METROPOLITAN INTERNATIONAL UNIVERSITY

FACULTY OF BUSINESS & MANAGEMENT

BACHELOR OF PROCUREMENT & LOGISTICS MANAGEMENT
END OF SEMESTER EXAMINATION
COURSE UNIT: Managerial Accounting
TIME ALLOWED: 3 Hours
INSTRUCTIONS:

1. Answer ALL questions in Section A and ANY ONE question in Section B.

2. Show all workings clearly where applicable.
3. Assume any missing information reasonably.
4. The examination consists of two sections:
o Section A: Essay Questions (13 × 5 marks = 65 marks)
o Section B: Case Studies (1 × 35 marks = 35 marks)
5. Total marks = 100.

SECTION A – ESSAY QUESTIONS (Answer ALL)

Q1. Discuss the role of managerial accounting in the decision-making process of an organization.
Provide examples of how managerial accounting information can be applied in short-term and long-
term decisions. (5 marks)

Q2. Explain the difference between variable costing and absorption costing. Which method is more
useful for internal decision-making and why? (5 marks)

Q3. Critically evaluate the relevance of Cost-Volume-Profit (CVP) analysis in planning and
decision-making. Provide limitations of this tool. (5 marks)

Q4. Discuss the importance of budgeting as a tool for managerial planning and control. Explain the
behavioral implications of budgeting. (5 marks)

Q5. Explain the concept of relevant costs in decision-making. Provide examples where irrelevant
costs might distort decisions if included. (5 marks)

Q6. Discuss the ethical considerations managerial accountants must observe when preparing
management reports. (5 marks)

Q7. Explain the classification of costs for managerial decision-making purposes. Provide examples
for each category. (5 marks)

Q8. Discuss the importance of overhead allocation in cost determination and product pricing. (5
marks)

Q9. Explain the Activity-Based Costing (ABC) method. How does it improve cost accuracy
compared to traditional costing methods? (5 marks)
Q10. Discuss the importance of cash flow statements in managerial accounting. How do they differ
from income statements? (5 marks)

Q11. Explain how cash budgeting supports managerial control and decision-making. (5 marks)

Q12. Identify and explain at least three common causes of budget variances in managerial
accounting. (5 marks)

Q13. Describe the relationship between fixed, variable, and mixed costs in cost behavior analysis.
Give a practical example for each. (5 marks)

SECTION B – CASE STUDIES (Answer ANY ONE)

Q14. CASE STUDY 1 – Breakeven & ABC Overhead Allocation (35 marks)

Scenario:
Elegant Furniture Ltd produces two products: Chairs and Tables. The following budgeted
information is available:

Details Chairs Tables

Selling Price per unit UGX 150,000 UGX 250,000
Direct Materials per unit UGX 40,000 UGX 70,000
Direct Labour per unit UGX 30,000 UGX 40,000
Units expected to sell 4,000 2,000

Overheads and activities (ABC method):

Activity Total Cost Cost Driver Total Driver Units

Machine Setups 48,000,000 No. of setups 120 setups
Quality Inspections 30,000,000 No. of inspections 300 inspections
Packaging 24,000,000 No. of units packed 6,000 units

Additional info:

 Chairs require 40 setups, 120 inspections, and 4,000 units packaged.

 Tables require 80 setups, 180 inspections, and 2,000 units packaged.
 Fixed costs (excluding above overheads) = UGX 50,000,000/year.

Required:
a) Allocate the overheads to each product using ABC. (10 marks)
b) Calculate the total cost per unit for Chairs and Tables. (6 marks)
c) Determine the breakeven point in units for each product, assuming sales mix is maintained. (12
marks)
d) Comment on which product is more profitable and why. (7 marks)
Q15. CASE STUDY 2 – Cash Flow, Breakeven & Overhead Analysis (35 marks)

Scenario:
Kisoro Dairy Products Ltd makes yogurt cups and cheese blocks. Forecast for 2026:

Details Yogurt Cup Cheese Block

Selling Price per unit UGX 5,000 UGX 20,000
Variable Cost per unit UGX 3,000 UGX 12,000
Units expected to sell 100,000 25,000

Overheads:

 Factory rent: UGX 60,000,000

 Maintenance: UGX 40,000,000 (allocated by machine hours)
 Marketing: UGX 30,000,000 (allocated equally)

Machine hours: Yogurt = 5,000 hrs. Cheese = 15,000 hrs.

Cash flow:

 Customers pay 70% of sales in cash immediately, 30% after 2 months.

 Suppliers paid after 1 month.
 Fixed costs paid evenly throughout the year.

Required:
a) Allocate overheads to each product. (10 marks)
b) Calculate contribution per unit for each product. (5 marks)
c) Determine the breakeven sales revenue for the company as a whole. (8 marks)
d) Prepare a cash receipts budget for the first quarter, assuming monthly sales are constant. (7
marks)
e) Explain why the company can be profitable yet face cash flow shortages. (5 marks)
Question 1:

Discuss the role of managerial accounting in the decision-making process of an organization.

Provide examples of how managerial accounting information can be applied in short-term and
long-term decisions.

Model Answer:
Managerial accounting provides financial and non-financial information to managers for planning,
controlling, and decision-making. Its primary role is to assist in evaluating alternatives, setting
budgets, monitoring performance, and implementing strategies.

 Short-term decisions:
o Example: Deciding whether to accept a special order below the normal selling price.
Managerial accounting tools such as relevant costing and contribution margin
analysis help determine if incremental revenue exceeds incremental cost.
o Another example is make-or-buy decisions, where cost analysis determines whether
producing in-house is cheaper than outsourcing.
 Long-term decisions:
o Example: Capital investment in new machinery.
Tools like capital budgeting, net present value (NPV), and internal rate of return
(IRR) are used to assess profitability and risk.

In summary, managerial accounting acts as a bridge between raw data and informed managerial
action, ensuring decisions align with the organization’s strategic goals.

Question 2:

Explain the difference between variable costing and absorption costing. Which method is more
useful for internal decision-making and why?

Model Answer:

 Variable Costing: Includes only variable manufacturing costs (direct materials, direct labor,
variable manufacturing overhead) in product costs. Fixed manufacturing overhead is treated
as a period expense.
 Absorption Costing: Includes both variable and fixed manufacturing overhead in product
costs. Required for external reporting under IFRS and GAAP.

Usefulness for internal decision-making:

Variable costing is generally more useful internally because:

 It highlights contribution margin, making it easier to analyze cost-volume-profit

relationships.
 It avoids profit fluctuations caused by changes in inventory levels (common under absorption
costing).
Example: In pricing decisions, variable costing quickly shows the minimum selling price to cover
variable costs and contribute toward fixed costs.

Question 3:

Critically evaluate the relevance of Cost-Volume-Profit (CVP) analysis in planning and

decision-making. Provide limitations of this tool.

Model Answer:
Relevance:
CVP analysis helps managers understand how changes in costs, volume, and price affect profit. It is
vital for:

 Determining breakeven points.

 Setting target profits.
 Evaluating the effect of price changes or cost structures.

Example: A manufacturer can use CVP to determine how many units to sell to cover fixed costs of
UGX 50,000,000 at a contribution margin of UGX 5,000 per unit (10,000 units).

Limitations:

 Assumes costs are strictly fixed or variable (in reality, some are mixed).
 Assumes constant selling price and cost per unit.
 Ignores qualitative factors (e.g., market competition, customer satisfaction).

Despite limitations, CVP remains an essential planning tool when used alongside other decision-
making techniques.

Question 4:

Discuss the importance of budgeting as a tool for managerial planning and control. Explain the
behavioral implications of budgeting.

Model Answer:
Importance:
Budgeting sets financial and operational targets, guiding resource allocation and performance
evaluation. It allows managers to anticipate problems, coordinate activities, and establish
benchmarks for control.

Behavioral Implications:

 Positive: Motivates managers when budgets are realistic, fosters goal congruence, and
promotes coordination.
  Negative: Unrealistic budgets can demotivate employees, lead to “budgetary slack”
(deliberately underestimating revenue or overestimating costs), and cause short-term focus
over long-term growth.

Example: A sales team given an unrealistic sales target may lose morale and underperform;
conversely, a challenging yet achievable target can drive innovation and extra effort.

Question 5:

Explain the concept of relevant costs in decision-making. Provide examples where irrelevant
costs might distort decisions if included.

Model Answer:
Relevant Costs are future costs that will change as a result of a decision. They are both future-
oriented and differential.
Irrelevant Costs are costs that will not be affected by the decision (e.g., sunk costs).

Example of relevance:

 A company considering a special order at UGX 4,000 per unit when the variable cost is UGX
3,500. Only the variable cost is relevant for the decision.

Example of irrelevance:

 Including the original purchase price of a machine (sunk cost) when deciding whether to
replace it can distort the decision, as that cost cannot be recovered.

Question 6:

Discuss the ethical considerations managerial accountants must observe when preparing
management reports.

Model Answer:
Managerial accountants must adhere to ethical standards such as:

1. Integrity – Avoiding falsification or manipulation of reports.

2. Objectivity – Presenting unbiased information free from conflict of interest.
3. Confidentiality – Protecting sensitive company data from unauthorized disclosure.
4. Professional Competence – Maintaining skills to produce accurate and relevant reports.

Example: Overstating revenues in a budget to secure investor confidence violates ethical principles
and may lead to legal consequences.

Additional Managerial Accounting Essay Questions & Model

Answers
Question 7:

Explain the classification of costs for managerial decision-making purposes. Provide examples
for each category.

Model Answer:
Costs can be classified in several ways, depending on the purpose:

1. By Behavior (how costs change with activity level):

o Variable Costs: Change directly with production volume (e.g., raw materials).
o Fixed Costs: Remain constant within the relevant range (e.g., rent).
o Semi-variable Costs: Contain both fixed and variable elements (e.g., electricity bills).
2. By Function:
o Production Costs: Direct materials, direct labor, manufacturing overhead.
o Non-production Costs: Selling and distribution expenses, administration costs.
3. By Traceability:
o Direct Costs: Can be traced to a specific product or department (e.g., wood in
furniture).
o Indirect Costs: Cannot be directly traced (e.g., factory supervisor’s salary).
4. By Relevance to Decision-making:
o Relevant Costs: Affect future decisions.
o Irrelevant Costs: Sunk costs or costs that remain unchanged by a decision.

Example: In deciding whether to produce or outsource, only variable production costs and avoidable
fixed costs are relevant.

Question 8:

Discuss the importance of overhead allocation in cost determination and product pricing.

Model Answer:
Overheads are indirect costs that cannot be directly traced to a single product (e.g., utilities, rent,
factory management salaries). Accurate allocation ensures fair cost distribution among products and
prevents underpricing or overpricing.

Importance:

 Helps in accurate product costing and competitive pricing.

 Ensures departments bear their fair share of costs.
 Aids in budgeting and variance analysis.

Methods of Allocation:

 Traditional Methods: Allocate based on volume measures such as machine hours or labor
hours.
 Activity-Based Costing (ABC): Allocates based on activities driving the costs.
Example: If electricity cost is allocated based on machine hours, products using more machine time
bear higher costs.

Question 9:

Explain the Activity-Based Costing (ABC) method. How does it improve cost accuracy
compared to traditional costing methods?

Model Answer:
ABC Method assigns overheads to products based on activities that consume resources, rather than
simply spreading them based on production volume.

Steps in ABC:

1. Identify major activities (e.g., machine setup, quality inspection).

2. Assign costs to activity cost pools.
3. Determine cost drivers for each activity (e.g., number of setups, inspection hours).
4. Allocate costs to products based on usage of activities.

Advantages:

 More accurate product costing, especially when overheads are high and diverse.
 Identifies non-value-adding activities, aiding cost control.
 Supports better pricing and product mix decisions.

Example: In a factory, Product A may require fewer machine hours but many setups. ABC ensures
setup costs are fairly charged to Product A instead of being averaged across all products.

Question 10:

Discuss the importance of cash flow statements in managerial accounting. How do they differ
from income statements?

Model Answer:
The Cash Flow Statement shows actual inflows and outflows of cash over a period, classified into:

 Operating Activities: Cash from main business operations (sales receipts, payments to
suppliers).
 Investing Activities: Cash from buying/selling assets.
 Financing Activities: Cash from issuing shares, borrowing, or repaying loans.

Importance in Managerial Accounting:

 Assesses liquidity and short-term solvency.

 Helps in planning for cash needs and avoiding overdrafts.
 Evaluates the ability to finance new investments internally.
Difference from Income Statement:

 Income statement records revenues and expenses based on accrual accounting (may include
non-cash items like depreciation).
 Cash flow statement focuses solely on cash transactions.

Example: A company may report a profit but still face liquidity issues if receivables are high and
cash collection is slow.

Question 11:

Explain how cash budgeting supports managerial control and decision-making.

Model Answer:
A cash budget is a projection of cash inflows and outflows over a specific period.

Benefits:

 Anticipates cash surpluses and shortages in advance.

 Guides financing decisions (e.g., when to borrow or invest surplus funds).
 Ensures smooth operations without liquidity crises.

Example: If a cash budget shows a shortage in March, management can arrange a short-term loan in
February to avoid operational disruption.
Perfect — I’ll design two comprehensive case study questions that integrate breakeven analysis,
overhead allocation (ABC), and cash flow analysis in the style of end-of-semester managerial
accounting exams.

Each will have:

 Scenario (realistic business setting)

 Required tasks (mix of calculations & discussion)
 Model answers with workings + interpretations

Case Study 1 – Breakeven & ABC Overhead Allocation

Scenario
Elegant Furniture Ltd produces two products: Chairs and Tables. The company is considering
whether to expand production next year. The following budgeted information is available:

Details Chairs Tables

Selling Price per unit UGX 150,000 UGX 250,000
Direct Materials per unit UGX 40,000 UGX 70,000
Direct Labour per unit UGX 30,000 UGX 40,000
Units expected to sell 4,000 2,000

The company has identified the following overheads and activities for ABC costing:

Activity Total Cost Cost Driver Total Driver Units

Machine Setups 48,000,000 No. of setups 120 setups
Quality Inspections 30,000,000 No. of inspections 300 inspections
Packaging 24,000,000 No. of units packed 6,000 units

Additional information:

 Chairs require 40 setups, 120 inspections, and 4,000 units packaged.

 Tables require 80 setups, 180 inspections, and 2,000 units packaged.
 Fixed costs (excluding the above overheads) are UGX 50,000,000 per year.

Required:

1. Allocate the overheads to each product using ABC.

2. Calculate the total cost per unit for Chairs and Tables.
3. Determine the breakeven point in units for each product, assuming the sales mix is
maintained.
4. Comment on which product is more profitable and why.
Model Answer (Workings)

Step 1: Overhead rates (ABC method)

 Machine setups: 48,000,000 ÷ 120 = UGX 400,000 per setup

 Inspections: 30,000,000 ÷ 300 = UGX 100,000 per inspection
 Packaging: 24,000,000 ÷ 6,000 = UGX 4,000 per unit

Step 2: Allocate to products

Chairs:

 Setups: 40 × 400,000 = 16,000,000

 Inspections: 120 × 100,000 = 12,000,000
 Packaging: 4,000 × 4,000 = 16,000,000
 Total Overhead = 44,000,000

Tables:

 Setups: 80 × 400,000 = 32,000,000

 Inspections: 180 × 100,000 = 18,000,000
 Packaging: 2,000 × 4,000 = 8,000,000
 Total Overhead = 58,000,000

Step 3: Total cost per unit

Chairs:

 Direct Materials = 40,000

 Direct Labour = 30,000
 Overhead per unit = 44,000,000 ÷ 4,000 = 11,000
 Total = UGX 81,000 per unit

Tables:

 Direct Materials = 70,000

 Direct Labour = 40,000
 Overhead per unit = 58,000,000 ÷ 2,000 = 29,000
 Total = UGX 139,000 per unit

Step 4: Contribution margin per unit

 Chairs: 150,000 – 81,000 = 69,000

 Tables: 250,000 – 139,000 = 111,000

Step 5: Weighted Average Contribution Margin (sales mix 4:2)

Total contribution = (69,000 × 4) + (111,000 × 2) = 276,000 + 222,000 = 498,000
Weighted average per unit of bundle (6 units) = 498,000 ÷ 6 = 83,000
Step 6: Breakeven point in bundles
= Fixed costs (50,000,000) ÷ 83,000 = 602 bundles
Bundle = 4 Chairs + 2 Tables → BE units = 2,408 Chairs and 1,204 Tables

Step 7: Comment
Tables give higher contribution per unit, but Chairs have higher sales volume. Both are needed to
maintain the mix and meet breakeven quickly.

Case Study 2 – Cash Flow, Breakeven & Overhead Analysis

Scenario
Kisoro Dairy Products Ltd makes yogurt cups and cheese blocks. The company has cash flow
concerns despite showing profits. The following forecast is for 2026:

Details Yogurt Cup Cheese Block

Selling Price per unit UGX 5,000 UGX 20,000
Variable Cost per unit UGX 3,000 UGX 12,000
Units expected to sell 100,000 25,000

Overheads for 2026:

 Factory rent: UGX 60,000,000

 Maintenance: UGX 40,000,000 (allocated based on machine hours)
 Marketing: UGX 30,000,000 (allocated equally between products)

Machine hours: Yogurt = 5,000 hrs, Cheese = 15,000 hrs.

Cash flow data:

 Customers pay 70% of sales in cash immediately, 30% after 2 months.

 Suppliers are paid after 1 month.
 Fixed costs are paid evenly throughout the year.

Required:

1. Allocate overheads to each product.

2. Calculate contribution per unit for each product.
3. Determine the breakeven sales revenue for the company as a whole.
4. Prepare a cash receipts budget for the first quarter (January–March) assuming monthly sales
are constant.
5. Explain why the company can be profitable yet face cash flow shortages.
Model Answer (Workings)

Step 1: Overhead allocation

 Rent: Allocate equally → Yogurt = 30,000,000, Cheese = 30,000,000

 Maintenance: Allocate by machine hours (total 20,000 hrs) → Rate = 40,000,000 ÷ 20,000 =
UGX 2,000/hr
o Yogurt = 5,000 × 2,000 = 10,000,000
o Cheese = 15,000 × 2,000 = 30,000,000
 Marketing: Equal → 15,000,000 each

Total fixed overheads:

 Yogurt = 30,000,000 + 10,000,000 + 15,000,000 = 55,000,000

 Cheese = 30,000,000 + 30,000,000 + 15,000,000 = 75,000,000

Step 2: Contribution per unit

 Yogurt: 5,000 – 3,000 = 2,000

 Cheese: 20,000 – 12,000 = 8,000

Step 3: Weighted Average Contribution Margin

Contribution total per “bundle” (100,000 yogurt + 25,000 cheese):
= (100,000 × 2,000) + (25,000 × 8,000) = 200,000,000 + 200,000,000 = 400,000,000
Average per unit (125,000 units) = 3,200

Breakeven units = (55,000,000 + 75,000,000) ÷ 3,200 = 130,000,000 ÷ 3,200 ≈ 40,625 units total
(maintaining 4:1 sales mix → 32,500 Yogurt, 8,125 Cheese)

Step 4: Cash receipts budget (Jan–Mar)

Monthly sales:

 Yogurt: 100,000 ÷ 12 ≈ 8,333 units × 5,000 = 41,665,000

 Cheese: 25,000 ÷ 12 ≈ 2,083 units × 20,000 = 41,660,000
Total monthly sales = 83,325,000

Cash receipts each month:

 Current month cash = 70% × 83,325,000 = 58,327,500

 Previous month credit = 30% × 83,325,000 = 24,997,500

January: 58,327,500 (cash) + 0 (no previous credit) = 58,327,500

February: 58,327,500 + 24,997,500 = 83,325,000
March: 58,327,500 + 24,997,500 = 83,325,000

Step 5: Profitability vs cash flow shortages

The Company may be profitable on paper due to accrual accounting (credit sales recorded as revenue
before cash is received). However, delays in customer payments, coupled with immediate supplier
and expense payments, can create cash shortages despite positive profits.