhibited accuracy, precision
and better understanding of the concepts.

 Observed reasons for the strengths; strong performers really and adequately
understood the costing methods and principles; develop the skills in applying the
costing principles.

Weaknesses demonstrated by candidates in answering the questions;

 Reasonable candidates did not adequately understand the costing principles required
very well to enable them successfully write exams,
 Many candidates did not take adequate time and effort to understand the
requirements of the questions and therefore deviated from some questions on features
of operational information and features of control systems in Question 3(a), and
calculation of overtime premium in Question 4(c). On the side of the candidate
strength, many of them were able to explain correctly the treatment of overtime
premium. These weaknesses were exhibited by few peculiar candidates.

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QUESTION ONE

You have just been appointed the full-time Management Accountant for Genuine Jobbers
Limited, a company based in the North Industrial Area in Accra that produces cartons to meet
customers’ specific requirements. You have been tasked to determine the cost and invoice price
per job for the forthcoming period and have been provided with the following:

Budgeted statement of profit or loss for the financial year ended 31 March, 2020:
GH¢’000 GH¢’000 GH¢’000
Revenues 4,800
Costs:
Direct material 1,578
Direct labour:
Grinding department (10,000 @ 40/Hr) 400
Finishing department (13,000 @ 40/Hr) 520 920
Production overheads:
Grinding department 350
Finishing department 416 766
Non-production overheads:
Administration costs 234
Selling and distribution costs 342 576 3,840
Net profit 960

The sales department is currently negotiating a price for an enquiry for job number 45A/2020
and the following information has been provided for that purpose:
Direct costs estimates: GH¢
Direct material 18,000
Direct labour: Grinding department 400 hours @ GH¢10 each 4,000
Finishing department 300 hours @ GH¢12 each 3,600
25,600
Note:
 It is recommended that production overheads are charged to jobs on the basis of direct labour
hours worked.
 Selling and administrative expenses are charged at 10% of production cost.
 It is a policy of the company to make a profit margin as budgeted on each job.

Required:
a) Compute the overheads absorption rates for each of the production departments. (4 marks)

b) As the Management Accountant, estimate the costs of Job 45A/2020 in the light of the
information provided, and hence an invoice price for the Sales Manager’s use.
(16 marks)

(Total: 20 marks)

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QUESTION TWO

You have been approached by the Managing Director of a small company that has recently been
set up. The company is hoping to obtain a significant amount of bank finance to support its
activities and it has been asked to supply various documentations as part of its funding
application. The Managing Director has provided all of the required information except that of
the forthcoming year. He has explained to you that he really doesn’t understand why this has
been requested and further confesses that he is unsure about how exactly a budget is prepared.

Required:
a) State and explain THREE (3) purposes of budgeting. (6 marks)

b) State the stages in the budgeting process. (6 marks)

c) Differentiate between master budget and functional budget and identify TWO (2) advantages
and ONE (1) disadvantage associated with these budgets. (8 marks)

(Total: 20 marks)

QUESTION THREE

a) The role of Management Accounting is to assist managers at all levels of management

(Strategic, Tactical and Operational) of an organization in decision making.

Required:
i) With examples from a manufacturing company, identify FIVE (5) features of information that
is provided at the operational level of management. (10 marks)

ii) State TWO (2) features of a control system that is used at the tactical level of management in
a commercial entity. (5 marks)

b) State and explain FIVE (5) features of specific order costing methods used in cost
ascertainment. (5 marks)

(Total: 20 marks)

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QUESTION FOUR

a) Walata Ltd manufactures and sells a unique anti-cold formula called the Magic Ball. The
product is produced from a combination of two ingredients; R and Q with the following details:

Standard quantity per unit:

Q 3kg
R 2kg

Standard prices:
GH¢
Q 2.50
R 4.00

For the quarter just ended, the following results were recorded:
Actual production 2,000 units

Material Quantity purchased and used Price per Kilogramme.

GH¢
Q 4,800 4.25
R 5,400 2.20
Required:
i) Calculate the price variance for each material. (3 marks)
ii) Calculate the usage variance for each material. (3 marks)

b) Apagya Ltd has two product lines AB and CD. Time rate and piece rate labour rewarding
systems are used for AB and CD products respectively.

Required:
Explain the terms time rate and piece rate, clearly outlining their differences and giving
examples of business setting where each could be applied. (4 marks)

c) AB Ltd operates a 40-hour weekly work regime and rewards labour for all overtime worked at
time and one-half.

The wage rate is GH¢80 per hour.

The following details are recorded for the month of October 2019 for an employee (Adamu):

Week Hours Worked

1 36
2 48
3 45
4 46

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 Required:
i) Compute the total direct labour costs for Adamu for the month of October 2019. (4 marks)
ii) Calculate the total indirect labour costs for Adamu for the month of October 2019.
(4 marks)
d) Explain the treatment of overtime premium in accounting for labour costs. (2 marks)

(Total: 20 marks)

QUESTION FIVE

a) FB Logistics has been clearing containers from the port of Tema over the past seven 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 engaged Cost Accountant you have been provided with some past quarterly
performance over a three-year period. Details of the performance are shown below:

Year 1 Year 2 Year 3

st
1 Quarter 120 180 150
2nd Quarter 140 160 200
3rd Quarter 160 185 230
4th Quarter 180 210 220

Required:
Using quarterly moving average, calculate the seasonal variation for the company.
(15 marks)

b) Standards as used in performance measurement are norms or benchmarks set for comparison
purposes in performance evaluation.

Required:
Explain FIVE (5) uses of standard costing. (5 marks)

(Total: 20 marks)

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SOLUTION TO QUESTIONS

QUESTION ONE

a) Computation of overheads absorption rates

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠
𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝐴𝑏𝑠𝑜𝑟𝑝𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = 𝐵𝑢𝑔𝑒𝑡𝑒𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝐻𝑜𝑢𝑟𝑠

GH¢350,000
𝐺𝑟𝑖𝑛𝑑𝑖𝑛𝑔 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 = 10,000 𝐻𝑜𝑢𝑟𝑠 = GH¢35/Hour

GH¢520,000
𝐹𝑖𝑛𝑖𝑠ℎ𝑖𝑛𝑔 𝐷𝑒𝑝𝑎𝑟𝑡𝑚𝑒𝑛𝑡 = 13,000 𝐻𝑜𝑢𝑟𝑠= GH¢40/Hour

(4 marks evenly spread using ticks)

b) JOB 45A/2020
JOB COST SHEET
GH¢ GH¢
Direct materials 18,000
Direct labour:
Grinding (400 x GH¢10) 4,000
Finishing (300 x GH¢12) 3,600 7,600
Prime costs
Production overheads:
Grinding (400 x GH¢35) 14,000
Finishing (300 x GH¢40) 12,000 26,000
Production costs 51,600
Selling & Administration overheads (10%x GH¢51,600) 5,160
Total costs 56,760
Profit mark-up (20/80 x GH¢56,760) 14,190
Selling price of Job 70,950
(16 marks evenly spread using ticks)
(Total: 20 marks)

EXAMINER’S COMMENTS
In general, the performance of students was not good. The question was reasonable
and its requirements were clear. Students who studied well had it easy and scored
above 15 marks and a handful scored 20 marks. Students who failed this question
either misunderstood it or were not prepared. Most of those who failed the question
were not able to compute the overhead absorption rates and the mark-up. It was
expected that, this question would have been the best for all students. In all, the
performance was below average and generally spread across all centers. The
performance reflected low level of preparedness by students and poor predictability
of questions by students.

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QUESTION TWO

a) Purposes of Budget
The budget of an enterprise serves the following purposes:
 Budget is an aid in making and coordinating short-range plans.
 It is a device for communicating these plans to the responsibility center managers.
 Budget is a way of motivating managers to achieve their responsibility centers goals.
 It is a bench mark for controlling on-going activities.
 Budget is a basis for evaluating the performance of responsibility centres and their
managers.
(Any 3 points well explained @ 2 marks each = 6 marks)

b) Stages in the budgeting process

The stages in setting the budget might be as follows:
 Stage 1: Identify the principal budget factor (or key budget factor). The principal
budget factor is often sales volume.
 Stage 2: Prepare the functional budget or plan for the principal budget factor. Usually,
this means that the first functional budget to prepare is the sales budget.
 All the other functional budgets should be prepared within the limitation of the
principal budget factor. For example, even if the company has the capacity to produce
more output, it should not produce more than it can sell ( unless it formally decides
to increase the size of the finished goods inventory, in which case the production
volume will be higher than the sales volume).
 Stage 3: Prepare the other functional budgets, in logical sequence where necessary.
When the sales budget has been prepared, a manufacturing organization can then
prepare budgets for inventories (=plans to increase or reduce the size of its
inventories), a production budget, labour usage budgets and materials usage and
purchasing budgets. Expenditure budgets should also be prepared for overhead costs
(production overheads, administration overheads and sales and distribution
overheads). Overheads costs budgets are usually prepared for each cost centre
individually.
 Stage 4: Submit the functional budgets to the budget committee for review and
approval. The functional budgets are co-ordinated by the budget committee, which
must make sure that they are both realistic and consistent with each other.
 Stage 5: Prepare the ‘master budget’. This is the budget statement that summaries the
plans for the budget period. The master budget might be presented in the form of:
 a budget income statement of the next financial year.
 a budgeted statement of financial position as at the end of the next financial year
 a cash budget or cash flow forecast for the net financial year
It should be possible to prepare the master budget statements from the functional
budgets.

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 Stage 6: the master budget and the supporting functional budgets should be
submitted to the board of directors for approval. The board approves and authorises
the budget.
 Stage 7: the detailed budgets are communicated to the managers responsible for their
implementation.
(Any 6 steps for 6 marks)

c) ‘Master budget’ is a consolidation of the various functional budgets. Budgeted

financial statements are prepared on the basis of the master budget. (1 mark)

Usefulness
 A master budget helps to co-ordinate all other functional budgets and to clarify the
short-term objectives of an organization. Department budget are co-ordinate with the
master budget which alleviates the conflict between the departmental objectives and
the organizational objectives.
 A master budget acts as a line of communication between the various departments
 A master budget is the basis for planning. Budgeted financial statements are prepared
on the basis of a master budget.
 A master budget possesses the targets of all the departments and therefore acts as a
basis for performance evaluation.
(Any 2 points for 2 marks)
Problems
 The main problem with any budgeting system is that it is based on forecasting and
therefore subject to uncertainties.
 Master budget are prepared on the basis of certain assumptions that may not hold
true in reality.
(Any 1 point for 1 mark)

‘Functional budgets ‘are budgets for individual functions such as sales, purchases,
production etc. (1 mark)
Usefulness
 Functional budgets give targets to individual mangers.
 As departmental mangers prepare functional budgets, they are more realistic and
motivating.
(2 points for 2 marks)
Problems
 As they are prepared by functional mangers, there is the possibility that they may not
be in line with the strategic objectives and may conflict with the organizational
objective or the objectives of the departments unless they are properly co-ordinate.
 Like any other budget, the functional budgets are also based on forecasts and
therefore affected by significant changes in the environment.
(1 point for 1 mark)
(Total: 20 marks)

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EXAMINER’S COMMENTS
The requirements of the question were straight forward. The performance of the
candidates in this question was above average. Comparative to the other questions
this was the question most candidates attempted and had at least 5 out of 20 marks.
About 50% of the candidates had more than 10 marks. Most candidates understood
the question but those who had below 10 marks were not able to clearly articulate
their points. The sub-question (a) on purposes of budgets was answered with ease by
most of the candidates across all centres. Also the sub-question (b) “state the stages
in the budgeting process” was handled well by candidates but few centres had
students struggling to articulate the budgeting process as pertained in companies. On
sub-question (c), a considerable number of candidates were able to clearly state the
difference between master budget and functional budget but had difficulties in
outlining advantages and disadvantages of same.

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QUESTION THREE

a) i)Features of Operational Information.

 Detailed information.( Production schedules)
 Mainly quantitative. (Payroll sheets)
 Internal sources.( Stores ledger cards)
 Relates to immediate term. (current or previous week)
 Prepared frequently. (daily production reports)
 Task specific. (maintenance reports)
(5 marks for 5 features)
(5 marks for 5 examples)
ii) Features of a Control System.
 There should be a target set.
 Actual performance is measured
 Actual is compared with targets.
 Variances are analyzed and corrective action taken.
(Any 2 features @ 2.5 marks each = 5 marks)

b) Some of the main features of Specific Order Costing include:

The following are some of the principal features of specific order costing, among other
things:
 A specific order is carried out or a product is produced is produced to meet the
specific requirements of the order
 Specific order costing enables a business to ascertain the cost of a job order on the
basis of which quotation for the specific order may be given.
 While computing the cost, direct costs are charged to the job order directly as they are
traceable to the job order.
 Indirect expenses i.e. overheads are charged to the job order on some suitable basis.
 Each specific order completed may be different from other specific orders and hence
it is difficult to have standardization of controls and therefore more detailed
supervision and control is necessary.
 At the end of the accounting period, work in progress may or may not exist.
(Any five points at 1 mark for 5marks)
(Total: 20 marks)

EXAMINER’S COMMENTS
The question on the surface did not seem to be a bad one and could be managed by
candidates with a little understanding of the framing of the question.
(a.i) demanded candidates to identify features of information that is provided at
operational level of management. Many candidates mistook this to mean features of
information that is provided to operational level management and hence were giving
all kinds of answers without examples.

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A greater number of the candidates just listed qualities of information instead of the
FEATURES of the information at the level stated.

In spite of the above, very few who prepared well had answers that fall in line with
the suggested answers provided by the Examiner. There were few who gave good
examples and tried to link them to the qualities of information.
([Link]) ‘features of control systems’; This question was straight forward but candidates
had answers that relate to how to control the various resources of production -
namely; material, labour, finance and so on.

(b) ‘features of Specific Order Costing’; This sub-question was answered above
average by candidates who prepared for the examination. However, a good number
concentrated on costing methods and mentioned such approaches as marginal
costing, batch costing, absorption costing and other funny, funny approaches. Very,
very few gave answers that are in line with the suggested solution.

On the whole, the performance was very bad. Possibly less than 10 percent of
candidates got above 10. Majority had between zero and four while few had between
5 and 9.

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QUESTION FOUR

a)

i. Calculation of price variances

Material R GH¢
5,400kg should have cost (5,400 x GH¢4.0) 21,600
But did cost (5,400 x GH¢2.20) 11,880
Variance 9,720F

Material Q GH¢
4,800kg should have costs (4,800 x GH¢2.5) 12,000
But did cost (4,800 x GH¢4.25) 20,400
Variance 8,400A
(3 marks evenly spread using ticks)

ii. Calculate the usage variance for each material

Material Q
2,000 bottles should have used (2,000 x 3kg) 6,000kg
But did use 4,800kg
Difference 1,200kgF
Valued at standard price/kg GH¢2.50
Variance GH¢3,000F

Material R
2,000 bottles should have used (2,000 x 2kg) 4,000kg
But did use 5,400kg
Difference 1,400kgA
Valued at standard price/kg GH¢4
Variance GH¢5,600A
(3 marks evenly spread using ticks)

b) PIECE RATE
This a wage reward system where labour is paid based on the volume of work done.
Here, the output recorded is the reference point for measuring the wages payable to
the employee but not the time spent. Examples of production settings where this rate
system is applicable may include, construction, manufacturing, food processing, etc.
(2 marks)

TIME RATE
This is a reward system that relates wages to the time spent by the employee.
Example, hourly, daily, weekly, fortnightly or monthly, depending on the nature of

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 skill of the employee. This is usually used in service firms such accounting firms,
hospitality services, law firms etc. (2 marks)

c) AB Ltd
(i) Computation of total direct labour costs for the month of October 2019
GH¢
Week1 (36 x GH¢80) 2,880
Week 2 (48 x GH¢80) 3,840
Week 3 (45 x GH¢80) 3,600
Week 4 (46 x GH¢80) 3,680
Total direct labour costs 14,000
(4 marks evenly spread using ticks)

(ii) Computation of total indirect labour costs for the month of October 2019
GH¢
Idle time (4 x GH¢80) 320
Overtime premium:
Week 2 (8 x GH¢80x50%) 320
Week 3 (5 x GH¢80 x 50%) 200
Week 4 (6 x GH¢80 x 50%) 240
Total indirect labour costs 1,080
(4 marks evenly spread using ticks)

d) Overtime premium is generally accounted for as indirect labour costs. However,

where overtime payments result from customer specific requirements for the
production of a product or job, then such overtime premium may be accounted for as
direct labour.
(2 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
In general, the performance of students was averagely good. A little over 50%
candidates obtaining below 10 marks out of 20 marks, whilst a little under 50% of
candidates obtained above 10 marks of the total 20 marks awarded.

The question was adequate and its requirements were clear except for the *4c*, a sub-
question, which some of the candidates had difficulties in computing the direct labour
cost for the month and the indirect labour cost, for the same person.

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Candidates who studied well had it easy and scored above 14 marks and a high score
of 19.4 marks. Candidates who failed the question either misunderstood it or were not
prepared.

Most of those who failed the question were not able to compute the usage and price
variances properly, and for those who scored 14 marks, most were not able to explain
the treatment overtime premium in Accounting for labour cost. It was my expectation
that, this question no. 4 would have been the easiest for all candidates.

In all the performance was averagely good and generally spread across particular
centers. The performance reflected weak preparedness by candidates and poor
predictability of questions by candidates.

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QUESTION FIVE
a)
Sales Moving total Mid-point Average Variation
(trend)
(1st ) 120
(2nd ) 140
600
(3rd) 160 630 157.5 -2.5
660
(4th) 180 670 167.5 -12.5
680
(1st) 180 692.5 173.13 -6.87
705
(2nd) 160 720 180 20
735
(3rd) 185 720 180 20
705
(4th) 210 725 181.25 -28.75
745
(1st) 150 767.5 191.88 41.88
790
(2nd) 200 795 198.75 -1.25
800
(3rd) 230
(4th) 220

Summary of variations
Year Q1 Q2 Q3 Q4 Total
1 -2.5 -12.5
2 -6.87 20 -5 -28.75
3 41.88 -1.25
Average 17.51 9.38 -3.75 -20.63 -2.5
Adjustment 0.63 0.63 0.63 0.63
Seasonal variation 18.14 10.01 -3.12 -20
(15 arks evenly spread using ticks)

b) Some of the main usefulness of standard costing include the following:

 Profit planning
 Profit measurement
 Performance assessment
 Cost control and management
 Employee reward schemes

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 Costs and inventory valuation
(Any 5 points at 1 mark each =5 marks)
(Total: 20 marks)

EXAMINER’S COMMENTS
This question was straight forward and easy to understand. About 10% of candidates
obtained 15 marks with majority scoring averagely 5 marks. Candidates could not do
the calculations of the figures correctly for part (a). Additionally, candidates also had
difficulties explaining the uses of standard costing in part (b). As a whole, the
performance of candidates was below average.

Areas where most candidates were ill-prepared:

 Special order/Job costing, Question 1
 Features of operational information and control systems in Question 3(a)
 Price and usage variances in Question 4(a)
 Calculation of overtime premium in Question 4(b); reasonable number of the
candidates who attempted the question wrongly applied overtime wage instead of
the premium, i.e. extra wage over the normal wage rates.
 Seasonal Moving Average and variation in Question 5 not well answered and
reasonable number of the candidates did not attempt all.

CONCLUSION
Recommendations for the observed weakness and advice to future candidates:
 Candidates should adequately prepare for the paper by ensuring that costing
principles and methods are well understood.
 Candidates should ensure that they proficiently and capably know how costing
principles and methods are applied
 Candidates should take their time to understand the requirements of the questions
before they start to answer them
 Candidates should attempt first the questions that relatively easier and straight-
forward to them

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