RCM COLLEGE

CA25 MANAGEMENT ACCOUNTING

AD32 FUNDAMENTALS OF MANAGEMENT ACCOUNTING
THEORY QUESTIONS AND ANSWERS APRIL 2025

APRIL 2025
QUESTION ONE
(a) Understanding cost behaviour patterns is important in making management accounting and
cost control decisions.
In relation to the above statement, explain THREE types of costs which can be classified
according to cost
behaviour. (6 marks)

1. Fixed Costs:These are costs that remain constant in total regardless of changes in the level of
activity within a relevant range.
Examples: Rent, salaries of permanent staff, insurance.
Behaviour: Per unit cost decreases as production increases because the total cost is spread over
more units.

2. Variable Costs:These are costs that vary directly and proportionately with changes in the level
of activity or output.
Examples: Direct materials, direct labour (if paid per unit), fuel used in production.

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Behaviour: Total variable cost increases with increased activity, but the cost per unit remains
constant.

3. Semi-variable (or Mixed) Costs:These costs have both fixed and variable components. They
remain fixed up to a certain level of activity, after which they vary with the level of output.
Examples: Utility bills (fixed service fee plus usage-based charge), maintenance costs.
Behaviour: Total cost increases with activity, but not in a strictly linear fashion like pure variable
costs.
QUESTION TWO
(a) Highlight FOUR features of process costing. (4 marks)

 Used for Mass Production:Applied in industries where identical products are produced
continuously (e.g., chemicals, oil refining, food processing).

 Cost Accumulated by Process:Costs are collected and assigned to specific processes or

departments, not individual units.

 Standardised Products:All units are identical, making it difficult to distinguish one unit
from another.

 Continuous Flow of Production:The production process is ongoing and uniform with no

clear distinction between individual jobs.

 Work-in-Progress Valuation:There is usually opening and closing work-in-progress, and

costs must be apportioned accordingly.

(b) (i) A budget is a planning and control tool expressed in monetary terms. The budget is
prepared to perform certain functions.
With reference to the above statement, discuss FOUR functions of budgetary control and
planning.
(8 marks)

 Planning:Budgets help managers plan for future operations by setting financial and
operational goals.

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 Coordination:They align activities across various departments to ensure all functions work
towards a common objective.

 Resource Allocation:Budgets allocate limited resources efficiently among competing

departments or projects.

 Performance Measurement:Actual results are compared with budgeted figures to evaluate

the efficiency of operations and management.

 Cost Control:Budgets help control costs by setting spending limits and identifying variances
for corrective action.

 Communication:They serve as a formal means of communicating objectives, expectations,

and constraints across all levels of management.

 Motivation:Budgets can motivate employees by setting targets and involving them in the
budgeting process, thereby improving performance.

QUESTION THREE
(a) Zuka Ltd. is planning to introduce a service costing system in its stores operations
department.
Required:
(i) Explain the concept of service costing as used in management accounting. (2 marks)

Concept of Service Costing

Service costing is a method used to determine the cost of providing services rather than tangible
products. It is commonly used in organizations like transport companies, hospitals, hotels, and
public utilities where the output is a service. Costs are accumulated for a specific service and
then divided by the service units to find the cost per unit (e.g., cost per passenger-kilometre, bed-
day, or service hour).

(ii) Propose FOUR factors that the company might consider when introducing the service costing
system.(4 marks)

 Nature of Services Provided:Understand whether the services are uniform or varied,

and if they are measurable.
 Cost Units to Use:Choose appropriate cost units such as service hour, delivery made, or
customer served.
 Cost Classification:Determine how to classify costs into direct and indirect (e.g., labour,
materials, and overheads).
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  Volume of Service Activity:Consider the expected service output to ensure accurate cost
allocation.
 Availability of Data:Reliable data must be available for input costs, service time, and
activity levels.
 Overhead Allocation Methods:Select suitable methods for allocating indirect costs to
service departments (e.g., activity-based costing).

(b) Explain TWO causes of differences in profits reported by marginal costing and absorption
costing methods.
(4 marks)

 Treatment of Fixed Production Overheads:

 Marginal costing: Treats fixed production overheads as period costs, expensed in
full in the period incurred.
 Absorption costing: Allocates fixed overheads to units produced, so some may
be carried in inventory.
 Effect of Opening and Closing Inventory Levels:
 When closing inventory increases, absorption costing shows higher profits
because some fixed costs are deferred in closing stock.
 When closing inventory decreases, marginal costing shows higher profit because
more fixed costs are released from inventory under absorption costing.
 Valuation of Inventory:
 Absorption costing includes a share of fixed overheads in inventory value;
marginal costing only includes variable costs.

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DECEMBER 2024

QUESTION ONE

Definitions of Costs in Decision Making

(i) Controllable Costs: are expenses that can be influenced or regulated by a manager within a
specific period.
Example: Direct labor or raw material costs in a manufacturing setting.

(ii) Discretionary : are expenses that are determined by managerial judgment and decision-
making rather than being directly tied to production levels. Example: Marketing campaign
expenses.

QUESTION TWO
(a) Distinguish between “joint products” and “by-products” as used in the costing methods.

Joint Products: These are two or more products that are produced simultaneously from a single
production process and have relatively equal economic value.

 Joint products usually undergo further processing after the split-off point to become
finished goods.
 Example: In crude oil refining, gasoline, diesel, and kerosene are joint products.

By-Products: These are secondary products obtained incidentally during the production of the
main product and typically have lower economic value compared to the main product.

 By-products may either be sold as is or processed further to increase value, but their
revenue often offsets production costs rather than being the primary focus.
 Example: Molasses produced during sugar manufacturing.

QUESTION THREE
(a) Explain the following terminologies as used in business decision making:

(i) Opportunity Cost: refers to the value of the next best alternative foregone when a decision is
made to use resources for a particular purpose. It represents the benefits that could have been
gained if the resources were allocated differently.

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(ii) Opportunity Savings: refer to the cost savings achieved when a decision avoids higher costs
or inefficiencies by selecting a more economical alternative. It represents the benefits of avoiding
unnecessary expenditure or optimizing resource use.

QUESTION FOUR

(a) The effectiveness of an organisation’s budgetary control system relies significantly on having
a well-designed budget that allocates resources efficiently and monitors expenditures
consistently.

Required:

i) With reference to the above statement, discuss FOUR conditions for an effective budgetary
control system.

Clear Objectives: The budget should reflect the organization’s goals and priorities, providing a
clear framework for decision-making. It ensures that all departments align their efforts toward
achieving organizational objectives.

Realistic and Flexible Budgets: Budgets should be based on accurate data and realistic forecasts
to ensure feasibility. Flexibility allows for adjustments in response to changes in external
conditions or unexpected events.

Participation and Communication: Involving managers and staff in the budget preparation
process fosters ownership and commitment to achieving the targets. Clear communication
ensures that everyone understands the goals and their role in achieving them.

Regular Monitoring and Feedback: Continuous comparison of actual performance against

budgeted figures helps identify variances promptly. Timely feedback allows corrective actions to
be implemented, ensuring the organization remains on track.

(ii) Ways in Which Advancements in Technology Enhance Management Accounting

Practices

Automation of Processes: Technology enables the automation of routine accounting tasks such
as data entry, payroll processing, and reporting. This reduces errors, saves time, and allows
accountants to focus on strategic analysis.

Real-Time Data and Analytics: Advanced software and tools provide real-time access to
financial data and analytics, enhancing decision-making. Predictive analytics and artificial
intelligence help in forecasting trends and identifying potential risks or opportunities.

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QUESTION FIVE
(a) Variance analysis is the process of investigating the cause of differences between the actual
amount of material, labour, sales and overheads and the expected budgeted amount. This results
in either favourable variances or adverse variances.
Required:

(i) Causes of Favourable Material Price Variances

Bulk Purchases: Discounts received for buying materials in large quantities.

Effective Negotiations: Successful bargaining with suppliers to reduce purchase prices.

Decline in Market Prices: A general reduction in the cost of raw materials due to market
conditions.

Sourcing from Low-Cost Suppliers: Identifying and purchasing from suppliers offering lower
prices without compromising quality.

(ii) Remedies to Adverse Material Price Variances

Improved Supplier Relationships: Build strong partnerships with suppliers to negotiate better
terms and discounts.

Market Research: Continuously monitor the market to identify alternative suppliers or changes
in material prices.

Efficient Inventory Management: Avoid last-minute purchases by maintaining an optimal

stock level, reducing the risk of higher costs.

Quality Control: Ensure materials meet quality standards to prevent additional costs associated
with defective or substandard inputs.