Code of
the
Module
BBA221
Name of the Module
Date of Exam
Time of
Exam
Set
14:00
1
Managerial Accounting
You are advised to read the following before answering the examination question.
1. Read each of the questions carefully before you answer.
2. Number the answers to the questions clearly before answering.
3. Answer all parts of a question at one place in continuous manner.
4. Please write as clearly as possible as illegible handwriting cannot be marked
This paper contains two parts; Section A and Section B. Section A is compulsory and
comprises two questions; Q.1 having four sub questions of five marks each is based on a
case study and Section B contains five questions having two sub questions of ten marks
each. Answer any three questions from section B.
Section A
Answer both questions
Q.1
Thorne Co values, advertises and sells residential property on behalf of its customers.
The company has been in business for only a short time and is preparing a cash budget
for the first four months of 2006. Expected sales of residential properties are as follows.
2005
2006
2006
2006
2006
Month
December
January
February
March
April
Units sold
10
10
15
25
30
The average price of each property is K 180,000 and Thorne Co charges a fee of 3% of
the value of each property sold. Thorne Co receives 1% in the month of sale and the
remaining 2% in the month after sale. The company has nine employees who are paid
on a monthly basis. The average salary per employee is K 35,000 per year. If more than
20 properties are sold in a given month, each employee is paid in that month a bonus of
K 140 for each additional property sold.
Variable expenses are incurred at the rate of 0·5% of the value of each property sold
and these expenses are paid in the month of sale. Fixed overheads of K4,300 per month
are paid in the month in which they arise. Thorne Co pays interest every three months
on a loan of K200,000 at a rate of 6% per year. The last interest payment in each year is
paid in December.
An outstanding tax liability of K95,800 is due to be paid in April. In the same month
Thorne Co intends to dispose of surplus vehicles, with a net book value of K15,000, for
K20,000. The cash balance at the start of January 2006 is expected to be a deficit of
K40,000.
Required:
a. Prepare a monthly cash budget for the period from January to April 2006. Your
budget must clearly indicate each item of income and expenditure, and the opening
and closing monthly cash balances. (10 marks)
b. Discuss the factors to be considered by Thorne Co when planning ways to invest any
cash surplus forecast by its cash budgets. (5 marks)
c. Discuss the advantages and disadvantages to Thorne Co of using overdraft finance to
fund any cash shortages forecast by its cash budgets. (5 marks)
Q.2
a. Explain the difference between the following terms
i. Product cost and period cost
ii. Sunk cost and relevant cost
iii. Controllable and uncontrollable costs
iv.
Prime cost and Conversion cost
v. Avoidable and unavoidable costs
(10 marks)
b. Discuss in detail the decision-making process, and the part management accounting
plays in that process.
(10 marks)
Section B
Answer any three questions
Q.3
Edge Company’s production vice president believes keeping up-to-date with
technological changes is what makes the company successful and feels that a
machine introduced recently would fill an important need. The machine has an
estimated useful life of four years, a purchase price of $500,000, and a residual
value of $50,000. The company controller has estimated average annual net
income of $22,500 and the following cash flows for the new machine:
Cash Flow Estimates
Year
Cash Inflows
1
$650,000
2
640,000
3
630,000
4
620,000
Cash Outflows
$500,000
500,000
500,000
500,000
Net Cash Inflows
$150,000
140,000
130,000
120,000
The company uses a 12 percent minimum rate of return and a three-year
payback period for capital investment evaluation purposes.
Required
Analyze the data about the machine. Use the following evaluation approaches in
your analysis:
a.
i.
Benefit Cost Ratio/Profitability Index (4 marks)
ii.
The Internal rate of return (6 marks)
iii.
The accounting rate-of-return method. (4 marks)
iv.
The payback period method (3 marks)
b.
Summarize the information generated in requirement a and make a
recommendation (3 marks)
Q.4
Beachy DAC has developed a new range of high-quality affordable sandals for
beachwear. The sandals are based on an innovative design that protects feet from the
effects of sun, salt and sand. The company has already received some sales orders for
the sandals and production is due to commence next month. The management
accountant has prepared the following projections for the trading year ahead:
(Production and sales of 100,000 pairs of sandals)
K
K
Sales
2,750,000
Cost of sales
Direct materials
619,000
Direct labour (Note 1)
411,000
Production overhead (Note 2)
236,000
1,266,000
Gross profit
1,484,000
Administration expenses (Note 2)
336,500
Selling and distribution expenses (Note 2)
145,000
481,500
Profit
1,002,500
Notes:
1. It is assumed that the company will pay workers based on a fixed time basis i.e. hours
worked regardless of output achieved.
2. The production, administration, and selling and distribution costs have been analysed
and the cost behaviour is shown below:
Fixed element
Variable element
Production overhead
25%
75%
Administration expenses
100%
n/a
Selling and distribution expenses
80%
20%
REQUIREMENT:
a. Calculate the break-even point in units (pairs of sandals) and revenue. (5 marks)
b. Calculate the margin of safety in units (pairs of sandals) and revenue. (5 marks)
c. How many pairs of sandals must Beachy DAC sell to make a profit of K1,500,000? (5
marks)
d. Briefly outline and comment on 5 Cost Volume and Profit analysis assumptions (5
marks)
Q.5
Book-it buys parts from outside vendors and assembles them into very basic e-book
readers. In the previous accounting period, the company produced 14,750 readers. The
total costs and unit costs incurred follow.
Total Cost
Unit Costs
Direct materials and parts
$ 88,500
$ 6.00
Direct labor
66,375
4.50
Variable overhead
44,250
3.00
Total variable production costs
$199,125
$13.50
Fixed overhead
154,875
10.50
Total production costs
$354,000
$24.00
Selling expenses
$ 73,750
$ 5.00
General expenses
36,875
2.50
Administrative expenses
22,125
1.50
Total selling, general, and administrative expenses
$132,750
$ 9.00
Total costs and expenses
$486,750
$33.00
Variable production costs
Selling, general, and administrative expenses
No changes in unit costs are expected this period. The desired profit for the period is
$110,625. The company uses assets totalling $921,875 in producing the e-book readers
and expects a 14 percent return on those assets.
Required:
a. Calculate the Gross Margin Price and Return on Asset Price for Book-It. (12
Marks)
b. Discuss factors that can affect the pricing decisions of an organization (8 marks)
Q.6
a. Discuss the concept of JIT, its essential elements and problems associate with It (10
marks)
b. How are the concepts of Throughput Accounting a direct contrast to the
fundamental principles of conventional cost accounting (5 marks)
c. What is Kaizen costing and how are its goals meet? (5 marks)
Q.7
An organisation in the civil engineering industry with headquarters located just outside
Lusaka undertakes contracts anywhere in Zambia. The organisation has had its tender for a
job in the north of Zambia accepted at K288, 000,000 and work is due to begin in March
20X3. However, the organisation has also been asked to undertake a contract in the south of
Zambia. The price offered for this contract is K352, 000,000. Both of the contracts cannot be
taken simultaneously because of constraints on staff site management personnel and on
plant available. An escape clause enables the organisation to withdraw from the contract in
the north, provided notice is given before the end of November and an agreed penalty of K28,
000,000 is paid.
The following estimates have been submitted by the organisation's quantity surveyor
COST ESTIMATES
North
South
K’000
K’000
Materials:
Held at original cost, Material X
21,600
Held at original cost, Material Y
24,800
Firm orders placed at original cost, Material X
30,400
Not yet ordered – current cost, Material X
60,000
Not yet ordered – current cost, Material Z
71,200
Labour – hired locally
86,000
110,000
Site management
34,000
34,000
Staff accommodation and travel for site management
6,800
5,600
Plant on site – depreciation
9,600
12,800
Interest on capital, 8%
5,120
6,400
Total local contract costs
253,520
264,800
Headquarter costs allocated at rate of 5% on total contract costs 12,676
13,240
266,196
278,040
Contract price
288,000
352,000
Estimated profit
21,804
73,960
Notes
(a) X, Y and Z are three building materials. Material X is not in common use and would
not realise much money if re-sold; however, it could be used on other contracts but only
as a substitute for another material currently quoted at 10% less than the original cost
of X. The price of Y, a material in common use, has doubled since it was purchased; its
net realisable value if re-sold would be its new price less 15% to cover disposal costs.
Alternatively, it could be kept for use on other contracts in the following financial year.
(b) With the construction industry not yet recovered from a recent recession, the
organisation is confident that manual labour, both skilled and unskilled, could be hired
locally on a subcontracting basis to meet the needs of each of the contracts.
(c) The plant which would be needed for the south contract has been owned for some
years and K12,800,000 is the year's depreciation on a straight-line basis. If the north
contract is undertaken, less plant will be required but the surplus plant will be hired out
for the period of the contract at a rental of K6,000,000.
(d) It is the organisation's policy to charge all contracts with notional interest at 8% on
the estimated working capital involved in contracts. Progress payments would be
receivable from the contractee.
(e) Salaries and general costs of operating the small headquarters amount to about
K108 million each year. There are usually ten contracts being supervised at the same
time.
(f) Each of the two contracts is expected to last from March 20X3 to February 20X4
which, coincidentally, is the company's financial year.
(g) Site management is treated as a fixed cost.
Required
As the management accountant to the organisation, do the following.
(a) Present comparative statements to show the net benefit to the organisation of
undertaking the more advantageous of the two contracts. (10 Marks)
(b) Explain the reasoning behind the inclusion in (or omission from) your comparative
financial statements of each item given in the cost estimates and the notes relating
thereto. (10 Marks)