CPA Advanced Management Accounting Cost estimation and interpretation Questions & Answers (PDF)

August 2025

1 Questions

Question 2b

Mambo Bakery bakes croissants. The management accountant of the bakery is in the process of estimating the cost function for the next month. The following data was gathered on the total cost of monthly production for the last 12 months:

Month	Number of croissants (units “000”)	Production cost Sh.“000”
1	60	1,350
2	180	2,100
3	60	900
4	30	900
5	180	2,700
6	150	2,250
7	30	1,050
8	150	1,950
9	90	1,350
10	120	1,950
11	120	1,800
12	90	1,500

The cumulative monthly total and monthly average figures for the last 12 months were as follows:

	Number of croissants	Production cost (Sh.)
Monthly total	1,260,000	19,800,000
Monthly average	105,000	1,650,000

Required:

(i) Devise an ordinary least squares regression equation in the form Y = a + bx.

(ii) If each croissant is sold at Sh.20, determine the break-even number of croissants.

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April 2025

2 Questions

Question 4c

Matrix Motors Ltd. is a leading producer of high-quality executive motor cars. The company is developing a new model branded “zillion” that is expected to be very advanced.

Additional information:

Matrix motors Ltd. expects the manufacture of the first car to take 72 assembly hours.
It is anticipated there will be a 90% learning curve that will continue until all 110 cars have been produced.
Direct labour is paid at a rate of Sh.30,000 per hour.
Direct material costs are expected to be Sh.3,750,000 per car. This will apply to all 110 cars produced.
There are no product-specific fixed costs associated with this new car.
Matrix Motors Ltd. is going to use a target costing approach for the new car model. Based on the market research it has undertaken, Matrix Motors Ltd. plans to sell each car for Sh.6,400,000.
Matrix Motors Ltd. requires a target profit margin of 25% of the selling price over the life of this new car model.
The learning curve index for a 90% learning curve is -0.152.

Required:

Calculate the value of any cost gap between the target cost of 110 cars and the expected cost of 110 cars.

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Question 4b

Global Logistics Ltd. has two operating segments; Longonot Division and Nzoia Division. Longonot Division orders most of its consignment of intermediate product from Nzoia Division using economic order quantity (EOQ) model. The managers of each division are given considerable autonomy in transfer pricing policies. Longonot Division managers want to use multiple linear regression analysis to evaluate the significance of independent variables on material handling cost of its consignment.

The finance director of Global Logistics Ltd. has availed the following data for Longonot Division for the past 10 months.

Month	Material handling cost (Y)	Number of orders	Number of kilograms ordered
	“Sh.000”	\(\mathbf{(X_1)}\)	\(\mathbf{(X_2)}\)
June 2024	2,000	100	6,000
July 2024	3,090	125	15,000
August 2024	2,780	175	7,800
September 2024	1,990	200	6,000
October 2024	7,500	500	29,000
November 2024	5,300	300	23,000
December 2024	4,300	250	17,000
January 2025	6,300	400	25,000
February 2025	5,600	475	12,000
March 2025	6,240	425	22,400

The computer output is as follows:

1.	Summary output of regression statistics:
	Multiple R	0.999420
	R Square	0.998841
	Adjusted R Square	0.998509
	Standard Error	75.76272
	Observations	10

2.	The analysis of variance (ANOVA) table:
		df	SS	MS	F-statistics
	Regression	2	34613020	17306510	3015.076722
	Residual	7	W	5739.99
	Total	9	34653200

3.	The parameter estimate table is as follows:
	Variable	Coefficients	Standard error	t-ratio value
	Intercept	507.3097	57.3225	8.850098
	X variable 1	7.835162	Z	33.47672
	X variable 2	0.107181	0.003742	28.6464286

Required:

(i) Write down the multiple linear regression function; \(Y = a + b_1x_1 + b_2x_2\)

(ii) Suppose in the month of April 2025, Longonot Division expected to have 350 orders with 17,000 kilograms of material ordered, predict the total material handling cost for April 2025.

(iii) Compute the values of missing letters W and Z.

(iv) Explain the significance of regression statistic output of R Square of 0.998841.

(v) Based on t-ratio value, explain whether the number of orders or number of kilograms ordered is more significant in predicting the total material handling cost.

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December 2024

3 Questions

Question 5b

Plasmaz TV Ltd., makes smart television sets. The company operates a standard absorption costing system. The following data has been collected for the year ended 30 November 2024:

Actual cost incurred:	Sh.
Direct material used (165,000 kilograms)	15,675,000
Direct labour (80,000 hours)	5,800,000
Variable production overheads	16,800,000
Fixed production overheads	6,750,000

The variance reconciliation statement was prepared to investigate the main cause of difference between budgeted profit and actual profit. The following planning and operating variances were disclosed from the analysis:

	Favourable	Adverse
Planning and operating variances	Sh.	Sh.
Direct material price variance	825,000
Direct material usage variance		1,500,000
Direct labour rate variance		200,000
Direct labour efficiency variance		350,000
Variable production overhead:
Expenditure variance		800,000
Efficiency variance		1,000,000
Fixed production overhead:
Expenditure variance	1,250,000
Volume variance	6,250,000

Additional information:

1. Variable production overheads are absorbed based on actual hours worked.

2. There was no significant difference in opening and closing work-in-progress.

3. Actual production was 1,500 television set units for the year ended 30 November 2024.

Required:

Calculate the following:

(i) Standard material cost per unit.

(ii) Standard labour cost per unit.

(iii) Standard variable overhead absorption rate per unit.

(iv) Standard fixed overhead absorption rate per unit.

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Question 4a

Agrovet Group is a multidivisional agrochemical firm that deals in multiple products. Delta Division, one of its subsidiaries makes three products branded Betax, Zetay and Alphaz. The management is contemplating changing the sales mix in scenario I to a new sales mix in scenario II in order to maximise the net profit.

The two scenarios are envisaged as below:

Scenario I

The sales, cost and output data for original sales mix for the year 2024 for three products are as follows:

Product	Betax	Zetay	Alphaz	Total
Sales mix	40%	30%	30%
	Sh.“per unit”	Sh.“per unit”	Sh.“per unit”	Sh.
Selling price	2,000	3,000	2,500
Variable cost	1,000	1,800	1,500
Total fixed costs				15,664,000
Total sales revenue				45,000,000

Scenario II

Agrovet Group’s estimated sales, costs and new sales mix are as follows:

Product	Betax	Zetay	Alphaz	Total
Sales mix	50%	20%	30%
	Sh.“per unit”	Sh.“per unit”	Sh.“per unit”	Sh.
Selling price	2,000	2,800	2,500
Variable cost	1,000	1,680	1,500
Total fixed costs				15,664,000
Total sales revenue				45,000,000

Additional information:

1. Management performance measures are based on cost volume profit (CVP) analysis.

2. The weighted average contribution margin ratio of each scenario is determined based on its sales mix.

Required:

(i) Compute both the break-even point in sales value and the net profit for each scenario.

(ii) By comparing the break-even point and net profit, advise the management of Agrovet Group whether it is worthwhile to change the sales mix.

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Question 1b

The management of Mario Processing Company Ltd. wishes to obtain a better cost estimate to evaluate the company’s operations more effectively.

The following information is provided to you for analysis:

Year 2023	Equivalent production	Overheads
Month	Units “000”	Sh.“000”
January	1,425	12,185
February	950	9,875
March	1,130	10,450
April	1,690	15,280
May	1,006	9,915
June	834	9,150
July	982	10,133
August	1,259	11,981
September	1,385	12,045
October	1,420	13,180
November	1,125	11,910
December	980	10,431

Required:

(i) Using high-low method, formulate the overhead cost function in the form Y = a + bx.

(ii) Using the regression method, estimate the overhead cost function.

(iii) The coefficient of determination \((r^2)\) has been determined to be 0.913. Interpret this result.

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August 2024

1 Questions

Question 2b

Plasma Electronics Ltd. supplies digital decoders and Liquid Electronic Display (LED) television sets for high end users. Customers contract Plasma Electronics Ltd. with requests for maintenance of their terrestrial signal frequency. To estimate the service cost, Plasma Electronic Ltd. wish to predict their installation time in hours (the dependent variable) necessary for each maintenance request.

Installation time is believed to be related to two factors; the number of months since the last maintenance services and the type of maintenance problem, whether digital or analogue.

The following is a summary of data analysis for time versus months and type:

Regression Analysis: Time versus months, Type

Predictor	Coefficient	SE Coef	t
Constant	0.93050	0.3670	\(X_a\)
Months	0.38762	\(X_b\)	6.20
Type	\(X_c\)	0.3141	4.02

S = 0.459048

R – Sq = 85.94%

R Sq (adj) = 81.9%

Analysis of variance (ANOVA)

Source	DF	SS	MS	F
Regression	2	9.0009	\(X_d\)	21.36
Residual error	7	\(X_e\)	0.2107
Total	9	10.4760

Required:

(i) Write down the linear regression equation model.

(ii) Find the missing values for \(X_a, X_b, X_d\) and \(X_e.\)

(iii) Explain the statistical meaning of the standard error of estimate, R squared and F statistic ratio.

(iv) Using the economic plausibility tests, is the regression model significant as a predictor model?

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April 2024

1 Questions

Question 1b

With reference to linear regression analysis, explain the following cost estimation concepts:

(i) Analysis of variance (ANOVA).

(ii) Goodness of fit tests.

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December 2023

3 Questions

Question 2b

Scotts Ltd. has experienced stock outs occasioned by the company’s poor inventory estimation techniques. The company has therefore engaged you to estimate its demand for the year 2024.

The company’s accountant had started using regression analysis and availed the following information to you:

1.	The demand for the company’s’ product is dependent on disposable income and price of the products.

2.	The analysis of variances table:
	Source	Degrees of freedom	Sum of squares
	Model	3	187
	Error	9	4
	Total	12	191
3.	The parameter estimates and their errors:
	Variable	Estimate	Standard error
	Constant	1.5	2.000
	Price	-1.4	0.1934
	Income	5	0.2700

Required:

(i) Develop a regression equation that will be used for prediction.

(ii) Determine the coefficient of determination. Interpret your result.

(iii) Test the adequacy of the model for prediction (F tables value 11.56).

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Question 3b

Kaza Joy is a small manufacturing enterprise that makes only three products X, Y and Z. Data for the month ended 30 November 2023 is as follows:

	X	Y	Z
Units produced and sold	12,000	16,000	8,000
	Sh.	Sh.	Sh.
Sales price per unit	50	70	60
Direct material cost per unit	16	24	20
Direct labour cost per unit	8	12	8
Product overhead costs	Total Sh.	Cost drivers
Machining costs	102,000	Machine hours
Production scheduling	84,000	Number of production runs
Set up costs	54,000	Number of production runs
Quality control	49,200	Number of production runs
Receiving materials	64,800	Number of components receipts
Packaging materials	36,000	Number of customer orders
Information on the cost drivers is given as follows:
	X	Y	Z
Direct labour hours per unit	1	1.5	1
Machine hours per unit	0.5	1	1.5
Number of components per unit	3	5	8
Number of component receipts	18	80	64
Number of customers orders	6	20	10
Number of production runs	6	16	8

Required:

Using activity based budgeting (ABB), compute the cost and gross profit per unit for each products during the month.

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Question 4b

Discuss the meaning of the following concepts as used in cost estimation:

(i) Economic plausibility tests.

(ii) Learning curve phenomenon.

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August 2023

2 Questions

Question 1b

Motorcar Repairs Ltd is in the process of estimating the fixed cost and variable cost components associated with the company’s repair activity using the cost estimation equation in the form Y = a + bx, where Y is the total repair cost, a is the fixed component, b is the variable component and x is the level of repair activity in hours.

Additional information:

1	Regression analysis performed using MS Excel in a computer yielded the following results:

	Summary of output Regression statistics
	Parameter	Output
	Multiple R	0.984523
	R square	0.969285
	Adjusted R square	0.961607
	Standard Error	32.196570
	Observations	6
2.	The analysis of variance (ANOVA) output was as follows:

Predictor	df	SS	MS	F	Significance F
Regression	1	130853.5	130853.5	126.2311	0.000357
Residual	4	4146.476	X
Total	5	135000
Variable	Coefficients	Standard error	t-statistic	P-value	Lower 95%	Upper 95%
Intercept	509.9119	45.55789	Y	0.000363	383.4227	636.4011
Variable X	29.40529	2.617232	11.23526	0.000357	22.13867	36.6719

Required:

(i) The linear regression equation in the form Y = a + bx.

(ii) Predict the total cost of repair if 14 hours are used.

(iii) Compute the values of the missing letters X and Y.

(iv) Explain the explanatory power of the model using the coefficient of determination.

(v) Explain if the independent variable is economically plausible as a predictor variable.

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Question 2b

Identify FOUR applications of learning curve model.

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April 2023

1 Questions

Question 5b

Sofaset Ltd. makes and sells executive leather chairs. The production manager is considering a new design of sofa set chair to launch into the competitive market in which they operate:

Additional information:

1. The production manager has carried out investigation in the market and using target costing system, he has targeted a competitive selling price of Sh.120,000 for the chair.

2. Sofaset Ltd. targets a profit margin on selling price of 20%.

3. The design frame will be bought for Sh.51,000 per chair and Sofaset Ltd. will beautify it in leather and assemble it ready for dispatch.

4. Leather costs Sh.10,000 per meter and two metres are needed for a complete chair although 20% of all leather is wasted in the beautification process.

5. The beautification and assembly process will be subjected to a learning effect as the workers get used to the new design. Sofaset Ltd. estimates that the first chair will take two hours to prepare but this will be subject to learning curve rate of 95%.

6. The learning improvement will stop once 128 chairs have been made and the time for the 128th chair will be the time for all subsequent chairs. The production manager believes that the target cost will be achieved from 128 chairs.

7. The cost of labour is Sh.15,000 per direct labour hour.

8. The learning curve index for 95% is -0.074.

Required:

(i) The average cost for the first 128 chairs made and identify any cost gap that may be present at that stage.

(ii) The cost of the 128th chair made and state whether the target cost is being achieved on the 128th chair.

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December 2022

1 Questions

Question 3b

Maono Ltd. is investigating the financial viability of a new product branded “Zem”. Product Zem is a short life product of six months. The following estimated information is available in respect of product Zem:

1. Sales should be 10,000 units per month in batches of 100 units on a just-in-time production basis.

2. An average selling price of Sh.120,000 per batch of 100 units is expected for a six-month life cycle.

3. An 80% learning curve will apply for the six months’ life-cycle period.

4. The labour requirement for the first batch in month 1 will be 500 hours at Sh.500 per hour.

5. Variable overhead will be absorbed at a rate of Sh.200 per labour hour.

6. Direct material input will be Sh.50,000 per batch of product Zem for the first 200 batches. The next 200 batches are expected to cost 90% of the initial batch cost. All batches thereafter will cost 90% of the batch cost for each of the second 200 batches.

7. Product Zem will incur directly attributable fixed costs of Sh.1,500,000 per month.

8. The initial investment for the new product will be Sh.7,500,000 with no residual value irrespective of the life of the product.

9. A target cash flow required over the life of the product must be sufficient to provide for a 331/3% target return for a six-month life cycle.

10. The learning curve formula is Y = ax^b

Where:

Y = Cumulative average time per batch
a = time taken to produce initial batch
x = cumulative units of batches
b = learning curve index

Required:

(i) The learning curve index and model.

(ii) Compute the cost gap or cost savings in the target cash flow of product Zem over its six-month life cycle.

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April 2022

1 Questions

Question 2b

Describe three assumptions of the learning curve theory.

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Pilot December 2021

2 Questions

Question 2b

Kenpoly Plastic Recyclers Ltd. has won a 3-year contract to supply a new model of chairs to Minimart Supermarket for sale.

The following data relate to the cost estimates for the new model of chairs.

Details	Sh.
Material cast per chair	250
Labour cost per hour	80
Fixed overheads per annum	300,000
Capital investment	830,000

Additional information:

1. The contract requires skilled labour that cannot be increased above the currently available hours. It is estimated that the available labour time will allow 5,000 chairs to be produced in the first year.

2. The estimated time to produce the first chair is 10 hours.

3. It is estimated that a learning curve effect for labour to produce the chairs will be 85%.

4. The selling price per chair is fixed at Sh.430.

5. Assume that an equilibrium of labour hours in year one will be available in each of the years two and three.

6. All cash flows occur at the end of the year apart from capital investment which occurs at the beginning of year one.

7. The capital investment has a nil salvage value at the end of the period and the cost of capital is 12%.

Required:

(i) The net present value of the contract. Advise the management of Minimart Supermarket on whether to accept or reject the contract.

(ii) State other factors that the management of Minimart Supermarket should consider before making the decision in (i) above

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Question 1a

The following regression equation depicting the cost behavior of factory overheads and machine hours was developed from 15 pairs of observations using the least – squares method of regression.

F = 12,000 + 40M

Where:	F = Total monthly factory costs, and
	M = Machine hour per month.
	Regression sum of squares = 41,437,500
	Residual sum of squares = 7,312,500

Required:

(i) List the assumptions made in regression analysis to validate inference made on the population.

(ii) Calculate both the coefficients of determination and correlation and interpret your results.

(iii) Determine the 95% confidence interval for the true factory overheads given that 900 machine hours are to be used during the month. (t value = 2.1604).

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December 2021

2 Questions

Question 3a

Summarise the components of time series.

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Question 3b

BZK Ltd. is a manufacturing company based in Africa.

The company has presented the following data relating to its production in the last two years for each quarter:

Year	Quarter	Quarter number	Units produced
2019	1	1	2,000
	2	2	2,500
	3	3	3,000
	4	4	6,000
2020	1	5	5,000
	2	6	4,000
	3	7	6,000
	4	8	10,000

The trend equation for the number of units produced has been estimated as follows:

X = 3,800 + 1,000Q

Where;	X represents units produced per quarter.
	Q represents the quarter number

The company's Management Accountant has established the following relationships between the quarterly costs and output based on the data collected in the last two years.

Cost item	Relationship
Office rent	TC = 500,000
Office salaries	TC = 200,000 + 2x
Fuel cost	TC = 45,000+ 6x
Transport wages	TC = 62,000 + 8x
Sundry costs	TC = 29,965 + x

Where;	TC represents the total cost per quarter
	x represents the number of units produced per quarter

Required:

(i) Using multiplicative time series model and least squares method for the trend, forecast the number of units to be produced in each of the quarters of the year 2021.

(ii) Using your answer in (b) (i) above and the cost relationship equations, determine the expected cost for each item of cost and the total cost to be incurred in the fourth quarter of the year 2021.

(iii) Establish the 95% confidence interval for the total cost obtained in (b) (ii) above given that the standard error of estimate is Sh.122,599 and t - value is 2.447.

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September 2021

2 Questions

Question 4c

The following details show the direct labour requirements for the first six batches of a new product that were manufactured in the month of August 2021:

	Budget	Actual
Output (batches)	6	6
Labour hours	2,400	1,950
Total labour cost (Sh.)	1,680,000	1,365,000

The management accountant reported the folłowing variances.

Total labour cost variance	Sh.315,000
Labour rate variance	Nil
Labour efficiency variance	Sh.315.000

The production manager has now said that he forgot to inform the management accountant that he expected a 90% learning curve to apply for at least the first 10 batches.

Required:

The planning and operational variances that analyse the actual performance taking into account the anticipated learning effect. (Learning index for 90% learning curve is - 0.1520).

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Question 2a

Highlight four limitations of the learning curve theory as a tool for cost estimation and forecasting.

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May 2021

2 Questions

Question 3b

The Digital Electronics Company manufactures cameras and video equipment. It is in the process of introducing the world's smallest and lightest camcorder with 3D, HD and SD recording modes.

The company has undertaken market research to ascertain the customers' perceived value of the product. The product's special features and a comparison with competitors' products and market prices have been used to establish a target selling price and projected life time volume.

In addition, cost estimates have been prepared based on proposed product specification. The company has set a target profit margin of 30% on the proposed selling price and this has been deducted from the target selling price to get the target cost.

The following is a summary of the information that has been presented to the management:

Project lifetime sales volume (units)	300,000
	Sh.
Target selling price	8,000
Target profit margin (30%)	(2,400)
Target cost	5,600
Projected cost	7,000

Before target costing exercise, the projected cost was estimated as follows:

Manufacturing costs:	Sh.	Sh.
Direct materials (bought in parts)	3,900
Direct labour	1,000
Direct machining costs	200
Ordering and receiving	80
Quality assurance	600
Rework	150
Engineering and design	100	6,030
Non-manufacturing costs:
Marketing	400
Distribution	300
After sales service and warranty costs	270	970
Total cost		7,000

The company then engaged a team to carry out a functional analysis on the product manufacture. After a careful analysis of the different elements, functions and attributes of the camcorder and potential customers interviewed to ascertain the values that may place on each of the functions, the following report was given to management.

1. Direct material cost (bought in parts to be reduced by 1/6).

2. Direct labour should be reduced to 80%.

3. Machining costs would remain the same as the projection.

4. Ordering and receiving costs to reduce by 75%.

5. Quality assurance to reduce to 5/6 of the orginal estimate.

6. Rework and engineering costs to reduce by Sh.90 and Sh.20 respectively.

7. Marketing, distribution and after sales service and warranty costs to reduce by 37.5%, 33 \frac{1}{3}\% and by Sh.80 respectively.

Required:

(i) Revised target cost.

(ii) The cost gap.

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Question 2a

Actross Ltd., a packaging company is preparing its budget for the year to 30 June 2021. In respect of fuel oil consumption, it is desired to estimate an equation in the form Y = a + bx, where Y is the total expense at an activity level x, a is the fixed expense and b is the variable cost per unit.

The following data relates to the year ending 30 June 2021:

Month	Machine hours "000"	Fuel oil expense Sh."000"	Month	Machine hours "000"	Fuel oil expense Sh."000"
July 2020	34	640	January 2021	26	500
August 2020	30	620	February 2021	26	500
September 2020	34	620	March 2021	31	530
October 2020	39	590	April 2021	35	550
November 2020	42	500	May 2021	43	580
December 2020	32	530	June 2021	48	680

The annual total and monthly average figures for the year ending 30 June 2021 were as follows:

	Machine hours "000"	Fuel oil expense "000"
Annual total	420	6,840
Monthly average	35	570

Required:

Estimate the cost equation for the company for budgeting purposes using the following methods:

(i) High low method.

(ii) Least squares regression analysis.

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November 2019

1 Questions

Question 3a

The assembly department of Lenku Race Course Club has designed a new concept in racing bicycles with the intention of selling them to professional racing teams.

The estimated cost and selling price of the first racing bicycle to be manufactured and assembled is as follows:

	Sh.
Materials	6,000
Assembly labour (12 hours at Sh.300 per hour)	3,600
Manufacturing overheads (150% of labour cost)	5,400
Profit mark-up	6,000
Selling price	21,000

Additional information:

1	It is expected that material cost per bicycle is to remain constant irrespective of the number of bicycles manufactured.
2	The management expects the assembly time to gradually improve with experience and has therefore estimated an 80% learning curve.
3	A racing team has approached the club's assembly department and made enquiries on the following quotations: The price of the second bicycle if the team purchases the first bicycle assembled and immediately places an order for the second bicycle. The average price of the third and fourth bicycles if the team waits until the first two bicycles are sold to another team. The price per bicycle if the team places an order for the first eight bicycles to be assembled.

Required:

Evaluate the price quotations for each of the three enquiries outlined above.

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May 2019

1 Questions

Question 2b

Faidika Ltd. buys and sells a single product branded “NN". The demand and lead time of product NN is not constant.

The following probability distribution has been provided:

Demand (units)	Probability
2 3 4 5 6 7 8	0.02 0.08 0.22 0.34 0.18 0.09 0.07

Lead time (weeks)	Probability
1 2 3 4 5	0.23 0.45 0.17 0.09 0.06

Additional information:

1. The re-order point and the re-order quantity has been set at 40 units and 30 units respectively.

2. The holding cost per unit per week is Sh.35.

3. The cost of placing an order is Sh.350.

4. If the company runs out of stock, a contribution of Sh.120 per unit is lost.

5. The opening inventory at the beginning of the first week was 60 units.

Required:

Using simulation of the above problem for 10 weeks, determine the average weekly cost using the following random numbers:

50 68 52 08 59 90 81 85 95 15 89 28 60 03

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November 2018

1 Questions

Question 5c

Zed Ltd. has received an order to supply 30 units of Product Aye. So far, 14 units have been completed. The first unit required 40 direct labour hours and a total of 240 direct labour hours have been recorded for the 14 units.

Additional information:

1	The production manager expects an 80% learning effect for this type of work.
2	The company uses standard absorption costing.
3	The costs attributable to the centre in which Product Aye is manufactured are as follows:

	Direct materials	Sh.30 per unit
	Direct labour	Sh.6 per hour
	Variable overheads	Sh.0.50 per direct labour hour
	Fixed overheads	Sh.6,000 per four-week operating period

Required:

(i) The learning curve index.

(ii) The unit cost.

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May 2018

1 Questions

Question 2b

The following data relates to the weekly amount spent on entertainment by households, the annual income of the head of the household and the household size in terms of number of persons:

Amount spent per week Sh.	Annual income of head of household per year Sh.	Household size No.
2,000 1,700 500 0 300 800 1,400 1,900 3,200 1,700 900 800 400 2,000 1,000 900 700 1,400 5,900 700	600,000 500,000 1,000,000 1,400,000 2,500,000 1,000,000 2,100,000 1,700,000 2,900,000 1,400,000 700,000 900,000 1,400,000 1,900,000 1,300,000 1,000,000 900,000 1,100,000 3,400,000 1,000,000	1 2 1 4 2 5 1 1 2 3 1 3 2 1 1 2 3 3 6 2

A computer output of the above data using a spreadsheet package was provided as follows:

Regression statistics
Multiple R	0.6691961
R square	0.447817
Adjusted R square	0.382855
Standard error	10.196161
Observations	20

Anova	df	ss	ms	F	significance F
Regression Residual Total	2 17 19	1432.03 1765.77 3197.80	716.0149 103.8688	6.893453	0.006423

	Coefficients	Standard error	t stat	P-value	Lower 95%	Upper 95%
Intercept Income Size	-4.099268 0.985764 1.762415	5.583689 0.313508 1.716065	-0.734151 3.144306 1.027009	0.472862 0.005915 0.318808	-15.87984 0.32432 -1.858171	7.681302 1.647208 5.383002

Required:

(i) The equation of regression line of the data.

(ii) A statistical anałysis of the computer results.

(iii) Outline three factors that might hinder the interpretation of your results above.

Note: Round off your figures to two decimal places.

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November 2017

2 Questions

Question 2b

Actross Ltd., a subsidiary of Master Pack Ltd., a packaging company is preparing a budget for the year ending 30 June 2018. In respect of fuel consumption, the company desires to estimate an equation in the form of y = a + bx, where "y" is the total expense at an activity level "x", "a" is the fixed cost and "b" is the variable cost.

The following information relates to the year ended 30 June 2017:

Year and Month 2016	Machine hours Sh."000"	Fuel expenses Sh."000"
July August September October November December 2017 January February March April May June	34 30 34 39 42 32 26 26 31 35 43 48	640 620 620 590 500 530 500 500 530 550 580 680

The annual total and monthly average figures for the year ended 30 June 2017 were as follows:

	Machine hours Sh."000"	Fuel expenses Sh."000"
Annual total	420	6,840
Monthly average	35	570

Required:

Estimate the fixed and variable elements of fuel expense from the above data using the following methods:

(i) High-low.

(ii) Least squares regression.

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Question 2c

From the information in (b) above, the coefficient of determination arising is approximately 0.25. Interpret the significance of this information.

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May 2017

1 Questions

Question 2b

Jambo Ltd. is a multiproduct firm. The company intends to launch a new product branded "ZP" in the coming months.

Production will be in batches of 1,000 units throughout the life of the product. It is expected to achieve a 90% learning curve but the learning would cease after the 64th batch.

Other relevant data of product "ZP" is as follows:

Expected life (production)	256,000 units
	Sh.
Selling price per unit	123
Direct material cost per unit	36
Total direct labour cost (first batch)	52,500
Variable overhead costs per unit	24
Total specific fixed costs	3,875,000

The learning index for a 90% learning curve is -0.152.

Required:

(i)	The expected profit to be earned from the product over its lifetime.
(ii)	It has now been established that the learning effect will continue for all ofthe 256 batches that will be produced. Required: The "learning curve" required to achieve a lifetime product profit of Sh.10 million, assuming that a constant learning rate applies throughout the product's life.

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November 2016

1 Questions

Question 2b

Innovators Ltd. has designed a new model of a manufacturing machine. The cost and sales price of the first machine to be produced has been estimated as follows:

	"Sh.000"
Materials	25,000
Labour (2,000 hours x Sh.15,000 per hour)	30,000
Overhead (50% of labour cost)	15,000
	70,000
Profit mark-up (25%)	17,500
Selling price	87,500

The company plans to sell all the machines at full cost plus 25%. A 90% learning curve is expected to apply to the production work. Only one customer has expressed interest in buying the machine so far, but he views Sh.87,500,000 as too high a price to pay. He could buy more of the machines in the coming periods.

Required:

(i)	If the customer above paid Sh.87,500,000 for the first machine, determine the price he would have to pay later for a second machine.
(ii)	Advise the management of Innovators Ltd. on the price quotation per machine if the customer above places an order for the third and the fourth machines as a single order.

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May 2016

1 Questions

Question 1b

(i) The learning phenomenon applies to time and will affect any cost which is a function of time. Whenever costs are estimated, the potential impact of learning should be considered.

Required:

Highlight four areas where the learning curve is applied in business.

(ii) Describe four limitations of using the learning curve in business.

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Cost estimation and interpretation

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