CPA(U) CMA Exam 1

✅ Correct answer: Disclose the link and step aside from the evaluation

📌 Explanation: A family relationship with a bidder creates self-interest and familiarity threats to objectivity. The appropriate safeguard is to disclose the relationship to the finance director and withdraw from evaluating the bids, so that the GHS 2,400,000 decision is taken by someone free from bias and the analysis stays credible.

❌ Why the other options are wrong: Finishing the analysis and only noting the link on file leaves the threat in place, because she still shapes the outcome; continuing quietly ignores that objectivity can be compromised by a relative's interest even without personal gain; rejecting the bid outright is itself a biased decision that could deny the company the cheaper supplier.

📋 Objective: 1.2 (Management accounting, the roles of accountants and ethics)

✅ Correct answer: KES 940,000

📌 Explanation: b = (nΣxy − ΣxΣy) / (nΣx² − (Σx)²) = (5 × 253,200 − 300 × 4,100) / (5 × 18,600 − 300²) = 36,000 / 3,000 = 12, i.e. KES 12,000 per tonne. a = (Σy − bΣx) / n = (4,100 − 3,600) / 5 = 100, i.e. KES 100,000 fixed. Cost at 70 tonnes = 100 + 12 × 70 = 940 thousand, so KES 940,000.

❌ Why the other options are wrong: KES 1,340,000 forgets to divide (Σy − bΣx) by n, overstating the fixed element at 500 thousand; KES 956,667 treats the whole cost as variable at the average of 4,100 / 300 thousand per tonne; KES 840,000 is the variable element only and leaves out the fixed cost of KES 100,000.

📋 Objective: 2.4 (Cost estimation methods)

✅ Correct answer: ZMW 900,000

📌 Explanation: Prime cost = 412,000 + 268,000 + 45,000 = ZMW 725,000. Factory cost = prime cost + factory overheads + opening WIP − closing WIP = 725,000 + 190,000 + 38,000 − 53,000 = ZMW 900,000. Administration overheads are added after factory cost to reach the cost of production, so they are excluded at this stage of the cost sheet.

❌ Why the other options are wrong: ZMW 915,000 ignores the work in progress adjustment; ZMW 930,000 reverses it by deducting opening and adding closing work in progress; ZMW 960,000 adds administration overheads, which belong below factory cost in the cost sheet.

📋 Objective: 2.3 (Elements of manufacturing cost and the cost sheet)

✅ Correct answer: 12.0%

📌 Explanation: Average number of employees = (180 + 220) / 2 = 200. The replacement method counts only leavers who were replaced: 24 / 200 × 100 = 12.0%. The 46 workers hired for the new ginning line reflect expansion rather than turnover, so they are excluded from the calculation.

❌ Why the other options are wrong: 15.0% is the separation method (30 leavers / 200); 13.3% divides the 24 replacements by opening staff of 180 instead of the average; 27.0% adds separations and replacements together, a version of the flux method rather than the replacement method.

📋 Objective: 4.2 (Labour turnover)

✅ Correct answer: KES 10,500

📌 Explanation: Halsey pays time wages plus 50% of the time saved at the hourly rate. Time wages = 36 × 250 = KES 9,000; time saved = 48 − 36 = 12 hours; bonus = 50% × 12 × 250 = KES 1,500. Gross pay = 9,000 + 1,500 = KES 10,500 for the consignment.

❌ Why the other options are wrong: KES 11,250 applies the Rowan formula (12 / 48 × 36 × 250 = KES 2,250 bonus); KES 12,000 pays the full time allowance of 48 hours, giving the worker 100% of the time saved instead of half; KES 9,000 is time wages alone and ignores the premium bonus earned.

📋 Objective: 4.6 (Remuneration methods and incentive schemes)

✅ Correct answer: ZMW 1,187,000

📌 Explanation: Start from the cost profit of ZMW 1,240,000. The lower financial closing inventory reduces financial profit by 28,000, and the higher financial opening inventory reduces it by a further 10,000. Add interest received of 45,000 and deduct the vehicle loss of 60,000, which appear only in the financial accounts: 1,240,000 − 28,000 − 10,000 + 45,000 − 60,000 = ZMW 1,187,000.

❌ Why the other options are wrong: ZMW 1,263,000 reverses both inventory adjustments; ZMW 1,207,000 reverses only the opening inventory adjustment, treating a higher opening figure as raising profit; ZMW 1,307,000 adds the loss on sale of the vehicle instead of deducting it.

📋 Objective: 6.3 (Reconciliation of cost and financial profits)

✅ Correct answer: Debit WIP control, credit production overhead control

📌 Explanation: Absorption charges overhead to the units being produced, so the work in progress control account is debited and the production overhead control account is credited with GHS 186,000. Any difference between this credit and the actual overhead debited to the control account is later transferred out as under- or over-absorbed overhead.

❌ Why the other options are wrong: Debiting production overhead control and crediting WIP reverses the entry; debiting finished goods skips work in progress, although overhead is absorbed while goods are still being made; debiting cost of sales charges the overhead to the income statement before the goods are sold.

📋 Objective: 6.1 (Integrated cost accounting systems)

✅ Correct answer: Shs 9,696,000

📌 Explanation: Production cost = 3,600,000 + 960,000 (120 × 8,000) + 1,500,000 (120 × 12,500) = Shs 6,060,000. Administration overhead = 20% × 6,060,000 = Shs 1,212,000, so total cost = Shs 7,272,000. A 25% margin means cost is 75% of price: 7,272,000 / 0.75 = Shs 9,696,000.

❌ Why the other options are wrong: Shs 9,090,000 adds a 25% mark-up on cost instead of a margin on price; Shs 8,080,000 omits administration overhead and applies the margin to production cost only; Shs 9,296,000 calculates administration overhead on prime cost rather than on production cost.

📋 Objective: 7.1 (Job costing)

✅ Correct answer: GHS 29.45

📌 Explanation: Batch cost = 6,800 + 1,500 (60 × 25) + 2,400 + 1,080 (60 × 18) = GHS 11,780. The order needs 1,200 / 400 = 3 batches, each with its own set-up, so the cost per net = 11,780 / 400 = GHS 29.45 and the order costs GHS 35,340 in total.

❌ Why the other options are wrong: GHS 25.45 charges the set-up only once for the whole order rather than once per batch; GHS 23.45 leaves out the set-up cost; GHS 26.75 omits the production overhead absorbed on labour hours.

📋 Objective: 7.2 (Batch costing)

✅ Correct answer: ZMW 46,891

📌 Explanation: Equivalent units: materials 16,000 + 4,000 = 20,000; conversion 16,000 + 40% × 4,000 = 17,600. Cost per equivalent unit: materials (18,000 + 171,000) / 20,000 = ZMW 9.45; conversion (7,400 + 92,600) / 17,600 = ZMW 5.6818. Closing WIP = 4,000 × 9.45 + 1,600 × 5.6818 = 37,800 + 9,091 = ZMW 46,891.

❌ Why the other options are wrong: ZMW 42,618 leaves the opening work in progress costs out of the weighted average; ZMW 57,800 treats the closing work in progress as fully converted; ZMW 26,273 applies the 40% stage of completion to materials as well as to conversion.

📋 Objective: 8.1 (Process accounts, losses and work in progress)

✅ Correct answer: Shs 70,588,235

📌 Explanation: NRV of oil = 40,000 × (7,500 − 2,500) = Shs 200,000,000; seed cake = 60,000 × 1,200 = Shs 72,000,000; total Shs 272,000,000. The oil's share = 200 / 272 × 96,000,000 = Shs 70,588,235. NRV deducts further processing costs so that each product's share reflects its value at the split-off point.

❌ Why the other options are wrong: Shs 77,419,355 uses the final sales value of Shs 300,000,000 without deducting refining costs; Shs 38,400,000 uses the physical units method on 40,000 of 100,000 units; Shs 25,411,765 is the share of the seed cake, not of the oil.

📋 Objective: 8.2 (Joint products)

✅ Correct answer: ETB 58.65

📌 Explanation: Net realisable value of the bran = 8,000 × (15 − 2) = ETB 104,000, credited to the process account. Net cost of the main product = 2,450,000 − 104,000 = ETB 2,346,000. The normal loss carries no cost of its own, so the cost per kg of flour = 2,346,000 / 40,000 = ETB 58.65.

❌ Why the other options are wrong: ETB 58.25 deducts gross bran sales of ETB 120,000 without the packing costs; ETB 61.25 gives no credit at all for the by-product; ETB 48.88 spreads the net cost over flour and bran together (48,000 kg), treating the bran as a joint product.

📋 Objective: 8.3 (By-products)

✅ Correct answer: KES 4,360,000

📌 Explanation: Contribution per labour hour: stools 1,000 / 1.25 = KES 800, tables 4,200 / 6 = KES 700, chairs 1,800 / 3 = KES 600. Make 1,600 stools (2,000 hours, KES 1,600,000), then 400 tables (2,400 hours, KES 1,680,000), then use the last 1,800 hours for 600 chairs (KES 1,080,000). Total = KES 4,360,000.

❌ Why the other options are wrong: KES 4,240,000 ranks by contribution per unit, putting tables and chairs ahead of stools; KES 4,720,000 meets the demand for every product, which needs 6,800 hours and breaches the labour limit; KES 4,300,000 ranks by fewest hours per unit, so chairs displace the more profitable tables.

📋 Objective: 10.2 (Limiting factors)

✅ Correct answer: ZMW 31,500

📌 Explanation: The 200 idle hours are paid anyway, so they have no incremental cost. The remaining 300 hours are diverted from pump seals, so each costs the wage of ZMW 60 plus the lost contribution of ZMW 45: 300 × 105 = ZMW 31,500, the cash flow that changes because the contract is accepted.

❌ Why the other options are wrong: ZMW 30,000 charges all 500 hours at the wage and ignores both the idle time and the lost contribution; ZMW 52,500 charges the opportunity cost on all 500 hours, including idle hours that displace nothing; ZMW 18,000 prices the diverted hours at the wage alone and omits the contribution forgone.

📋 Objective: 10.3 (Identifying relevant costs)

✅ Correct answer: Profit falls by Shs 26,000,000

📌 Explanation: The relevant cost of making is the variable cost of Shs 14,500 plus the avoidable supervisor's salary of Shs 2,000, a total of Shs 16,500 a unit. Buying costs Shs 17,800, so each unit costs Shs 1,300 more: 20,000 × 1,300 = Shs 26,000,000 lower profit. The other Shs 4,000 of absorbed fixed overhead continues either way.

❌ Why the other options are wrong: A rise of Shs 54,000,000 compares the supplier price with the full absorbed cost of Shs 20,500, treating unavoidable overhead as saved; a fall of Shs 66,000,000 ignores the saving of the supervisor's salary; a rise of Shs 26,000,000 has the right amount but the wrong direction.

📋 Objective: 10.4 (Decision statements)

✅ Correct answer: GHS 30.00

📌 Explanation: Driver rates: set-ups 240,000 / 400 = GHS 600 per set-up; handling 180,000 / 600 = GHS 300 per movement. Premium body butter: 60 × 600 + 80 × 300 = GHS 60,000, so 60,000 / 2,000 = GHS 30.00 per tin, which reflects the batch-level activity the product actually causes.

❌ Why the other options are wrong: GHS 33.00 swaps the two driver rates between the activities; GHS 18.00 charges only the set-up pool and leaves out material handling; GHS 10.00 is the traditional labour-hour charge (420,000 / 21,000 = GHS 20 per hour × 0.5 hours), which ignores the activities consumed.

📋 Objective: 11.1 (Activity-based costing)

✅ Correct answer: 4.00

📌 Explanation: Throughput per lamp = 42,000 − 18,000 = RWF 24,000, so return per bottleneck hour = 24,000 / 0.25 = RWF 96,000. Factory cost per bottleneck hour = 960,000,000 / 40,000 = RWF 24,000. TA ratio = 96,000 / 24,000 = 4.00, so each bottleneck hour earns four times what it costs.

❌ Why the other options are wrong: 7.00 uses the selling price rather than throughput, ignoring material cost; 0.25 inverts the ratio by dividing factory cost by return; 2.50 also deducts labour from throughput, although labour is a factory cost already included in the denominator.

📋 Objective: 11.2 (Other modern costing methods)

✅ Correct answer: KES 1,320,000

📌 Explanation: Production = sales 48,000 + closing 8,000 − opening 6,000 = 50,000 tubs. Milk usage = 50,000 × 0.5 = 25,000 litres. Purchases = usage 25,000 + closing 2,000 − opening 3,000 = 24,000 litres, and 24,000 × KES 55 = KES 1,320,000.

❌ Why the other options are wrong: KES 1,265,000 bases milk usage on sales instead of production; KES 1,430,000 reverses the milk inventory adjustment; KES 1,210,000 reverses the finished goods adjustment and budgets production of only 46,000 tubs.

📋 Objective: 12.1 (Budget purpose, process and types)

✅ Correct answer: Budgetary slack built into the targets

📌 Explanation: When managers set the targets that decide their own bonuses, they have an incentive to understate achievable sales. Targets beaten by over 20% each year without any gain in market share point to budgetary slack, which the finance director should tackle by challenging submissions or linking bonuses to external benchmarks.

❌ Why the other options are wrong: Goal congruence is the desired outcome, and here the managers' interests have drifted away from the owners'; imposed budgets are the opposite of the participative approach in use; spending to avoid future budget cuts concerns cost budgets, not understated sales targets.

📋 Objective: 12.3 (Behavioural aspects of budgeting)

✅ Correct answer: Shs 1,800,000 adverse

📌 Explanation: Flexing to 9,000 cartons gives materials 40,500,000, labour 27,000,000, variable overhead 10,800,000 and fixed overhead unchanged at 18,000,000, a flexed total of Shs 96,300,000. Actual cost = 41,200,000 + 26,500,000 + 30,400,000 = Shs 98,100,000, so the variance is Shs 1,800,000 adverse.

❌ Why the other options are wrong: Shs 6,900,000 favourable compares actual cost with the fixed budget of Shs 105,000,000 for a different output; Shs 3,600,000 adverse flexes the fixed overhead as if it were variable; Shs 1,800,000 favourable has the right amount but the wrong sign, since actual cost exceeds the flexed budget.

📋 Objective: 12.4 (Budgetary control and reporting)

Annual usage D = 3,000 x 12 = 36,000 bags. EOQ = square root of (2 x Co x D / Ch) = square root of (2 x 18,000 x 36,000 / 400) = square root of 3,240,000 = 1,800 bags.

Re-order level = maximum usage x maximum lead time = 900 x 3 = 2,700 bags.

Minimum level = re-order level - (normal usage x normal lead time) = 2,700 - (720 x 2) = 1,260 bags.

Maximum level = re-order level + EOQ - (minimum usage x minimum lead time) = 2,700 + 1,800 - (500 x 1) = 4,000 bags.

Orders a year = 36,000 / 1,800 = 20. Annual ordering cost = 20 x 18,000 = KES 360,000. Annual holding cost = (1,800 / 2) x 400 = KES 360,000. Total annual ordering and holding cost = KES 720,000; at the EOQ the two costs are equal, which confirms the minimum-cost order size.

📋 Objective: 3.3 (Inventory control techniques)

(i) FIFO

9 March issue of 1,050 bags: 600 x 9,000 = 5,400,000 plus 450 x 9,400 = 4,230,000, total KES 9,630,000. Balance 550 bags at 9,400.

22 March issue of 750 bags: 550 x 9,400 = 5,170,000 plus 200 x 9,850 = 1,970,000, total KES 7,140,000. Balance 250 bags at 9,850.

30 March issue of 700 bags: 250 x 9,850 = 2,462,500 plus 450 x 10,000 = 4,500,000, total KES 6,962,500.

Total cost of issues = KES 23,732,500. Closing inventory = 300 bags x 10,000 = KES 3,000,000.

(ii) Perpetual weighted average

After the 4 March receipt: 1,600 bags costing 5,400,000 + 9,400,000 = 14,800,000, an average of KES 9,250. 9 March issue = 1,050 x 9,250 = KES 9,712,500; balance 550 bags, KES 5,087,500.

After the 16 March receipt: 1,000 bags costing 5,087,500 + 4,432,500 = 9,520,000, an average of KES 9,520. 22 March issue = 750 x 9,520 = KES 7,140,000; balance 250 bags, KES 2,380,000.

After the 27 March receipt: 1,000 bags costing 2,380,000 + 7,500,000 = 9,880,000, an average of KES 9,880. 30 March issue = 700 x 9,880 = KES 6,916,000.

Total cost of issues = KES 23,768,500. Closing inventory = 300 bags x 9,880 = KES 2,964,000.

Check: goods available = 5,400,000 + 9,400,000 + 4,432,500 + 7,500,000 = 26,732,500, which equals issues plus closing inventory under both methods.

📋 Objective: 3.5 (Inventory valuation methods)

With prices rising from KES 9,000 to KES 10,000 a bag, FIFO charges issues at the older, lower prices, so cost of sales is lower and closing inventory is higher (KES 3,000,000 against KES 2,964,000). FIFO profit for March is therefore KES 36,000 higher than under weighted average.

FIFO closing inventory is close to current replacement cost, but its issue prices are out of date, so product costs and selling prices based on them may understate the current cost of nuts.

The weighted average method smooths out price differences between deliveries, gives issue prices closer to current cost than FIFO, and is acceptable under IAS 2.

I recommend that the company adopts the weighted average method, because it is simple to run on a perpetual stores ledger, dampens the effect of rising prices on product costs and avoids reporting inflated profits from holding gains.

📋 Objective: 3.5 (Inventory valuation methods)

Primary apportionment (ZMW). Rent rate = 9,600,000 / 12,000 square metres = ZMW 800 per square metre.

Step 1: close off Maintenance (6,400,000): Fabrication 50% = 3,200,000; Assembly 30% = 1,920,000; Stores 20% = 1,280,000.

Step 2: close off Stores, now 4,900,000 + 1,280,000 = 6,180,000. The 10% of Stores work done for Maintenance is ignored because Maintenance is already closed, so the cost is shared 54:36 (60% and 40%): Fabrication 6,180,000 x 54/90 = 3,708,000; Assembly 6,180,000 x 36/90 = 2,472,000.

Final overheads: Fabrication = 23,300,000 + 3,200,000 + 3,708,000 = ZMW 30,208,000. Assembly = 15,600,000 + 1,920,000 + 2,472,000 = ZMW 19,992,000. Check: 30,208,000 + 19,992,000 = 50,200,000, equal to total overheads.

📋 Objective: 5.4 (Reapportionment of service department overheads)

Fabrication rate = 30,208,000 / 23,600 = ZMW 1,280 per machine hour. Assembly rate = 19,992,000 / 29,400 = ZMW 680 per direct labour hour.

Fabrication: absorbed 25,000 x 1,280 = ZMW 32,000,000 against actual 31,400,000, so over-absorbed by ZMW 600,000.

Assembly: absorbed 28,500 x 680 = ZMW 19,380,000 against actual 19,850,000, so under-absorbed by ZMW 470,000.

Net position for the company: 600,000 over-absorbed less 470,000 under-absorbed = ZMW 130,000 net over-absorbed.

📋 Objective: 5.5 (Overhead absorption and under/over absorption)

First, actual activity differed from budget. Fabrication worked 25,000 machine hours against 23,600 budgeted, 1,400 more machine hours, because the mines ordered more conveyor sections, so more overhead was absorbed; Assembly worked 900 fewer labour hours because of the bearing shortage, so too little was absorbed.

Second, actual expenditure differed from budget: Fabrication spent ZMW 31,400,000 against a budget of 30,208,000, while Assembly spent less than its budget. Predetermined rates are based on estimates of both spending and activity, so some difference is expected.

The net over-absorbed overhead of ZMW 130,000 is a period adjustment: it is credited to the income statement (profit and loss) for 2026 rather than being charged back to individual jobs.

📋 Objective: 5.5 (Overhead absorption and under/over absorption)

Closing inventory = 400 + 6,500 - 6,200 = 700 stoles. Sales = 6,200 x 450 = GHS 2,790,000. Fixed overhead absorption rate = 540,000 / 6,000 = GHS 90 per stole, so full production cost = 180 + 90 = GHS 270 per stole.

(i) Marginal costing (GHS)

Sales 2,790,000. Opening inventory 400 x 180 = 72,000; add variable production cost 6,500 x 180 = 1,170,000; less closing inventory 700 x 180 = 126,000; variable cost of sales = 1,116,000. Variable selling cost 6,200 x 20 = 124,000. Contribution = 2,790,000 - 1,116,000 - 124,000 = 1,550,000. Less fixed production overhead 540,000 and fixed selling and administration 150,000. Marginal costing profit = GHS 860,000.

(ii) Absorption costing (GHS)

Sales 2,790,000. Opening inventory 400 x 270 = 108,000; add production 6,500 x 270 = 1,755,000; less closing inventory 700 x 270 = 189,000; cost of sales at full cost = 1,674,000. Over-absorbed overhead: absorbed 6,500 x 90 = 585,000 against actual 540,000 = 45,000, which is credited. Gross profit = 2,790,000 - 1,674,000 + 45,000 = 1,161,000. Less variable selling cost 124,000 and fixed selling and administration 150,000. Absorption costing profit = GHS 887,000.

📋 Objective: 9.2 (Profit statements under each method)

Marginal costing profit GHS 860,000. Inventory rose from 400 to 700 stoles, an increase of 300 stoles. Under absorption costing each of these stoles carries GHS 90 of fixed production overhead, so 300 x 90 = GHS 27,000 of September's fixed overhead is carried forward in closing inventory instead of being charged against September's profit; this cost is deferred to October. Absorption costing profit = 860,000 + 27,000 = GHS 887,000.

The difference arises only from the change in inventory; if production equalled sales the two profits would be the same.

📋 Objective: 9.2 (Profit statements under each method)

The published financial statements must continue to value inventory at full production cost under IAS 2, so absorption costing is still needed at the year end.

For monthly internal reports, however, absorption costing lets profit rise simply because stoles are made for inventory, as the GHS 27,000 in September shows; managers could manipulate profit by over-producing, and profits will fall sharply in December when the inventory is sold.

Marginal costing reports contribution, which shows how profit responds to sales volume and is the relevant figure for decisions such as pricing diaspora orders or accepting extra boutique work.

I advise the directors to use marginal costing for monthly management reporting and to make a simple year-end adjustment for fixed overhead in inventory for the published accounts.

📋 Objective: 9.1 (Marginal versus absorption costing)

Standard quantity for actual output = 8,200 x 15 = 123,000 kg. Standard hours for actual output = 8,200 x 0.5 = 4,100 hours.

Material price variance = (126,500 x 1,200) - 148,005,000 = 151,800,000 - 148,005,000 = Shs 3,795,000 favourable (actual price Shs 1,170 per kg).

Material usage variance = (123,000 - 126,500) x 1,200 = Shs 4,200,000 adverse.

Labour rate variance = (4,350 x 6,000) - 27,405,000 = 26,100,000 - 27,405,000 = Shs 1,305,000 adverse (actual rate Shs 6,300 per hour).

Labour efficiency variance = (4,100 - 4,350) x 6,000 = Shs 1,500,000 adverse.

Variable overhead expenditure variance = (4,350 x 4,000) - 16,530,000 = 17,400,000 - 16,530,000 = Shs 870,000 favourable.

Variable overhead efficiency variance = (4,100 - 4,350) x 4,000 = Shs 1,000,000 adverse.

📋 Objective: 13.2 (Variance analysis)

Standard variable cost of actual output = 8,200 x 23,000 = Shs 188,600,000.

Variances (Shs): material price 3,795,000 favourable; material usage 4,200,000 adverse; labour rate 1,305,000 adverse; labour efficiency 1,500,000 adverse; variable overhead expenditure 870,000 favourable; variable overhead efficiency 1,000,000 adverse. Adverse total 8,005,000 less favourable total 4,665,000 = net 3,340,000 adverse.

Actual variable cost = 148,005,000 + 27,405,000 + 16,530,000 = Shs 191,940,000, which equals 188,600,000 + 3,340,000.

📋 Objective: 13.2 (Variance analysis)

The favourable price variance and the adverse usage variance are probably linked: the new outgrowers' fruit was cheaper but smaller and less ripe, so more kilograms were trimmed away for each case, and the saving of Shs 3,795,000 was more than lost through excess usage of Shs 4,200,000.

The adverse labour rate variance reflects the overtime premium paid for weekend shifts after the power cuts.

The adverse labour efficiency variance arises from stoppages and the extra trimming of poor fruit; because variable overhead is absorbed on labour hours, the overhead efficiency variance moves with labour efficiency, while lower power use during cuts may explain the favourable expenditure variance.

Management should investigate the material usage variance first, as it is the largest adverse variance and is controllable through the choice of supplier.

📋 Objective: 13.2 (Variance analysis)