Questions on Wages Incentive Scheme


Nyali Mbali Ltd. are retailers who sell ceramic tiles. During the months of July to September 2000, there were price fluctuations. Due to the above problem the company had to adjust its selling prices.

The following transactions took place during the period.

3 July Opening stock was 5,000 tiles valued at Sh 825,000.

10 July Orders placed with the company increased, so extra tiles had to beobtained from Mombasa. Therefore 22,000 tiles were purchased at a cost Sh 140 each but in addition, there was a freight and insurance charge of Sh 5 per tile.

31 July During the month 20,0000 tiles were sold at a price of Sh 220 each.

4 August A new batch of 14,000 tiles was purchased at a cost of Sh 175 per tile.

30 August The sales for the month of August were 14,000 tiles at a selling price of Sh 230 each.

1 September A further 24,000 tiles were purchased at a cost of Sh 195 each.

30 September 270,000 tiles were sold during September at price of Sh 240 each.

The cost accountant of Nyali Mbali Ltd decided he would apply first-in-first-out basis and weighted average methods of material pricing for purposes of comparison.


  1. A stores ledger account using the two methods and showing stock values at 30 September 2000. (14 marks)
  2. The trading accounts using each of the above methods. (6 marks)

(Total: 20 marks)


Lotus Ltd manufactures mobile telephones. The current operating level is 400,000 phones but full capacity is 550,000. The phones normally sell for Sh 1,500 per phone. Manufacturing cost data of 400,000 phones is as shown below:

Manufacturing costs Sh‘000’ Sh‘000’
Variable costs 300,000  
Fixed costs 187,500 487,500
Selling and administration costs    
Variable (freight and commissions) costs 30,000  
Fixed costs 60,000 90,000

A vendor offers to buy 100,000 phones for export at Sh 1,125 per phone. The buyer will pay for freight and no commissions will be paid. The acceptance of this offer will not affect the present sales. The managing director is reluctant to accept that offer because he believes that the offer price of Sh 1,125 is well below the manufacturing cost per unit.


  1. Should the offer be accepted? (7 marks)
  2. What factors should be considered before accepting the order? (3 marks)

Wassant Ltd manufactures a product that uses components made by the company. Due to market liberalization, the same component can be bought from an importer of the component. The management accountant of Wassant Ltd. has provided the following manufacturing data for the component:

Direct material  
10 kg of zero 1 @ Sh 25 per kg 250
Direct labour  
Department 1 0.75 hours x Sh 120  
2 0.6 hours x Sh 125 165
Variable overheads 80

Production overheads are recovered on basis of 20% of labour cost in both departments. The cost accountant anticipates that three-quarters of fixed overhead will be incurred irrespective of the decision made. The importer is willing to sell the component at Sh 510 per unit.


  1. Advise the management of Wassant Ltd whether to make or buy the component. (7 marks)
  1. What other factors would Wassant Ltd consider before making the decision? (3 marks)  (Total: 20 marks)


Tinn Ltd produces a detergent which passes through two processes namely mixing and refining t completion. The following data relate to the refining process for the month of October 2000:

Opening stock 5,000 units
Cost of opening stock:  
Materials 100,000
Labour 25,000
Overheads 60,000
Total cost 185,000

During the month, 20,000 units were passed from the mixing to the refining process. Costs incurred during the month were:

Labour 125,000
Overheads 108,100
Other materials 45,300
Total cost 278,400

At the end of the month, 21,000 units had been completed and passed to finished goods while 4,000 units were still in the process having reached the following stages:

Materials 100%

Labour 80%

Overheads 60%


Refining process account. (20 marks)


  1. Kanga Ltd has three production departments and two service departments. The following is their budgeted factory overheads for the year ended 30 September 2000:
  Shs. Shs.
Production departments    
A 240,000  
B 180,000  
C 220,000 640,000
Service departments X 86,000  
Y 44,000 130,000

The service department costs are to be re-apportioned as per the following percentages:


X 20 30 35 - 15

Y 30 30 30 10 -


  • Re-apportion the service department costs to the production departments using the simultaneous equation method. (10 marks)
  • You are informed that the overheads are absorbed on the basis of the direct labour hours and the budgeted direct labour hours for the departments as given below:

Department A 1000 hours

B 2500 hours

C 4000 hours


Determine the overhead absorption rates per hour for the three production departments. (10 marks) (Total: 20 marks)


Tonga Ltd manufactures a single product whose cost structure is given below:

  Sh Sh
Direct materials:    
Material A (2 kg @ Sh 25 per kg) 50  
Material B (3 litres @ Sh 75 per litre) 225 275
Direct labour (4 hours @ Sh 30 per hour)   120
Variable overheads   80
Fixed overheads   25

The variable and fixed overheads are absorbed on the basis of the direct labour hours.

During the year ended 31 October 2000, the company produced and sold 40,000 units and incurred the following costs:

  Sh Sh
Direct materials:    
Material A (78,000 Kg) 205,000  
Material B (121,000 Kg) 6,800,000 7,005,000
Direct labour (156,000 hours)   4,900,000
Variable overheads   3,000,000
Fixed overheads   900,000
Total cost   15,805,000


  1. Material mix and yield variances. (8 marks)
  2. Variable overhead expenditure and efficiency variances. (8 marks)
  3. Standard cost card for 40,000 units. (4 marks)   (Total: 20 marks)


What factors should be considered when designing a wages incentive scheme? (20 marks)


  1. Explain the term budgetary control and state its importance to a business firm. (10 marks)
  2. State and briefly explain the limitations of budgets in the management of business firms. (10 marks)   
    (Total: 20 marks)