PRACTICAL QUESTIONS
CHAPTER ONE
OVERVIEW OF COST PLANING AND CONTROL
Q1) Contrast the accounting requirement for external and internal reporting and outline the role of management accountant
in meeting these requirements
Q2) List and explain the level of management and highlight contents of information that are used in each level
Q3) Think of at least one piece of non-monetary information that a management accountant might obtain from the
following sources in order to make a decision about a new product:
 Marketing manager
 Vehicle fleet supervisor
 Premises manager
 Public relations officer
 Head of research
Q4) Maintainace cost of Lever brothers plc production department for the five years have been as follows
Year
Cost
Production Volume
N
(Standard Hour)
1
100,000
7,000
2
115,000
8,000
3
97,000
6,000
4
111,000
7,700
5
114,500
8,200
What cost should be expected in year 6 when output is expected to be 7,500 standard hour? Ignore taxation
Q5) Pack street hotel owns five hotels in the same country, providing accommodation mainly to business people and
tourists. Each hotel has a bar and restaurant open to resident and non-residents.
The directors of the company work in two offices in the oldest hotel in the southern region of the country, where the small
finance office is located. Until now the company has only produced statutory financial accounts. And has not produced
management accounts
The director disagree with each other about the profitability of each of the individual hotels owned and operated by the
company, The head of the finance office has proposed that performance reports should be produced, based on a system of
responsibility accounting for each of the hotels. The performance of all five hotels should be amalgamated to prepare
performance reports at company level.
Required
Suggest
a) What report this management information should produce
b) What report the information should contain
Q6) The following data are the actual cost of Danjuma Manufacturing Limited for the month of September 2018
Data
Direct Material
Direct Labour
Supervising Labour
Factory Rents and rate
Fuel and power
Costing Office
Maintainace
Depreciation
Miscellaneous
N
26,800
39,900
3,000
7,000
11,400
6,700
3,300
12,000
15,600
The production for the month of August was 2200 units. You are required to:
a) Determine the variable cost per unit
b) Determine the total fixed cost using Account Analysis method
c) Determine what the costs would be in September, if the production is 1500 units.
Q7) You have been asked to prepare an analysis between fixed and variable costs in your department. The power costs do
not seem to fit into with category easily. The details are as follows:
Week
Power cost N
Machine Hour
1
36,000
80,000
2
39,500
90,000
3
30,500
65,000
4
33,800
74,000
5
38,700
86,000
6
40,200
92,000
7
20,950
37,000
You are required to:
a) Separate the cost, finding the closest estimate of the element and the variable cost per machine hours, using High
and low method
b) Estimate the total cost likely in week 8 if the expected level of machine hours is 8,000.
Q8) Abia Youth chairman limited has the following total cost at two activity level:
Activity Levels (units)
Total cost (N)
170,000
1,400,000
220,000
1,700,000
Variable cost per unit is constant in this range of activity and there is a step up of N 50,000 in the total fixed cost when
activity exceeds 180,000 units
Required:
What is the total cost at an activity level of 200,000 units?
Q9) Production and cost data of Aliyu jari Limited have been recorded over two years thus:
Last year
Production (units)
60,000
Total Costs (N)
1,820,000
Between last year and current year, there has been 5% cost inflation
Current year
64,000
1,961,400
Required:
a) Calculate the real fixed and variable costs.
b) Estimate what the total cost will be next year when it is expected that there will be a 4% cost push inflation and output
will be 70,000 units
Q10) During the month of October 2018 management’s meeting of Ngozika productions Limited, the Production Manager
criticized the inaccuracies in the accountant cost statements which have repeatedly shown wide variance between actual and
forecast.
The table below shows actual cost and output for the first half of 2018. Output for November 2018 is expected to be 130,000
units while the factory will close down for the December elections.
Outputs (‘000 units)
Cost
Material
Direct Labour
Supervising Labour
Factory rent
Fuel and Power
Office expenses
Maintainace
Depreciation
Miscellaneous
May
80
N ‘000
1,950
2,950
280
700
920
610
220
1,100
1,510
June
90
N ‘000
2,350
3,010
290
700
1010
620
230
1,100
1,590
July
August September October
100
80
120
110
N ‘000 N ‘000
N ‘000
N ‘000
2,670
2,030
3,080
2,680
3,540
3,320
4,500
3,990
280
290
310
300
700
700
700
700
1180
910
1230
1140
690
630
690
670
220
240
280
260
1,100
1,100
1,200
1,200
1,720
1,580
1,710
1,560
Required: Using the engineering method or simple regression analysis, separate the above costs into their fixed and variable
portions and estimate the November production cost.
Q11) Cost in the repairs and maintainace department of Hamates mambo Ltd in previous periods have been records as
follows:
Period
Output (Standard hour
Repair & Maintainace
of production
costs N)
1
2,400
6,400
2
2,300
6,400
3
2,500
6,460
4
2,700
6,600
5
2,000
5,900
7
2,860
7,000
a) Using the least squares technique to estimate the fixed and variable costs
b) What should be the budget estimate for repairs and maintainace if output of 3,000 standard hours is predicated?
Q12) EZIMA Company’s total factory overhead cost fluctuates considerably from year to year according to the number of
direct labour – hours worked in the factory. These costs at high and low level of activity for recent years are given below :
Direct Labour hours
Total Factory overhead cost N
Level of Activity
Low
High
64,000
80,000
244,000
282,000
The factory overhead cost above consists of indirect materials, rent and maintenance. The company has analysed the
cost of 60,000 direct labour hour’s level of activity and has determined that at this activity level the cost exists in the
following proportions:
Indirect materials (variable)
Rent (Fixed)
Maintainace (Mixed cost)
Total factory overhead cost
N 90,000
N 100,000
N 54,000
N 244,000
For planning purpose, the company wants to break down the maintainace cost into variable and fixed cost.
Required:
(a) Determine how much of the N 282,000 factory overhead cost at the high level of activity consists of maintainace cost
(b) By means of the high-low method of cost analysis determine the fixed cost element for maintainace
(c) Express the company’s maintainace costs in the liner equation form Y = a + bx
(d) What total overhead cost would you expect the company to incur at an operating level of 70,000 direct labour hour
Q13) Browns Global Ltd. produces a single product which is bottled and sold in cases. The normal annual level of operation on which
the production overhead absorption is based is 360,000 cases.
Data for the last financial year were as follows:
Production
Sales
Selling price
Cost:
Production:
Direct Labour
Direct materials
Variable overhead
Fixed overhead (budgeted & incurred)
Selling & administrative cost::
Fixed
Variable
400,000 cases
320,000 cases
N
60
12
14
8
2,160,000
500,000
15% of sales revenue
There were no opening stock of finished goods and the work-in-progress stock may be assumed to be the same at the end of
the end of the year as it was at the beginning of the year.
You are required to prepare profit statements for the year based on:
a) Marginal costing method
b) Absorption costing method
Q14) Using the information given below prepare profit statements for the months of June and July 2017 using the following
costing methods
a) Marginal Costing
b) Absorption costing
Per unit
N
Sales price
50
Direct Material
18
Variable production overhead
3
Direct wages
4
Per Month:
Fixed production overhead
Fixed selling overhead
Fixed administration expenses
Variable selling expenses:
Normal capacity was
Sales
Production
June
Unit
100,000
120,000
N 990,000
N 140,000
N 260,000
10% sales value
110,000 units per month:
July
Unit
120,000
100,000
Q15) The following date in Kilograms was taken from the records of Bala Musa Limited:
Period 1
Period 2
Period 3
Production
300,000
380,000
270,000
Sales
300,000
270,000
380,000
Opening Stock
110,000
Closing Stock 110,000
The firm makes distinct product, the financial details of which are as follows (based on a normal activity level of
300,000 kgs): Cost per kg
Direct material
N 1.50
Direct labour
N 1.00
Production overheads = (300% of labour)
N 3.00
5.50
Selling price per kg =
N9
Administrative overheads are fixed at N250,000 and also one third of the production overheads are fixed Prepare separate
operating statements based on marginal costing and absorption cost techniques
Q16) Hart Okeke& co produces two products A & B, using similar techniques and kit Data for the last period are:
Detail
Quantity produced (units)
Labour hour per unit
Machine hour per unit
Set-up in period
Orders handled in the period
Overhead Cost
Production set up cost
Order handling cost
Machine activity
Total Overhead cost
A
6,000
1
4
15
12
B
8,000
2
2
45
60
₦
179,000
30,000
55,000
264,000
Required:: Calculate the overheads to be absorbed per unit of each product based on:
a) Conventional absorption costing technique using the labour hour absorption rate
b) An Activity based costing ABC approach using the suitable cost drivers
Q17) KMD produces four products B, C D, and E. Data for the past period where as follows
Products
Output
Units
No of production
run in period
Direct labour
hour per unit
B
C
D
E
25
25
250
250
3
4
7
10
24
2
4
2
4
Machine Hour Material cost
Material
per units
per units
components for
units
₦
2
30
8
4
75
5
2
30
8
4
75
6
Direct Labour cost is ₦7 per hour
Overhead cost
Short run variable cost
Long run variable costs:
Scheduling costs
Set-up costs
Material handling cost
₦
8,250
7,680
3.600
7.650
27,180
Find the unit production cost
a) Using conventional product costing with a labour hour or machine hour overhead absorption rate
b) Using ABC with the following cost drivers:
Cost Nature
Cost Driver
Short term variable cost Machine Hour
Schedule Cost
No of production runs
Set – up costs
No of production runs
Materials handling cost
No of Components
Q18) Kadeleto Nigeria Limited manufactures and sells three products A, B and C. the company is recently considering
the introduction of an activity based costing approach to facilitate efficient cost allocation, as well as achieving
improvement in cost accuracy and reduction
The new approach will use two direct cost methods of direct materials and direct labour as well as five indirect cost pools
which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single
indirect cost pool where overheads are allocated using direct labour hours
The following information is provided for the next period
Product A Product B Product C
Product and sales (units)
40,000
25,000
10,000
Direct material cost
₦25
₦20
₦18
Direct labour hours
3
4
2
Machine Hours
2
4
3
Number of production runs
5
10
25
Numbers of component
15
25
120
receipts
Number of production orders
15
10
25
Direct labour is paid at ₦8 per hour
Overhead costs in the period are expected to be as follows
₦
Cost
Cost Drivers
Set up
140,000
Production Runs
Machine
900,000
Machine Hours
Goods Inwards
280,000
Company Receipts
Packaging
200,000
Production Order
Engineering
180,000
Production Order
₦1,700,000
Total
₦1,680,000
240,000
210,000
40
160
50
Required:
(a) Calculate the units costs of each product using:
i.
Prior product costing approach (Traditional Cost)
ii.
The ABC Method
Q19) Cadet Nigeria Limited assembles three types of scramblers at the same factory: the 50cc roadfast, the 100cc
roadfaster and the 150cc road fastest. It sells the scramblers throughout the North African regions. In response to
market pressure Cadet has invested heavily in new manufacturing technology in recent years and as a result, has
significantly reduced the size of its workforce historically, the company has allocated all overheads costs using total
direct labour hour, but is now considering introducing Activity Based Costing (ABC). Cadet Senior Accountant produced
the following data
Types of Scramblers
Road Fast
Road Faster
Road Fastest
Selling Price
(₦/unit)
25,000
30,000
40,000
Raw Material
cost (₦/unit)
4,000
6,000
9,000
Annual output
(Unit)
5,000
4,000
1,400
Annual Direct
Labour hours
500,000
550,000
200,000
All direct labour is paid at ₦50 per hour.
The company holds no inventories.
The three cost drivers that generate over heads are:
Deliveries to retailers The number of deliveries of Scramblers to retail showroom
Set Ups
The number of times the assembly line process is re set to accommodate
the production run of a different type of motorcycle
Purchase orders
The number of purchase orders.
The annual cost driver volumes relating to each activity and each type of Scramblers are as follows
Types of Scramblers
Road Fast
Road Faster
Road Fastest
Annual Overhead Cost (₦’000)
No of deliveries to retailers
200
160
140
24,000
No of set - ups
70
80
50
60,000
No of Purchase orders
400
300
100
36,000
As the senior management Accountant of Cadet, you are required to:
a) Calculate the total profit on each of Cadet’s three types of products using the following method of absorbing overheads:
(i) The existing methods based on labour hours
(ii) Activity based costing
b) Write a report to the Directors of Cadet, which evaluates the labour hours and activity based costing methods in the
circumstances of cadet.
Refer to your calculations in requirement (a) above where appropriate
(Q20) A manufacturing company produces Ball Pens that are printed with the logos of various companies. Each Pen is
priced at N 5. Costs are as follows:
Unit Variable Cost N
Level of Cost Driver
Unit Sold
205
Setups
225
40
Engineering Hours
10
250
Other Data:
Total fixed cost (Conventional) N48,000
Total Fixed cost (ABC) N36,500
Required
(i)Compute the break-even point in units using activity-based analysis.
(ii)Suppose that company could reduce the setup cost by N 75 per setup and could reduce the number of engineering hours
needed to 215. How many units must be sold to break even in this case?
Q21) The normal annual level of operation of Oil link limited is 960,000 bracelets upon which the production overhead
absorption rate is calculated.
The record shows the following at the end of the year;
1,000,000 bracelets
Production
900,000 bracelets
Sales
Selling price
N 12
Fixed overhead (budgeted & incurred)
N
2,016,000 Production Cost
N
Direct Labour
3
Direct materials
2
Variable overhead
2
Selling & Distribution cost:
Variable
5% of sales revenue
Fixed
N 500,000
There were no opening stock of finished goods and the work-in-progress stock may be assumed to be the same at the
end of the end of the year as it was at the beginning of the year.
You are required to prepare profit statements for the year ended 30/08/2017 based on
1) Marginal costing method
2) Absorption costing method
Q22) Conventionally it is often assumed that costs can be easily separated into fixed and variable elements and that the
variable element behaves linearly and is affected only by changes in the level of activity yet cost behaviour in practice
is much complex than this simple model suggests.
You are required to explain the above statement?
Q23)Story is a well-established, global publishing conglomerate. The corporation is structured to allow each country of
operation to function as an autonomous business unit, that reports back to head office. The data from each business unit
is entered onto the mainframe computer at head office. Each business unit can make use of any service offered by other
business units and can also offer services to the other units. The services include translation into different languages,
typesetting, printing, storage and so forth. In each country of operation there is at least one, and usually several, retail
outlets.
The core business was traditionally based upon the provision of fictional stories for the mass market. For the past
decade Story has diversified into publishing textbooks and technical literature. The organisation currently enjoys a
good reputation in both areas of the business and global sales are increasing annually at a rate of 5% for fictional books
and 2% for textbooks. Last year 700 million fictional works and 25 million textbooks were sold.
The corporate management team wish to increase the growth in sales of textbooks but realise that they cannot afford to
allocate significant resources to this task as the market, and profit margin, for textbooks is very much smaller than for
fiction. They also wish to improve the sales performance of the fictional books.
Story is currently having trouble in maintaining a corporate image in some countries of operation. For example, several
business units may be unaware of additions to the product range. Another example is that a price change in a book is
not simultaneously altered by all the business units, leading to pricing discrepancies.
Some members of the corporate management team see possible advantages to upgrading the existing computer system
to one that is fully networked. Other members are more sceptical and are reluctant to consider enhancing the system.
Some members have also wondered whether big data could provide useful information to aid decision-making for
Story but others think there may be problems with actually using big data.
Required:
a) Discuss the issues involved in upgrading the existing information system and the proposed changes, with reference
to both the wider business environment and the decision-making process
b) Explain the problems Story may have trying to capture and use big data
c) Management information systems (MIS) allow managers to make timely and effective decisions using data in an
appropriate form. List three types of MIS and how they would be used in an organisation
CHAPTER TWO
COST PLANING AND CONTROL FOR COMPETITIVE ADVANTAGE
Question 1:
Key resources (bottleneck) of facility Z is available for 15,650 minutes per period.
Budgeted factory costs and date for two products A and B are shown as below
Product Selling price/unit Material cost/unit
₦
₦
A
14
9
B
14
8
Time in facility
Z Mins
2
4
Actual Production
Unit
6,000
700
Budgeted factory cost per week:
Direct Labour
Indirect labour
Lighting
Depreciation
Space costs
Maintenance
Administration
Actual Factory Cost
Calculate:
a)
b)
c)
d)
e)
f)
g)
₦
10,000
5,000
700
9,000
3,200
1,400
2,000
31,300
Total factory cost (TFC)
Cost per factory Minute
Return per factory Minute for both products
Throughput activity ratios for both products
Standard minutes of throughput
Throughput cost for the week
Efficiency percentage
Question 2
The following shows the transactions of Ibis ltd, in a given period
₦
Purchases of raw materials
510,000
Processing costs
411,600
Qty. (in units)
Production
9,800
Sales
9,700
There were no opening stocks of raw materials, WIP or finished goods. The standard cost per unit is ₦ 93 (₦51 material + ₦42
processing cost) there was no closing WIP at the end of the period.
Journalize the entries on back flush accounting, using a raw material in progress (RIP) account
Question 3
JHN Nig. Ltd uses target costing method and wants to introduce a new product to the market. Estimated market for the product is
50,000 units
Existing estimated costs are as follows
Manufacturing Cost
Bought in parts (100 components)
Direct labour (Assembling of component)
10hours x ₦500/hour
₦‘000
50,000
5,000
Machine costs (750,000,000 ÷ 50,000)
Ordering and receiving
500 orders x 100 components x₦500 per order)
÷ 50,000 unit
15,000
500
Non-Manufacturing cost
Distribution
Warrant cost
10% (probability of recall) x
₦15,000 (cost to correct)
₦‘000
10,000
1,500
Total ₦‘000
Quality assurance (10 hours x ₦800 per hour) 8,000
Rework costs
1,000
10% (probability of failure)  ₦10,000 (costof
rework)
Sub- Total
79,500
Target selling price (₦)
Target margin
Target profit (₦)
Target cost (₦)
11,500
91,000
100,000
20%
20,000
80,000
The company has undertaken market research which found that several proposed features of the new product were not
valued by customers.
Redesign to remove the features leads to a reduction in the number of components down to 80 components and a direct
material cost reduction of 12%.
The reduction in complexity has other impacts:
i) Assembly time will be reduced by 20%.
ii) Quality assurance will only require 6 hours.
iii) The probability of a failure at the inspection stage will fall to 5%.
iv) The probability of an after-sales failure will also fall to 5%.
v) Cost of warranty corrections will fall by ₦2,000.
vi) Reduced weight of the product will reduce shipping costs by ₦1,000 per unit .
Required: Determine if the target cost reduction is achieved
Question 4
Ken Nigeria Limited, with a 10% cost of capital, is considering the purchase of two Fertilizer machines Lux
Machine and Del Machine,
Both can produce the same component at identical rates per working hour and the relevant data on the machine, are
as follows
Cost
(1) Capital cost
(2) Operating cost per working hours
Energy Consumable
Variable Overheads
(3) Maintainace costs
Service intervals
Cost of services
Random breakdowns
Cost of breakdowns
(4) Expected availability
(Working hours per annum)
(5) Contribution from production per hour
(6) Expected life
(7) Net salvage value at the end of year 5
Lux Machine Del Machine
₦380,000
₦480,000
₦9
₦18
₦18
₦15
₦24
₦21
36pa
₦3,000
9 pa
₦6,000
30pa
₦2,400
9 p.a
₦9,000
4,500 hrs.
₦150
5 years
₦30,000
6,000 hrs.
₦150
5 years
₦ 75,000
Required: Determine the machine to be bought with reasons
Question 5
Great Games, a manufacturer of computer games, is in the process of introducing a new game to the market and has
undertaken market research to find out about customers' views on the value of the product and also to obtain a
comparison with competitors' products. The results of this research have been used to establish a target selling price of
₦60. This is the price that the company thinks it will have to sell the product at to achieve the required sales volume
Cost estimates have been prepared based on the proposed product specification.
Manufacturing cost
Direct material
Direct labour
Direct machinery costs
Ordering and receiving
Quality assurance
₦
3.21
24.03
1.12
0.23
4.60
Non-manufacturing costs
Marketing
8.15
Distribution
3.25
After-sales service
1.30
The target profit margin for the game is 30% of the target selling price.
Required
Calculate the target cost of the new game and the target cost gap.
Question 6
Solaris specialises in the manufacture of solar panels. It is planning to introduce a new slimline solar panel specially
designed for small houses. Development of the new panel is to begin shortly and Solaris is in the process of determining the
price of the panel. It expects the new product to have the following costs.
Unit manufactured and sold
R&D costs
Marketing costs
Production cost per unit
Customer service costs per unit
Disposal of specialist equipment
Year 1
Year 2
Year 3
Year 4
2000
15000
20000
5000
₦
₦
₦
₦
1,900,000
100,000
0
0
100,000
75,000
50,000
10,000
500
450
400
450
50
40
40
40
300,000
The Marketing Director believes that customers will be prepared to pay ₦500 for a solar panel but the Financial Director
believes this will not cover all of the costs throughout the life cycle.
Required
Calculate the cost per unit looking at the whole life cycle and comment on the suggested price
Question 7
Match the following costs to the appropriate life cycle cost classification.
Costs
Classifications
Design
Inventory costs
Energy costs
Acquisition costs
Warehousing
Maintenance costs
Transportation
Operation costs
Customer service
Product distribution costs
Question 8
A company manufactures a single product, which is processed in turn through three machines, Machine type A, Machine
type B and Machine type C. The current maximum output capacity per week on the existing machinery is as follows.
Machine type A: 1,800 units
Machine type B: 1,600 units
Machine type C: 1,500 units
The company could purchase an additional Machine type C for ₦8 million which would increase output capacity on
Machines C by 600 units per week. It could also purchase an additional Machine type B that would cost ₦5 million and
increase output capacity by 300 units per week.
An increase in weekly output capacity is worth (in present value terms) ₦50,000 per unit of additional output.
What should the company do, Should it buy either or both the additional machines?
Question 9
How are the concepts of through put accounting a direct contrast to the fundamental principles of conventional cost accounting?
Question 10
WR Co manufactures three products, A, B and C. Product details are as follows
Product A
₦
Selling price
2.80
Material Cost
1.20
Direct Labour cost
1.00
Weekly sales and demand (unit)
Machine hours per unit
Product B
₦
1.60
0.60
0.80
Product C
₦
2.40
1.20
0.80
4000
0.5 hours
4000
0.2 hours
5000
0.3 hours
Machine time is a bottleneck resource and maximum capacity is 4,000 machine hours per week. Operating costs including direct
labour costs are ₦410,880 per week. Direct labour workers are not paid overtime and work a standard 38-hour week.
Required
Determine the optimum production plan for WR Co and calculate the weekly profit that would arise from the plan.
Question 11
Corrie Company produces three products, X, Y and Z. The capacity of Corrie's plant is restricted by process Alpha. Process Alpha
is expected to be operational for eight hours per day and can produce 1,200 units of X per hour, 1,500 units of Y per hour and 600
units of Z per hour.
Selling prices and material costs for each product are as follows.
Product
X
Y
Z
Selling price
₦ Per unit
150
130
300
Material cost
₦/Per unit
80
40
100
Throughput
₦ Per unit
70
90
200
Operating costs are ₦720,000 per day.
Required
(a) Calculate the profit per day if daily output achieved is 6,000 units of X, 4,500 units of Y and 1,200units of Z.
(b) Calculate the TA ratio for each product.
(c) In the absence of demand restrictions for the three products, advise Corrie's management on the optimal production plan
Question 12
Edward limited assembles and sells many types of radio; it is considering extending its product range to include digital
radios. These radios produce a better sound quality than traditional radios and have a large number of potential additional
features not possible with the previous technologies (station scanning, more choice, one touch tuning, station
identification text and song identification text etc)
A radio is produced by assembly workers assembling a variety of components. Production overheads are currently
absorbed into product costs on an assembly labour hour basis.
Edward Limited is considering a target costing approach for its new digital radio product.
Required:
a) Briefly describe the target costing process that Edward Limited should undertake
b) Explain the benefits to Edward Limited of adopting a target costing approach at such an early stage in the product
development process
Question 13
Fantata Ltd makes and sells a product H which is manufactured through two consecutive processes; assembly and
finishing. Raw material is input at the commencement of the assembly process. An activity-based costing approach is
used in the absorption of product specific conversion cost.
The following estimated information is available for the period.
Product H
Production/ sales units
12,000
Selling price per unit
N75
Direct material cost per unit
N 20
ABC variable conversion cost per unit:
Assembly
N 20
Finishing
N 12
Product specific fixed costs
N 170,000
Company fixed costs
N 50,000
The management wishes to achieve an overall net profit margin of 12% on sales in this period in order to meet return on
capital target.
Required:
(a) Calculate target cost.
(b) Calculate the cost gap.
(c) Suggest specific areas of investigation.
Question 14
Aeon Plc is designing a new, high-tech consumer product currently known as Product 801. The research and
development, design and management accounting teams have estimated that the Product 801 could be developed and
manufactured in one of two ways. Approach 1 is the simpler option. Approach 2 requires more development and
additional machinery to manufacture the product in a more efficient way. Market research shows that Product 801
should sell for $50 per unit.
Approach 1
Development costs = N1,250,000
Variable manufacturing cost per unit = N 25
Selling price per unit = N 50
Repairs and warranty costs = $50/unit needing repairs, and 1% of sales will incur these costs
Clean-up and machinery dismantling costs at end of production N 50,000
Approach 2
Development costs = N 2,350,000
Variable manufacturing cost per unit = N 20
Selling price per unit = N 50
Repairs and warranty costs = N 30/unit needing repairs, and 0.5% of sales will incur these costs
Additional fixed cost per year to run new manufacturing machinery = N 20,000
Clean-up and machinery dismantling costs at end of production = N 30,000
The life of Product 801 if developed and manufactured using Approach 1 should be 5 years and 50,000 units per year
should be sold. Because of the higher level of research used in Approach 2, the product’s life will be increased to 6
years.
Required
a) Using a life-cycle costing, which of Approach 1 or Approach 2 is expected to give the higher total profit?
b) If the target gross profit for any product sold by the company is 40%, what is the target cost of Product 801 and
calculate whether the lifetime costs per unit of Approach 1 and Approach 2 would give costs less than the target cost.
Explain, using calculations where possible, how target any cost gaps could be closed in this case.
c) Explain why life-cycle costing is particularly important in hightechnology mass production industries.
Question 16
Product YZ2 is made in a production process where machine time is a bottleneck resource. Production of one unit of
Product YZ2 takes 0.25 machine hours. The costs and selling price of Product YZ2 are as follows:
Materials
Labour (0.5 hours)
Other factory costs
N 10
N7
N7
24
Sales price
Profit
N30
N6
Required:In a system of throughput accounting, what is the return per factory hour (to two decimal places)?
QUESTIONS
Question 15
A company manufactures Product Q, which sells for N50 per unit and has a material cost of N 14 per unit and a direct
labour cost of N 10 per unit. The total direct labour budget for the year is 18,000 hours of labour time at a cost of $10 per
hour. Factory overheads are N1,620,000 per year. The company has identified machine time as the bottleneck in
production. Product Q needs 0.05 hours of machine time per unit produced. The maximum capacity for machine time is
6,000 hours per year.
Required: What is the throughput accounting ratio for Product Q (to one decimal place)?
CHAPTER THREE
LEARNING AND EXPERIENCE CURVE THEORY
Question 1: Y- Not Nig. Ltd. provides electronic components to order.
The majority of the work is labour intensive including a high percentage of assembling time. The firm normally assumes
that an 80% learning curve effects will apply to all jobs
Y- Not’s cost accountant has been asked to prepare an estimate for the following product, based on the cost of the first unit
produced. The cost estimated were
Component data
Material
Variable Overhead (₦ 0.50 per hour)
Fixed Overhead
Labour (20 hours at ₦3 per hour)
₦
38.00
10.00
40.00
60.00
148.00
You are required to calculate:
a) The total cost of an order for 16 units of the component;
b) The cost of the second order if the customer decides to split the total quantity required into two of eight unit eac h
Question 2
A customer has asked you firm to prepare a bid on supplying 1,600 units of a new product. Production will be in batches of
100 units. The firm as estimated that the labour costs for the first batch of 100 units will average ₦50 a unit. The firm also
expects that an 80% learning curve will apply to the cumulative labour cost on the contract
You are required to:
a) Prepare an estimate of labour cost of fulfilling the contact
b) Estimate the incremental labour cost of extending the production run to produce an additional 1,600 units.
c) Estimate the incremental cost of extending the production run from 1,600 to 2,000 units
Question 3
Ife Nig. Ltd. has been producing a particular type of engine for one month. Cost has been as follows
₦
Material
840,000
Labour 112,000 hrs. at ₦8 per hour
896,000
Variable overhead
313,600
2,049,600
To date Ife has produced 2,500 engines, and has identified an 80% learning effect. Variable overheads are recovered on labour hour.
You are required to determine:
a) Ife costs for further 17,500 engines
b) Ife cost for further 24,000 engines
Note: formula for learning curve is Y=axb
Question 4
The average cost of producing the first batch of 2000 litres of floured milk by a certain diary company is ₦20 per litre.
From past experience, the company’s operating cost decreases by 25% each time the output is doubled.
Required:
Use the data given to demonstrate your understanding of the theory by finding the learning curve ration and average cost of
producing 64,000 litres of the product
Question 5
You have been asked about the application of the learning curve as a management accounting techniques.
Using the data given below
Direct labour need to make the first batch machine hour 1,000
Learning Curve rate 80%
Direct labour cost ₦3 per hour
Direct Material cost 1,800 per machine
Fixed cost for either size order ₦8,000
You are required to
a) Define the term learning Curve
b) Explain the theory of Learning Curve
c) Indicate the areas where Learning Curve may assist in management accounting
d) Illustrate the use of Learning Curve for Calculating the expected average unit cost of making
i) 4 machines
ii) 8 machines
Question 6
Gina. Nig. Ltd has been making annual purchases of 80,000 water pumps from water Engineering Nig Ltd. The price
has increased each year, reaching a level of ₦136 per unit last year. Because purchase price has increased significantly,
Gina Nig. Ltd. Management has asked that an estimate be made of the cost to manufacture the pumps in its own
facilities. The company has no experience with products requiring assembly
The engineering, manufacturing and accounting departments have prepared a report to management which included the
estimate shown below for an assembly run of 10,000 units. Additional production employees would be hired to
manufacture the sub-assembly. However no additional equipment, space or supervision would be needed
The report stated that total cost for 10,000 units would be ₦ 1,914,000 or ₦191,140 a unit. The current purchase price is
₦136 a unit. So the report needed continued purchases of product
The total cost for 10,000 units is broken down to
₦
Component (outside purchases)
240,000
Assembly labour (1)
600,000
Factory overheads (2)
900,000
General and administrative overhead (3)
174,000
a) Assembly labour consist of hourly production workers
b) Factory overhead is applied to products on a direct labour cost basis Variable overhead costs vary closely with direct
labour costs:
Fixed Factor overhead
50% of direct labour
Variable factory overhead
100% of direct labour
General and administrative overhead is applied at 10% of the total cost of material (or component assembly labour and
factory overhead)
Required:
a) Assuming an 80% learning curve. What would be cumulative labour cost for producing the 80,000 pumps during
the first year
b) Compute the total incremental cost for each pump produced with the 80% learning curve
c) Should Gina Nig. Ltd buys or makes the pump? Support your decision with relevant figures and computations
Question 7
Petro Based Nigeria Limited has developed a design for a new product, the Wildnutte. It intends to sell the product at
full production cost plus a profit margin of 40%. The estimated production cost and selling price for the first unit of the
Wildnutte are as follows
₦
Direct Material
2,000
Direct Labour (200 hours@ ₦15 per hour
3,000
Factory production overheads (₦20 per direct labour hour)
4,000
Full production cost
9,000
Profit Margin (40%)
3,600
Selling Price
12,600
The company’s management expects reductions in the time to produce subsequent units of the Wildnutte, and an 80%
learning curve is expected.
a) A customer has expressed an interest in buying units of Wildnutte, and has asked the following questions
b) If we bought the first Wildnutte for 12,600 and immediately ordered another one, what would be the selling price
for the second Wildnutte?
c) If we waited until you have sold the first two Wildnutte to another customer, and then ordered the third and fourth
units that you produce, what will be the average price for the third and fourth units?
d) If we decided to buy eight Wildnutte immediately, and asked you to quote a single price for all eight units, what
price would you charge?
e) List three limitation of learning curve theory
Answer each of these questions, assuming that the policy of the company remains to make profit of 40% on each unit
that it makes and sells
Question 7
Kiss Co has developed a new product. The first batch of 200 units will take 3,500 labour hours to produce. There will be
a 75% learning curve that will continue until 4,800 units have been produced. Batches after this level will each take the
same amount of time as the 24th batch. The batch size will always be 200 units.
Note. The learning index for a 75% learning curve is –0.415
Ignore the time value of money.
a) What is the time taken for the 24th batch (to the nearest hour)?
b) The total time for the first 16 batches of units was 22,000 hours. What was the actual learning rate, to the nearest %?
Question 8
Mic Co produces microphones for mobile phones and operates a standard costing system. Before production
commenced, the standard labour time per batch for its latest microphone was estimated to be 200 hours. The standard
labour cost per hour is N12 and resource allocation and cost data were therefore initially prepared on this basis.
Production of the microphone started in July and the number of batches assembled and sold each month was as follows:
Month
July
August
September
October
November
No of batches assembled and sold
1
1
2
4
8
The first batch took 200 hours to make, as anticipated, but, during the first four months of production, a learning
effect of 88% was observed, although this finished at the end of October. The learning formula is shown on the
formula sheet and at the 88% learning rate the value of b is –0.1844245.
Mic Co uses 'cost plus' pricing to establish selling prices for all its products. Sales of its new microphone in the first
five months have been disappointing. The sales manager has blamed the production department for getting the
labour cost so wrong, as this, in turn, caused the price to be too high. The production manager has disclaimed all
responsibility, saying that, 'as usual, the managing director prepared the budgets alone and didn't consult me and,
had he bothered to do so, I would have told him that a learning curve was expected.'
Required
a) Calculate the actual total monthly labour costs for producing the microphones for each of the five months from July
to November
b) Discuss the implications of the learning effect coming to an end for Mic Co, with regard to costing, budgeting and
production
c) Discuss the potential advantages and disadvantages of involving senior staff at Mic Co in the budget-setting process,
rather than the managing director simply imposing budgets on them.
Question 9
Cam Co manufactures webcams, devices which can provide live video and audio streams via personal computers. It has
recently been suffering from liquidity problems and hopes that these will be eased by the launch of its new webcam,
which has revolutionary audio and video quality.
The webcam is expected to have a product life cycle of two years. Market research has already been carried out to
establish a target selling price and projected lifetime sales volumes for the product. Cost estimates have also been
prepared, based on the current proposed product specification. Cam Co uses life cycle costing to work out the target
costs for its products. You are provided with the following relevant information for the webcam:
Projected lifetime sales volume
Target selling price per unit
Target profit margin
50,000 units
N200
35%
Note. Estimated lifetime cost per unit:
N
Manufacturing costs
Direct material (bought in parts)
Direct labour
Machine costs
Quality control costs
Non-manufacturing costs
Estimated lifetime cost per unit
The following information has been identified as relevant:
N
40
26
24
10
100
60
160
a) Direct material cost: all of the parts currently proposed for the webcam are bespoke parts. However, most of
these can actually be replaced with standard parts costing 55% less. However, three of the bespoke parts, which
currently account for 20% of the estimated direct material cost, cannot be replaced, although an alternative
supplier charging 10% less has been sourced for these parts.
b) Direct labour cost: the webcam uses 45 minutes of direct labour, which costs N 34.67 per hour. The use of more
standard parts, however, will mean that while the first unit would still be expected to take 45 minutes, there will
now be an expected rate of learning of 90% (where 'b' = – 0.152). This will end after the first 100 units have
been completed
Required
a) What is the target cost of the new webcam?
b) What is the direct material cost per unit in light of the new information in point (1)?
c) What is the average direct labour cost per unit in light of the new information in point (2)
CHAPTER FOUR COST
OF QUALITY
Practical Question
Question 1
Discuss the “The cost of poor quality is the money wasted when work fails to meet customer requirements”
Question 2
Explain what quality and quality cost?
Question 3
Explain challenges that can be faced in implementing a quality cost system
Question 4
Discuss on cost of conformance and cost of nonconformance with examples
CHAPTER FIVE
ETHICAL ISSUES IN PERFORMANCE MANAGEMENT
Case study 1
You are one of three partners in a firm of accountants. Five years ago the firm was appointed as external accountants to a young
successful and fast-growing company, engaged to prepare year end accounts and tax returns. The business had started trading with
a handful of employees but now has a work force of 200, while still remaining below the size of company requiring a statutory audit.
Due to your close relationship with the directors of the company (who are its owners) and several obits staff, you become aware that
staff purchases of goods manufactured by the company are authorised by production managers, and then processed outside the
accounting system. The proceeds from these sales are used to fund the firm’s Christmas party.
Required: Discuss the ethical issues highlighting
 Key fundamental principle
 Consideration
 Possible course of action
Case study 2
A junior member of staff has just returned to work after taking special leave to care for her elderly mother. For financial reasons she
needs to work full-time. She has been having difficulties with her mother’s home care arrangements, causing her to miss a number of
team meetings (which usually take place at the beginning of each day) and to leave work early. She is very competent in her work
but her absences are putting pressure on her and her overworked colleagues. You are her manager, and you are aware that the flow
of work through the practice is coming under pressure. One of her male colleagues is beginning to make comments such as “a
woman’s place is in the home”, and is undermining her at every opportunity, putting her under even greater stress
Required: Discuss the ethical issues highlighting
 Key fundamental principle
 Consideration
 possible course of action
Case study 3
You are a sole practitioner who used to provide a range of accountancy services for a small company (Company A) that owns a
hardware shop in the town where you practice. Following a brief retendering process, the client chose to engage an alternative firm of
accountants. Both you and the other firm had been asked to tender for a range of services, including the preparation of year end
accounts, tax compliance work, and a due diligence exercise in respect of the intended purchase of a small hardware business in the
neighboring town. You believe that you were unsuccessful in the tendering process on the basis of cost alone, as Company A is not
very profitable, and suffers from the competition of the other hardware business that it intends to acquire.
You are the continuity provider for another local sole practitioner. Two months ago he suffered a heart attack, and so you are
currently acting for a number of his clients. He is not expected to resume practicing for another two months.
One of the clients of the incapacitated practitioner (Company B) operates a shop selling electrical goods. The director and majority
shareholder has called you to arrange a meeting to discuss a business venture that he is considering.
At the meeting, the client explains that he intends to make an offer for the same small hardware business that Company A is seeking
to acquire. He is aware that there is another bidder for the business, but is unaware that it is Company A, or that Company A used to
be your client.
When the meeting is over, you start to feel uneasy. You want to help Company B and provide a valued service on behalf of the
practitioner for whom you are the continuity provider. But you realise that you are also in possession of confidential information
concerning the plans of your previous client. You are aware of Company A’s problems and its motivation for wishing to acquire the
business




Required: Discuss the ethical issues underlining
 Key fundamental principle
 Consideration
 Possible course of action
Case study 4
You are a qualified accountant in practice, and you lead a team providing management consultancy services. In recent years your
practice has undertaken several assignments on manufacturing efficiency improvements for a medium-sized, quoted group of
companies. It operates through a number of divisions, but line responsibility appears complicated, and so significant control rests
with four semi-autonomous regional directors. The authority of these directors is enhanced by their seats on the group’s main board.
You have cultivated a good working relationship with the regional director with whom you are in contact most frequently. Three weeks
ago that regional director asked you to investigate, as a matter of urgency, a particular project, Project A. He had been irritated to be
told, informally, of the likely deferral of the agreed delivery date for the components on this sophisticated design-and-build contract.
Project A comes within the regional director’s responsibility primarily because of the location of the factory that makes the key
components.
Once on site, your team had discovered a range of difficulties with the project, starting with fundamental design faults and extending
deep into the manufacturing processes. It is clear that various contracts will be breached, and litigation is likely to follow. Your team
has produced a prioritised list of actions and begun working to establish a revised schedule to take the project to completion.
At a recent meeting, you gave the regional director and the factory manager your estimate that the delay to Project A will be a
minimum of three months. You indicated that extra direct costs are likely to be N 7 million to N 10 million. This is before any potential
claims for compensation.
On the instructions of the regional director, your team has been working on a formal report specifying detailed recommendations.
While still incomplete, the report appears certain to support your previous estimates.
You are aware, from the financial press, that the group is rumoured to have difficulties with its bankers. You assume that the situation
with Project A is likely to be seriously detrimental to the group’s financial position.
One week before the final version of the report is due; you receive a surprise telephone call from the group’s finance director. He
explains that he is about to enter a main board meeting, but needs to know a date for delivery of the report on Project A. Late the
previous evening, the regional director had informed the finance director that your firm had been asked to provide the report. He
says:
“I appreciate that you have only just started, so there are no reliable estimates yet. But the regional director mentioned that Project A
could incur around N4 million to N 5 million in extra costs, with income delayed by perhaps six to eight weeks. The regional director
has sent his apologies to the board meeting, as he has to attend a family funeral.”
He adds:
“Hopefully, the regional director is being cautious, but if something does turn out to be as wrong with Project A as those numbers
suggest, the extra costs and deferred income have serious implications for the group’s cash flow. The full board will need to start
planning remedial action now. When will your report be ready?”
Required: Discuss the ethical issues underlining
 Key fundamental principle
 Consideration
 Possible course of action
Case study 5
You are a partner in a three-partner firm of accountants. The firm generates fees of approximatelyN1.4 million per annum. Within
your portfolio of clients is Company A, which has been very successful since it first came to your firm five years ago. It now has an
annual turnover in excess of N15 million.
Company A generates annually recurring fees for the practice of approximately N50,000, of which approximately N35,000 is in
respect of audit work and N15,000 relates to routine tax calculations and preparation of the corporation tax return. Your firm has a
separate tax department, which performs the tax compliance work in respect of Company A.
The company’s financial year end is December. Last year the audit work commenced in June, and the audit report was finally signed
in August. By the end of August, the tax return had been submitted to the taxation authority, and the firm’s invoice had been issued to
Company A.
In September a significant customer of Company A went into receivership, and Company A suffered a large bad debt. The directors
approached you immediately, and were very open about the company’s short-term cash flow problem. Therefore, you agreed that
payment of the firm’s invoice of N50,000 could be spread over ten months, commencing in October.
Company A
Also needs the support of its bank and, in December, it was negotiating a modest increase in its overdraft facility. It is now early
March, and the bank has requested audited financial statements by the end of the month. The audit is well underway, and you have
promised the directors of Company A that the bank will have the audited accounts on time.
The planning of the audit was performed by the audit senior and reviewed by the audit manager for the assignment (in whom you
have a great deal of confidence). Due to pressure of work, you did not review the audit plan in detail before the audit team
commenced the year end audit work, and so you decide to review and sign off that section of the audit file now.
You note that the audit manager has correctly identified going concern as the area of the audit attracting greatest risk. However, at
the time of planning the audit, the manager was unaware of the credit agreement reached with regard to the payment of last year’s
fees.
You check your firm’s records, and determine that Company A still owes the firm N25,000.
Required: Discuss the ethical issues underlining
 Key fundamental principle
 Consideration
 Possible course of action
CHAPTER SIX
BUDGETARY SYSTEM, PLANNING AND CONTROL
Question 1 The following information has been made available from the record of Mikado Tools Nig. Ltd for the six month of 2016
and of only the sales of January 2017) in respect of product K
(a) Unit sold for different month are:
Month
Year
Unit
July
2016
1,100
August
2016
1,100
September
2016
1,700
October
2016
1,900
November
2016
2,500
December
2016
2,300
January
2017
2,000
(c) There will be no work in progress at the end of any month
(d) Finishing unit which are equal to half the sales of the next month will be in stock at the end of every month (IncludingJune 2016)
(e) Budgeting production and production cost for the year ending 31st 2016 are as follows:
Production (Units) - 22,000
Direct material per unit----------------------------- ₦10
Direct wages per unit
-₦4
Apportioned to production -------------------------- ₦88, 000
You are required to prepare:
1. A production budget for each of the six month of 2016
2. A summarized production cost budget for the same period
Question 2: The sales manager of Jim - Jim Nig Ltd reports that next year he expect to sell 50,000 unit of certain product
consulting the warehouse supervisor and cost his figure as follows
Two kinds of raw materials K and L are required for manufacturing the product. Each unit of the product requires 2 unitsof K and 3
units of L
The estimated opening balance at the commencement of the next year
Unit
10,000
Finished products
12,000
K
15,000
L
The desirable closing balances at the end of the next year
Unit
14,000
Finished products
13,000
K
16,000
L
You are required to draw up a quantitative chart to show the material purchases budget for the next year
Question 3: The opening cash balance on the 1st January was expected to be ₦300, 000. The sales were as follows:
November
December
January
February
March
₦800, 000
₦900, 000
₦750, 000
₦750, 000
₦800, 000
Analysis of records shows that debtor settles according to the following pattern
60% within the month of sales
25% the month following
15% the month following
Extract from the purchases budget were as follows
₦600, 000
December
₦550, 000
January
₦450, 000
February
₦550, 000
March
All purchases are on credit and past experience shows that 90% are settled in the month following purchases and the balance settled
the month following
Wages are ₦150, 000 per month and overhead of ₦200, 000 per month (including ₦50,000 depreciation) are settled monthly
Taxation of ₦80, 000 has to be settled in February and company receive settlement of an insurance claim of ₦250, 000in March
Required: Prepare a cash budget for the 3 month of January to March
Question 4: The budgeted level of output for a manufacturing department is 18,000 hours per period and it is desired to produce a
flexible budget for its factory overhead.
The rate of pay for direct labour is ₦1. Per 1 hour. The following is available:
Variable cost: Indirect labour per direct labour hour ₦1
>>>>> Consumable Supplies 10K
>>>>> Power
25K
>>>>> Holiday and Sick pay 5% of direct labour
Fixed Cost: Rent rate per period ₦6, 000
Depreciation Per period ₦3, 500
Head office charges ₦2, 000
Supervision for period ₦4, 000
Semi Variable cost – for this purpose, these costs may be regard as partly fixed and variable
The previous 4 months costs compared with direct labour hour worked were as follows
Month
Direct Labour Hour
Semi Variable cost
1
17,600
₦13, 200
2
16400
₦12, 600
3
17000
₦12, 900
4
18800
₦13, 800
You are required to:
(a) Prepare a flexible budget for the department at 80% 90% 100% and 110% of the budgeted level of output
(b) Calculate the total overhead rate per direct labour hour that would absorb the budgeted cost of the department divide the rate into
its variable and fixed cost
Question 5: Blessed link ltd makes two products V and W. is preparing an annual budget for 2015.You are required using the
information given below to prepare
(a) Production Budget
(b) Direct material cost budget
(c) Purchase budget
(d) Direct labour cost budget
Standard data per unit of product
Direct Material
Standard price per kilo
₦0.5
M12
₦0.1 5
M13
Standard rate per hour
Direct Labour
Product V Kilo’s
10
6
Product V hour
Product W Kilo’s
4
Product W hour
M12
₦1.5
8
10
₦1.0
M13
12
5
Fixed production O/H is absorbed on a direct hour basis. There is no variable overhead administration, selling and distribution cost is
absorbed on a budgeted basis of 20% of production cost. Profit is budgeted at 20% of selling price
Budgeted Data
Product V
Product W
₦3, 750,000
₦4, 800,000
Sales for year
Finished stock valued at standard production cost
Product V
Product W
January 01, 2015
250
600
December 31, 2015
750
1000
Direct material stock valued at standard prices
Material M12
₦160, 000
₦80, 000
January 01, 2015
December 31, 2015


Material M13
₦ 150, 000
₦ 210, 000
₦2,040,000
₦2,550,000.
Fixed production overhead per annum
Direct labour hour per annum -----------
It is expected there will be no work in progress at the beginning or end of the year
Question 6
A factory engaged in manufacturing plastic buckets is working at 40% capacity and produces 10,000 buckets per month
The present cost breakup for one bucket is as below
Material
₦10
₦3
Labour
₦5
(60% Fixed)
Overhead
The selling price is ₦20 per bucket. If it is desired to work the factory at 50% capacity the selling prices falls by 3%. At90% capacity
the selling price falls by 5% accompanied by a similar falling the price of material.
You are required to prepare a profit statement at 50% and 90% capacities and also calculate the breakeven points atthis capacity
production
Question 7
The following are the summarised flexible budget for sago manufacturing company
Level of activities
Direct material X
Direct material Y
Direct Labour
Production overhead
Selling and distribution O/H
Administrative overhead
Total
40,000
₦
48,000
60,000
24,000
98,000
7,000
13,000
250,000
50,000
₦
60,000
75,000
30,000
115,000
7,000
13,000
300,000
70,000
₦
84,000
105,000
42,000
149,000
7,000
13,000
400,000
Overheads within the limited exceeds 80,000 units, the flowing additional administration ₦1,000
You are required to prepare budgets for activity level of 76,000 units and 84,000 units
Question 8
The following information relates to Omega Plc., a publishing company
The selling price of a book is ₦15, and sales are made on credit through a bookshop and invoiced on the last day of theMonth.
Variable costs of production per book are:
Material
Labour
Overhead
₦5
₦4
₦2
The Sales manager has forecasted the following volumes: No of books
Nov
1,000
Dec
1,000
Jan
1,000
Feb
1,250
Mar
1,500
Apr
2,000
May
1,900
June
2,200
Jul
2,200
Aug
2,300
Customers are expected to pay as follows
One month after the sales 40%
Two month after the sales 60%
The company produces the book two month before they are sold and the creditor for material are paid two month after production
Variable overhead are paid in the month following production and are expected to increase by 25% in April; 75% of wages are paid in
the month of production and 25% on the following month
A wage increase of 12.5% will take place on 1st March
The company is going through a restricting and will sell one of its freehold properties in May for ₦25, 000, but it is also planning to
buy a new printing press in May for ₦10, 000. Depreciation is currently ₦1,000 per month, and will rise to ₦1,500 after the purchase
of the new machine
The company corporate tax (of ₦10, 000) is due for payment in March.
The company presently has a cash balance at bank on 31st December 2013 of ₦1, 500
You are required to produce a cash budget for the six month from 1 January 2014 to 30 June 2014
Question 9
The production department of SPI Co has four major activities, namely receiving deliveries, material handling, production runs and
quality tests.
Each of these activities has an identifiable cost driver. These are provided below along with estimated volumes for the coming period.
Number of deliveries
300
Number of movements of material400
Number of production runs
800
Number of quality tests
600
Two other activities that occur in the department are administration and supervision. While these activities are non-volume related,
they are necessary functions and should not be ignored in the budgeting process.
Budgeted costs for the coming period are displayed below.
Total
Attributable to
N'000
N'000
Management salary
50 Supervision: N 45; Administration: N 5
Basic wages
30
Receiving deliveries: N 7; Production runs: N 5; Administration:
N 6 Material handling: N 7; Quality tests: N 5
Overtime
15
Receiving deliveries: N 6; Quality tests: N 1; Production runs: N 8
Factory overheads
12
Receiving deliveries: N 3; Production runs: N 2; Administration
N1.5; Material handling N 2; Quality tests: N1.5; Supervision:
N2
Other costs
4
Receiving deliveries: N 1; Supervision: N 1; Administration: N 2
111
Required
Produce an activity based budget for the coming period that shows:
(a) Total cost for each activity
(b) Total cost for the production department
(c) Cost per activity unit
Question 10
A company uses a system of rolling budgets. The sales budget is displayed below.
Sales
Jan-Mar
N
Apr-May
N
July-Sept
N
Oct-Dec
N
Total
N
78,480
86,120
91,800
97,462
353,862
Actual sales for January – March were N 74,640. The adverse variance is explained by growth being lower than anticipated and the
market being more competitive than predicted.
Senior management has proposed that the revised assumption for sales growth should be 2.5% per quarter.
Required
Update the budget as appropriate.
Question 11
(a) Critically discuss the relative merits of periodic budgeting and continuous budgeting
(b) Discuss the consequences of budget bias for cost control
(c) Discuss the ways in which budgets and the budgeting process can be use to motivate managers to endeavor to meet the
objectives of the company .Your answer should refer to
(i) Setting targets for finance performance
(ii) Participation i the budget setting process.
Question 12
Joyful hotels operate a chain of upmarket hotels across Nigeria. Each hotel manager is responsible for producing an annual budget
based on targets set by head office.
According to the last year’s budget, the company had hoped to turn an expected 8% rise in total revenue into 16% increase in hotel
profits.
At the year-end it was found that hotel profit had increased by10% with the primary reason for the shortfall appearing to be excessive
spending.
(a)
(b)
(c)
(d)
(e)
Explain why Zero based budgeting might be a useful tool for Joyful Hotels
Describe the steps needed to be undertaken in order to implement a zero based budgeting system
Explain how the use of zero based budgeting can motivate employees
Discuss the problems that Joyful Hotels may encounter if ZBB was introduced
Explain the advantage of encouraging employee participation in budget setting
Question 13
In June 2013 the managing director of a large furniture store Cushair Designs engaged a management consultant to devise a simple
and practical method of forecasting the stores’ quarterly sales levels for a period of six months ahead. On taking up the task the
consultant felt that a forecasting method appropriate for the purpose would first require him to deseasonalise the store’s gross
quarterly sales over the last 30 months. The time series obtained could then be plotted and a line of best fit determined and
extrapolated over the next two quarters. By applying an appropriate seasonal index to these figures. Sales for the two periods ahead
could be estimated
Gross Data for Cushair design
Sales period
Value of retail sales
N ‘000
Q1
285
Q2
310
Q3
315
Q4
385
Q5
340
Q6
370
Q7
375
Q8
460
Q9
395
Q10
425
The management consultant also gave some thought to how he could avoid getting the store to compute its own seasonal indices,
an operation he felt inappropriate considering the small amount of past data he had available. He decided to use a national quarterly
seasonal index as published in a national journal. He thought that his client's furniture store had a product mix not too different from
the aggregate mix on which the index was based.
CHAPTER SEVEN
VARIANCE ANALYSIS
QUESTION 1
From the following data prepare the standard cost card for one unit of the sole product manufactured
Direct Material
Direct Labour
40kgs N @ N 1.60k per unit
30kgs B @ N 4.80k per unit
Preparation: 28 hours @ N 7.50k per hour
Assembly: 10 hours @ N 5.00k per hour
The budgeted total overhead cost for the year
Dept
Preparation
Assembly
N
176,000
300,000
Hours
42,000
48,000
The fixed overhead (including in the above figures) are 50,000 and 96,000 respectively
The standard cost card should show subtotal for
(a) Prime cost
(b) Variable production cost
(c) Total production cost
QUESTION 2
Product (W) has a standard direct material cost as follows:
Kilograms of material M @ N2= N10 per unit of W.
During April 2015, 100 units of the product are manufactured, using 520 kilograms of material M which cost N 1, 025
Required: Calculate the
(a) Total Material cost variance
(b) Material Price Variance
(c) Material Usage Variance
QUESTION 3
The Standard direct labour cost of product B is
4 hours of grade S labour at N 3 per hour=N 12 per unit.
During May 2015, 200 units of product B were made, and direct labour cost of grade S was N 2, 440 for 785 hours of work.
You are required to calculate the:
a. Total direct labour cost variance
b. Direct labour rate variance
QUESTION 4
The direct labour cost of product C is as follows:
3Hours of grade T labour @ N 2.50 per hour = N 7.50 per unit. During June 2016, 300 unit of product C were made and the labour
cost of grade T was N 2,200 for 910 hours.
During the month there was a machine breakdown, and 40 hours were recorded as the idle time
You are required to calculate the:
(a) Direct labour total cost variance
(b) Direct Labour rate variance
(c) Idle time variance
(d) Direct labour efficiency variance
(e) Direct labour total cost variance
QUESTION 5
Variable Production Overhead Variance
The variable production overhead of product D is as follows: 2 hours @ N1.50 = N 3 per unit. During July 2005, 00 units of product D
were made.
The labour force worked 820 hours of which 60 hours were recorded as idle time. The variable overhead Cost is was N1,230
You are required to calculate:
a. Total variable overhead cost variance
b. Variable overhead expenditure variance
c. Variable Overhead efficiency variance
QUESTION 6
A company budgets to produce 1,000 units of product E during August 2015. The expected time to produce a unit of E is 5 hours and
the budgeted fixed production overhead is N 20, 000. The Standard fixed production overhead cost per unit of product E will
therefore be:
5 hours at N 4 per hour = N 20 per unit.
Actual fixed production overhead expenditure in August 2015 turns out to be N 20,450. The labour force managed to produce 1,100
units of product E in 5,400 hours of work
You are required to calculate the:
(a) Total fixed production overhead cost variance
(b) Fixed production overhead expenditure variance
(c) Fixed production overhead volume variance
(d) Fixed production overhead efficiency variance
(e) Fixed production overhead capacity variance
QUESTION 7
A company budget to sell 600 units of product F at a sale price of N 30. The standard full cost of production is N 20 for variable costs
and N8 for fixed cost, l.e N 28 in total, so that the standard profit is N 2 per unit of product F. If actual sale are 620 units for N 20, 460
You are required to determine the:
(a) Sale price Variance
(b) Sales volume variance
QUESTION 8
Ayoola ltd. manufactures one product, and the entire product is sold as soon as it is produced. There is no opening or closing stocks
and work in progress is negligible. The company operates a standard costing system and analysis of variance is made every month.
The standard cost card for the product “ZIK” Is as follows
Direct Materials
Direct Wages
Variable Overhead
Fixed Overheads
Standard Cost
Standard Profit
Standard Selling Price
“ZIK”
0.5 Kilos @ N 4.00 per Kilo
2 hours @ N2.00 Per Hour
2 hours @ N0.30 per hour
2 hours @ N3.70 per hour
N
2.00
4.00
0.60
7.40
14.00
6.00
20.00
Selling and administrative expenses are not included in the standard cost and are deducted from profit as a period charge.
Budgeted output for the month of June 2015 was 5,100 units
Actual results for June 2015 were as follows:
 Production of 4,850 units was sold for N 95,000
 Material consumed in production amounted to 2,300 kilo at a total cost of N 9,800





Labour hours paid for amounted to 8,500 hours at a cost of N 16,800
Actual operating hours amounted to 8,000 hours.
Variable overheads amounted to N 2, 600.
Fixed Overhead amounted to N 42,300
Selling and administrative expenses amounted to N 18,000
You are required to
a. Calculate all variances
b. Prepare an operating statement for the months ended 30th June 2015
QUESTION 9
Global NIG. LTD. manufactures one brand of a multi-purpose product. A budget was prepared for the 6 – month operating period on
a standard marginal costing basis. The following figures have been extracted from the company’s costing records. (There were
neither opening nor closing stocks)
Standard Cost
Per Unit
N
1.00(24,500gk)
2.40 (48,000hrs)
1.40
4.80
7.00
N2.20
Direct Material (2Kg @ N 0.50)
Direct Labour (4hrs. @ N0.60)
Variable Overhead (4hrs. @ N0.35)
Selling Price
Volume (units)
Fixed Cost
Budget
10,000
N8, 000
Actual Total
Cost
N
12,740
36,000
18,000
66,740
85,000
N18, 260
Actual
12,500
N7, 660
You are required to prepare an operating statement on a standard marginal costing basis to indicate to management the reasons
why the budgeted profit was not achieved despite the 25% increase in the volume of production and sales (show al workings)
QUESTION 10
The following data are available from the spraying department of MOONBALL limited, a furniture manufacturer which has established
standard cost of producing a cabinet styled CONCORD
N
Labour
4.50
Material (15 metre @ N8)
120.00
Indirect Cost:
Variable Charge (3 hrs. at N 1)
Fixed charged (3hrs. At N 0.5)
3.00
1.50
129.00
The actual cost of producing 400 of these cabins during November 2016 are stated below
N
Material (7,500 metre @ N 9)
67,500
Material consumed (7,200 metre.)
Direct Labour (1,100 hrs. at N 1.70)
1,870
Variable charge
950
Fixed charge
600
Fixed charge rate has been set by using 1,400 direct labour hours of operation as monthly activities level. There were no opening
stocks of raw material
You are required to compute the following variance
1. Material price variance
2. Material usage variance
3. Material cost variance
4. Labour rate variance
PERFORMANCE MANAGEMENT -08134289772
8. Variable Efficiency variance
9. Variable cost variance
10. Fixed expenditure variance
11. Fixed volume variance
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5. Labour efficiency variance
6. Labour cost variance
7. Variable expenditure variance
12. Fixed efficiency variance
13. Fixed capacity variance
14. Fixed overhead total variance
QUESTION 11
The following information related to Pam Paints Nig. Ltd
Standard Mix
Inputs
X
Y
Units
60
40
100
30
70
Rate
N2.50
N 5.00
Amount
N 150
N 200
N 350
Standard Loss
---350
Standard Mix
Inputs
X
Y
Units
Rate
56
N 2.50
44
N 5.00
100
26
Actual Loss
---74
360
The Standard loss is 30%. You are required to Calculate
Amount
N 140
N 220
N 360
a. Material Mix Variance
b. Material Yield Variance
QUESTION 12
The following is the standard mix for the production of one unit of product MIJ
Material A…60 Liters @ N 15 per Litre ............... N 900
Material B…80 Liters @ N 20 per Litre ............... N 1600
Material C. 100 Liters @ N 25 per Litre .............. N 2500
240 Litres
N5, 000
During period 2. 10 units of MIJ were actually produced and consumption was follows
Material A…640 Litres @ N 17.50 per Litre .................. N 11, 200
Material B…950 Litres @ N 18.00 per Litre ..................N 17, 100
Material C. 870 Litres @ N 27.50 per Litre ................. N 23, 925
2460
N52, 225
You are required to calculate
a.
b.
c.
d.
e.
Material cost variance
Material Price Variance
Material Usage Variance
Material Mix Variance
Material Yield Variance
QUESTION 13
The Budgeted sales for a company for a period were
Product Units
X
8, 000 (40%)
Y
7, 000 (35%)
Z
5,000 (25%)
And the actual sales were:
Product
X
Y
Unit
6, 000
7, 000
Unit Contribution
N20
N12
N9
Unit Contribution Margin
N20
N12
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Total Contribution
N 160,000
N 84,000
N 45,000
Total
N120,000
N84,000
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Z
9, 000
22,000
You are required to calculate.
N9
N81,000
285,000
a. Total sales margin variance
b. Sales Margin price Variance
c. Sale Margin Mix Variance
d. Sales Margin Yield /Quantity Variance
QUESTION 15
Department L of Pave Integrated limited produces a product Gas oil and Kerosene. The standard time for the production of the
product is 30 minutes for Gas oil and 24 minutes for kerosene. The budget for September is 24,000 units of Gas oil and 10,000 units
of Kerosene. During the month, 12,000 labour hours were worked and 20,000 units of Gas oil and 8,000 units of kerosene were
produced
Required
A) Compute for activity ratio
B) Compute for efficiency ratio
C) Compute for capacity ratio
QUESTION 16
A company manufactures three types of products, models B, C & D has the following result for a year’s operation:Model
A
B
C
Sales Quantity Standard cost of
Each
N
4,000
20
7,000
25
3,000
15
Selling price of
Each
N
23
30.50
19
Actual Sales
Quantity
Cost of Each
N
4,500
6,000
2,500
21
24
15
Selling price of
each
N
23.50
30
18
You are required to prepare a summary for the sales manager showing the actual profit achieved in the year compared with that
expected and the difference analysed to show the variations due to :a) Cost
c) Sales Mix
b) Selling Prices
d) Sales volume
QUESTION 17
Badaco Ltd manufactures a single product, a laminated Kitchen unit with a standard cost of N80 made up as follows:
N
Direct Materials (15 sq.metres @ N 3 per sq metre)
45
Direct Labour (5 hours @ N 4 per hour)
20
Variable Overheads (5 hours @ N 2 per hour)
10
Fixed overheads (5 hours @ N 1 per hour)
5
80
The standard selling price of the kitchen unit is N 100
The monthly budget projects production and sales of 1000 units. Actual figure for the month of April are as follows






Sales 4200 units at N 102
Production 1,400 units
Direct Materials 22,000 sq metres at N 4 per square metre
Direct Wages 6800 hours at N 5
Variable overheads N 11, 000
Fixed Overheads N 6, 000
You are required to prepare:
A trading account reconciling actual and budgeted profit and show all the appropriate variances
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QUESTION 18
The following data relate to actual output, cost and variance for the four- weekly accounting period of Vend ltd that makes only one
product. Opening and closing work in progress figures were the same
Actual Production of product CD
Actual Cost Incurred:
Direct materials purchases and used (150,000kg)
Direct wages for 32,000 hours
Variable production overhead
18,000 units
(N ‘000)
210
136
38
(N ‘000)
Variances:
Direct materials price
Direct Material Usage
Direct Labour rate
Direct Labour Efficiency
Variable Production Overhead expenditure
Variable production overhead efficiency
15F
9A
8A
16F
6A
4F
Variable production overhead varies with labour hours worked
A standard marginal costing system is operated.
Required:
Calculate the standard product cost for one unit of product CD
Show all workings
QUESTION 19
Malaren Nig Ltd prepared a budget which includes the following raw materials costs per unit of product
2Kg of copper at N1 per Kg = N 2
Due to a rise in world prices for copper during the year, the average market price of copper rose to N 1.50 per kg
during the year, 100 units were produced at a cost of N 3, 250 for 2,200 kg of copper
You are required to calculate:
(a) Conventional variance l.e Material cost variance:
(b) Planning variance
(c) Operational variance (total)
(d) Operational price variance: and
(e) Operational usage variance
QUESTION 20
The ATF & Co Nig Ltd manufactures a product named LILLY. The production process requires the inputs of a large number of raw
materials which are then worked on by various grades of labour. The standard cost of LILLY is made of the following:
NN
Materials: A 1Kg @ N 1
1.00
T 2Kg @ N 2
4.00
F 4Kg @ N 1.50
6.00
11.00
Labour: Skilled 4 Hours @ N 5
Semi-Skilled 10Hours @ N 2
Unskilled 10Hours @ N 1.50
Production overhead Variable
Fixed
20.00
20.00
15.00
34.00
80.00
55.00
114.00
220.00
Production and sales for September was budgeted at 5,000 units. Actual data for the month were as follows
Production ..................................................................... 4,500 units
Materials A 7,000kg
N 80, 000
T 8,000Kg
N 19, 000
F 20,000Kg
N 28, 000
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Labour: Skilled 20,000 hours
Semi-Skilled 40,000 hours
Unskilled 60,000 hours
Variable Overhead cost
Fixed Overhead Cost
Sales
N 100, 000
N 100, 000
N 120, 000
N 150, 000
N 420, 000
4,200 units for N1 Million
You are required to produce a statement for management analyzing the difference between budgeted profit and actual profit
QUESTION 21
Pestle limited produces cake and bread which it supplies to a major supermarket in Port Harcourt. It adopts the Just-In-time (JIT) system.
The standard cost of the wheat used in baking the product is N 200 per kg. Each piece of cake uses 0.5kg of wheat while each load of
bread uses 2kg of wheat.
The production levels for cake and bread for the month of November were as follows:
Budgeted Production (units)
Bread
Cake
Actual production (units)
240,000
380,000
240,000
360,000
The Actual cost of wheat in November was N 232 per kg, 496,000kg of wheat was used to bake the bread and 190,000kg was used
to bake the cake.
Global prices of wheat increased by 18% in the month of November.
At the beginning of the month, the supermarket group made an expected request for an immediate shape change to the cake
resulting in 5% more wheat than previously required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in the month. The production director is given the task of purchasing relevant input materials and
any production request which occur, although he does not take responsibility for setting standard cost
Required
(a) Compute the following variances for the month of November for each of the products and in total
(1) Material price planning variance
(2) Material price operational variances
(3) Material usage planning variances
(4) Material usage operational variances
(b) What are the benefits of planning and operational variances to a management accountant?
QUESTION 22
Brunco prepared a sales budget based on an estimated market size of200,000 units and a budgeted market share of 25%
Standard contribution per unit ₦40
At the end of the year it was estimated that the actual size of the market during the year had been 260,000 units.
Actual sales in the year were 61,000 units.
Required
Calculate for the year:
(a) The total sales volume variance
(b) The market size variance
(c) The market share variance.
QUESTION 23
A company produces and sells one product only, the Thing, the standard cost for one unit being asfollows.
N
Direct material A – 10 kilograms at N 20 per kg
200
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Direct wages – 5 hours at N 6 per hour
Fixed production overhead
Total standard cost
30
50
310
The fixed overhead included in the standard cost is based on an expected monthly output of 900 units.
Fixed production overhead is absorbed on the basis of direct labour hours.
During April the actual results were as follows.
Production 800 units
Material A 7,800 kg used, costing N159,900
Material B 4,300 litres used, costing N23,650
Direct wages 4,200 hours worked for N24,150
Fixed production overhead N47,000
Required
(a) Calculate price and usage variances for each material.
(b) Calculate labour rate and efficiency variances.
(c) Calculate fixed production overhead expenditure and volume variances and then subdivide the volume variance.
QUESTION 24
A company manufactures a chemical, Dynamite, using two compounds Flash and Bang. The standard materials usage and cost of
one unit of Dynamite are as follows.
N
Flash 5 kg at N 2 per kg
10
Bang 10 kg at N 3 per kg
30
40
In a particular period, 80 units of Dynamite were produced from 600 kg of Flash and 750 kg of Bang.
Required
Calculate the materials usage, mix and yield variances.
QUESTION 25
Coope and Sorcerer Co make product T42 in a continuous process, for which standard and actual quantities in month 10 were as
follows.
Quantity Kg
Material P
Material Q
40,000
20,000
60,000
Standard Price Per
Kg N
2.50
4.00
Value
N
100,000
80,000
180,000
Quantity
34,000
22,000
Actual price
per KgN
2.50
4.00
56,000
Std cost of
actual usage N
85,000
88,000
173,000
Losses occur at an even rate during the processing operation and are expected to be 10% of materials input. So budgeted output for
the month was 54,000 kg of T42 (= 60,000 kg × 90%).
Actual output during the month was 51,300 kg of T42.
Required
Calculate total usage, mix and yield variances
QUESTION 26
A company produces Widgets and Splodgets which are fairly standardized products. The following information relates to period 1.
The standard selling price of Widgets is N50 each and Splodgets N100 each. In period 1, there was a special promotion on
Splodgets with a 5% discount being offered. All units produced are sold and no inventory is held.
To produce a Widget they use 5 kg of X and in period 1, their plans were based on a cost of X of N3 per kg. Due to market
movements the actual price changed; if they had purchased efficiently, the cost would have been N4.50 per kg. Production of
Widgets was 2,000 units.
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A Splodget uses raw material Z but again the price of this can change rapidly. It was thought that Z would cost N30 per tonne but in
fact they only paid $25 per tonne and if they had purchased correctly the cost would have been less, as it was freely available at only
N23 per tonne. It usually takes 1.5 tonnes of Z to produce 1 Splodget and 500 Splodgets are usually produced.
Each Widget takes three hours to produce and each Splodget two hours. Labour is paid N5 per hour. At the start of period 1,
management negotiated a job security package with the workforce in exchange for a promised 5% increase in efficiency – that is,
that the workers would increase output per hour by 5%.
Fixed overheads are usually N12,000 every period and variable overheads are N3 per labour hour.
Required
Produce the original budget and a revised budget allowing for controllable factors in a suitable format.
QUESTION 26
Product X had a standard direct material cost in the budget of:
4 kg of Material M at N 5 per kg = N 20 per unit.
Due to disruption of supply of materials to the market, the average market price for Material M during the period was N 5.50 per kg,
and it was decided to revise the material standard cost to allow for this.
During the period, 6,000 units of Product X were manufactured. They required 26,300 kg of Material which cost N 139,390.
Required
Calculate:
(a) The material price planning variance
(b) The material price operational variance
(c) The material usage (operational) variance
QUESTION 27
A manufacturing company, Haxicon has provided you with the following data which relates to products RYX. For the period which
has just ended
Budget
Number of labour hours 8,400
Production units
1,200
Overhead costs (all fixed) N22,260
Actual
7,980
1,100
N25,536
Overheads are absorbed at a rate per standard labour hour
required:
(a) (i) Calculate the fixed production overhead cost variance and the following subsidiary variances
 Expenditure
 Efficiency
 Capacity
(iii) Provide a summary statement of these four variances
(b) Discuss the possible reasons why adverse fixed production overhead expenditure, efficient and capacity variance occur
(c) Briefly discuss two examples of inter-relationships between the fixed production overhead efficiency variance and the material
and labour variance
QUESTION 27
KSO budgeted to sell 10,000 units of a new product during 20X0. The budgeted sales price was N 10 per unit, and the variable cost N
3 per unit.
Actual sales in 2018 were 12,000 units and variable costs of sales were N 30,000, but sales revenue was only N 5 per unit. With the
benefit of hindsight, it is realised that the budgeted sales price of N 10 was hopelessly optimistic, and a price of N 4.50 per unit would
have been much more realistic.
Required
Calculate planning and operational variances for sales price.
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CHAPTER EIGHT
PERFORMANCE MEASUREMENT ANALYSIS
QUESTION 1
Calculate liquidity and working capital ratios (Current ratio, quick ratio, receivable turnover period, inventory turnover period and
payable turnover period) from the accounts of a manufacturer of products for the construction industry, and comment on the ratios.
Turnover
Cost of sales
Gross Profit
Current assets
Inventories
Receivables (note 1)
Short-term investments
Cash at bank and in hand
Payables: amounts falling due within one year
Loans and overdrafts
Corporation taxes
Dividend
Payables (note 2)
Net current assets
Notes
1. Trade Receivable
2. Trade Payable
2018
N’m
2,065.0
1,478.6
586.4
2017
N’m
1,788.7
1,304.0
484.7
119.0
400.9
4.2
48.2
572.3
109.0
347.4
18.8
48.0
523.2
49.1
62.0
19.2
370.7
501.0
N’m
71.3
35.3
46.7
14.3
324.0
420.3
N’m
102.9
2018
329.8
236.2
2017
285.4
210.8
QUESTION 2
Spotlight Productions has in the past produced just one fairly successful product. Recently, however, anew version of this product
has been launched. Development work continues to add a related product tothe product list. Given below are some details of the
activities during the month of November.
Units produced
Cost of units produced
Sales revenue
Hours worked
– existing product
– new product
– existing product
– new product
– existing product
– new product
– existing product
– new product
Development costs
25,000
5,000
N375,000
N70,000
N550,000
N125,000
5,000
1,250
N47,000
Required
(a) Suggest and calculate performance indicators that could be calculated for each of the four perspectives on the balanced
scorecard.
(b) Suggest how this information would be interpreted.
QUESTION 3
Suggest two separate performance indicators that could be used to assess each of the following areas of afast food chain's
operations.
(a) Food preparation department
(b) Marketing department
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QUESTION 4
A service business has collected some figures relating to its year just ended.
Budget
6,000
Customer enquiries: New customers
Existing customers
4,000
Business won: New customers
2,000
Existing customers
1,500
Types of service performed: Service A
875
Service B
1,575
Service C
1,050
Employees: Service A
5
Service B
10
Service C
5
Actual
9,000
3,000
4,000
1,500
780
1,850
2,870
4
10
8
Required
Calculate figures that illustrate competitiveness and resource utilisation.
QUESTION 5
Paradise Park Plc. has 5,000,000 ordinary shares in issue. Its results for the year end are as follows:
₦’000
750
150
600
150
450
Profit before taxation
Taxation
Profit after taxation
Ordinary dividend- proposed
Retained profit
The market price per share is currently 83k cum- div.
Requirements:
Calculate the following ratios:
(i) Price/earnings
(ii) Dividend payout
(iii) Dividend yield
(iv) Dividend cover
(v) Earning yield
QUESTION 6
NTM ltd has two factories, North and south, producing a similar product. Data for the two factories for the last year are as follows:
Particulars
Unit produced and sold
Budgeted Capacity in direct labour hour
Direct labour hour worked
Direct Material used
Capital Employed
Sales
Direct material consumed
Direct labour
Production Overhead
Variable
Fixed
Sales and Distribution Overhead
Variable
fixed
Total cost
Net surplus (Deficit)
North
10,000
40,000
30,000
50,000kg
N 300,000
₦'
450,000
175,000
120,000
South
12,000
45,000
37,000
68,000kg
N575,000
₦'
552000
204,000
15,000
60,000
40,000
60,000
42,000
15,000
12,000
422,000
28,000
12,000
15,000
483,000
69,000
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Variable costs are relevant to unit produced; fixed costs are not affected by changes in volume
Required:
The management of NTM ltd is currently doing a review of its operation, and interested in having fair knowledge of it level of relative
profitability, efficient and productivity.
The management has given you a mandate to give a report supported with relevant computation. On the above requirement
a) Calculate comparative measures of performance to show the relative profitability, efficiency and productivity for the two factories
and comment on the results
Using the following
Profitability
Sale price/ unit
Contribution margin
Contribution per unit
Margin of safety
Total cost per unit
Efficiency
Productivity
Direct labour hour/unit
Capacity utilization
Direct materials(kg) used per unit Return on capital employed
Sales / capital employed
b) Management requires all factories to achieve a return on capital employed of 15% calculate for both factories the number of
units required to achieve this return
QUESTION 7
GSM Nig ltd manufactures and sells washing products and has over time improved by introducing more advance washing product.
The management is making decision to advance further in developing another washing product that will increase the revenue of the
company and offer better quality and performance
As the Management Accountant, you are asked to provide a report in writing to the management, advising if the new product will be
worthwhile from using GSM ltd most recent financial year information
Data
Revenue
Capital Employed
Good Rinse
₦' million
89,600
65,200
Good Rinse
₦' million
Administration Cost 900
Distribution cost
800
Quality Cost
300
Marketing costs
4,000
Fixed Costs
Better Rinse
₦’million Total
₦’ million
61,600
151,200
50,000
115,200
Better Rinse
₦’ million
900
800
300
4,000
Good Rinse
₦' per unit
Material
4,500
Labour
3,000
Overheads
2,000
Distribution Costs 2,250
Quality Cost
1,000
Variable Costs
Good Rinse
Million (units)
GSM sales
3.36
Total Market share 27.99
Data
₦’million Total
1,800
1,600
600
8,000
Better Rinse
₦’ per unit
6,000
4,000
2,500
2,250
1,500
Better Rinse
million Total
(Unit)
Million (units)
1.32
4.68
3.99
11.98
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GSM ltd adopt modern cost technique in allocation of fixed cost (the activity based costing)
Required:- a) Provide the following computation and comment on each product. A change effect of the product in %
Net profit Ratio
Total fixed cost / sales ratio
Sale price/ unit
Break-even point (unit and Naira)
Contribution margin
Contribution per unit
Margin of safety
Total cost per unit
Total quality cost
Individual Variable expenses / Sales ratio
Total variable expenses/ sales ratio
Total fixed cost/ variable cost ratio
All Assumption and applied formula should be clearly stated
QUESTION 8
Height way Ltd. us a railway company. Height way ltd operates a passenger railway services and is responsible for the operation of
services and the maintainace of track signalling equipment and other facilities such as stations. In recent years it has been criticised
for providing a poor service to the travelling public in terms of punctuality, safety and the standard of facilities offered to passengers.
In the last year Height way ltd has invested over ₦20 million in new carriages, station facilities and track maintainace programmes in
an attempt to counter these criticisms
Summarised financial results for Height way Ltd for the last two years are given below
Summarised income statement for the year ended 31 December
2017
N’million
180.0
18.0
(3.2)
(4.4)
10.4
Sales revenue
Earnings before interest and tax
Interest
Tax
Earnings available for ordinary shareholder
2018
N’million
185.0
16.5
(4.7)
(3.5)
8.3
Summarised statement of financial position as at 31 December
Non-current assets (net)
Current assets
Inventory
Receivables
Cash
2017
N’million N’million
100.4
5.3
2.1
6.2
Ordinary share capital (1 share)
Reserves
Amount payable after more than one year
8% Debenture 2019
Bank loan
Payables due within one year
2018
N’million N’million
120.5
5.9
2.4
3.6
13.6
114.0
25.0
45.6
11.9
132.4
25.0
48.2
15.0
20.0
8.4
114.0
15.0
35.0
9.2
132.4
Required:
(a) Calculate the following ratios for Heighway Ltd for 2017 and 2018, clearly showing your workings
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(i) Return on capital employed (based upon closing capital employed)
(ii) Net profit margin
(iii) Asset turnover
(iv) Current ratio
(b) Briefly comment on the financial performance of Heighway Ltd in 2017 and 2018 as revealed by the above ratio and suggest
causes for the changes
(c) Suggest THREE non-financial indicators that could be useful in measuring the performance of a passenger railway company and
explain why you chosen indicators are important
(d) Explain what is meant by short-termism and suggest ways in which a long term view can be encouraged.
QUESTION 9
Accounting for Business (AFB) is a national organisation which provides privates tuition courses in accounting. The courses are
generally attended b individuals who work as bookkeepers for other companies and who wants to develop their practical skills. None
of the attendees is aiming towards any professional qualification or examination.
Courses are run on basic bookkeeping; value added tax, payroll, credit control, company administration and basis business
management. Other bespoke courses run on demand, are charged out at higher than normal rates.
AFB has six branched nationwide with individual branch manager. Head office is suited at Nottingham and has responsibility for
company accounting payroll and inventory ordering activities. Individual branch managers have responsibility for all other areas of
the business such as pricing, product mix and staffing.
Each branch rents its premises (a national company policy) and staff numbers range from 4 in Newcastle to 18 in Cardiff. Staff is
generally former accountants, bankers and tax inspectors who concentrates on keeping courses practical and applicable to their
customers
To date managers have always been appraised by returns on investment (ROI) with a target return of 40%. Branches have regularly
exceeded this target and branch managers seem happy to be appraised in this manner.
Jim Buxton, the company’s main shareholder and managing director recently visited all branches in order to promote corporate
identity and inspect performance at a local level. He returned dismayed at the condition of some branch premises and feels overall
that, although recent financial performance has been consistent with previous years. The company does not seem to have changed
or developed since he last visited branches five years ago.
Jim believes that he needs to change the appraisal method for branches so that they fit more closely with what he expects from the
company. He wants the business to develop and grow and become the leading providers of business training in the UK.
Required:
Answer the following questions considering each independently from the others and supporting your answers wit appropriate
calculation
(a) Outline the problems the business is likely to have from its use of ROI as its sole performance indicator
(b) Describe the balanced scorecard approach to performance measurement and how it might rectify these problems
(c) Outline possible performance measures which might be used in each area of the balance scorecard by AFB
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CHAPTER NINE
DIVISIONAL PERFORMANCE AND TRANSFER PRICING
QUESTION 1
Suppose that a division currently has net income of N20,000,000 per annum generated from an investment
base of N100Million.The company requires a minimum return on capital employed of 15%.A new project
being considered by the division which will entail additional investment of N10Million and will yield annual net
income N1,700,000.
Required:
Using the ROCE and Residual income method evaluate which will enhance the objective of goal Congruence?
QUESTION 2
A division has an operating income of N6,000,000 and assets of
N20,000,000
(a) What is the Division’s ROI?
(b) Assume interest is imputed @14%,what is the residual income
(c) What effect on management behavior can be expected if ROI is used to measure performance?
(d) What effect on management behavior can be expected if residual income is used to measure performance
QUESTION 3
The Athletic footwear division of KALET Manufacturing Nigeria plc.
Prepared the following budgeted at a:
N
Plants & Equipment, net
3,000,000
Inventories
2,000,000
Receivables
1,000,000
Total
6,000,000
Fixed Overhead
2,000,000
Variable cost per pair
N10
Desired rate of return on average available assets
25%
Selling price per pair
N45
Required
(a) How many pair of shoe must be sold to obtain the desired rate of return on average assets?
(b) What would be the expected capital turnover?
(c) What would be the operating income percentage of Naira sales?
(d) IfKA-LEThas15% cost of capital, what will be the Residual income for Athletic Foot wear Division?
(e) What rate of return will be earned on available assets if sales volume is 120,000 pairs of shoes?
QUESTION 4
Pavy Company Ltd is a large integrated conglomerate with shipping metals and mining operations throughout the country.
The general manger of the metals division has been directed by the board to submit his proposed capital budget for 2017
for inclusion in the company wide budget.
The division manager has for consideration the following projects all of which requires an outlay of capital. All projects have
equal risk. Project
Return
Investment Required
N‘000
N‘000
1
12,000
2,760
2
4,800
1,536
3
3,500
490
4
2,400
432
5
1,600
320
6
700
196
The division manager must decide which of the projects to take. The company has a cost of capital of 15%. An amount of
N30million is available to the division for investment purposes.
Required:
1. State selected projects by computing the total investment, total return, total return on capital invested, and total residual
income of the division manager if:
(a) The company has a rule that all projects promising at least 20% or more should be taken
(b) The divisional manager is evaluated on his ability to maximize his return on capital invested
(c) The divisional manager is expected to maximize residual income as computed by using the15% cost of capital
(d) Which of the three approaches will result in the most effective investment policy of the company as whole?
(Adapted from ICAN)
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QUESTION 5
Divisionalisation is a common form of organizational arrangement but there is some diversity of opinion as to the best
measure of divisional performance. Discuss this topic and describe and compare the main performance measures that
have been suggested
QUESTION 6
Discuss the proposition that interest (paid and/or imputed) should be regarded as a cost.
(a) In a conventional cost accounting system and
(b) In a divisional performance evaluation system
QUESTION 7
D. Carol runs the Trans Amadi division of a large multinational company. He has prepare the following forecast for the year 2016
Profit Before depreciation
Depreciation
Net current asset at 1/1/2016
Net book value of Non-currentassetsat1/1/2016
Company cost of capital is
N
100,000
25,000
50,000
200,000
10%
He is considering selling a non-current asset with a net book value of N7,500 which after depreciation of N600, generates a profit
per annum of N3,000.The proceeds and a subsidy from head office would be used to purchase a new machine for N20,000
which would generate an annual profit of N 6,000 after depreciation of N1,500
Required:
a) Assuming E.Carol does not sell and replace the machine using opening year financial position statement value
calculate:
I. The division returns on investment
II. The division’s residual income
b) If E.Carol does sell and replace the machine, what will be
III. The division returns on investment
IV. The division’s residual income
QUESTION 8
A division with capital employed of N 400,000 currently earns an ROI of 22%. It can make an additional investment of N 50,000 for a
five year life with nil residual value. The average net profit from this investment would be N 12,000 after depreciation. The divisions
cost of capital is 14%.
(a) What are the residual incomes before and after the investment?
QUESTION 9
A new company has non-current assets of N 460,000 which will be depreciated to nil on a straight line basis over 10 years. Net current
assets will consistently be N 75,000, and annual profit will consistently be N 30,000. ROI is measured as return on net assets.
Required
Calculate the company's ROI in years 2 and 6.
QUESTION 10
BCD Division of the WXY manufacturing Nig plc. Is a Single-product division which sells externally and can also transfer
to other divisions within the organisation?
BCD Division has set a target of a budgeted residual income of N300,000 for the coming
financial year. Additional information on BCD Division:
1. Maximum production/sales capacity: 120,000units
2. Sales to externalcustomers:80,000 units @ N20each
3. Variable cost per unit:N14
4. Fixed cost directly attributable to the division: N 60,000
5. Capital employed: N 1,600,000 with a cost of capital of 15%
The JKL Division of the WXY manufacturing Nig. Plc. Has asked BCD Division to quote a transfer price for 40,000
units. Required:
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a. Calculate the transfer price per unit which BCD Division should quote to JKL Division in order that its budgeted residual
income targets are achieved.
b. You are required to explain why the transfer price calculated in (a) may lead to sub-optimal decision making from a group view
point
(Adapted from A.C.C.A)
QUESTION 11
The Campus Company Nig Ltd has two divisions M and N. One of the company’s products divisions M produces a major
sub- assembly and division N incorporates this sub-assembly into the final product. There is a market for both the subassembly and the final product and the divisions have been delegated profit responsibility. The transfer price for the subassembly has been set at long-run average market price
The following data are available for each division:
Estimated selling price for final product
Long–run average selling price for intermediate product
Outlay cost for completion in division N
Outlay cost in division M
₦300
₦200
₦150
₦120
The Manager of division N has made the following calculations:
Selling Price-Final Product
Transfer-in cost (market)
Outlay cost for completion
Loss in product
₦ 300
₦200
₦150
₦ 350
₦ 50
Required:
(a)
i) Should transfer be made to division N if there is no excess capacity in division M?
ii) Is market price the correct transfer price?
(b) Assume that division M’s maximum capacity for the product is 1,000 units per month and sales to the
intermediate market are presently 800units.Should 200 units be transferred to division N? If so at what
relevant transfer price?
Assume for a variety of reasons that M will maintain the ₦200 selling price indefinitely, l.e M is not considering cutting
the price to outsiders regardless of the presence of the idle capacity.
c). suppose division M quoted a transfer price of ₦150,what would be the contribution to the firm as a
whole if the transfer were made? As manager of N would you be inclined to buy at ₦150?
(d) The Manager of division M has the notion of:
(i) Cutting the external price to₦195 with the certainty that the external sales will rise to1,000 unit
(ii) Maintaining the outside price of ₦200 for the 800 units and transfer the 200 units to N at a price that
would produce the same total contribution for Division M.
QUESTION 12
(a) Outline and discuss the main objective of transfer pricing system
(b) Consider the advantage and disadvantage of market based transfer prices
(c) Michael Wax industries limited sells a product, which has a variable cost of ₦8perunit.The sales demand at the current sales price
of ₦14 is 3000 unit. It has been estimated by the marketing department that the sales volume would fall by100 for each addition of 25
kobo to sales price
Required: Is the current price of ₦14 the optimal price which maximizes contribution?
(Adapted from ICAN)
QUESTION 13
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Hassan Nigeria Ltd has two independent departments known as department X and Y. The output of department X can either
be sold in the open market or transferred to Y as an intermediate product, which varies with production volume, Department Y
after processing the intermediate product disposes the final product in the open market. Relevant details are supplied below
Output unit
A
Total Cost Dept. X
B
Process Cost Dept. Y
C
Unit
3,000
4,000
5,000
6,000
₦
40,000
50,000
60,000
70,000
₦
32,000
42,000
52,000
62,000
Department X
Transfer price
D
₦
15.50
15.00
13.85
13.00
Department Y
Selling price
E
₦
15.50
28.50
28.30
26.50
Required
a) Ascertain the quantity of intermediate product that department X will be interested to transfer to department Y
b) Ascertain the quantity that department Y will like to receive from department X
c) What is the nature of the problem identified and how do you think the problem could be resolved
d) Itemize two major objectives of transfer pricing
e) List three major methods of transfer pricing and state 3 advantage and disadvantage each
(Adapted from ICAN)
QUESTION 14
Dorado Group Plc. is a manufacturer of house hold product which operates on divisional basis. Division A manufactures “EXE”
Which it sells to external customers and also to division C, another member of the group
Dorado Group’s policy is that divisions have the freedom to set transfer price and choose their suppliers. The group
also uses Residual Income (RI) to assess divisional performance and each year it sets each division a target R1.The
group’s cost of capitalis15%ayear.
Division A
Budgeted information for the coming year is:
Maximum capacity (unit)
150,000
External Sales(units)
110,000
External Selling price
₦70
Variable Cost
₦44
Fixed Cost
₦2, 180,000
Capital employed
₦6,400,000
Targeted residual Income
₦400,000
Division C
Division C has found two other companies willing to supply “EXE”
Company P could supply at ₦56 per “EXE” but only for annual order in excess of 50,000units
Company Q could supply at ₦66 per unit for any quantity ordered
Required
(a) If division C provisionally requests a quotation for 60,000 unit of “EXE” from division A for the coming year
i. Compute the transfer price per ‘EXE’ that division A should quote in order to meet its residual income target
ii. Compute the two prices division A would have to quote to Division C based on oppournity cost
(b) Evaluate and discuss the impact of the group’s current and proposed policies on the profit of divisions A and C, and on the
Illustrate your answer with calculation
Assume that division A and Care base in different countries and pay taxes at different rates of
50%and30%respectively Division A has now quoted transfer price of ₦60 for “EXE’ for 60,000units.Calculate
whether it is better for the group if division C purchase 60,000 units from A or from supplier P
(Adapted from ICAN)
QUESTION 15
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H is an investment group which owns a number of subsidiary companies. Each subsidiary produces a particular product range or
services
For the purpose of management control, the subsidiary companies are organised in three sectors.
Consulting and Services (CS): comparing a consultancy practise which provides advice on product design, manufacturing
technique and material usage both to H group companies and to businesses outside the group Salaries companies about 95% of
costs in the CS sector
Heavy Engineering (HE): comparing two subsidiary companies producing machinery, equipment and tolls used in a variety of
industry applications. These companies requires a major investment in the form of factory premises, plant and transport facilities
Light Engineering (LE): comparing four subsidiaries which produce a range of small mechanical and electrical components many of
which are designed into the products of HE sector companies. The production of these components is generally considered to be
labour intensive.
At the start of 2018 the management of H decides to prepare a five-year strategic plan for the group. A team of H executive is
assembled to prepare the plan..
At the first meeting the team is provided with the following summary of the group’s performance in 2017
Book value as at 31 December 2017
Non -current asset
Current asset
Current liability
Capital employed
CS
₦’000
80
90
(20)
150
HE
₦’000
4,970
820
(140)
5,650
LE
₦’000
810
180
(65)
(925)
Year to 31 December 2017
Sales
Trading profit
CS
₦’000
860
220
HE
₦’000
6,320
1,073
LE
₦’000
1,918
240
All the above figures are taken from H group main accounting system and are prepared on historical cost basis
The group finance charge is 12% of capital employed in each sector at the end of the year. The figure in H ltd cost of money and is
also used as the discount rate in project evaluation
Required:
(a) Calculate the return on investment (ROI) and residual income (RI) for each sector and comment on your calculation.
(b) Discuss the relative merit of ROI and RI as performance indicators
(c) Discuss the relevance of the information given in the question, and state what additional information you would find helpful in
advising H on which of its three sectors should be expended
(d) Briefly explain Fitzgerald and Moon Building Block Model and discuss whether it would be useful in measuring the performance
of H investment group.
QUESTION 16
(a) Explain the advantage of Divisionalisation
(b) SK is divided into five divisions that provide that provides consultancy services to each other and outside customers. Discuss the
implication of SK, and the consequence for the manager of the supplying and receiving division of each of the following cost
based approach to setting transfer prices
(i) Marginal cost
(ii) Total cost
(iii) Cost plus
(iv) Oppournity cost
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CHAPTER TEN
RELEVANT COST
Question 1:
AKM is considering whether to agree to do a job for a customer. It has sufficient spare capacity to take on this job. To do the job,
three different raw materials will be required. Material P, Material Q. Material R. Data relating to these materials is as follows:
Material
Quantity
needed for the
job
Units
Quantity
currently held
as inventory
units
X
Y
Z
800
600
500
200
400
300
Original cost of
units currently
held as
inventory
N per unit
20
15
30
Current
purchase
price
N per unit
Current
Disposal
value
N per unit
23
19
40
22
12
20
Material X is regularly used by the company for other work.
Material Y is no longer in regular use, and the units currently held as inventory have no alternative use
Material Z is also no longer in regular use, but if the existing inventory of material is not used for this job, they can be used as a
substitute material on a different job, where the contribution would be N 25 per unit of material Z Used
Required: Calculate the total relevant costs of the materials for this job for the customer.
Question 2:
Banjo-D ltd has been asked to quote a price for a one-off contract. The company’s management accountant has asked for your
advice on the relevant costs for the contact. The following are available information
Materials: The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The
company has 2,000 kg of material K currently in stock which has been purchases last month for a total cost of N19, 600. Since then
the price per kilogram for material K has increased by 5%
The contract also requires 200 Kg of material L. there are 250 kg of material L in stock which are not required for normal production.
This material originally cost a total of N 3, 125. If not used on this contract, the stock of material L would be sold for N 11 per kg
Labour: The contract requires 800 hours of skilled labour. Skilled labour is pad N 9.50 per hour. There is a shortage of skilled labour
and all the available skilled labour is fully employed in the company in the manufacturing of product W. The following relates to
product W.
N Per unit
N per unit
Selling Price
100
Less: Skilled Labour
38
Other Variable Cost
22
60
40
Required:
a) Prepare calculation showing the total relevant costs for making a decision about the contract n respect of the following elements.
I.
Material K and L: and
II.
Skilled labour
b) Explain how you would decide which overhead cost would be relevant in the financial appraisal of the contract
Question 3:
Kings Limited has been to quote a price for a one off contract, Management have drawn up the following schedule
N
Contract price (Cost plus 20%)
60,780
Costs:
Material: V (300kg at N 10/kg)
3,000
I (1,000 litres at N7/litres)
7,000
C (550kg at N3/kg)
1,650
Labour: Department 1 (1,500 hours at N8/hour)
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Department 2 (2,000 hours at N10/hour)
20,000
Overheads: Absorbed on a budgeted labour hour basis
(3,500 hours at N2/Labour hour)
7,000
Total costs
50,650
The following is also relevant:
Material V: The cost of N10 is the original purchase cost incurred some years ago. This material is no longer in use by the company
and if not used in the contract then it would be sold for scrap at N3/kg
Material I: This in continuous use by the businessN7 is the historic cost of the material although current supplies are being
purchased at N6.50
Material C: Kings limited has 300kg of this material in stock and new supplies would cost N4/kg. If current stocks are not used for the
contract then they would be used as a substitute for material Y in another production process costing N/7kg. 2kg of C replaces 1kg of
Y
Department 1: This department has spare labour capacity sufficient for the contract and labour would be retained
Department 2: This department is currently working at full capacity. King limited could get the men to work overtime to complete the
contract at time and a half, or they could divert labour hour from the production of other units that currently average N3 contribution
per labour hour.
Overhead: There are arbitrarily absorbed at a pre-determined rate. There would be no incremental cost incurred
Required:
Calculate the minimum contract price that kings limited could accept to break even using the relevant cost technique
Question 4
Define briefly the following terms used in management accounting
(i) Full cost
(ii) Sunk cost
(iii) Oppournity cost
(iv) Incremental cost
(v) Differential cost
(vi) Relevant cost
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CHAPTER ELEVEN
COST –VOLUME-PROFIT ANALYSIS
Question1:
In a firm a detailed budget of costs and sales at various levels had been prepared, but due to the computer operator’s
negligence, most of the information was destroyed
The following are the data that could be rescued
Sales level(units)
Material Cost
Labour Cost
Overhead cost
6,000
N
18,000
15,000
11,700
8,000
N
24,000
19,000
14,700
The selling price is N8.00 per unit at all levels
You are required to compute
(a) The fixed elements if any of each component cost
(b) The breakeven point in units and value
Question 2: Tokyo Ltd manufactures and sells only one product. The product is sold at N 10 per unit. Other details are as
follows:
Variable cost per unit
Fixed cost per month
Normal sales per month
N5
N20 000
6000units
Required:
1) Calculate the contribution per unit.
2) Calculate the contribution ratio (P/V ratio).
3) Calculate the break-even point in units.
4) Calculate the break-even point in sales value (N).
5) Calculate the margin of safety and the margin of safety ratio.
6) Draw a break-even graph which clearly indicates the break-even point.
7) Calculate the net profit per month if 5000 units are sold.
8) Suppose the variable cost increases to N6 per unit and the fixed cost decreases to N18000.
8.1 Calculate how many more units have to be sold in order to break-even.
8.2 Calculate the number of units to be sold in order to earn a net profit of N 7 500 per month.
Question3:
Easy steam Ltd manufactures and sells steam irons. Selling at N190 per unit and the variable costs amount to N81.70perunit.The
company’s fixed costs is N108,000 per year and the current tax rate is 30%.
Required:
Calculate what the company’s sales value (N) must be if management expects a net income (profit) of N125,000 after income tax.
Question 4:
Nangana Ltd supplied the following information regarding its three products:
Sales in units
Selling price per unit
Variable cost per unit
Product A
2000
N20
N16
Product B
3000
N50
N36
Product C
5000
N40
N28
Total fixed cost = N77 000
Required: Compute the company’s break-even point in units
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Question 5:
Flump Ltd produces 3 products and has fixed costs of N363 000 per year. Other data for the year is as follows:
A
B
C
Selling price per unit
N18
N12
N36
Variable cost per unit
N12
N7
N27
Relative sales mix
0.4
0.3
0.3
Required:
5.1
Calculate the break-even point in units for each product individually.
5.2 Determine how many units of each product must be sold to earn a net income of N99,000
Question 6:
Chukwu Nig ltd assembles a brand of power generating set which is in high demand in the country
because of the erratic public power supply. The component parts of the generating set are imported
from abroad.
The company has been operating at 80% which produces 2,800 sets but recently it has been difficult to obtain the foreign exchange
necessary to bring in the component parts. Obtainable foreign exchange could only allow the company to operate at
20%capacity.The flexible budget for 2014 is as follows
Cost Items
Direct Material
Direct wages
Production Overhead
Administration Overhead
Selling and distribution Overhead
Total Cost
Sales
Profit
70%
N’ 000
420
91
188
158
213
1,069
1,470
401
80%
N’ 000
480
104
206
158
221
1,169
1,680
511
90%
N’ 000
540
117
224
158
230
1,269
1,890
621
You are required to:
(a) Prepare a revised profit budget for 2016 based on 20% capacity utilization
(b) To calculate the capacity level at which the company will break-even
(c) Discuss briefly three problems which may arise if the company should operate at 20% capacity
Question7
Kete-Ekiti industries ltd manufactures two product – corn and wheat flour
The following data are projected for the coming year
Sales
Fixed Cost
Variable Cost
Total Cost
Net Profit
Corn Flour
Kg
N
100,000
100,000
20,000
60,000
80,000
20,000
Wheat Flour
Kg
N
80,000
100,000
56,000
30,000
86,000
14,000
(a) You are required to compute the following
(i) Break even sales in kilograms for corn flour assuming that the facilities are not used jointly
(ii) Breakeven sales in Naira for wheat flour, assuming that the facilities are not used jointly
(iii) Composite quantity contribution margin, assuming that consumers purchase composite quantity of 60Kg of corn flour
and 40Kg of wheat flour
(iv) Break even quantity of both products, assuming that consumer purchase composite 60Kg of corn flour and 40kg of
beans flour
(v) Composite contributor margin ratio, assuming that a composite quantity is defined as one Kg of corn flour and one kg of
wheat flour
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(vi) Break even sales in Naira, assuming that corn flour and wheat flour become one Kg to one Kg complement and there
are no changes in the company’s cost
(b) Define the following
(i) Break-even point
(ii) Margin of safety
Question7
Well Ventures ltd has the following cost and output data for the year 2015 in its PEAK farm operations
Sales Mix
Selling price/kg (N)
Variable cost/kg (N)
Total fixed cost
Total sales
Sorghum
30%
20
15
Product
Maize
30%
25
15
Yam
40%
40
20
Total N
170,000
650,000
In view of the demand pressure on CASSAVA, the management is proposing to replace the cultivation of SORGHUN with CASSAVA
the new estimate cost and output data are:
Sales Mix
Selling price/kg (N)
Variable cost/kg (N)
Total fixed cost
Total sales
Cassava
40%
30
14
Product
Maize
25%
25
15
Yam
35%
40
20
Total
N
190,000
650,000
You are required to:
(a) Calculate the profit for the two option
(b) Calculate the break-even point in Kilogram
(c) Advise whether the company should replace Sorghum with cassava
Question8
Wellness Company Limited is a manufacturer and distributors of new wonder drugs designed to relief tension and reduce
inhibitions. The company’s market consists principally of people connected with the entertainment industry on the West coast of
Africa. The company prices the drug at full cost plus 100%. The current variable costs of productions are as follows
Ingredient “X”
Labour:
Ampoules:
8mg @ N10 per mg
5 minutes @ N 80 per hour
1 @ N 1.50 per ampoule
The company’s fixed costs (which include the cost of distribution) are currently N 320,000 per annum and are absorbed on the basis
of budgeted production for the year.
The company is currently setting the price of the drug for the coming year and wishes to take into account expected price increase
attached to the various elements of costs.
These are as following
Element of cost
Ingredient “X”
Labour:
Ampoules:
Fixed costs
Expected price increase
10%
50%
33¹/3%
12½ %
The company’s budgeted production and sales for the coming year is 9,000 wonder drug, Having received the projected profit figure
for the coming year, the Chairman has asked, the market protection unit to help in producing a more sophisticated approach to
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pricing. They have investigated the market and believe that, with some influence being exercised with clients, the following demand
pattern will emerge.
Selling Price N
200
220
240
260
280
300
Demand (Units)
17,000
16,000
15,000
11,000
9,000
7,000
You are required to calculate:
(a) The selling price of the drug for the coming year on the company’s usual basis
(b) The company profit at the budgeted level of activity
(c) The break-even points in units and sales value
(d) The profit volume ratio
(e) The maximum amount that the company should prepare to spend on advertising to increase sales to 10,000 units
(f) The optimal selling price and production level (with supporting calculations) assuming that demand pattern shown above the
accurate
(g) The additional profit (if any) compared to the selling price calculated in (a) (I) above.
Question9
Ajayi Ltd. Plans to achieve a total output of 50,000 tonnes in year 2018. The product is expected to be sold @ N10 per tonnes
the anticipated costs are as follows:
Manufacture costs
Variable
Fixed
N 150,000
N 50,000
Administration costs:
Fixed (100%)
N 40,000
Selling and distribution costs:
Variable
N 50,000
Fixed
N60,000
Given that the variable cost per tonne is N 4. Use the data to construct the break even chat
Question10
SEGUN Ltd. and SHOLA Ltd. manufacture and sell the same type of product. Their estimated profit and loss account for the
month of December 2017 is represented below.
SEGUN Ltd
N
Sales
Less Variable cost 480,000
Fixed cost
60,000
profit
N
SHOLA Ltd
N
600,000
540,000
60,000
N
600,000
400,000
140,000
540,000
60,000
You are required to:
(i) Calculate the Breakeven point for each company
(ii) Determine the sales volume at which each of the two companies will make a profit of 20,000
(iii) Assess how their profitability will change with increase or decrease in volume
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CHAPTER TWELVE
OTHER DECISIONS
Marginal Costing: Make/ Buy Decision.
QUESTION 1
The management of JML (NIG) LTD. is considering next year’s production and purchases budgets. One of the component produced
by the company which is incorporated into another product before being sold has a budgeted manufacturing cost as follows:
N
Direct Material
14.00
Direct Labour
12.00
Variable Overheads
8.00
Fixed Overheads
20.00
54.00
DEF (Nig) LTD. has offered to supply the above component at a guaranteed price of N50/unit
You are required to advise the management of JML (NIG) LTD. whether the above component should be purchased from DEF (Nig)
LTD or produced internally.
QUESTION 2
A firm is considering whether to manufacture or purchase a particular component K345. This would be in batches of 10,000 and the
buying in price will be N 6.50. The marginal cost of manufacturing component of K345 is N 4.75 per unit and the component would
have to be made on a machine which was currently working at full capacity. If the component was manufactured. It is estimated that
the sales of finished product FP79 will be reduced by 1,000 units. FP79 has a marginal cost of N 60.000/unit and sells for N 80.00/
unit
Determine whether or not the firm should manufacture or purchase component K345
QUESTION 3
Ka-zim (Nig.) Ltd. makes four components A, B, C and D for which costs in the forthcoming year are expected to be
A
B
C
D
Production (Units)
2,000
4,000
8,000
6,000
Unit Marginal Cost:
N
N
N
N
Direct Materials
8
10
4
8
Direct Labour
16
18
8
12
Variable Production
4
6
2
4
Overheads
28
34
14
24
Total fixed costs per annum:
Incurred as a direct consequence of making
A
B
C
D
Other fixed costs
N
2,000
10,000
12,000
16,000
60,000
100,000
A subcontractor has offered to supply units of A, B, C and D for N24, N42, N20, and N28 respectively. Should Ka-zim make or buy
the components?
QUESTION 4
GEM company which manufacture part W-6 for use. Its production cycle has the following cost per unit for the production of 27,500
units:
N
Direct Materials
7.50
Direct Labour
22.50
Manufacturing Overheads
24.00
54.00
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It has been established that 662/3% of the manufacturing overhead costs is fixed. DIYA Coy. Ltd. has offered to sell 27,500 unit of
part W-6 to GEM Coy for N47.50/unit. If GEM company accepts DIYA’s offer, some of the facilities presently used to manufacture
part W-6 could be rented to a 3rd party at an annual rent of N65, 000. Additionally N6/unit of the fixed overhead cost which applies to
part W-6 will be total eliminated.
The Managing Director of GEM has called on you to advice on whether or not they should accept DIYA Coy’s. Offer Mention factors
other than relevant costs above which will influence your decision to accept or reject DIYA’s offer
Marginal Costing: Product Profitability
QUESTION 1
A company produces three products for which the following statement has been produced
X
Y
Z
Total
NN
N
N
Sales
32,000
50,000
45,000
127,000
Total Cost
36,000
38,000
34,000
108,000
Net Profit/(Loss)
(4,000)
12,000
11,000
19,000
The total costs comprise two third (2/3) variable and one third (1/3) fixed. The director considered that as product X shows a loss in
its operating result it should be discontinued
Required:
Based on the above date, should product X be dropped?
What other factors should be considered?
QUESTION 2
BAMAIYO (NIG.) LTD manufactures product W, X Y Z, all of which have 100% import content for materials. The budget for the month
of July 2014 is given as follows:
W
X
Y
Z
N
N
N
N
Direct Materials
32
60
60
30
Direct Labour
12
18
12
12
Period Costs
4
12
12
6
Profit
36
30
56
27
Sales
210,000
264,000
420,000
202,500
The budget may not be achieved because the company now faces shortage of finds to import the required materials, based on its
cash flow projection which has been prepared using the average rate for the past two month. The company can only afford to
purchase the N452, 000 worth of the required materials.
The company’s management has decided to produce at least 2,000 units of each product and the balance of the fund if any to be
utilized for products that gives the highest contribution to their profit
You are required to
(a) Advise management on the quantities of the product to produce
(b) Prepare the revised income statement showing the total profit from each product based on 1(a) above
Marginal Costing: Acceptance or Rejection of Special Order
QUESTION 1
Wazobia (NIG.) Ltd. manufactures and sells condensed milk which sells for N20 per can. Currently output is 400,000 tins per month
which represents 80% of installed capacity.
The company has the opportunity to utilize its surplus capacity by selling its products at N13/tin to a supermarket who will sell it as an
‘’own label’’ product
Variable Cost per can N10
Period Fixed cost N1, 600,000
required:
Based on the above data, should Wazobia accept the supermarket offer/order?
What other factors should be considered?
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CHAPTER THIRTEEN
LIMITING FACTOR
QUESTION 1
BAMAIYO (NIG.) LTD manufactures product W, X Y Z, all of which have 100% import content for materials. The budget for the month
of July 2014 is given as follows:
W
X
Y
Z
N
N
N
N
Direct Materials
32
60
60
30
Direct Labour
12
18
12
12
Period Costs
4
12
12
6
Profit
36
30
56
27
Sales
210,000
264,000
420,000
202,500
The budget may not be achieved because the company now faces shortage of finds to import the required materials, based on its
cash flow projection which has been prepared using the average rate for the past two month. The company can only afford to
purchase the N 452, 000 worth of the required materials.
The company’s management has decided to produce at least 2,000 units of each product and the balance of the fund if any to be
utilized for products that gives the highest contribution to their profit
You are required to
(c) Advise management on the quantities of the product to produce
(d) Prepare the revised income statement showing the total profit from each product based on 1(a) above
QUESTION 2
Gale Nigeria limited manufactures two products L and M, The selling prices of which are N 45 and N 72 respectively. Below are the
standard cost data
Product
L
Per Article
N
10
Direct Material
Direct Wages (N4/hr.)
Dept. 1
Dept. 2
Dept. 3
Dept. 4
Variable Overheads
Product
M
N
12
8
4
12
2
12
8
16
6
Fixed Overheads per annum
N 50, 000
Gala operates 40 hours weekly for 50 weeks each year. Currently, the employees in each department are:
Dept.1 = 15
Dept. 2 = 8
Dept. 3 = 9
Dept. 4 =12
You are required to state if one product only where to be made.
(a) Which product will give maximum profit and the problems that you envisage could arise
(b) Which product should be made and the amount of profit per annum resulting assuming that product L and M use the same
direct materials and that there is a shortage of material with supply limited at current price to a maximum of N 200,000 per
annum
(c) Which product should be made and the amount of profit per annum resulting, assuming that there is a shortage of persons
possessing the required skills required in department 2 with the result that the number of employees there cannot be increased
QUESTION 3
The following data are available regarding three product lines:
Product L N
Selling price
100
Direct Material (N 2/Litre) 10
Product M N Product N N
150
56
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45
Page 53
Direct Labour (N 4/hr.)
Variable Overhead
40
20
22
11
60
30
Variable overhead are recovered on the basis of N2/direct labour hour. Total fixed overheads are N200, 000
You are required to rank each of the product lines on the following assumption
(a) Sales is a limiting factor
(b) Material is a limiting factor
QUESTION 4
You have been engaged as a consultant to Oyemi manufacturing company to advice on the most profitable production plan for the
company.
The company makes three products A, B and C and the appropriate data are as follows.
COST PER UNIT
Direct Material
Direct labour process
A
B
C
Variable overheads
Fixed costs
Total
Selling price
Product A
N
15
36
15
18
30
20
134
150
Product B
N
45
30
18
9
20
20
142
190
Product C
N
30
45
30
36
50
20
211
260
The rate of pay for the direct labour are process A N 3 per hour, process B N 6 per hour and process C N 3 per hour and you are
advised that the labour in process B is in short supply and cannot be increased.
Fixed costs are covered on a unit basis and the current production and forecast for the three products are shown below.
Current production
Forecast of maximizing sale possible
Product A
Units
10,000
12,000
Product B Product C
Units
Units
5,000
6,000
7,000
9,000
Required:
It is required to advise the company on the most-profitable mix of production showing what improvement in profitability is possible
QUESTION 5
Sausage makes two products, the Mash and the Sauce, Unit variable costs are as follows
Direct material
Direct labour (N 3 per hour)
Variable overhead
Mash
N
1
6
1
Sauce
N
3
3
1
The sales price per unit is 14 per Mash and 11 per Sauce. During July the available direct labour is limited to 8,000 hours. Sales in
July is expected to be as follows
Mash
3,000 units
Sauce:
5,000 units
Required: Determine the production budget that will maximise profit, assuming that fixed costs per month are 20,000 and that there
is no opening inventory of finished goods or work in progress
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QUESTION 6
Kobo Nig ltd. Manufactures for sales two products X and Y from three raw materials, R1, R2 and R3 which are in short supply.
The usage of these raw materials per product is as follows:
R1
R2
R3
Raw material per unit
X
Y
6
2
2
2
2
4
The supply of each raw material is limited to
R1 = 240; R2 = 120; R3 = 200
The contribution per product is N 100 for X and N 160 for Y
You are required to:
(a) Formulate and determine graphically the optimal solution
(b) At the optimum solution, determine the shadow price of each raw material
(c) Assuming it is possible to increase the supply of R2 at the extra rate of N 12 per unit, determine if the company should increase
the supply and if so, by how many units.
QUESTION 7
A ship Nig ltd produces three products namely A, B, and C with a contribution of N 2, N 3 and N 4 respectively. Production data are
as follows;
A
B
C
Total hour available
Skilled Labour (hours) Semi-skilled labour (hours) Machine (hours)
5
4
3
2
5
5
4
6
4
12,000
24,000
18,000
You are required to:
(a) Formulate the linear programming problem into a standard form
(b) Determine the optimal production mix that will maximize profit and
(c) Interpret the information on the final tableau
QUESTION 8
XYZ LTD has just received an order for its kitchen cabinet which it makes in two models- standard and deluxe. The order is for at
least 100 kitchen cabinets of either variety including at last forty of the deluxe model
The standard model takes four hours of assembly time and has a variable cost of N800 whereas the deluxe model takes ten hours
assembly time and has a variable cost of N1, 200. There are 800 hours in total available for assembly. The equipment can be used
to assemble either model of cabinets in any combination. Other reasons dictate that at least as many standard cabinets as deluxe
cabinets must be made. The company wishes to minimize its variable cost of production on this special order
You are required to:
(a) Formulate this problem as linear programme
(b) Graph the constraints shading the feasible region
(c) Recommend the best product mix for the company and the variable cost incurred
(d) List four limitations of linear programming
(e) Define and explain the concept of shadow pricing
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QUESTION 9
Adelagun international produces and sells products A and B which requires
Product
Material (KG)
Labour (Hours)
Machine Time (Hours)
A
6
2
5
B
3
5
3
Total Available 5000Kg
2,500hrs
3,200hrs
You are required to
Contribution ₦
25
23
(a) Formulate the linear programming problem
QUESTION 10
DCC operates a small plant for the manufacture of two joint chemical products X and Y. The production of this chemical requires two
raw material A and B which cost N 5,000 and N 8,000 per Litre respectively. The maximum available supply per week is 2,700 litres
of A and 2,000 litres for B
The plant can operates using either of two processes, which have different operating cost and raw material requirement for the
production of X and Y, as follows.
Process
1
2
Process 1
Process 2
Raw material consumed
Output
Litres per processing hours Litres per hour
A
B
X
Y
20
10
15
20
30
20
20
10
Cost
Per hour N ‘000
500
230
The plant can run for 120 hours per week in total, but for safety reasons process 2 cannot be operated for more than 80 hour per
week
X sells for 18,000 per litre, Y sells for 24,000 per litre
Required:
Formulate a linear programming model, and then solve it to determine how the plant should operate each week.
QUESTION 11
TDS manufacture 2 products, X and Y which earns a contribution of N 8 and N14 per unit respectively. At current selling price there
is no limit to sells demand for Y, but maximum demand for X would be 1,200 units. The company aims to maximise its annual profit,
and fixed cost are N15,000
In the year to 30 June 2018, the company expect to have a limited availability of resources and estimates of availability are as follows
Skilled labour
Machine time
Material M
Maximum 9,000 hours
Maximum 4,000 hours
Maximum 1,000 hours
The usage of these resources per unit of products is as follows:
X
Skilled labour
Machine time
Material M
3 hours
1 hours
Hours
Y
4 hours
2 hours
hours
Required:
a) Formulate the problem using the simplex method of linear programming
b) Determine how many variables will have a positive value and how many a value of zero in any feasible solution
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CHAPTER FOURTEEN
PRICING DECISION
QUESTION 1
Patches Nig. Ltd sells a product which has a variable cost of N 160 per unit. The sales demand at the current price of N 280 per unit
is 3,000 units. The marketing manager has estimated that sales volume would fall by 100 units for each addition of N 5 to sales
prices and vice-versa
Required: Determine if the current price of N 280 per unit is the optimal price which maximizes contribution
QUESTION 2
Cee-Cee Company limited produces a fast-moving toy called rubber beads. The company sold 10,000 units of the toy last year with
the following result:
N
N
Sales
210,000
Manufacturing cost of goods sold:
30.000
Direct Labour
Direct Material
28,000
40,000
(98,000)
Overhead (60% Variable)
112,000
Gross Profit
Selling and administrative Expenses:
Variable
(66,000)
Fixed
18,000 48,000
Profit
46,000
The marketing manager is preparing the forecast for 2016 and has made the following estimates of the demand at various potential
prices
Price (N)
Demands( unit)
20
19
12,000 15,000
18
20,000
17
30,000
16
35,000
15
45,000
14
50,000
13
55,000
The existing plant has a single machine with a capacity of 15,000 units. Machine can be acquired to meet any increased demand for the
company’s product but the addition of each machine increases existing fixed costs by N 56,000
Required: At what price should the toys be sold and why?
QUESTION 3
FJM & Co has information about the demand that would be generated by certain selling price as follows:
Selling Price (N)
Demand (‘000 units)
22
0
18
4
14
8
12
10
10
12
8
14
4
18
0
22
The variable cost of producing each unit is N6 and the company incurs annual fixed cost of N30, 000
You are required:
a. Using the tabular approach to calculate the optimal selling, optimal output and optimal profit.
b. Express the cost and revenue data in terms of continuous function and calculate the optimal selling price, optimal output
and optimal profit
QUESTION 4
Bola Nig. Ltd manufactures and markets consumer’s goods. The company’s sales volume is strongly influenced by the current economic
recession (external condition) which is outside the management control. Notwithstanding the external influences, the company has
planned to achieve a 20% returns on capital employed. In pursuing this objective, the company has based its selling price on normal
production which is 25,000 units
As a result of its research effort the company has developed a new product which it planned to introduce to the market
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(a) You are required as the company’s accountant to advise management on the selling price per unit which will produce the desired
rate of return on capital employed
Additional information
Variable costs N 80 per unit
Fixed costs N 3,000,000 per annum
Normal capital employed: Working capital N 20 per unit fixed assets N 1, 500,000
(b) Verify your computation of the selling price per unit by calculating the rate of returns on capital employed for 25,000 unit
(Adapted from ICAN)
QUESTION 5
Wami ltd manufactures a mono product. The company’s fixed cost amounted to N 2, 550 per week. It is estimated that its variable
cost per unit is given by the expression
1.6 + 0.04Q where Q is the quantity( in units) produced and sold
The marketing director considers that there is a linear relationship between the quantity demanded and the selling price per unit.
Such that each time the selling price is increased by N 0.30, the quantity demanded falls by one. and vice-versa, for decreasing the
selling price. The current selling price is N 51.60 and the resultant demands is for 60 units per week
Wami ltd. aims to maximize profit
QUESTION 6
Focus path limited operates in a manufacturing industry. It produces to order and carried no inventory
Its demand function is estimated to be P = 100 – 2Q (where P is the unit selling price in ₦ and Q is the quantity demanded in
thousands of units)
Its total cost function is estimated to C =
+ 10Q+500 (where C is the total cost in ₦’ 000and Q is as above)
You are required in respect of focus path limited to:
(a) Calculate the output in units that will maximize total profit and determine the corresponding unit selling price, total loss and total
sales revenue
(b) Mention 4 factors to be considered by management in its pricing strategy
QUESTION 7
Albany has recently spent some time on researching and developing a new product for which they are trying to establish a suitable
price. Previously they have used cost plus 20% to set the selling prices.
The standard cost per unit has been estimated as follows:
Direct materials:
N
Material 1
10 (4kg at N 2.50/kg)
Material 2
7 (1kg at N 7/kg)
Direct Labour
13 (2 hours at N 6.50/kg)
Fixed Overheads
7 (2 hours at N3.50/kg)
37
Required:
a) Using the standard costs calculate two different cost plus prices using two different bases and explain two advantages and
disadvantage of each method.
b) Give and explain three other possible pricing strategies that could be adopted
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CHAPTER FOURTEEN
RISK AND DECISION MAKING
QUESTION 1
(a) Barco Plc introduces one new product with its range of products next year. The extra cost will be N 750,000 for either product X
and Y.
Product X
Product Y
N
N
Selling Price
20
25
Variable cost
10
13
From past experience with similar products, the demand probabilities have been estimated at:
Demand in unit
probabilities
X
Y
50,000
0.2
0.1
75,000
0.4
0.2
100,000
0.3
0.4
125,000
0.1
0.3
You are required to compute the breakeven point for each product and advice with reasons, which product should be chosen
(b) Three varieties are being considered for honoring a two year free services guarantee. Your company had an offer to obtain the
sale of 2,000 communication sets to a hotel group. The varieties are:
(1) Do the servicing with own staff based on past experience, the cost will be:
Probability of Occurrence
0.30
0.50
0.20
Event of servicing
Very little trouble (500 calls/year)
Usual Trouble (1,000 calls/year)
A lot of trouble (1,500 calls/year)
Total Cost N
7,000
12,000
25,000
(2) Sub-contract to firm K who has quoted a fixed cost of N14,000 plus N2 for each visit in excess of 750 visits over the two year
period
(3) Sub contract to firm P who has quoted a fixed cost of N16,000 plus
You are required to advise the management on the variety they should adopt. Justify your recommendation
QUESTION 2
Sunny enterprise ltd has two investment options, each of which involves an initial outlay of N 3,000 and an expected life of 3 years
Annual net cash flow from each project being one year after the initial investment is made and has the following probability
distributions:
Project
A
State of the World
Probability
Annual net cash flows N
I
0.2
2,400
II
0.6
3,000
III
0.2
3,600
I
0.2
0
B
II
0.6
3,000
III
0.2
7,500
(a) What is the expected value of the annual cash flow from each project?
(b) At What is the risk adjusted net present value of each project if the company has decided to evaluate the riskier project and
the less riskier at 8%
QUESTION 3
Considering the following investment oppournities A and B. each has an initial outlay of N 10,000 and a two year life. Net cash flow
forecast are given which are shown as a range of outcomes and together with assumed chances of each outcome occurring
Project
A
Net cash flow N
5,000
7,000
Year 1
Probabilities
0.1
0.8
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Net cash flow N
6,000
10,000
Year 2
probabilities
0.2
0.6
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10,000
Project
B
4,000
7,000
10,000
0.1
Year 1
0.1
0.1
0.2
13,000
4,000
9,000
14,000
0.2
Year 2
0.1
0.6
0.3
The second year net cash flow of both projects is assumed to be independent of those of the first year. The best capital is 10%
You are required to:
(a) Calculate the expected net value of the project
(b) Determine the standard deviation of the cash flow in each of the two years for each project
(c) Determine the standard deviation for each of the project
(d) Calculate the coefficient of variation for each of the project
(e) Discuss ways of comparing project A and B as investment oppournities using the result of A to assist in making comparison
QUESTION 4
The Nigerian Grain Reserve company ltd is investigating the possibility of producing and marketing storage silos for peasant farmers
in the country. Undertaking this project will require the construction of either a large or small manufacturing plant. The market for the
product named “SRGN” could be either favorable or unfavorable. The company of course has the option of not developing the
product line at all
Additional Information
(a) With a favorable market a large facility would give the company a net profit of N200,000
(b) With an unfavorable market, a small plant would result in a net loss N180,000
(c) With a favorable market, a small plant would result in a net loss of N100,000
(d) With an unfavorable market, a small plant would result in a net loss of N20,000
(e) Assume a 50 – 50 chance of occurrence for the state of nature
You are required to advise the company on the course of action it should follow adopting a decision tree technique
QUESTION 5
A company is considering whether to develop and market a new product, Development cost are estimated to be N 180,000, and
there is a 0.75 probability that the development effort will be successful and a 0.25 probability that the development after will be
unsuccessful. If the development is successful; the product would be marketed, and it is estimated that
(a) If the product is very successful, profit will be N 540,000
(b) If the product id moderately successful, profit will be N 100,000
(c) If the product is a failure, there will be a loss of N 400,000
Each of the above profit and loss calculations is after taking into account the development cost of N 180,000. The estimated
probabilities of each of the above events are as follows
(a) Very Successful ............. 0.4
(b) Moderately Successful .. 0.3
(c) Failure ............................0.3
You are required to advise the company on the course of action it should follow adopting a decision tree
QUESTION 6
A company is considering the manufacturing of a new product. If manufacture is starting without research, it is estimated that there is
a 65% probability of good sales, giving a net profit of N 300, 000 and a probability of poor sales with a resultant net loss of N 30, 000
If research is undertaken at a cost of N 6, 000, it is estimated that there is a 90% chance that it will indicate that sales will be high and
a 10% probability that it will forecast low sales. It is possible however, for research of this type when it gives a good indication, to be
correct 70% of the time, when the net profit is calculate to be N 40,000 and incorrect 30% of the time, when the net loss is N 5,000. If
research forecasts poor sales, there is an 80% chance that it is correct, with a net loss of N 10, 000 and a 20% chance that I is wrong
when the profit is N 8,000 net
You are required to prepare a decision tree showing the various alternative lines of action open to the company and indicate the
optimal strategy
QUESTION 7
A project is expected to last four years costing N20,000. Annual sales and related cost are below shown
N
N
Sales (50 units)
21,500
Direct Material
4,000
Direct labour
3,000
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Direct factory overhead:
Variable
1,500
Contribution
Fixed cost (incremental)
Annual profit
8,500
13,000
(5,000)
8,000
Required:
(a) Calculate the projects NPV
(b) Prepare a stamen showing how sensitive the NPV id to error of estimation in each component of your calculation in (a)
above, namely
(1) Annual sales volume
(2) Unit selling price
(3) Direct material cost
(4) Direct labour cost
(5) Variable overhead
(6) Annual fixed cost
(7) Initial cost
(8) Product life
(9) Cost of capital
QUESTION 8
Obanikoro venture has been operating a stand at a university’s football stadium on a concessionary rate. The university has had
successful football teams for many years as a result the stadium is all full. The university is located in an area that suffers no rain
during football season. From time to time, Obanikoro has found itself in short supply of fish roll and at other times it has unsold stock.
A review of the records of sales of the past nine seasons revealed the following frequency of hot fish roll sold
Fish Roll No of games
10,000
5
20,000
10
30,000
20
40,000
15
50
Fish roll sell for N 50 each and cost Obanikoro N 30each. Unsold fish roll are given without charge to a local orphanage home
Required:
i.
Assuming only the four quantity listed where ever sold and that the occurrence were random events, prepare a payoff table
(ignore income tax) to represent the four possible strategies of ordering 10,000 20,000,30,000,40,000 fish roll
ii.
Using the expected value decision rule, determine the best strategy
iii.
What is the naira value of perfect information?
QUESTION 9
As a result of routine analysis of income statements, the performance Accountant of Akola Nigeria limited considers that there are
three items in the income stamen which are likely to vary significantly from month to month these are
a) Direct material cost
b) Direct labour cost
c) Sales revenue
Using the data collected over the last two years, and taking into account likely changes in the level of operation during the next few
month, the following distribution have been estimated for the monthly income and expenditure in each of this categories
Direct Labour Cost Probability
Direct material cost
Probability
Sales Revenue Probability
N’000
N’000
N’000
10-12
0.3
6-8
0.2
30-34
0.1
12-14
0.5
8-10
0.3
34-38
0.3
14-16
0.2
10-12
0.3
38-42
0.4
12-14
0.2
42-46
0.2
Additional Information:
(a) Other expenditure items which amounted to N14, 000 per month are to be regarded as fixed.
(b) All cash receipts and payments are assumed to be independent and occur at the end of the month
(c) Random numbers are given as follows:
Direct labour Cost
2
7
9
2
9
8
Raw material cost
4
4
1
0
3
4
Sales revenue
0
6
6
8
0
2
Required to simulate six month income statement for AKOLA NIGERIA LIMITED
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CHAPTER FIFTEEN
WORKING CAPITAL MANAGEMENT
QUESTION 1
The following information is extract from the record of Omro ltd
Items
Inventories
Account receivable
Account payable
Beginning
N
5,000
1,600
2,700
Ending
N
7,000
2,400
4,000
Credit sales for the year just ended were N 50,000 and cost of goods sold was N 30,000
Required: prepare for Omro ltd
1) Operating cycle
2) Cash cycle
QUESTION 2
Roasted chicken ltd a Lagos based catering outlets managed by professional. He following information was obtained on the average
working capital cycle from other company in the industry:
Raw Material Stock Turnover
Trade receivable period
W-I-P inventories turnover
Finished goods received
Cash received
Working capital cycle
23days
65days
15days
38days
(55) days
86days
The below data relates specifically to Roasted Chicken ltd
N
Turnover
45,000
Cost of sales
31,500
Purchases
9,000
Average inventories
1,200
Average W-I-P
1,275
Average finished goods
2,700
Average trade receivable
5,250
Average trade payable
1,350
Required: using the above data calculate the current working capital cycle of Roasted Chicken ltd and comment briefly on your result
QUESTION 3
The managing director of soulex limited a small scale business enterprise is worried about the short term solvency/liquidity of his
company. The management accountant based on the information of the managing director came up with the following estimated
figure for the coming trading year
Turnover
N 8,400,000
Average account receivable
759,000
Gross profit margin
25%
Average inventories
N
Finished goods
525,000
W-I-P (80% completed)
825,111
Inventories
330,000
Average account payable
315,000
Material cost represents 50% of the total cost of sales
Required: Calculate the cash operating cycle of the company to the nearest day
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QUESTION 4
The following information was extracted from the budget of delta ltd.
Required: prepare a statement showing the average amount of working capital required by the company
Annual sales are estimated (100,000 units @ ₦1/unit) N 100,000
Production quantity co side with sale and will be carried on evenly throughout the year. Production is estimated as follows
Material (0.5/unit @100,000 units) N 50,000
Labour (0.2/unit @100,000 units) N 20,000
Expenses 0.175/unit @ 100,000unit) N 17,500
Customer is given 60days credit and 50days credit taken from suppliers.
40days supply of raw material
15 days suppliers of finished goods are kept
Production cycle (w-i-p) 20days
And all materials are used at the commencement of each production cycle
Cash equilvant of 1/3 of other working capital is also required
QUESTION 5
The table below gives information extracted from the annual financial statement of Management plc for the past year.
Management Plc-Extracts from annual accounts
N
Inventories: Raw materials
108.000
Work in progress
75,600
Finished goods
86,400
Purchase of raw material
518,400
Cost of production
675,000
Cost of goods sold
756,000
Sales
864,000
Receivables
172,800
Payables
86,400
Required
Calculate the length of the working capital cycle (assuming 365 days in the year)
QUESTION 6
The working capital (or operating) cycle of a business is the length of time between payment for materials entering into stock and
receipt of the proceeds of sales.
The table below gives information extracted from the annual accounts of Oleku plc for the past three years
you are required to
a. Calculate the length of the working capital cycle by year assuming 365 days in the year; and
b. List possible actions that might be taken to reduce the length of the cycle, and the possible disadvantages of each.
Stocks: raw materials
Stocks: Work-in-progress
Finished goods
Purchases
Cost of goods sold
Sales
Debtors
Trade creditors
Year 1
N
108,000
75,600
86,400
518,400
756,000
864,000
172,800
86,400
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Year 2
N
145,800
97,200
129,600
702,000
972,000
1,080,000
259,200
105,300
Year 3
N
180,000
93,360
142,875
720,000
1,098,360
1,188,000
297,000
126,000
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CHAPTER SIXTEEN
INVENTORY MANAGEMENT
QUESTION 1
The following data given below is to be used for calculating the following stock control levels
a) Re-order level
b) Minimum level
c) Maximum level
d) Average level
Average usage is 50units/day
Maximum usage is 70units/day
Minimum usage is 30units/day
Re-order period: 11-13 days
QUESTION 2
Calculate three control levels for a stock control system having the following characteristics
Average usage 3000units/week
Minimum usage 2200 unit/week
Maximum usage 4200 units/week
Re-order period 10-14 weeks
EOQ = 35,000 units
QUESTION 3
Daily consumption 130-180units
Lead time 16-20 days
EOQ 4,800 units
holding cost/unit ₦10
Required
a) Find the average stock level
b) What is the total cost of the base stock/annum
c) Would your answer to (b) above differ, if the normal daily consumption is 160units
QUESTION 4
Hallmark venture has an annual demand of 1000unit/month. The ordering cost is N 350/order. The unit cost is N8 each and it is
estimated that carrying cost are 15% per annum of the purchase price
You are required to determine the Economic order quantity
QUESTION 5
The following data relate to components B10
Cost of raw material
N10 per unit
Usage of raw material
100units
Minimum re-order period
20days
Maximum re-order period
30days Cost
of ordering materials
N400/order
Carrying cost
10% per order
Assuming that each year consist of 48 working weeks of 5 days per week
Required
Calculate
a) The order level (EOQ)
b) The re-order quantity
c) The maximum level
d) The minimum level
e) The average level
QUESTION 6
Globe motors, a car assembly plants buys batteries from an overseas suppliers at N20/battery. Total annual requirement are 25,000
batteries at a rate of 100 per working days. The following cost data are available.
Desired annual return on stock investment N2
Sundry carrying cost/unit per year N0.50
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Total carrying cost/unit per year N2.50
Cost of purchase order include clerical cost, stationary, telephone N50
Required:
a) Prepare in tabular form the total annual relevant cost for each of the following order size:250, 500,1000, 2000, 4000 and 8000
b) What is the EOQ for batteries at globe motors and why
QUESTION 7
A retailer has an annual demand for a certain non-perishable commodity of 1000units. He buys from a wholesaler at a cost of N5/unit
and the cost of ordering and receiving delivery of a replacement order is N25 each time. His stock holding costs are 25% of the
average stock value per year
Required
1) How many units should the retailer order per occasion and how often should he order this quantity to minimise the total relevant
cost?
2) What is the total stock-out?
3) Suppose the wholesaler offers 5% discount on the purchase price per unit on order between 300 and 1999 10% discount on
order of 2000 or more
Determine whether the retailer should take advantage of either of the discount offered
QUESTION 8
The annual demand of a product by a company is 5000 units order cost are N100 and the basic unit price is N5 and carrying cost are
20% per annum
Discounts are available thus
1,200 – 1,399 less 10%
1,400 – 1,499 less 15%
1,500 – over less 20%
What is the economic quantity to order?
QUESTION 9
A company uses 50,000 rings per annum which cost N10 to purchase, the ordering and handling. Costs are N150/order and carrying
cost are 15%. However, on purchasing is own machinery, the company now has the capacity to purchase 250,000 rings per annum.
You are required to calculate the EOQ (assuming there is now a gradual replenishment of Stock)
QUESTION 10
Bayo ltd has the following in respect of material local beans used in the production of food ingredient
Expected usage during the year 5,000,000 tonnes
Ordering Cost N25
Price/tonne N10,000
Holding cost 10% material price
Determine the EOQ with trial size of 250, 500, 625, 1000 and 2500
I.
Using tabular method
II.
Using formula method
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CHAPTER SEVENTEEN
MANAGEMENT OF RECEIVABLE AND PAYABLE
QUESTION 1
Sage ltd is currently producing and selling 250,000 units of his product at N5/unit.
Unit cost of production N4.50
Company is currently extending one month credit, the company is however thinking of extending the credit period to 2 month with the
expectation that sales will increase by 25%
If the required rate of returns on these form of investment is 20%
Required; advise the company if the credit policy is worthwhile
QUESTION 2
Adams plc is considering a change of credit policy which will result in an increase in the average collection period from 1-2 months.
The relaxation in credit is expected to produce an increase in sales in each year amounting to 26% of the current sales
Selling price/unit - N 10
Variable cost/unit - N 8.50
Current annual sales N 2,400,000
Required rate of returns on investment is 20%
Assume that the 26% increase in sales will result in additional stock of N100,000 and additional creditors N20,000
Advise the company on whether or not to extend the credit period offered to the customers if:
a) All customers take the longer credit of 2 months
b) Existing customers do not change their payment habit and only the new customer takes a full two month credit
QUESTION 3
Wise manufacturing investment is considering is capital investment for next year. Estimated noncurrent asset and current liabilities
are respectively
Non-current asset N2, 600,000
Current liabilities N 2,340,000
Sales and profit before interest and tax
PBIT depends on current asset investment, particularly inventory and bad debts
The company is examining the following alternative working capital policies
Working Capital policies
Conservative
Moderate
Aggressive
Investment in current
asset(N‘000)
4,500
3,900
2,600
Estimated sales (N‘000) PBIT (N‘000)
12,300
11,500
10,000
1,230
1,150
1,000
Required: Calculate the following for each policy
a) Rate of returns on total sales
b) Net working capital position
c) Current ratio
d) Current asset to noncurrent asset ratio
QUESTION 4
Elscon oil limited have been offered credit term from its major suppliers of “2/10 net 45”. The company has the choice of paying 98k
per N 1 on day 10 or to invest the 98k for additional 35 days and eventually pay the suppliers
Required: Advise the company whether or not they should take the accept the discount assuming cost of borrowing is 20%
QUESTION 5
SGS Nigeria limited had just issued to one of its buyers an invoice for N10,000 at “2/10 net 45”, the company can invest on short
term basis at 25% p.a.
Advise the company whether it should continue to give discount or not.
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QUESTION 6
Fred Olsen Ltd needed to increase its working capital by N100,000. There are essentially three alternatives of financing available.
To forgo cash discount granted on the bases of “3/10 net 30”
Borrow from the bank at 8%, this will necessitate maintain the 25% compensating balance
Issue promissory note, selling at 7.5%. The cost of placing this issue is N500 each 6 month
Assuming the firm will prefer the flexibility of Bank financing and provided the additional cost of this flexibility is not more than 1%.
Which alternative should be selected?
QUESTION 7
If a customer decided to pass up the chance of a cash discount of 1% in return for reducing her average payment period from 70 to
30 days. What would be the implied cost of interest per annum?
QUESTION 8
Ninety-percent of Alan Blow Ltd total sales of N600,000 is on credit. If its year end receivables turnover is 5, the average collection
period (based on a 365 days year) and year=end receivable are, respectively what?
QUESTION 9
If credit terms of “2/10 net 40” are offered, the approximate cost of not taking the discount and paying at the end of the credit period
would be closest to ---? (Assume a 365-day year.)
QUESTION 10
Sixty percent of Bucket mouth’s mouth annual sales of 900,000 is on credit. If its year end receivables turnover is 4.5, the average
collection period and the year-end receivable are respectively ……. ?(Assuming a 365 – day year)
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CHAPTER EIGHTEEN
CASH MANAGEMENT
QUESTION 1
The following information relates to Kingdom plc, a publishing company.
The selling price of a book is N30, and sales are made on credit through a bookshop and invoiced on the last day of the month.
Variable costs of production per book are:
Materials ................................. N10
Labour ................................... N8
Overhead ................................. N4
Total ........................................ N22
The following volume of books have been forecasted by the sales manager
Nov
Dec
Jan
Feb
Mar
Apr
May
No of books
1,000 1,000
1,000
1,250
1,500
2,000 1,900
Jun
2,200
Jul
2,200
Aug
2,300
Customer’s payment pattern as follows:
One month after the sale
40%
Two months after the sales 60%
The company provides the book two months before they are sold and the creditors for materials are paid two month after production.
Variable overhead are paid in the month following production and are expected to increase by 25% in April; 75% of wages are paid in
the month of production and 25% in the following month
A wage increase of 12.5% will take place on 1 March
The company is going a restructuring and will sell one of its freehold properties in May for N25,000, but it is also planning a new
printing press in May for N10,000. Depreciation is currently N1,000 per month, and will rise to N1,500 after purchase of the new
machine
The company’s corporation tax (of N10,000) is due for payment in March
He company presently has a cash balance at bank on 31st December, 2016, of N1,500
You are required to produce a cash budget for the six months from 1 January 2017 to 30June 2017
QUESTION 2
Gubuwa limited faces a fixed cost of N8,000 to obtain new fund. There is a requirement for N48,000 of cash over each period of one
year for the foreseeable future. The interest cost of new funds is 12% annum; the interest rate earned on short-term securities is 9%
per annum. How much finance should Gubuwa Limited raise at a time?
QUESTION 3
Formulate a decision rule using the Miller-Orr model
The following data applies to SDS ltd
a) The minimum cash balance is N8,000
b) The variance of daily cash flows is 4,000,000,equilvant to a standard deviation of N2,000 per day
c) The transaction cost for buying or selling securities is N50
d) The interest rate is 0.025% per day
QUESTION 4
The financial manager at Millor Ltd believes that cash flows are almost impossible to predict on a daily basis. She knows that a
minimum cash balance of N20,000 is required and transferring money to or from the bank costs N50 per transaction. Inspections of
daily cash flow over the years suggest that standard deviation is N3,000 a day and interest rate is 0.03% per day.
Required:
Using the Miller- Orr model Formulate a decision
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QUESTION 5
Specify the basic formula for calculating the cost of cash discounts.
QUESTION 6
What are the main differences in the assumptions underlying the Baumol and Miller–Orr cash models?
QUESTION 7
Hunslett Express Company specifies payment from its customers at the end of the month following delivery. On average, customers
take 70 days to pay. Sales total N8 million per year and bad debts total N40,000 per year.
The company plans to offer cash discounts for payment within 30 days. It is estimated that 50 per cent of customers will take up the
discount, but that the remaining customers will take 80 days to pay. The company has an overdraft facility costing 13 per cent p.a. If
the proposed scheme is introduced, bad debts will fall toN20,000 and savings in credit administration ofN12,000 p.a. are expected.
Should the company offer the new credit terms? If the cost of cash discount if 2%
QUESTION 8
The treasurer of Bizarre plc, a company specialising in unusual gifts for eccentric business managers (a rapidly growing market), has
a sizeable sum invested in short-term investments, earning 6 per cent interest. Every time she sells investments to top up the bank
balance the transaction cost isN25 Monthly cash payments are aroundN200,000
Required: How often and by how much should she transfer money to the bank account? Using the EOQ model
QUESTION 9
Entity Green decides that it needs a minimum cash balance of ₦40,000. It estimates that it has transaction costs of ₦120 for each
purchase or sale of short-term investments.
Based on its measured historical observations, the standard deviation of daily cash flows is ₦1,800.
The annual market interest rate on short-term investments is 7%.
Required
Using the Miller-Orr model, calculate the upper cash limit, and the return point.
QUESTION 10
Entity GF invests all cash as soon as it is received, to earn interest at 5%. It incurs cash expenditures of ₦16,000,000 each year, and
pays for these at a constant rate each day. The cost of converting a batch of investments into cash is ₦250, regardless of the size of
the transaction.
Required
Use the Baumol model to decide how much cash should be obtained each time investments are sold.
QUESTION 11
Entity KL makes payments to its creditors of ₦3 million a year, at an equal rate each day. Each time it converts investments into
cash, it pays transaction charges of ₦150. The opportunity cost of holding cash rather than investing it is 6% per year.
Using the Baumol model, calculate what quantity of investments should be sold whenever more cash is needed by Entity KL
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CHAPTER NINETEEN
CAPITAL BUDGETING DECISION
QUESTION 1
A machine is available for purchases at the cost of N 80,000, and it has an expected life of 5 years with a scrap value of 10,000 at
the end of the five year period. Estimate of additional profit before depreciation over the asset life are as follows
Year
1
2
3
N
20,000
40,000
30,000
The company’s cost of capital is 9%
Required:
a) Appraise the project using the ARR technique
b) Advise if the project should be undertaking with reasons
4
15,000
5
5,000
QUESTION 2
Yola plc is to undertake a project requiring N1,000,000 outlay.
Required: what is the payback period if?
a) The project generates N 250,000 annually
b) The project has the flowing cash flow profile
Year
N(cash flow)
1
200,000
2
220,000
3
230,000
4
220,000
5
195,000
QUESTION 3
A machine with a purchase price of N 940, 000 is estimated to manual operations costing N 250, 000 per annum. The machine will
last for five years and has no residual value at the end of its useful life
You are required to calculate:
(a) The net present value of the project if the cost of capital is 10%
(b) The projects internal rate of returns
(c) The level of annual savings necessary to achieve the 12% d.c.f returns
QUESTION 4
1. The management of Hemitrope limited are receiving the company’s capital investment option for the coming year, and are
considering 6 projects.
Project A would cost N 29, 000 now and would earn the following cash profit:
Year
1
2
3
4
N Cash Profit
8,000
12,000
10,000
6,000
The capital equipment purchases at the start of the project could be resold for N 5,000 at the start of year 5
Project B Would involve a current outlay of N44, 000 on capital equipment and N20,000 on working capital. The profits from the
project would be as follows
Year
sales
N
Variable cost
N
PERFORMANCE MANAGEMENT -08134289772
contribution
N
Fixed cost
N
profit
N
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1
2
3
75,000
90,000
45,000
50,000
60,000
28,000
25,000
30,000
14,000
10,000
10,000
8,000
15,000
20,000
6,000
Fixed cost includes an annual charge of N 4,000 for depreciation. At the end of year 3 the working capital investment would be
recovered and equipment would be sold for N 5,000
Project C would involve a current outlay of N 50,000on equipment and N15,000 on working capital. The investment in working
capital would be increased to N21,000 at the end of the first year. Annual cash flow would be N18,000 per annum for 5 years, at the
end of which the investment in working capital would be recovered.
Project D would involve an outlay of N 20,000 now and a further outlay of N 20,000 after one year cash profit thereafter would be as
follows:
Year
Year 2
Year 3
Year 4 – 8:
Cash profit (N)
15,000
12,000
8,000 p.a
Project E: is a long-term project, involving an immediate outlay of N 32,000 and annual cash profit of N 4,500 pa in perpetuity.
Project F: is another long term project involving an immediate outlay of N 20,000 and annual cash profits as follows:
Year
Year 1 – 5
Year 6 - 10
Year 11 in perpetuity
Cash profit (N) 5,000
4,000
3,000
The company discounts all projects of 10 years’ duration or less at a cost of capital of 12% and all longer projects at a cost of 15%
Ignore taxation and uncertainty in the forecasts of cash flows:
Required:
(a) Calculate the NPV of each project, and determine which should be undertaken by the company
(b) Calculate the IRR of project A, C and E
(c) Calculate the discounted and non-discounted payback periods of projects A
QUESTION 5
A company is considering an investment in an item of equipment costing ₦150,000.The equipment would be used to make a product.
The selling price of the product at today’s prices would be ₦10 per unit, and the variable cost per unit (all cash costs) would
be ₦6.
The project would have a four-year life, and sales are expected to be:
Year
Units of sale
1
20,000
2
40,000
3
60,000
4
20,000
At today’s prices, it is expected that the equipment will be sold at the end of Year 4 for ₦10,000. There will be additional fixed cash
overheads of ₦50,000 each year as a result of the project, at today’s price levels.
The company expects prices and costs to increase due to inflation at the following annual rates:
Item
Annual inflation rate
Sales
5%
Variable costs
8%
Fixed costs
8%
Equipment disposal value
6%
The company’s money cost of capital is 12%. Ignore taxation
Required
Calculate the NPV of the project.
QUESTION 6
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A company is considering whether or not to invest in a five-year project. The investment will involve buying an item of machinery for
₦200,000.
At today’s prices, the annual operating cash flows would be:
Revenues
Year
running costs
₦₦
1
200,000
100,000
2
200,000
100,000
3
250,000
125,000
4
150,000
75,000
5
100,000
50,000
Revenues are expected to go up by 7% each year due to inflation, and costs are expected to go up by 12% per year due to inflation.
The machinery is expected to have a re-sale value at the end of year 5 of ₦20,000 at today’s prices, but this amount is expected to
rise by 5% each year due to inflation.
The cost of capital is 16%.
Required
Calculate the NPV of the investment project.
QUESTION 7
Microtic Ltd, a manufacturer of watches, is considering the selection of one from two mutually exclusive investment projects, each
with an estimated five-year life. Project A costs N1,616,000 and is forecast to generate annual cash flows of N500,000. Its estimated
residual value after five years is N301,000. Project B, costing N556,000 and with a scrap value of N56,000, should generate annual
cash flows of N200,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a.
Microtic Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate
of return (i.e. average accounting profit to initial book value of investment).
Required
a) Make the appropriate calculations and give reasons for your investment advice.
b) Most capital budgeting textbooks strongly recommend NPV, but most firms prefer IRR. Explain
QUESTION 8
Ismail Isiaq Nigeria limited currently operate an out dated machine which has the following cost and residual data
Year
Operating Expenses (₦’000)
Maintainace expenses (₦’000)
Residual Value (₦ 000)
0
0
0
0
1
2,500
500
1,000
2
3,000
1,000
600
3
3,500
1,500
1,000
4
4,000
1,700
0
3
(₦ 000)
0
2,600
900
2,000
4
(₦ 000)
0
2,800
1,200
1,000
The machine is to be replaced by one of the new type for which financial date:
Time
Outlay
Operating (o)
Maintainace (m)
Residual Value
0
(₦ 000)
7,000
0
0
0
1
(₦ 000)
0
1,800
200
4,000
2
(₦ 000)
0
2,200
500
3,000
The appropriate interest rate is 8%.
Required: At what time should the old and new types of machine be replaced?
QUESTION 9
Anew machine cost 120,000 and may be sold at the end of any year at the following prices. Studies of the machines performance
also show the maintenance cost
Year (end)
Selling prices (₦)
Maintainace cost (₦)
1
75,000
15,000
2
49,000
18,000
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3
30,000
22,000
4
16,500
30,500
5
9,000
45,000
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Required: How often should machine with identical characteristic be bought if the average total cost per period is to be minimised?
Cost of capital 10%
QUESTION 10
The directors of Myola Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the
purchase of new plant. The following data are available for each project:
Project
1 (₦)
2 (₦)
Cost (immediate outlay)
100,000
60,000
Expected annual net profit (loss)
Year 1
29,000
18,000
2
(1,000)
(2,000)
3
2,000
4,000
Estimated residual value
7,000
6,000
The company has an estimated cost of capital of 10 per cent and employs the straight-line method of depreciation for all fixed assets
when calculating net profit. Neither project would increase the working capital of the company. The company has sufficient funds to
meet all capital expenditure requirements
Required
(a) Calculate for each project:
(i) The net present value
(ii) The approximate internal rate of return
(iii) The profitability index
(iv) The payback period
(b) State which, if any, of the two investment projects the directors of Myola Ltd should accept, and why.
(c) State, in general terms, which method of investment appraisal you consider to be most appropriate for evaluating investment
projects and why
QUESTION 11
Lekki plc, a multi-product company is considering four investments projects details of which are given below. Development costs
already incurred on the projects are as follows:
A
B
C
D
₦
₦
₦
₦
100,000
75,000
80,000
60,000
Each project will require an immediate outlay on plant and machinery, the cost of which is estimated as follows:
A
B
C
D
₦
₦
₦
₦
2,100,000
1,400,000
2,400,000
600,000
In all four cases the plant and machinery has a useful life of five years at the end of which it will be valueless.
Units’ sales per annum for each product are expected to be as follows
A
B
C
₦
₦
₦
150,000
75,000
80,000
D
₦
120,000
Selling price and variable cost per unit for each product are estimated below
A
B
C
₦
₦
₦
Selling price
30.00
40.00
25.00
Materials
7.60
12.00
4.50
Labour
9.80
12.00
5.00
.Variable Overhead
6.00
7.00
2.50
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D
₦
50.00
25.00
10.00
10.00
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The company charges depreciation on plant and machinery on a straight line basis over the useful life of the plant and machinery.
Development cost of projects are written off in the year that they are incurred
The company apportions general administration costs to projects at a rate of 5% of selling price. None of the above projects will lead
to any actual increase in the company’s administration costs.
Working capital requirement for each project will amount to 20% of the expected annual sale value. In each case this investment will
be made immediately and will be recovered in full when the projects end in five year time
Fund available for investment are limited to ₦5,200,000. The company’s cost of capital is estimated to be 18%p.a.
Required
a) Calculate the NPV of each project
b) Advise the company which of the new projects, if any, to undertake. Your advice should state clearly your order of preference for
the four projects, what proportion you will take of any project that is scaled down, and the total NPV value generated by your
choice
CHAPTER TWENTY
STRATEGIC MODELS AND PERFORMANCE MANAGEMENT
Question 1
a) Explain and differentiate between value added and conversion cost
b) Explain how an incentive scheme based on value added concept can be applied
Question 2
King dominion Nig Ltd has just employed you as a management accountant. “Your engagement letter state you are under a 3 month
probation period”. Company policy “all newly engaged staff must give a presentation to the entire staff of the organisation prior to
employment confirmation” you presentation topic is discuss on strategic planning and control in king dominion Nig ltd. What will be
your major bullet point?
Question 3
a) What is bench marking?
b) List and discuss the form of bench marking
Question 4
List and discuss the four strategies Ansoff’s growth vector analysis describe as a way of product and market development in order to
grow a business
Question 5
“There are various strategies that an organisation might adopt in its desire to survive and grow. In determining the strategies to adopt
Boston consulting group came up with BCG model by placing the firm’s strategies plan at corporate level in proper perspective”
discuss on the perspectives
Question 6
“Growth strategies may be internally or externally generated and may be stable or dynamic “using SWOT analysis model to discuss
these quotes and list likely activities
Question 7
“Corporate planning consists of two parts, corporate objective and corporate strategies, of the organisation and how to achieve
stated objectives” knowing this define corporate planning in your word and highlights the main components of a corporate plan
Question 8
“Environmental scanning must be a continuous process since the corporate world is highly dynamic and subject to frequent change
over time” Adopting the PESTEL model list likely environmental factors and how you it can be managed
Question 9
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Lilly –little limited a company listed on the unlisted security market, is making a request for a term loan from one of its banker Faith
bank limited. Lilly – little manager have requested a further ₦300,000 five year floating rate loan on an initial interest of 12% per
annum in order to purchase new machinery. The machinery will not materially change the company’s current average percentage
returns on investment. Lilly – little turnover increased by 9% during the last financial year. prior to receiving the request the regional
commercial manager of faith bank limited had conducted a review of lily little financial position and had decided to ask Lilly Little
management to reduce the company’s overdraft by 25% within the next 6 months.
Summarized financial accounts of Lilly little are shown below
Latest year Previous year
₦’000
₦’000
Non –Current assets:
Land and building (at revaluation)
Plant and machinery (net)
Current assets:
Inventory
Receivables
Investment (at cost) – Note 1
Cash
Total asset
Less payables – Note 2
Net assets
Financed By:
Term loan
12.5% debenture 2005
Capital Reserves:
Ordinary Shares @ 10k
Profit and loss account135
408
395
382
337
1,582
1,211
438
85
4,119
1,984
2,135
1,093
867
503
48
3,230
1,565
1,665
300
800
0
800
190
845
2,135
190
675
1,665
NOTE
1. Latest year short term deposits ₦ 194,000, listed investment market value ₦ 312,000, Previous year: short term deposits ₦
235,000, listed investments market value ₦304,000
2. Payables
Latest year
Previous year
₦’000
₦’000
Overdraft
817
661
Trade creditors
1,016
734
Corporate taxation
121
140
Proposed dividend
30
30
1,984
1,565
Summarized income statement
₦’000
Turnover
4,964
Trade profit
538
Interest(net)
192
Profit before taxation
346
Taxation
121
Profit after tax
225
Dividend
55
Retained profit
170
The company’s debentures are currently trading at ₦ 96.50 and ordinary shares at ₦ 156k
Comparative data for Lilly’s little industry (averages)
Share price
Dividend yield
Gross asset turnover
PERFORMANCE MANAGEMENT -08134289772
356K
2.5%
1.4 times
Page 75
Earnings per share
17.8k
Gearing (total loans/ shareholders’ fund)
110%
Acid test
1.1
Interest cover
4 times
Dividend payout ratio
50%
Return on sales (profit before tax and interest/sales 9%
Required:
(a) Acting as a consultant to faith bank limited produce a reasonable case explaining why the bank should request a 25% reduction
in the company’s overdraft
(b) Acting as consultant to Lilly little limited
Prepare a reasonable case to present to faith bank limited in support of the new tern loan.
Suggest possible advice that might be given to the board of Lilly little limited concerning how the company’s financial
position might be improved.
State clearly any assumptions that you make. Any assumptions must relate to all parts of the question
ADDITIONAL PRACTISE QUESTIONS
QUESTION 1
Trendy manufactures a variety of clothing items which are sold through retailers, mainly in the domestic market. Most retailers are
independent organisations, operating either as single outlets or as retail chains. Trendy has a small number of its own shops where it
sells its own products exclusively.
In the past year or so, there has been a noticeable change in the buying habits of retailers. Whereas previously, retailers would often
place a large order for items at the beginning of each season, they now make smaller orders throughout the season when they have
established which items are selling well and which are less popular. Retailers are also expecting prompt deliveries when they place
an order. The operations director of Trendy refers to this new retailer buying behaviour as ‘just in time purchasing’.
The market for clothing is very competitive and retailers do not show much loyalty to their suppliers. Retailers buy what is available
quickly at a good price and what will sell well. Occasionally, retailers may ask for a specially-produced batch of items, subject to the
items being available at a satisfactory price.
In order to maintain or increase market share, Trendy has a large sales force that travels round retail outlets and the central
purchasing departments of large retail organisations. Trendy’s sales staff receive a bonus based on the amount of sales they achieve.
Trendy has recently introduced an enterprise resource planning (ERP) system to coordinate the information systems of all the
functions within the company, to replace the separate manufacturing, inventory, accounting and sales systems that were used
previously. The CEO of Trendy believes that this will enable the company to be more effective and competitive. In addition, the CEO,
who is a management accountant by training, believes that Trendy should use strategic management accounting methods to improve
decision- making, and he wants to establish an IT system for competitor analysis as a stage in the creation of a strategic information
system.
Required
(a) Explain how the introduction of an ERP system in Trendy should improve the competitiveness of the company.
(b) Describe the nature and purpose of strategic management accounting. Indicate the information that may be required for
competitor analysis and discuss whether an IT system for competitor analysis will help to improve decision-making in Trendy.
QUESTION 2
Lush Co installs irrigation systems. Its customers include farmers, local government bodies, sports centres and building contractors.
Its annual sales turnover is currently ₦25 million, and annual pre-tax profit is ₦1.2 million. The company is currently working at close
to capacity, and its activities are restricted by a shortage of skilled engineers to install and maintain the pumping equipment for the
irrigation systems.
Prices for the installation of irrigation systems are negotiated between customers and sales representatives of Lush. The sales
representatives have authority to offer discounts on price in order to win large contracts or in return for more favourable payment
arrangements. The installation of irrigation systems typically takes several months for large contracts, and Lush usually sets up a site
office on the customer’s premises with a compound for holding system parts and other inventory. Delivering inventory to a site can be
difficult; especially where the customer is a farmer in is mote location.
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Sports centres often insist on minimum disruption to sporting activities during the installation of a new irrigation system. This can limit
the size of the site office and inventory compound, which sometimes delays progress on a contract when the installation team has to
wait for more inventories to be delivered. The installation teams all fill in time sheets on a daily basis.
The management accountant of Lush is not satisfied with current reporting arrangements, and thinks that some types of contract are
much more profitable than others. It seems likely, for example, that farmers negotiate much better prices than local government
bodies (such as local councils) . Some contracts are more complex and difficult to negotiate than others, and winning a contract from
a local government body can take much longer than contract negotiations with other customers.
The management accountant thinks that the company would benefit from the introduction of a customer profitability reporting system,
where the profitability of each type of customer is measured and assessed separately. A benefit of this type of reporting system is that
Lush should be able to put more resources into selling to more profitable types of customer, thereby helping to increase the
company’s profitability.
The CEO is not convinced that a customer profitability reporting system would be useful and wants to know where the information will
come from and how it will be collected, as well as what the costs and benefits of the reporting system would be.
Required
(a) Discuss the information requirements for a customer profitability reporting system within Lush and where the data for this system
might be obtained.
(b) Discuss how the information in a customer profitability reporting system might improve management control within Lush.
(c) Explain what the direct and indirect costs of obtaining data and producing information for this system might be, and how the
value of such a system should be assessed
QUESTION 3
At a recent board meeting of spring, there was a heated discussion on the need to improve financial performance. The production
director argued that financial performance could be improved if the company replaced its existing absorption costing approach with an
activity-based costing system. They argued that this would lead to better cost control and increased profit margins. The managing
director agreed that better cost control could lead to increased profitability, but informed the meeting that they believed that
performance needed to be monitored in both financial and non-financial terms. They pointed out that sales could be lost due to poor
product quality or a lack of after-sales service just as easily as by asking for too high a price for spring’s products. They suggested
that, while the board should consider introducing activity-based costing, it should also consider ways in which the company could
monitor and assess performance on a wide basis.
Required:
(a) Describe the key features of activity-based costing and discuss the advantages and disadvantages of adopting an activity-based
approach to cost accumulation.
(b) Explain the need for the measurement of organisational and managerial performance, giving examples of the range of financial
and non-financial performance measures that might be used.
QUESTION 4
(a) Compare and contrast the use of residual income and return on investment in divisional performance measurement, stating the
advantages and disadvantages of each.
(b) Division Y of Chardonnay currently has capital employed of N100,000 and earns an annual profit after depreciation of N 18,000.
The divisional manager is considering an investment of N 10,000 in an asset which will have a ten-year life with no residual
value and will earn a constant annual profit after depreciation of N 1,600. The cost of capital is 15%.
Calculate the following and comment on the results.
(i) The return on divisional investment before and after the new investment
(ii) The divisional residual income before and after the new investment
(iii) Explain the potential benefits of operating a transfer pricing system within a divisionalised company.
QUESTION 5
(a) The absence of the profit measure in non-profit seeking organisations causes problems for the measurement of their efficiency
and effectiveness.
Required (i) Explain why the absence of the profit measure should be a cause of the problems referred to.
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(ii) Explain how these problems extend to activities within business entities which have a profit motive. Support your answer with
examples.
(b) A public health clinic is the subject of a scheme to measure its efficiency and effectiveness. Among a number of factors, the
'quality of care provided' has been included as an aspect of the clinic's service to be measured. Three features of 'quality of care
provided' have been listed.
1) Clinic's adherence to appointment times
2) Patients' ability to contact the clinic and make appointments without difficulty
3) The provision of a comprehensive patient health monitoring programme
Required
(i) Suggest a set of quantitative measures which can be used to identify the effective level of achievement of each of the features
listed
(ii) Indicate how these measures could be combined into a single 'quality of care' measure.
QUESTION 6
RAB Consulting specialises in two types of consultancy project.
 Each type A project requires 20 hours of work from qualified researchers and 8 hours of work from junior researchers.
 Each type B project requires 12 hours of work from qualified researchers and 15 hours of work from junior researchers.
Researchers are paid on an hourly basis at the following rates.
Qualified researchers N30/hour
Junior researchers’N14/hour
Other data relating to the projects:
Project type
Revenue per project
Direct project expenses
Administration*
A
N
1,700
408
280 270
B
N
1,500
310
* Administration costs are attributed to projects using a rate per project hour. Total administration costs are N28,000 per four-week
period.
During the four-week period ending on 30 June 2018, owing to holidays and other staffing difficulties the numbers of working hours
available are:
Qualified researchers 1,344
Junior researchers 1,120
An agreement has already been made for 20 type A projects with XYZ group. RAB Consulting must start and complete these projects
in the four-week period ending 30 June 2018
A maximum of 60 type B projects may be undertaken during the four-week period ending 30 June 2018
RAB Consulting is preparing its detailed budget for the four-week period ending 30 June 2018 and needs to identify the most
profitable use of the resources it has available.
Required
(a) Calculate the contribution from each type of project.
(b) Determine the optimal production plan for the four-week period ending 30 June 2018, assuming that RAB is seeking to maximise
the profit earned. You should use a linear programming graph, identify the feasible region and the optimal point and accurately
calculate the maximum profit that could be earned using whichever equations you need.
QUESTION 7
Daily Company Limited has developed a new product, Details are as follow:
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Selling price and product life
The product will have a life cycle of 10,000 units, it is estimated that the first 9,000 units will be sold for N 3,100 each and then the
product will enter the decline stage of the life cycle; it is difficult to forecast the selling price for the1,000 units that will be sold during
this stage
Costs
Labour will be paid at N 300 per hour. Other variable costs will be N 950 per unit. Fixed costs over the life cycle of the product will be
N 2,000,000. The labour rate and other cost will not change throughout the product life cycle
Learning curve
The first batch of 100 units will take 1,500 labour hours to produce. There will be an 85% learning curve that will continue until 6,400
units have been produced. Any batch produced after this level will each take the same amount of time as the 64th batch. The batch
size is constant at 100 units
Required:
Calculate
i.
The cumulative average time per batch for the first 64 batches
ii.
The time taken for the 64th batch
iii.
The average selling price of the final 1,000 units that will allow Daily Company Limited to earn a total profit of N 2,500,000
from the product.
QUESTION 8
Your manager has asked you to prepare a report entitle “How to design an effective management information system’. The report
should incorporate references to specific types of environments/organisations and give examples of the management accounting
tools that could be useful for each type.
Required:
Prepare a draft as requested by your manager.
QUESTION 9
The use of internet has made the entire universe a global village. Managers can comfortably sit in their offices connected to the
internet and the World Wide Web to obtain all necessary information for their business need.
Required:
a) Discuss the concept of globalisation and how management information system has enhanced effective management
performance
b) What arguments will you advance against globalization as it relates to management performance?
QUESTION 10
Markus Limited manufactures three products and operates a marginal costing system.
The following information has been extracted from the company’s record:
Product
Unit budgeted to be produced and sold
Selling price (N)
X
3,600
120
Y
6,000
110
Z
3,400
100
Requirement per unit
Direct Material (Kg)
Direct Labour (Hours)
Direct Labour hour Rate (N)
Direct Material Costs per kg (N)
X
5
4
4
8
Y
3
3
4
8
Z
4
2
4
8
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Variable Overheads (N)
Fixed Overhead (N)
Maximum possible sales (units)
14
20
8,000
26
16
20
20
10,000 3,000
All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which
is the Key factor, is limited to 37,000 hours
You are required to:
(a) Determine the most profitable product mix
(b) Prepare a statement of profitability for the product mix
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EXAM STYLE QUESTIONS
QUESTION 1
Handra manufactures equipment for metal testing. It also manufactures the electronic chips that go into the manufacture of the testing
equipment. The company has a well-established cost and management accounting system. The cost accounting system records the
actual manufacturing costs for the electronic chips and the testing equipment, and also produces standard unit costs for the purposes of
budgeting and variance analysis. The management accountant of Handra is pleased with the management information system that is in
place within the company, and is particularly proud of the budgetary control reporting system that provides monthly control reports to
the board within one week of the end of each month
The market for metal testing equipment is growing at a reasonable rate, but there are three other competitors in the market. Competition
between them is strong and consequently profit margins are fairly low at the moment, although Handra is operating at a profit. Handra's
senior management are not sure what any competitor might do next, although they suspect that at least one of them may be in financial
difficulty. Handra's sales director is certain that although low prices are one factor in the buying decisions of customers, customers are
much more concerned about the quality, reliability and functional features of the equipment that Handra produces.
At a recent board meeting, the board made two important decisions. The first was a decision not to invest in new equipment for
manufacturing electronic chips that would significantly reduce the water and energy consumption in the production process. This
decision was taken because the discounted cash flow return on investment was considered insufficient.
The second decision was an agreement that costs needed to be reduced to improve profitability. In relation to this, the board decided that
employees in the manufacturing units should be empowered more, and should be given some authority to take decisions affecting
production operations.
The board also discussed the current lack of sufficient strategic information within Handra. They were aware that the decision not to
invest in the new equipment had not taken into consideration the probability of rising water and energy costs in the future, and they felt
they needed more information to help them predict the long term prospects for their industry.
Required
a)
Explain the difference between strategic, tactical and operational information, and give examples of each that should be used by a
company such as Handra.
(5 marks)
b) Discuss why it will be important for Handra to monitor non-financial aspects of performance as well as financial performance.
(5 marks)
c) Evaluate the compatibility of the current management accounting system in Handra and the information it provides with the
objectives of management accounting.
(5 marks)
d) Discuss the ways in which the information requirements for a performance management system in Handra would be changed by the
delegation of authority to employees working at factory floor level.
(5 marks)
(Total = 20 marks)
Question 2
Eagles Legal is a reputable law partnership offering a variety of legal services to clients. The managing partner has recently sought advice
in relation to improving the accuracy and efficiency of its billing system. The advisor, Janet Darcy, suggested the introduction of activity
based costing (ABC) to replace the existing traditional overhead costing method used by Legal Eagles. The current costing method
allocates overhead costs to clients based on total labour hours (for partners, junior clerks and secretarial support). Clients are billed based
on cost plus a mark- up of 60%. In order to introduce ABC the managing partner assigned a team, comprising one partner and two
junior clerks, to ascertain the cost and activity relationships, and corresponding cost data, and this is shown below.
Cost activity relationships:
Cost pool
Legal search
Documentation
Office administration (telephone, postage, etc.)
Cost Drivers
Number of searches conducted
Number of pages printed/copied
Secretarial support time spent on case
Cost and Activity Data
Partner salary cost
Junior clerk wages cost
Secretarial support wages cost
Legal search costs
Printing and stationery costs
Office administration costs
PERFORMANCE MANAGEMENT -08134289772
N386,400
N184,320
N52,256
N18,180
N48,300
N36,616
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Partner labour hours
Junior clerk labour hours
Secretarial support labour hours
Total number of searches conducted
Total number of document pages printed/copied
6,440
7,680
3,680
1,212
1,610,000
Details relating to two legal cases:
Number of searches
Partner time spent on case
Junior clerk time spent on case
Document pages printed/copied
Secretarial support time spent on case
Case 1406
5
2 hours
5 hours
215
1 hour
Case 2655
1
1 hour
3 hours
86
1 hour
REQUIREMENT
a. Calculate the total cost of each of the cases noted above using:
i) The existing costing method;
ii) Activity based costing.
QUESTION 3
Abkaber assembles three types of motorcycle at the same factory: the 50cc Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells
the motorcycles throughout the world. In response to market pressures Abkaber has invested heavily in new manufacturing technology
in recent years and, as a result, has significantly reduced the size of its workforce.
Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing Activity
Based Costing (ABC). Abkaber's accountant has produced the following analysis
Annual output (unit)
Sunshine
Roadster
Fireball
Annual Direct labour
Hour
200,000
220,000
80,000
2,000
1,600
400
Selling material
(N Per unit)
4,000
6,000
8,000
Raw Material
Cost (N Per unit)
400
600
900
The three cost drivers that generate overheads are:
Deliveries to retailers – the number of deliveries of motorcycles to retail showrooms
Set-ups – the number of times the assembly line process is re-set to accommodate a production run of a different type of motorcycle
Purchase orders – the number of purchase orders.
The annual cost driver volumes relating to each activity and for each type of motorcycle are as follows:
Sunshine
Roadster
Fireball
Number of deliveries to retailers
100
80
70
Numbers of set-up
35
40
25
Number of purchase orders
400
300
100
The annual overhead costs relating to these activities are as follows:
Deliveries to retailers
Set-up cost
Purchase order
N
2,400,000
6,000,000
3,600,000
All direct labour is paid at N 5 per hour. The company holds no inventories.
At a board meeting there was some concern over the introduction of activity based costing.
The finance director argued: 'I very much doubt whether selling the Fireball is viable but I am not convinced that activity based costing
would tell us any more than the use of labour hours in assessing the viability of each product.'
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The marketing director argued: 'I am in the process of negotiating a major new contract with a motorcycle rental company for the
Sunshine model. For such a big order they will not pay our normal prices but we need to at least cover our incremental costs. I am not
convinced that activity based costing would achieve this as it merely averages costs for our entire production'.
The managing director argued: 'I believe that activity based costing would be an improvement but it still has its problems. For instance if
we carry out an activity many times surely we get better at it and costs fall rather than remain constant. Similarly, some costs are fixed
and do not vary either with labour hours or any other cost driver.'
The chairman argued: 'I cannot see the problem. The overall profit for the company is the same no matter which method of allocating
overheads we use. It seems to make no difference to me.'
Required
(a) Calculate the total profit on each of Abkaber's three types of product using each of the following methods to attribute overheads:
i) the existing method based upon labour hours; and
(10 marks)
ii) activity based costing.
(b) Write a report to the directors of Abkaber, as its management accountant. The report should:
i) evaluate the labour hours and the activity based costing methods in the circumstances of Abkaber; and
ii) examine the implications of activity based costing for Abkaber, and in so doing evaluate the issues raised by each of the
directors.
Refer to your calculations in requirement (a) above where appropriate.
(10 marks)
(Total = 20 Marks)
QUESTION 4
Southcott Ltd is a firm of financial consultants which offers short revision courses on taxation and auditing for professional
examinations. The firm has budgeted annual overheads totaling N1,526,250. Until recently the firm has applied overheads on a volume
basis, based on the number of course days offered.
The firm has no variable costs and the only direct costs are the consultants' own time which they divide equally between their two
courses. The firm is considering the possibility of adopting an activity based costing (ABC) system and has identified the overhead costs
as shown below.
Details of Overhead
Centre Hire
Enquiries administration
Brochures
Total
N
625,000
271,250
630,000
1,526,250
The following information relates to the past year and is expected to remain the same for the coming year.
Course
Auditing
Taxation
Number of
courses sold
50
30
Duration of
course
2days
3days
No of enquires
per course
175
70
No of Brochures
printed per course
300
200
All courses run with a maximum number of students (30), as it is deemed that beyond this number the learning experience is severely
diminished, and the same centre is hired for all courses at a standard daily rate. The firm has the human resources to run only one course
at any one time.
Required
a) Calculate the overhead cost per course for both auditing and taxation uses traditional volume based absorption costing.
(5 marks)
b) Recalculate the overhead costs per course using activity based costing and explain your choice of cost driver in your answer.
(10 marks)
(5 marks)
c) Discuss the results that you have obtained.
(Total= 20 marks)
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QUESTION 5
Jola Publishing Co publishes two forms of book.
The company publishes a children's book (CB) which is sold in large quantities to government controlled schools. The book is produced
in only four large production runs but goes through frequent government inspections and quality assurance checks.
The paper used is strong, designed to resist the damage that can be caused by the young children it is produced for. The book has only a
few words and relies on pictures to convey meaning.
The second book is a comprehensive technical journal (TJ). It is produced in monthly production runs. 12 times a year. The paper used is
of relatively poor quality and is not subject to any governmental controls and consequently only a small number of inspections are
carried out. The TJ uses tar more machine hours than the CB in its production.
The directors are concerned about the performance of the two books and are wondering what the impact would be of a switch to an
activity based costing (ABC) approach to accounting for overheads. They currently use absorption costing, based on machine hours for
all overhead calculations. They have produced an analysis tor the coming year as follows:
Paper (400g@ N 2 per kg)
Printing ink (50 ml@ N 30 per litre)
Machine costs (6 mins@ N 12 per hour)
Overheads (6 mins@ N 24 per hour)
Total cost
Selling price
Margin
CB
N
Per unit
0.80
1.50
1.20
2.40
5.90
9.30
3.40
{100g@ N 1 per kg)
(150 ml@ N 30 per litre)
(10 mins@ N 12 per hour)
(10 mins@ N 24 per hour
TJ
N
Per unit
0.10
4.50
2.00
4.00
10.60
14.00
3.40
The main overheads involved are
Overhead
Property costs
Quality control
Production set up costs
% of total overhead
75.0%
23.0%
2.0%
Activity driver
Machine hours
Number of inspections
Number of set ups
It the overheads for the previous accounting year were re allocated under ABC principles then the results would be that the
overhead allocation to CB would be N 0· 05 higher at N 2.35 per unit and the overhead allocated to TJ would be N 0.30 lower
at N 3.65 per unit.
Required:
(8 marks)
i) Explain why the overhead cost has changed in the way indicated above
(4 marks)
ii) Briefly explain the implication problems often experienced when ABC is introduced
Overhead
Property costs
Quality control
Production set up costs
Total
Annual cost for the coming year (N)
2,160,000
668,000
52,000
2,880,000
The CB will be inspected on 180 occasions next year, whereas the TJ will be inspected just 20 times.
Jola Publishing will produce its annual output of 1,000,000 CBs in four production runs and approximately10,000 TJs per month in each
of 12 production runs.
Required:
iii) Calculate the cost per unit and the margin for the CB and the TJ using activity based costing principles to absorb the overheads.
(8 marks)
(Total=20marks)
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QUESTION 6
Sapu make and sell a number of products. Products A and B are products for which market prices are available at which Sapu can obtain
a share of the market as detailed below. Estimated data for the forthcoming period is as follows.
Product data
Product A
5000
N‘000
Total direct material cost
80
Total direct Labour cost
40
Selling price and material cost for each product are as follows
Product/sales(units)
Product
Product A
Product B
Other product
Selling price per
unit
N
150
120
300
Product B
10000
N‘000
300
100
Material cost per
unit
N
70
40
100
Other product
40000
N‘000
2,020
660
Though put
contribution per
unit N
80
80
200
Conversion costs are N 720,000 per day
Required:
i) Calculate the profit per day if daily output achieved is 6,000 units of X, 4.500 units of Y and 1,200 units of Z.
ii)
Determine the efficiency of the bottleneck process given the output (a).
iii) Calculate the TA ratio for each product.
iv) In the absence of demand restrictions for the three products. advise sapu management on the optimal production plan.
v) State FOUR actions that management could consider to improve the TA ratio of a particular product
QUESTION 7
Telecoms at Work (TAW) manufacture and markets office communications systems. During the year ended 31 2018 TAW
made an operating profit of N30 million on sales of N360 million. However, the directors are concerned that products do
not conform to the required level of quality and TAW is therefore not fulfilling its full potential in terms of turnover and
profits achieved.
The following information is available in respect of the year ended 31 May 2018:
(1) Production data:
Units manufactured and sold
18,000
Units requiring rework
2,100
Units requiring warranty repair service
2,700
Design engineering hours
48,000
Process engineering hours
54,000
Inspection hours (manufacturing)
288,000
(2) Cost data:
Design engineering per hour
N 96
Process engineering per hour
N 70
Inspection per hour (manufacturing)
N 50
Rework per communication system reworked (manufacturing) N 4,800
Customer support per repaired unit (marketing)
N 240
Transportation costs per repaired unit (distribution)
N 280
Warranty repairs per repaired unit (customer service)
N 4,600
(3) Staff training costs amounted to N180,000 and additional product testing costs of N 72,000.
(4) The marketing director has estimated that sales of 1,800 units were lost as a result of public knowledge of poor quality at
TAW. The average contribution per communication system is estimated at N 7,200.
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Required
(a) Prepare a cost analysis which shows actual prevention costs, appraisal costs, internal failure costs, and external failure
costs for the year ended 31 May 2018. Your statement should show each cost heading as a % of turnover and clearly show
the total cost of quality. Comment briefly on the inclusion of opportunity costs in such an analysis.
QUESTION 8
Summary financial information for the Gamma Group (which is not connected with the Delta Group) is as follows:
Income statements/financial information:
2016
2017
N’m
N’m
Revenue
400
450
Profit before tax
96
117
Income tax expense
(29)
(35)
Profit for the period
67
82
Dividend
(23)
(27)
Retained earnings
44
55
Statements of financial position
2016
2017
N’m
N’m
Noncurrent assets
160
180
Current assets
180
215
340
395
Financed by:
Total equity
270
325
Long term debt
70
70
340
395
Other information is as follows:
1) Capital employed at the end of 2015 amounted to N279m.
2) The Gamma Group had non-capitalised leases valued at N16m in each of the years 2015 to 2017 which were not
subject to amortisation.
3) Amortisation of goodwill amounted to N5m per year in both 2016 and 2017. The amount of goodwill written off against
reserves on acquisitions in years prior to 2016 amounted to N 45m.
4) The Group's pre-tax cost of debt was estimated to be 10%.
5) The Group's cost of equity was estimated to be 16% in 2016 and 18% in 2017.
6) The target capital structure is 50% equity, 50% debt.
7) The rate of taxation is 30% in both 2016 and 2017.
8) Economic depreciation amounted to N40m in 2016 and N45m in 2017. These amounts were equal to the depreciation
used for tax purposes and depreciation charged in the income statements.
9) Interest payable amounted to N6m per year in both 2016 and 2017.
10) Other non-cash expenses amounted to N12m per year in both 2016 and 2017.
Required
a) Stating clearly any assumptions that you make, estimate the Economic Value Added (EVA™) of the Gamma Group for
both 2016 and 2017 and comment briefly on the performance of the Group
b) Briefly discuss three disadvantages of using EVA™ in the measurement of financial performance.
QUESTION 9
Alpha Division, which is part of the Delta Group, is considering an investment opportunity to which the following estimated
information relates:
1) An initial investment of N45m in equipment at the beginning of year 1 will be depreciated on a straight-line basis over a
three-year period with a nil residual value at the end of year 3.
2) Net operating cash inflows in each of years 1 to 3 will be N12.5m, N18.5m and N 27m respectively.
3) The management accountant of Alpha Division has estimated that the NPV of the investment would be N1.937m using
a cost of capital of 10%.
4) A bonus scheme which is based on short-term performance evaluation is in operation in all divisions within the Delta
Group.
Required
Calculate the residual income of the proposed investment and comment briefly (using only the above information) on the
values obtained to rank the viability of projects to be adopted by divisional management
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QUESTION 10
A Co makes two products, B1 and B2. Its machines can only work on one product at a time. The two products are worked
on in two departments by differing grades of labour. The labour requirements for the two products are as follows:
Department 1
Department 2
Minutes per unit of product
B1
B2
12
16
20
15
There is currently a shortage of labour and the maximum times available each day in Departments 1 and 2 are 480 minutes
and 840 minutes respectively. The current selling prices and costs for the two products are shown below:
Selling price
Direct Material
Direct Labour
Variable overhead
Fixed overhead
Profit per unit
B1
N Per unit
50.00
10.00
10.40
6.40
12.80
10.40
B2
N Per unit
65.00
15.00
6.20
9.20
18.40
16.20
As part of the budget setting process, A Co needs to know the optimum output levels. All output is sold.
(a) Calculate the maximum number of each product that could be produced each day, and identify the limiting
factor/bottleneck.
(5 marks)
(b) Using traditional contribution analysis:, calculate the 'profit-maximising' output each day, and the contribution at this
level of output
(6 marks)
(c) Using a throughput approach, calculate the "throughput maximising' output each day, and the "throughput contribution'
at this level of output
(5 marks)
(d) Describe four aspects in which the concept of ‘contribution’ in marginal costing differs from the concepts used in
throughput accounting.
(4 marks)
QUESTION 11
A company has two operating divisions X, and Y that are treated as profit centres for the purpose of performance reporting.
Division A makes two products, Product A and Product B. Product A is sold to external customers for N62 per unit. Product
B is a part-finished item that is sold only to Division Y.
Division Y can obtain the part- finished items from either Division X or from an external supplier. The external suppliers
charge a price of N55 per unit.
The production capacity of Division X is measured in total of outputs, Products A and B. Each unit requires the same direct
labour time. The costs of production in division X are as follows
Variable cost
Fixed Cost
Full cost
Product A N
46
19
65
Product B N
48
19
67
Required:
You have been asked to recommend the optimal transfer price, or range of transfer prices, for product B
a) What is an optimal transfer price?
b) What would be the optimal transfer price for product B if there is spare production capacity in Division X?
c) What would be the optimal transfer price for product B if Division X is operating at full capacity due to limited availability
of direct labour, and there is unsatisfied external demand for product A
QUESTION 12
The sunshine M. Company limited is a multi-divisional company and its managers have been delegated full profit
responsibility and complete autonomy to accept or reject transfer from other divisions. Division A produces a sub-assembly
with a competitive market. The sub-assembly is currently used by division B. A charges division B market price for subassembly which is ₦700 per unit. Variable costs are ₦520 and ₦600 for division A and B respectively. The manager of
Division B feels that Division A should transfer the Sub assembly at a lower price than the market price because at this
price, Division B is able to make a profit
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Required:
a) Compute Division B’s contribution margin if transfer are made at the market price and also total contribution to profit for
the company
b) Assume that Division A can sell in the open market only 500 units at ₦ 700 per unit of the 1000 units that it can produce
every month and that a 20% reduction in price is necessary to sell at full capacity. Should transfer be made?
c)
If so, how many unit should it transfer and at what price? Summit a schedule showing comparisons of contribution
margins under four different alternatives to support your decision
Alternatives:
Sell 500 units and at ₦ 700 per unit and transfer 500 units
i.
ii.
Sell 1000 units at ₦ 560 and no transfer
Sell 500 units at ₦700 per unit and transfer nothing
iii.
Transfer 1000 units
iv.
QUESTION 13
Oil link group has separate divisions, each operating as an investment centre within the group. South Division makes and
sells three products, AA, BB and CC. All three products are sold under the Titan brand label, but product AA and Product
BB are also sold through the super market group as unbranded products.
Budgeted data for the year 31 December 2017 is as follows
Product sales
Product AA
160,000
450,000
Titan brand
Unbranded
Unit
Product BB unit
120,000
600,000
Product CC
50,000
-
Unit
Product BB N per Unit
3.20
2.00
Product CC N per Unit
5.00
-
Selling prices
Product AA N per Unit
2.50
1.50
Titan brand
Unbranded
Selling costs
Product AA:
Titan brand
Unbranded
Product BB:
Titan brand
Unbranded
Product CC:
Titan brand
Production
Packaging
1.20
1.20
0.30
0.10
1.60
1.60
0.40
0.20
2.50
0.50
Budgeted marketing expenditure is N180,000 for the year, and other budgeted expenditure for other fixed cost is
N375,000. The average capital employed is West Division in year 2017 is expected to be N400,000 and the division’s cost
of capital is 10%
Required
a) Calculate the budgeted ROI for west Division for South Division for the year 31 December 2017
b) Calculate the budgeted residual income for South Division for the year to 31 December 2017
In spite of the fact that there are some snags accompanying with transfer pricing. It is fundamentally designed to achieve a
number of objectives
Required
c) List and briefly describe the three major objectives which Transfer pricing seeks to achieve.
d) Discuss the major snags commonly associated with Transfer pricing
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QUESTION 14
The Bearing Division operates in the energy sector and consists of a number of business units, nearly all of which are involved in
the processing and sale of fossil fuels. The division has been financially very successful in recent years and, because of this the
Group has allowed the division manager considerable autonomy. In any year, the size of the division manager’s bonus is
determined by the extent to which the division’s Return on Investment (ROI) exceeds its cost of capital (which is 6%). ROI is
calculated by the Group as the net profit for the year divided by the net book value of the capital invested in the division at
the beginning of the year.
On the basis of existing activities, it is likely that Bearing Division’s net profit next year (2020) will be N 340,000 and that the net
book value of its assets at 1 January 2020 will be N 2,000,000. These figures do not include the effect of a possible new
investment by the division in an additional business unit which would be involved in the production and supply of solar energy. This
new solar energy business unit (SEBU) would require an additional investment of N 230,000 for tangible non-current assets plus
N 70,000 for working capital which the Group would be willing to finance. The investment would be made and operations
would begin on 1 January 2020. It can be assumed that SEBU would have a five-year life, and that the working capital
investment would be recovered in full at the end of that time. The tangible non-current assets would be depreciated on a
straight-line basis over the five years with no residual value. It is estimated that the net operating cash flows from SEBU over the
five years would be as follows:
2020
2021
2020
2022
2023
N 20,000
N 60,000
N 80,000
N 90,000
N 120,000
It should be assumed that all of these net operating cash flows would arise on the last day of the year to which they relate.
NB: Ignore taxation in answering this question.
REQUIREMENT:
a) Given the manner in which divisional performance is evaluated and rewarded at present, is the Bearing Division
manager likely to invest in SEBU? Justify your answer fully
b)
Respond to (i) and (ii) below, having regard to the best interests of the Group’s shareholders, including the long- term
strategic choices indicated by Tom Winter in the case study. Note: your answers to parts (i) and (ii) should include, but not
be limited to, appropriate calculations:
i)
Discuss whether it would it be in the best interests of the Group’s shareholders for Bearing Division to invest in SEBU.
ii)
Appraise potentially superior alternatives to the existing ROI-based performance evaluation and reward system.
QUESTION 15
The home division and the away division manufacture and sell similar products. however, the two divisions operate
independently of each other in different geographical territories. each division manager exercises her
considerable autonomy in nearly all aspects of operations, and argues that in doing so she is helping to deliver
maximum shareholder value from her division.
The cost of capital is 10% per annum, and the performance of each division manager is measured on a residual
income basis. summary income statements for the two divisions for the most recent year ended 31 december 2015
are as follows:
sales
divisional variable costs
divisional fixed costs
divisional profits
Home Division
N 370,000
N 160,000
N 150,000
N 60,000
Away Division
N 490,000
N 250,000
N 170,000
N 70,000
For purposes of a residual income calculation, divisional net assets are measured at their statement of financial
position valuations at the year-end (31 december 2015). summary statements of financial position at that date
were as follows
non-current assets (net book value)
current assets
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Home Division
N 500,000
N 200,000
Away Division
N 400,000
N 150,000
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current liabilities
divisional net assets
N 128,000
N 572,000
N 70,000
N 480,000
The Following is also available

The away division spent N 20,000 on research & development (R&D) in 2014 and a further N 40,000 on R &
D in 2015. the away division manager made these expenditures because she believed that they would lead
to significant product improvements which would prolong product lifecycles over a 5-year period
beginning in the year of expenditure in each case. There was no expenditure on R&D by the home division in
any year, and no expenditure on R&D by the away division in any year before 2014.

each division spent N 30,000 on brand advertising in 2015. because of the nature of this advertising, it can be
assumed that it has helped (and will help) to sustain sales in each division over a 4-year period beginning in
2015.

both divisions created provisions for doubtful debts on the express recommendation of their respective
auditors. a provision of N 5,000 was created by the home division in 2014 and a provision of N 15,000 was
created by the away division in 2015. however, given the excellent payment records of their customers,
neither division manager believes that there is a real likelihood of any bad debts. therefore, although the
provisions remain in the accounts at their original amounts because of the auditor’s recommendations,
neither division manager increased the amount of the provision in any year after its initial creation.

the above expenses (r&d, advertising, and the amounts provided by way of provision for doubtful debts)
were written off to income statements as they were incurred.

divisional fixed costs in 2015 included depreciation calculated on a straight-line basis amounting to N 50,000 in
the home division and N 40,000 in the away division. all divisional non-current assets were purchased one
year ago (on 31 december 2014). it is estimated that the market value of the non-current assets declined during
2015 by N 90,000 in the home division and N 35,000 in the away division.
REQUIREMENT:
a) determine the residual income earned by each division in accordance with the company’s existing
performance measurement rules. then, insofar as is possible from the information provided, determine the
economic Value added (eVa) of each division.
b) after reviewing your answer to part (a), pat bradley has queried the appropriateness of eVa in measuring
the amount of shareholder value created by each division. in particular, pat argues that your eVa
calculation significantly overstates the shareholder value generated by the away division. he also argues
that it takes no account of what pat calls “extraordinarily difficult ongoing macroeconomic circumstances”
faced by the home division in the markets in which that division operates. Prepare a memo to pat Bradley in
which you respond appropriately to these arguments. You should make full use of the elements of your
calculation in part (a) to support your point.
PERFORMANCE MANAGEMENT -08134289772
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATIONS - MAY 2015
PERFORMANCE MANAGEMENT
Time Allowed: 3 hours
ATTEMPT FIVE QUESTIONS IN ALL
SECTION A:
COMPULSORY QUESTION
(30 Marks)
QUESTION 1
TADEFO Limited is a manufacturing company which produces and assembles car components.
The company has two main production departments: Machining and Assembling. Each of the
two departmental managers is responsible for producing annual budgets based on targets set by
the management. From last year’s budget, TADEFO Limited hoped to turn an expected 10
percent rise in total revenue into a 20 percent increase in the company’s profits.
The following budgeted information relates to TADEFO Limited for the forthcoming period:
Sales and production (units)
Selling price (per unit)
Prime cost (per unit)
Machine Department (machine hours per unit)
Assembly Department (direct labour hours per unit)
ACQ
30,000
N
73
65
Hours
4
2
Products
BEZ
50,000
N
45
32
Hours
2
7
CFJ
40,000
N
95
84
Hours
5
3
Overheads can be re-analysed into ‘cost pools’ as follows:
Cost pool
Machine services
Assembly services
Set-up costs
Order processing
Purchasing
N‘000
359
328
36
165
88
976
Cost driver
Machine hours
Direct labour hours
Set-ups
Customer orders
Suppliers’ orders
Quantity for
the period
425,000
532,000
720
34,000
12,400
You have also been provided with the following estimates for the period:
Number of set-ups
Customers’ orders
Suppliers’ orders
ACQ
220
18,000
5,200
BEZ
130
10,000
3,600
CFJ
210
10,000
4,200
Required:
a.
Prepare and present a profit statement using activity-based costing.
(14 Marks)
b.
What would you consider to be the weaknesses of an incremental budgeting system for a
company such as TADEFO Limited?
(5 Marks)
c.
Describe Activity-Based Budgeting (ABB) and comment on the advantages of its use by
TADEFO Limited.
(5 marks)
d.
Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees.
(3 Marks)
e.
“Encouraging employee participation in budget setting is beneficial”
Discuss.
(3 Marks)
Total (30 Marks)
SECTION B:
Marks)
ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(40
QUESTION 2
Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers.
The company is financed by a capital of N15million inclusive of reserves in a mix of 30% and
70% of debt and equity respectively.
The Company has been in trading business for the past six years and has consistently adhered to
its corporate policy on sales, purchases and inventory management.
The company’s policy on sales is to ensure that sales are collected as follows:
(i)
Cash sales is 40% of the monthly sales.
(ii)
The balance of the month’s sales is to be collected in the month following sales.
The policy on purchases is in agreement with the supplier’s policy which is to pay for all
supplies in the month following. The company’s stock policy is to reserve 30% of the month’s
purchases as closing inventory.
The following information is available for the five years 2010 to 2014:
Monthly Sales
Monthly Purchases
Monthly Salaries
Monthly Rent
Monthly Cash Expenses
2010
N
3,400,000
2,000,000
350,000
100,000
200,000
2011
N
3,600,000
2,400,000
350,000
100,000
220,000
2012
N
4,200,000
2,800,000
430,000
100,000
240,000
2013
N
4,800,000
3,200,000
430,000
100,000
280,000
2014
N
7,200,000
4,800,000
480,000
100,000
360,000
Additional information:
(i)
The company purchased a motor vehicle in July 2013 which was paid for in September
2013. The cost of the motor vehicle was N5,000,000.
(ii)
Annual depreciation for the motor vehicle is 20%.
(iii)
The Cash Balance as at 31st December 2011 was N4,000,000.
(iv)
The company’s salaries, rent and expenses were paid in the month they were due.
Required:
a.
Prepare a Profitability Statement for 2012, 2013 and 2014.
(10 Marks)
b.
Prepare a Cash Flow Statement for 2012, 2013 and 2014.
(7 Marks)
c.
Determine and comment on the liquidity ratio (current ratio) for 2014.
(2 Marks)
d.
Compute the gearing ratio.
(1 Mark)
(Total 20 Marks)
QUESTION 3
Pakex is a division of an automobile group that has five years remaining on a leased premises in
which it sells self-assembled motorcycles. The management is proposing an investment of
N48million on immediate improvements to the interior of the premises in order to stimulate sales
by creating a more effective selling environment. The following information is available:
(i)
The expected increase in revenue following the improvements is N40million per annum.
The average contribution to sales ratio is expected to be 40%.
(ii)
The cost of capital is 16% and the division has a target Return on Capital Employed of
20% based on the net book value of the investment at the beginning of the year.
(iii)
At the end of the five year period, the premises improvements will have a NIL residual
value.
(iv)
The management staff turnover at Pakex division is high. The division’s investment
decisions and management performance measurement are currently based on the figures
for the first year of the proposal.
In addition to the above information, there is an alternative proposal that suggests a
forecast of the increase in revenue per annum from the premises improvements as
follows:
Year
Increase in Revenue
1
Nm
56
2
Nm
40
3
Nm
40
4
Nm
24
5
Nm
16
All other factors are expected to remain the same.
Required:
a.
b.
Prepare a summary of the statement of the management’s investment proposal for years 1
to 5 showing Residual Income and Return on Capital Employed for each year using the
straight line depreciation method.
(10 Marks)
Comment on the use of the figures from the Statement in (a) above as a decision-making
and management performance measure.
(4 Marks)
c.
Calculate the Residual Income and Return on Capital Employed for year 1 using the
alternative proposal.
(6 Marks)
(Total 20 Marks)
QUESTION 4
BADEGY Limited is a medium-sized company. The company is in the process of deciding its
pricing policy for the next period.
The following information is available from its records:
Previous period
Revenue:
N’000
100,000 units at N130
Costs
Profit
13,000 106,000 units at N130
10,000 Costs
3,000 Profit
Current period
Revenue:
N’000
13,780
10,774
3,006
It was discovered that between the previous and current periods, there was a 4% general cost
inflation and it is forecast that costs will rise further by 6% in the next period. As a matter of
policy, the company did not increase the selling price in the current period although competitors
raised their prices by 4% to allow for the increased costs. A survey by a team of management
consultants was commissioned and has found that the demand for the product is elastic with an
estimated price elasticity of demand of 1.5. This means that volume falls by 1 times the rate of
real price increase. Various options are to be considered by the Board.
You are required to:
a.
Show the budgeted position of the company if it maintains the N130 selling price for the
next period when it is expected that competitors will increase their prices by 6%.
(15 Marks)
b.
What would the budgeted position be if the company also raises its price by 6%?
(5 Marks)
(Total 20 Marks)
SECTION C: ATTEMPT ANY TWO OUT OF THE THREE QUESTIONS IN THIS SECTION (30
Marks)
QUESTION 5
CAROSSI Limited makes quality wooden products such as tables, chairs, benches and doors.
Historically, the company has used mainly financial performance measures to assess the
performance of the company as a whole. The company’s Chief Executive Officer has just been
informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.
CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams. Each
Division is managed by a divisional manager who has the power to make all investment
decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically,
investment decisions have been made by calculating the Return on Investment (ROI) of any
opportunities and presently, the return on investment of each Division is 18 percent.
A recently appointed manager for Division X strongly feels that using Residual Income (RI) to
make investment decisions would result in better ‘goal congruence’ throughout the organisation.
Each Division is currently considering the following separate investments:
Division X
Division Y
Capital required for investment
N88.2m
N46.0m
Revenue generated from investment
N46.4m
N28.1m
Net profit margin
30 percent
35 percent
The company is seeking to maximise shareholders’ wealth.
Required:
a.
Describe the Balanced Scorecard Approach to performance measurement.
(8 Marks)
b.
Determine both the return on investment and residual income of the new investment for
each of the two divisions. Comment on these results and take into consideration the
manager’s views about residual income.
(7 Marks)
(Total 15 Marks)
QUESTION 6
Markus Limited manufactures three products and operates a marginal costing system.
The following information has been extracted from the company’s records:
Products
X
Y
Z
Units budgeted to be produced and sold
Selling Price (N)
Requirement per Unit:
Direct Material (kg)
Direct Labour (Hours)
Direct Labour Hour rate (N)
Direct Material Cost per Kg (N)
Variable Overheads (N)
Fixed Overheads (N)
Maximum possible sales (units)
3,600
120
6,000
110
3,400
100
5
4
4
8
14
20
8,000
3
3
4
8
26
20
10,000
4
2
4
8
16
20
3,000
All the three products are produced from the same direct material using the same types of
machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.
You are required to:
a.
Determine the most profitable product mix.
(6 Marks)
b.
Prepare a statement of profitability for the product mix.
(9 Marks)
(Total 15 Marks)
QUESTION 7
The use of internet has made the entire universe a global village. Managers can comfortably sit
in their offices connected to the internet and the world wide web to obtain all necessary
information for their business needs.
Required:
a.
Discuss the concept of globalisation and how management information system has
enhanced effective management performance.
(10 Marks)
b.
What arguments will you advance against globalisation as it relates to management
performance?
(5 Marks)
(Total 15 Marks)
SKILLS LEVEL EXAMINATION – NOVEMBER 2015
PERFORMANCE MANAGEMENT
Tĺme Allowed: 3 hours
ANSWER FIVE OUT OF SEVEN QUESTIONS IN ALL
SECTION A:
COMPULSORY QUESTION
(30 Marks)
QUESTION 1
The Board of Directors of Danda Company Lĺmĺted is proposĺng the purchase of eĺther of
two machines that have been proved adequate for the productĺon of an engĺneerĺng
product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Productĺon ĺn
the first year would be affected by installation challenges and inadequate understanding
of the operating instructions of the machines.
Information available from the productĺon profile of the two machines are as shown
below:
ZIGMA 5000:
Productĺon
Capacity:
Year
1
2
3
4
5
6
Productĺon
Capacity (%)
-
60
90
100
100
50
30
Cost of machine ĺs N16, 500,000 while the life span is 6 years.
DELPHA 7000:
Productĺon
Productĺon
capacity (%)
Capacity:
Year
1
50
2
100
3
100
4
100
5
80
6
50
Cost of plant ĺs N18,300,000 whĺle the lĺfe span ĺs 6 years.
Other ĺnformatĺon relevant to the company‟s operatĺons and admĺnĺstratĺon are:
(ĺ)
(ĺĺ)
(ĺĺĺ)
(ĺv)
(v)
(vĺ)
(vĺĺ)
(vĺĺĺ)
Sellĺng prĺce per unĺt ĺs N300.
Varĺable cost per unĺt ĺs N150.
Annual fĺxed overhead exclusĺve of deprecĺatĺon ĺs N1,200,000.
Company deprecĺatĺon polĺcy ĺs straĺght lĺne basĺs.
The budgeted productĺon capacĺty ĺs 100,000 unĺts.
No openĺng or closĺng ĺnventory ĺs envĺsaged.
All sales are for cash.
All costs are for cash.
Requĺred:
a.
b.
c.
d.
e.
Prepare the SIX year profĺtabĺlĺty statement for the two machĺnes.
(6 Marks)
(6 Marks)
Prepare the SIX year cash flow statement for the two machĺnes.
What ĺs the payback perĺod for the two machĺnes?
(7 Marks)
Determĺne the Net Present Value (NPV) of the two machĺnes ĺf
the acceptable dĺscount rate for the company ĺs 15%.
(7 Marks)
Whĺch of the two machĺnes should the company acquĺre?
(4 Marks)
(Total 30 Marks)
SECTION B: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Pestel Lĺmĺted produces cake and bread whĺch ĺt supplĺes to a major supermarket ĺn
Abuja. It holds no ĺnventorĺes because ĺt adopts the Just-In-Tĺme (JIT) system.
The standard cost of the wheat used ĺn bakĺng the products ĺs N200 per kg. Each pĺece
of cake uses 0.5kg of wheat whĺle each loaf of bread uses 2kg of wheat.
The productĺon levels for cake and bread for the month of October were as follows:
Bread
Cake
Budgeted
productĺon (unĺts)
240,000
380,000
Actual productĺon
level (unĺts)
240,000
360,000
The actual cost of wheat ĺn October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prĺces of wheat ĺncreased by 18% ĺn the month of October.
At the begĺnnĺng of the month, the supermarket group made an expected request for an
ĺmmedĺate shape change to the cake resultĺng ĺn 5% more wheat than prevĺously
requĺred. Thĺs change also brought about productĺon delays whĺch caused a reductĺon ĺn
productĺon by 20,000 unĺts of cake ĺn that month. The productĺon dĺrector ĺs gĺven the
task of purchasĺng relevant ĺnput materĺals and any productĺon request whĺch occur,
although he does not take responsĺbĺlĺty for settĺng standard costs.
Requĺred:
(a)
Compute the followĺng varĺances for the month of October for each of the products
and ĺn total:
(ĺ)
Materĺal prĺce plannĺng varĺances,
(4 Marks)
(ĺĺ)
Materĺal prĺce operatĺonal varĺances.
(4 Marks)
(ĺĺĺ) Materĺal usage plannĺng varĺances,
(4 Marks)
(ĺv) Materĺal usage operatĺonal varĺances
(4 Marks)
(b)
What are the benefĺts of plannĺng and operatĺonal varĺances to a management
accountant?
(4 Marks)
(Total 20 Marks)
QUESTION 3
Casko Lĺmĺted manufactures four products from a sĺngle chemĺcal process and a sĺngle
raw materĺal. The productĺon dĺrector ĺs consĺderĺng proposals to dĺscontĺnue certaĺn
productĺon process and has provĺded the followĺng ĺnformatĺon:
(ĺ) The cost of raw materĺals for the year just ended was N1,320,000.
(ĺĺ) The ĺnĺtĺal processĺng costs amounted to N2,564,600.
(ĺĺĺ) All the four products W, X, Y and Z are produced sĺmultaneously at a sĺngle splĺtoff poĺnt.
(ĺv) Product Y ĺs sold ĺmmedĺately wĺthout further processĺng.
(v)
The other three products are subjected to further processĺng before beĺng sold.
(vĺ) It ĺs the company‟s polĺcy to apportĺon the cost prĺor to splĺt-off poĺnt on a suĺtable
sales value basĺs.
(vĺĺ) The output, sales and the addĺtĺonal processĺng costs for the past year were as
follows:
Products
W
X
Y
Z
Output
(unĺts)
Sales
N
400,000 3,840,000
89,230 1,160,000
5,000
160,000
9,000 1,200,000
Addĺtĺonal
processĺng
costs
N
800,000
640,000
40,000
The proposal beĺng consĺdered by the management ĺs to sell the products to other
processors ĺmmedĺately after the splĺt-off poĺnt wĺthout any of the present addĺtĺonal
processĺng. The addĺtĺonal processĺng costs of products W,X and Z would eĺther no
longer be ĺncurred or be charged to an alternatĺve profĺtable use. The prĺces per unĺt to
be obtaĺned from the other processors would be: W: N6.40, X: N8, Y: N32, and Z: N100.
You are requĺred to prepare a statement of:
a.
ĺ.
The profĺt or loss on each of the four products.
ĺĺ.
b.
The change ĺn the profĺt or loss gĺven ĺn your solutĺon to
(ĺ) above, ĺf the proposals beĺng consĺdered were adopted.
(10 Marks)
(8 Marks)
Identĺfy TWO long-run prĺcĺng decĺsĺon approaches that are relevant
to a prĺce settĺng fĺrm.
(2 Marks)
(Total 20 Marks)
QUESTION 4
The exĺstĺng busĺness of MOOJ Ltd. ĺs very profĺtable, wĺth forecasts for the next year
showĺng that thĺs trend of profĺtabĺlĺty wĺll contĺnue.
MOOJ Lĺmĺted manufactures all of ĺts own clothes, and then sells these dĺrect to the
publĺc through 105 branches located around Nĺgerĺa. The branches are not run as profĺt
centres; prĺces are set centrally for the clothes and the costs of each branch are
monĺtored at the Head Offĺce. Surprĺsĺngly, there ĺs no mĺnĺmum or maxĺmum turnover
requĺrement for each branch. In the company‟s vĺew, thĺs enables staff to focus on
customer servĺce wĺthout the concern of meetĺng a profĺt fĺgure. The strategy obvĺously
works well, gĺven the company‟s results.
The exĺstĺng Informatĺon Technology (IT) ĺnfrastructure ĺs based around each shop
maĺntaĺnĺng ĺts own ĺnventory records. There ĺs no Wĺde Area Network (WAN) and Head
Offĺce has few ĺntegrated systems.
The Dĺrectors recognĺse that the current IT ĺnfrastructure of MOOJ Lĺmĺted ĺs ĺnadequate
for Internet tradĺng.
The Board of MOOJ Lĺmĺted ĺs currently dĺscussĺng whether or not to start sellĺng clothes
on the Internet.
Requĺred:
Identĺfy and dĺscuss the strategĺc and performance management ĺssues that the Board of
MOOJ Lĺmĺted wĺll have to address prĺor to a decĺsĺon beĺng taken regardĺng tradĺng on
the Internet.
(Total 20 Marks)
SECTION C: ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(30 MARKS)
QUESTION 5
KOMERE Lĺmĺted operates a Standard Costĺng System. The standard cost ĺnformatĺon ĺs
presented ĺn the standard costs cards below.
Dĺrect Materĺal:
N
2,000
2,400
A 20kg at N100 per kg B 30kg at N80 per kg -
Dĺrect Labour:
Skĺlled -10hours at N40 per hour
Unskĺlled-10 hours at N25 per hour
400
400
Varĺable overhead cost- 10 hours at N20 per hour
200
5,250
The actual results for the month of October 2015 ĺs gĺven below.
(ĺ)
Dĺrect Materĺal:
Dĺrect Materĺal A
Dĺrect Materĺal B
(ĺĺ)
Dĺrect Labour:
Skĺlled labour
Unskĺlled labour
Purchases Amount (N) Consumed
105,000kg 10,290,000 99,000 kg
148,000kg 11,988,000 144,000kg
Hours
56,000
56,000
(ĺĺĺ) Varĺable overhead
N1,064,000
(ĺv) Actual productĺon
4,800 unĺts
Amount (N)
2,352,000
1,344,000
Requĺred:
(a)
Calculate all the relevant varĺances.
(b)
What are possĺble causes of the varĺances computed.
(8 Marks)
(7 Marks)
(Total 15 Marks)
QUESTION 6
Tee Company makes and sells a product, the Green, whĺch ĺs nearĺng the end of ĺts lĺfe. A
replacement product, Brace, has been desĺgned and test marketed and the company ĺs
tryĺng to decĺde when to replace Green wĺth Brace. Tee Company only has the capabĺlĺty
to produce one of the two products at a tĺme.
Sales of Green are expected to be 100,000 unĺts ĺn the fĺrst quarter of Year 7 and are
forecast to fall after that so that each quarter‟s sales wĺll be 10% less than those of the
prevĺous quarter. Green has a sellĺng prĺce of ₦14 per unĺt and ĺts Contrĺbutĺon to Sales
ratĺo (C/S ratĺo) ĺs 40%. The fĺxed costs of makĺng Green ĺn Year 7 wĺll be ₦200,000 per
quarter.
Test market results for Brace were very good and demand for sĺmĺlar products ĺs growĺng
rapĺdly. Tee Company belĺeves that sales of Brace can be predĺcted by the followĺng
equatĺon:
Y = 80,000 + 6,000 T
Where:
Y = Sales of Brace ĺn unĺts per quarter
T = Tĺme, measured ĺn quarters. For the fĺrst quarter of Year 7 (that ĺs, January to March
Year 7), T = 1; for the second quarter of Year 7, T = 2; etc
The sellĺng prĺce of the Brace wĺll be ₦16 and ĺts contrĺbutĺon per unĺt wĺll be ₦6.
Fĺxed costs wĺll ĺncrease to ₦240,000 per quarter ĺf Green ĺs replaced by Brace.
To avoĺd dĺsruptĺon of the productĺon of Tee‟s other products, the changeover between
Green and Brace must take place on eĺther 1 January Year 7 or 1 July Year 7. The costs of
changeover wĺll dĺffer dependĺng upon whĺch date ĺs chosen and the followĺng
ĺnformatĺon ĺs avaĺlable.
(ĺ) Some of the machĺnery used to make the Green wĺll no longer be requĺred for the
Brace. The wrĺtten down value of thĺs machĺnery wĺll be ₦250,000 at 1 January
Year 7, and ₦220,000 by 1 July Year 7. Its net realĺsable value at 1 January Year 7
wĺll be ₦140,000, but by 1 July Year 7 ĺt wĺll be ₦30,000.
(ĺĺ) Some redundancĺes wĺll result from the change of products. Redundancy
payments of ₦40,000 wĺll be made ĺf the changeover occurs on 1 January, but
these wĺll rĺse to ₦50,000 by 1 July. The fĺve admĺnĺstratĺon workers concerned are
each paĺd ₦20,000 per annum and wĺll not be replaced.
Theĺr wages are not ĺncluded ĺn the costs gĺven above.
Requĺred:
a.
Determĺne whether the company should contĺnue to sell Green ĺn Year 7 or
ĺntroduce Brace ĺn Year 7.
(8 marks)
b.
If the company were to replace Green wĺth Brace ĺn Year 7 recommend whether thĺs
should be wĺth effect from 1 January or 1 July. (Include a schedule of relevant costs
and revenues and provĺde explanatĺons of your fĺgures).
(7 marks)
(Total 15 Marks)
QUESTION 7
Stuck Ltd manufactures ĺndustrĺal glues and solvents ĺn a sĺngle large factory.
Approxĺmately 400 dĺfferent ĺnputs are used to produce the 35 specĺalĺst outputs, whĺch
range from ultra-strong glues used ĺn aĺrcraft manufacture to hĺgh-ĺmpact adhesĺves that
are requĺred on constructĺon sĺtes.
Two years ago, wĺth the company only just breakĺng even, the dĺrectors recognĺsed the
need for more ĺnformatĺon to control the busĺness. To assĺst them wĺth theĺr strategĺc
control of the busĺness, they decĺded to establĺsh a Management Informatĺon System
(MIS). Thĺs ĺs now operatĺonal but provĺdes only the followĺng lĺmĺted range of
ĺnformatĺon to the dĺrectors vĺa theĺr networked computer system:
(ĺ) A summary busĺness plan for thĺs and the next two years. The plan ĺncludes detaĺls
of the expected future ĺncomes and expendĺture on exĺstĺng product lĺnes. It was
produced by a new member of the accountĺng department wĺthout reference to past
productĺon data;
(ĺĺ) Inventory balances on ĺndĺvĺdual ĺtems of raw materĺals, fĺnĺshed goods etc. Thĺs
report ĺs at a very detaĺled level and comprĺses 80% of the output from the MIS
ĺtself; and
(ĺĺĺ) A summary of changes ĺn total demand for glues and solvents ĺn the market place
for the last fĺve years. Thĺs ĺnformatĺon ĺs presented as a numerĺcal summary ĺn sĺx
dĺfferent sectĺons. Each sectĺon takes up one computer screen so only one sectĺon
can be vĺewed at a tĺme.
Requĺred:
(a)
Comment on the weaknesses ĺn the ĺnformatĺon currently beĺng provĺded to the
dĺrectors of the company.
(9 Marks)
(b)
Suggest how the ĺnformatĺon may be ĺmproved, wĺth partĺcular reference to other
outputs whĺch the MIS mĺght usefully provĺde to the dĺrectors.
(6 marks)
(Total 15 Marks)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2016
PERFORMANCE MANAGEMENT
Tĺme Allowed: 3 hours
INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
1.
Hĺcenta Lĺmĺted makes three products Soyĺ, Mĺlco and Yoghurt. All the three
products must be offered for sale each month ĺn order to provĺde a complete
market servĺce. The products are fragĺle and theĺr qualĺty deterĺorates rapĺdly
shortly after productĺon.
The products are produced on two types of machĺne and worked on by a sĺngle
grade of dĺrect labour. Fĺfty dĺrect employees are paĺd N80 per hour for a
guaranteed mĺnĺmum of 160 hours per month.
All the products are fĺrst pasteurĺsed on a machĺne type A and then fĺnĺshed
and sealed on a machĺne type B.
The machĺne hour requĺrements for each of the products are as follows:
Soyĺ
Hours per unĺt
1.5
Machĺne type A
1.0
Machĺne type B
Mĺlco
Hours per unĺt
4.5
2.5
Yoghurt
Hours per unĺt
3.0
2.0
The capacĺty of the avaĺlable machĺnes type A and B are 6,000 hours and 5,000
hours per month respectĺvely. Detaĺls of the sellĺng prĺces, unĺt costs and
monthly demand for the three products are as follows:
Soyĺ
N per unĺt
Sellĺng prĺce
910
Concentrate cost
220
Other dĺrect materĺal cost
230
Dĺrect labour cost @ N80 per hour
60
Overheads
240Profĺt
160
1200
Maxĺmum monthly demand (unĺts)
Mĺlco
N per unĺt
1,740
190
110
480
620
340
700
Yoghurt
N per unĺt
1,400
160
140
360
520
220
600
Although, Hĺcenta Lĺmĺted uses margĺnal costĺng and contrĺbutĺon analysĺs as
the basĺs for ĺts decĺsĺon makĺng actĺvĺtĺes, profĺts are reported ĺn the monthly
management accounts usĺng the absorptĺon costĺng basĺs. Fĺnĺshed goods
ĺnventorĺes are valued ĺn the monthly management accounts at full absorptĺon
cost.
You are requĺred to:
a.
Calculate the monthly machĺne utĺlĺsatĺon rate for each product and
explaĺn whĺch of the machĺnes ĺs the bottleneck/lĺmĺtĺng factor.
(6 Marks)
b.
Use current system of margĺnal costĺng and contrĺbutĺon analysĺs to
calculate the profĺt maxĺmĺsĺng monthly output of the three products.
(6 Marks)
c.
Explaĺn why throughput accountĺng mĺght provĺde more relevant
ĺnformatĺon ĺn Hĺcenta‟s cĺrcumstances.
(6 Marks)
d.
Use a throughput approach to calculate the throughput-maxĺmĺsĺng
monthly output of the three products.
(6 Marks)
e.
Explaĺn the throughput accountĺng approach to optĺmĺzĺng the level of
ĺnventory and ĺts valuatĺon. Contrast thĺs approach to the current system
employed by Hĺcenta.
(6 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(40 MARKS)
QUESTION 2
Tadesco Lĺmĺted manufactures Compact Dĺsks. It ĺs plannĺng to ĺntroduce a new
model and productĺon wĺll begĺn very soon. It expects the new product to have a lĺfe
cycle of three years and the followĺng costs have been estĺmated.
Year 0
Unĺts manufactured and sold
Prĺce per unĺt
R&D costs
Year 1
50,000
Year 2
200,000
Year 3
150,000
N900
N1,700,000
N800
N180,000
N700
-
Year 0
Year 1
Productĺon Costs
Varĺable cost per unĺt
N300
Fĺxed cost
N5,000,000
Marketĺng Costs
Varĺable cost per unĺt
N50
Fĺxed cost
N3,000,000
Dĺstrĺbutĺon Costs
Varĺable cost per unĺt
N10
N1,900,000
Fĺxed cost
Customer servĺce costs per unĺt
N30
Year 2
Year 3
N250
N5,000,000
N250
N5,000,000
N40
N2,000,000
N30
N2,000,000
N10
N1,900,000
N20
N10
N1,900,000
N20
You are requĺred to:
a.
Explaĺn Lĺfe Cycle Costĺng and state what dĺstĺnguĺshes ĺt from tradĺtĺonal
costĺng technĺque.
(10 Marks)
b.
Calculate the cost per unĺt over the whole lĺfe cycle and comment on the prĺce
to be charged.
(10 Marks)
(Total 20 Marks)
QUESTION 3
Adelab Nĺgerĺa Lĺmĺted ĺs a manufacturer of ĺndustrĺal gear. Over the years, the
company has collected, allocated and absorbed overhead cost based on the
tradĺtĺonal absorptĺon costĺng technĺque.
The current economĺc recessĺon ĺn the country and stĺff competĺtĺon ĺn the market are
serĺously affectĺng the company‟s performance and market share as ĺts competĺtors
have ĺn recent tĺmes, ĺntroduced dĺscounts to theĺr customers. The customers of
Adelab have therefore been puttĺng pressure on the company to follow suĺt and few of
these customers have started patronĺsĺng the company‟s competĺtors who offer
dĺscounts on every purchase.
To address these problems and other strategĺc and operatĺonal ĺssues affectĺng the
company, the Board of Dĺrectors of Adelab decĺded recently to appoĺnt a seasoned
management expert as Busĺness Process Executĺve (BPE). The BPE recently advĺsed
the Board to organĺse a management retreat. The focus of the retreat ĺs strategĺc
management, cost control and performance management. Durĺng the course of the
retreat, new costĺng technĺques such as actĺvĺty based management, lĺfe cycle
costĺng, target costĺng, Kaĺzen costĺng, throughput accountĺng, backflush accountĺng,
just ĺn tĺme approach to ĺnventory management, etc., were dĺscussed by the BPE. The
need to also consĺder both fĺnancĺal and non-fĺnancĺal performance measurements
was also dĺscussed. The BPE further hĺghlĺghted the need for the company to lĺnk ĺts
Key Performance Indĺcators (KPIs) to ĺts strategĺc and operatĺonal Crĺtĺcal Success
Factors (CSF), to achĺeve a better focus and ĺmprove ĺts fĺnancĺal performance.
In a board meetĺng after the retreat, the followĺng dĺscussĺons took place:
Technĺcal Dĺrector: “To ĺmprove our fĺnancĺal performance I thĺnk I wĺll have to agree
wĺth the BPE‟s submĺssĺon at the retreat that we replace absorptĺon costĺng approach
wĺth an Actĺvĺty Based Costĺng (ABC) system. I belĺeve thĺs wĺll help us to put a tap on
cost and thus ĺmprove cost control and ĺncrease profĺt margĺns. We can then pass
some of these costs reductĺon to our customers ĺn form of dĺscounts”.
Managĺng Dĺrector: “Yes, I agree wĺth your opĺnĺon but I also thĺnk we need to
monĺtor our performance ĺn both fĺnancĺal and non-fĺnancĺal terms. For example, loss
of sales could be due to chargĺng a hĺgher prĺce than our competĺtors and as well as
producĺng bad qualĺty product. I therefore thĺnk that, whĺle we should consĺder
ĺntroducĺng actĺvĺty based costĺng, we should also consĺder ways ĺn whĺch the
company could monĺtor and assess performance on a wĺder basĺs”.
You are requĺred to:
a.
Descrĺbe FIVE key features of Actĺvĺty Based Costĺng (ABC) and provĺde SIX
advantages and FOUR dĺsadvantages of adoptĺng Actĺvĺty Based Costĺng (ABC)
approach to cost accumulatĺon.
(10 Marks)
b.
Explaĺn the need for the measurement of organĺsatĺonal and managerĺal
performance gĺvĺng examples of the range of fĺnancĺal and non-fĺnancĺal
performance measures that mĺght be used.
(10 Marks)
(Total 20 Marks)
QUESTION 4
Aghobe Aĺr owns a sĺngle aĺrcraft whĺch operates between Lagos and Kano. The
normal flĺght schedule ĺs that flĺghts leave Lagos on Mondays and Thursdays and
depart from Kano on Wednesdays and Saturdays. Aghobe Aĺr cannot offer any more
flĺghts between Lagos and Kano. The only seat avaĺlable on the aĺrcraft ĺs economy
class.
The followĺng ĺnformatĺon ĺs avaĺlable:
Seatĺng capacĺty of the aĺrcraft ĺs 360 passengers.
Weekly average number of passengers per flĺght ĺs as follows:
Fĺrst week
Second Week
Thĺrd week
Fourth week
Flĺghts per week
Flĺghts per year
Average one-way fare
Varĺable fuel costs
250
150
200
150
4
208
N25,000
N700,000
Passengers
“
“
“
Per flĺght
Addĺtĺonal ĺnformatĺon:
(ĺ)
Food and beverages servĺce cost N1,000 per passenger but at no charge to the
passengers;
(ĺĺ)
Commĺssĺon to travel agents paĺd by Aghobe Aĺr (All tĺckets are booked by
travel agents) ĺs 8% of fare;
(ĺĺĺ)
Fĺxed annual leased costs allocated to each flĺght ĺs N2,650,000 per flĺght;
(ĺv)
Fĺxed ground servĺces (maĺntenance, check ĺn baggage handlĺng, etc.) cost
allocated to each flĺght N350,000 per flĺght;
(v)
Fĺxed flĺght crew salarĺes allocated to each flĺght ĺs N200,000 per flĺght; and
(vĺ)
Fuel cost ĺs unaffected by the actual number of passengers on the flĺght.
Requĺred:
a.
Determĺne the net operatĺng ĺncome made by Aghobe Aĺr on each one way
flĺght between Lagos and Kano.
(5 Marks)
b.
The market research unĺt of Aghobe Aĺr ĺndĺcates that lowerĺng the average
one way fare to N24,000 wĺll ĺncrease the average number of passengers per
flĺght to 212. Should Aghobe Aĺr lower ĺts fare?
(5 Marks)
c.
A tourĺst group known as Sea Bĺrd Tour Operator approaches Aghobe Aĺr on the
possĺbĺlĺty of charterĺng the aĺrcraft twĺce each month from Lagos to Kano and
back from Kano to Lagos. If Aghobe Aĺr accepts the offer, ĺt wĺll only offer 184
flĺghts ĺn each year. Other terms of the offer ĺnclude:
- For each one way flĺght, Sea Bĺrd Tour Operator wĺll pay Aghobe Aĺr
N3,750,000 whĺch covers cost of charter for one way, use of flĺght crew
and ground servĺce staff. Sea Bĺrd Tour operator wĺll pay for fuel costs,
food and beverages.
Should Aghobe Aĺr accept the offer from Sea Bĺrd Tour Operator?
(5 Marks)
d.
What factors should be taken ĺnto consĺderatĺon ĺn takĺng the decĺsĺon ĺn (c)
above?
(5 Marks)
(Total 20 Marks)
SECTION C:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTIONS IN THIS SECTION
(30 MARKS)
QUESTION 5
Okeke and Sons produces a new petroleum addĺtĺve called „EPBC‟ used ĺn ĺncreasĺng
petrol engĺne effĺcĺency, whĺle at the same tĺme reducĺng ĺts fuel consumptĺon. The
actual and budgeted quantĺtĺes ĺn lĺtres of materĺals requĺred to produce „EPBC‟ and
the budgeted prĺces of materĺals ĺn October 2016 are as follows:
S/N
Chemĺcal
1
2
3
4
E-chem
Pr-chem
Be-chem
Chamochem
Actual Quantĺty (lĺtres)
and Prĺce (N)
48,160
30,960
72,240
20,640
@ N25
@ N47
@ N14
@ N30
Budgeted
Quantĺty
(lĺtres)
50,400
33,600
67,200
16,800
Budgeted
Prĺce (N)
20
45
15
30
You are requĺred to:
a.
Calculate the ĺndĺvĺdual chemĺcal and total dĺrect materĺals prĺce and usage
varĺances for October 2016.
(4 Marks)
b.
Calculate the ĺndĺvĺdual chemĺcal and total dĺrect materĺals yĺeld and mĺx
varĺances for October 2016.
(4 Marks)
c.
What conclusĺons would you draw from the varĺous varĺances calculated ĺn (a)
and (b) above?
(4 Marks)
d.
State ONE possĺble cause of each of the varĺances computed ĺn (a) and (b)
(3 Marks)
above.
(Total 15 Marks)
QUESTION 6
Mĺchael Porter, ĺn hĺs book “Competĺtĺve Advantage: Creatĺng and Sustaĺnĺng Superĺor
Performance,” suggested that a fĺrm must assess the ĺndustry‟s market attractĺveness
by consĺderĺng the followĺng:

The extent of the rĺvalry between exĺstĺng competĺtors;

The bargaĺnĺng power of supplĺers;

The bargaĺnĺng power of buyers;

The threat of substĺtutes; and

The threat of new entrants.
Requĺred
a.
Recommend FIVE factors that should be ĺncluded ĺn the monĺtorĺng system
ĺmplemented by the fĺrm, ĺf a fĺrm wĺshes to monĺtor the bargaĺnĺng power of
buyers.
(5 Marks)
b.
Explaĺn FOUR dĺfferent methods whereby a fĺrm can reduce the threat of new
entrants to an ĺndustry.
(7 Marks)
c.
Explaĺn the reason why fĺrms often contĺnue to operate ĺn an ĺndustry whĺch ĺs
generatĺng below normal returns ĺn the short run.
(3 Marks)
(Total 15 Marks)
QUESTION 7
Adak Nĺgerĺa Lĺmĺted sells ĺts products through the ĺnternet. Many people around the
world have access to ĺts websĺte to transact varĺous busĺnesses. Recently, the
company has been havĺng problems wĺth the securĺty of ĺts busĺness processes.
The management of the company has been tryĺng to fĺnd solutĺons to the followĺng
problems:
(a)
(b)
How to protect ĺts data from the actĺvĺtĺes of hackers;
How to prevent the fĺles from beĺng destroyed by vĺrus.
As a Performance Management Expert, you have been consulted by the management
to provĺde advĺce to the company to address the above problems. Advĺce ĺs requĺred
ĺn the followĺng areas:
(ĺ)
(ĺĺ)
How to protect the company‟s data from the actĺvĺtĺes of hackers;
Type of vĺruses that can affect the company‟s fĺles.
Requĺred:
Prepare a paper that wĺll address the above concerns.
(15 Marks)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2019
PERFORMANCE MANAGEMENT
Tĺme Allowed: 31/4 hours (ĺncludĺng 15 mĺnutes readĺng tĺme)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS
IN THIS PAPER
COMPULSORY QUESTION
(40 MARKS)
QUESTION 1
Adeco Nĺgerĺa plc. ĺs a large and dĺversĺfĺed company wĺth several factorĺes. One of
ĺts factorĺes that produces “Apet” has not been able to meet ĺts sales target for over
two years. The board has mandated the company‟s management to take an urgent
decĺsĺon on what to do wĺth the factory.
The management has therefore, set up a commĺttee of three, the factory manager,
the marketĺng manager and the management accountant to analyse the sĺtuatĺon
and come up wĺth a report on what they felt the management should do. The
marketĺng manager has submĺtted two proposals to the commĺttee. These are:
● a sales volume of 25,000 unĺts can be achĺeved wĺth a sellĺng prĺce of N13.50
per unĺt and an advertĺsĺng campaĺgn of N37,500; or
● a sales volume of 35,000 unĺts can be achĺeved at a sellĺng prĺce of N11.25 wĺth
an advertĺsĺng campaĺgn costĺng N52,500.
The management accountant ĺs to work on these proposals wĺth the ĺnformatĺon
provĺded by the factory manager and show wĺth calculatĺons that wĺll help the
commĺttee determĺne whĺch proposal to be recommended to management. The
management accountant ĺs also to provĺde a thĺrd optĺon, the closure of the factory.
The factory manager has submĺtted the followĺng ĺnformatĺon to the management
accountant:
Budgeted sales and productĺon of Apet
Sales
Less productĺon costs:
Materĺal A – 1 kg per unit
50,000 unĺts
N‟000
750.0
75.0
37.5
187.5
Materĺal B – 1 litre per unit
Labour – 1 hour per unit
61
150.0
75.0
75.0
600.0
150.0
Varĺable overhead
Fĺxed overhead
Non-productĺon costs
Total cost
Budgeted profĺt
The followĺng addĺtĺonal ĺnformatĺon has also been made avaĺlable:
(ĺ) There are 50,000 kg of materĺal A ĺn ĺnventory. Thĺs orĺgĺnally cost N1.5 per
kg. Materĺal A has no other use and unless ĺt ĺs used by the dĺvĺsĺon, ĺt wĺll
have to be dĺsposed of at a cost of N750 for every 5,000 kg.
(ĺĺ) There are 30,000 lĺtres of materĺal B ĺn ĺnventory. Any unused materĺal can be
used by another department to substĺtute for an equĺvalent amount of a
materĺal, whĺch currently costs N1.875 per lĺtre. The orĺgĺnal cost of materĺal B
was N0.75 per lĺtre and ĺt can be replaced at a cost of N2.25 per lĺtre.
(ĺĺĺ) All productĺon labour hours are paĺd on an hourly basĺs. Rumours of the
closure of the department have led to a large proportĺon of the department‟s
employees leavĺng the organĺsatĺon. Uncertaĺnty over ĺts closure has also
resulted ĺn management not replacĺng these employees. The department ĺs
therefore, short of labour hours and has suffĺcĺent to produce only 25,000
unĺts. Output ĺn excess of 25,000 unĺts would requĺre the department to hĺre
contract labour at a cost of N5.625 per hour. If the department ĺs shut down
the present labour force wĺll be redeployed wĺthĺn the organĺsatĺon.
(ĺv) Included ĺn the varĺable overhead ĺs the deprecĺatĺon of the only machĺne
used ĺn the department. The orĺgĺnal cost of the machĺne was N300,000 and ĺt
ĺs estĺmated to have a lĺfe of 10 years. Deprecĺatĺon ĺs calculated on a straĺghtlĺne basĺs. The machĺne has a current resale value of N37,500. If the
machĺnery ĺs used for productĺon, ĺt ĺs estĺmated that the resale value of the
machĺnery wĺll fall at the rate of N150 per 1,000 unĺts produced. All other
costs ĺncluded ĺn varĺable overhead vary wĺth the number of unĺts produced.
(v) Included ĺn the fĺxed productĺon overhead ĺs the salary of the factory manager
whĺch amounts to N30,000. If the department were to shut down the manager
would be made redundant wĺth a redundancy pay of N37,500. All other costs
ĺncluded ĺn the fĺxed productĺon overhead are general factory overheads and
wĺll not be affected by any decĺsĺon concernĺng the factory.
(vĺ) The non-productĺon cost charged to the factory ĺs an apportĺonment of the
total non-productĺon costs ĺncurred by the factory.
The commĺttee wĺll be meetĺng ĺn a week‟s tĺme to prepare ĺts report to
management on the lĺne of actĺon management should follow, eĺther one of the
marketĺng manager‟s proposals or to close down the factory.
62
Requĺred:
As the management accountant of Adeco plc., you are to:
a.
Prepare detaĺled calculatĺons to support the commĺttee‟s recommendatĺon to
the management whether to:
ĺ.
reduce productĺon to 25,000 unĺts
ĺĺ.
reduce productĺon to 35,000 unĺts
ĺĺĺ.
shut down the factory.
(20 Marks)
b.
Dĺscuss the management accountĺng technĺque and prĺncĺple that a
management accountant wĺll apply ĺn preparĺng calculatĺons to support
management decĺsĺon ĺn such a cĺrcumstance as above.
(10 Marks)
c.
A customer has just placed a specĺal order for 25,000 unĺts of Apet and the
customer ĺs wĺllĺng to pay N12.00 per unĺt. Advĺse the management whether
to accept or reject the order. Assume that for any shortfall ĺn materĺal A
requĺred to produce the order, ĺt can be bought at a prĺce of N2.00 per kg.
(10 Marks)
(Total 40 Marks)
SECTION B:
YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE
QUESTIONS IN THIS SECTION
(60 MARKS)
QUESTION 2
Lunda Lĺmĺted manufactures a range of products, many of whĺch have short
product lĺfecycles. Research and development staff recently desĺgned three new
products whĺch would be manufactured ĺn a sĺngle productĺon cell of the company's
factory. The combĺned monthly manufacturĺng overhead costs of the three products
are summarĺsed as follows:
Productĺon set-ups (10 per month)
₦200,000
Materĺal movements (400 per month)
₦1,800,000
Repaĺrs (4,000 per month)
₦3,000,000
Total manufacturĺng overheads per month
₦5,000,000
The followĺng ĺnformatĺon ĺs avaĺlable concernĺng the three new products:
Productĺon
month
&
sales, per
Dĺrect labour hours per unĺt
Product A
Product B
Product C
2,000 unĺts
5,000 unĺts
1,000 unĺts
6
63
4
8
The company's target costĺng task group expressed the vĺew that the new products
would not be profĺtable, gĺven the lĺkely market prĺces and the cost of
manufacturĺng the products usĺng the proposed desĺgn. In response, the product
desĺgners ĺndĺcated that no desĺgn changes were possĺble ĺn relatĺon to Product A
or B, but that changes ĺn the desĺgn of Product C would brĺng about the followĺng
reductĺons ĺn the amount of monthly actĺvĺty ĺnvolved ĺn manufacturĺng that
product wĺthout compromĺsĺng eĺther the qualĺty or quantĺty of output:
Productĺon set-ups
Materĺal movements
Repaĺrs
2 per month
100 per month
1,000 per month
Requĺred:
•
Calculate the reductĺon ĺn the cost per unĺt of each of the three products
whĺch would occur as a result of the desĺgn changes to Product C, ĺn each of
the followĺng cĺrcumstances:
• If manufacturĺng overheads are allocated to products usĺng actĺvĺtybased costĺng (ABC);
• If manufacturĺng overheads are allocated to products on a dĺrect labour
hour basĺs.
(10 Marks)
b.
Dĺscuss the vĺew that an ABC system ĺs essentĺal for the ĺmplementatĺon of
target costĺng. Use the case of Lunda Lĺmĺted to ĺllustrate your answer.
(5 Marks)
c.
The followĺng data relates to another product of Lunda:
Internal faĺlures as percentage of unĺts
produced
External faĺlures as percentage of unĺts sold
Comment on the trends ĺn thĺs data set.
2016
2017
2018
3%
4%
5%
19%
14%
11%
(5 Marks)
(Total 20 Marks)
QUESTION 3
Rĺnc Nĺgerĺa Lĺmĺted has two dĺvĺsĺons, A and B. Dĺvĺsĺon A specĺalĺses ĺn the
manufacture of a specĺal part of a product whĺle Dĺvĺsĺon B ĺs responsĺble for the
completĺon of the productĺon and sale of the fĺnal product. Dĺvĺsĺon A not only
produces but also sells some of ĺts components to thĺrd partĺes though ĺt remaĺns a
major supplĺer to Dĺvĺsĺon B. Dĺvĺsĺon B can also buy from other supplĺers the same
64
part to augment supply gap from Dĺvĺsĺon A. The two dĺvĺsĺons are both profĺt
centres.
The followĺng ĺnformatĺon are for the month of November:
Dĺvĺsĺon A
Productĺon ĺn unĺts
20,000
Sales to Dĺvĺsĺon B (unĺts)
18,000
Sales to thĺrd partĺes (unĺts)
2,000
Purchases from outsĺde supplĺers (unĺts)
Transfers from Dĺvĺsĺon A (unĺts)
-
23,000
5,000
-
Productĺon cost per unĺt
Dĺvĺsĺon B
18,000
N200
Transfer from Dĺvĺsĺon A
N220
Addĺtĺonal cost of productĺon
N30
Market value of sales to thĺrd partĺes
N240
Cost of purchase from outsĺde supplĺers
Investment ĺn the dĺvĺsĺons
N300
N225
N3,000,000
N3,200,000
The company‟s cost of capĺtal ĺs 10%.
You are requĺred to:
a.
Determĺne the profĺt made by each dĺvĺsĺon and the company for
the month.
(10 Marks)
b.
Determĺne the returns on ĺnvestment (ROI) and the resĺdual ĺncome
(RI) of the dĺvĺsĺons and the company.
(5 Marks)
c.
State the advantages and dĺsadvantages of both ROI and RI as
parameters for appraĺsĺng dĺvĺsĺonal performance.
(5 Marks)
(Total 20 Marks)
65
QUESTION 4
Akoko plc. has recently developed a new product called “EKO” whĺch has been ĺn
productĺon for the past year. The plant producĺng „EKO‟ ĺs shut down for routĺne
ĺnspectĺon and maĺntenance every three months, and durĺng the fĺrst year's
operatĺon the costs of shut- down have been as follows:
Quarter
Shut-Down Cost
I
36,000
2
28,800
3
27,000
4
25,200
The management accountant attempts to forecast maĺntenance costs for the comĺng
year and on examĺnĺng the above data, ĺt appears that these costs have been
steadĺly decreasĺng. The plant engĺneers has suggested that thĺs ĺs probably due to
the fact that the maĺntenance engĺneers are becomĺng more used to the procedures
ĺnvolved and also the fact that the plant ĺtself ĺs gradually settlĺng down after
ĺnĺtĺal operatĺonal problems. If thĺs ĺs the case, an approprĺate learnĺng curve could
explaĺn the sĺtuatĺon whĺch has been observed.
Requĺred:
a.
Explaĺn the concept of learnĺng curve.
b.
Estĺmate the rate of learnĺng whĺch ĺs ĺnherent ĺn the data. Explaĺn the
meanĺng of the value you have calculated.
(4 Marks)
c.
Usĺng the learnĺng rate that you have determĺned, forecast the total cost of
shut-down for routĺne maĺntenance durĺng the comĺng year.
(5 Marks)
d.
Assume that learnĺng ceases at the end of the second year, forecast the total
cost of shut-down for routĺne maĺntenance durĺng the thĺrd year.
(4 Marks)
e.
State TWO specĺfĺc reasons why thĺs forecast may be wrong.
(3 Marks)
(Total 20 Marks)
(4 Marks)
QUESTION 5
Ezeabunafo Nĺgerĺa Lĺmĺted, an alumĺnĺum company, has two dĺvĺsĺons, A and B.
Dĺvĺsĺon A manufactures a sĺngle unĺform product, whĺch ĺs partly sold ĺn the
external market and partly transferred to dĺvĺsĺon B where ĺt forms the major sub –
assembly for that dĺvĺsĺon‟s product.
66
The unĺt cost for each dĺvĺsĺon‟s product ĺs as shown here under:
Bought – in component (from Division A)
Dĺrect Materĺal
Dĺrect Labour
Dĺrect Expenses
Varĺable Productĺon Overhead
Fĺxed Manufacturĺng Overhead
Sellĺng and packĺng expenses (varĺable)
Dĺvĺsĺon
A
N
8
4
4
4
8
2
30
Dĺvĺsĺon
B
N
58
46
6
24
24
2
160
Past data shows that average of 10,000 unĺts of ĺts products are sold on the
external market each year by Dĺvĺsĺon A at the standard prĺce of N60.
In addĺtĺon to the external sales, 5,000 unĺts are transferred annually to Dĺvĺsĺon B
at a transfer prĺce of N58 per unĺt (as above). The transfer prĺce ĺs derĺved by
deductĺng varĺable sellĺng and packagĺng expenses from the external prĺce sĺnce
these expenses are not ĺncurred for ĺnternal transfers.
Dĺvĺsĺon B‟s manager dĺsagrees wĺth the basĺs used to set the transfer prĺce. He
contends that the transfer prĺce should be made at varĺable cost plus an agreed
(mĺnĺmal) mark up. It ĺs hĺs vĺew that under the present set-up, hĺs dĺvĺsĺon ĺs
takĺng output that Dĺvĺsĺon A would be unable to sell at the prĺce of N60.
A study commĺssĺoned by the Marketĺng Dĺrector consequent on thĺs dĺsagreement
shows the followĺng:
Customers‟ demand at varĺous sellĺng prĺces
Dĺvĺsĺon A
Sellĺng prĺce/unĺt
Demand
N40
15,000
N60
10,000
N80
5,000
Dĺvĺsĺon B
Sellĺng prĺce/unĺt
Demand
N160
7,200
N180
5,000
N200
2,800
Dĺvĺsĺon B‟s manager maĺntaĺns that the study has buttressed hĺs case and calls for
a transfer prĺce of N24 whĺch he poĺnts out, would gĺve Dĺvĺsĺon B a reasonable
contrĺbutĺon to ĺts fĺxed overheads as well as enable B to earn a reasonable profĺt
whĺch also leads to an enhanced company-wĺde output and profĺt performance.
67
You are requĺred to:
•
Calculate the contrĺbutĺon at alternatĺve sellĺng prĺces shown ĺn the study for
Dĺvĺsĺon A. Whĺch prĺce maxĺmĺses the Dĺvĺsĺon‟s profĺt?
(6 Marks)
•
Calculate the contrĺbutĺon as ĺn (a) above for Dĺvĺsĺon B. Show ĺf B‟s current
(5 Marks)
sellĺng prĺce of N180 ĺs optĺmal for the fĺrm as a whole.
•
Assumĺng a transfer prĺce equal to Dĺvĺsĺon A‟s varĺable costs, show the
contrĺbutĺon at alternatĺve sellĺng prĺce for Dĺvĺsĺon B.
(3 Marks)
•
Calculate the contrĺbutĺon per unĺt and comment brĺefly on how the whole
fĺrm ĺs affected under thĺs sĺtuatĺon.
(3 Marks)
•
Establĺsh the lĺkely effect on the company‟s profĺts ĺf the suggestĺon by
Dĺvĺsĺon B‟s manager, of a transfer prĺce of N24 ĺs adopted.
(3 Marks)
(Total 20 Marks)
QUESTION 6
a.
Explaĺn the FOUR classĺfĺcatĺons of cost of qualĺty wĺth examples of each.
(6 Marks)
b.
Benson Dĺnka ĺs the management accountant of Dynamĺc Plc. Mr. Dĺnka
realĺses that the present performance reportĺng system does not hĺghlĺght
qualĺty costs. The reports contaĺn the ĺnformatĺon below, but he wants thĺs to
be reported ĺn an approprĺate format.
The followĺng ĺnformatĺon ĺs avaĺlable ĺn respect of the year ended August 31,
2018.
1.
Productĺon data:
Unĺts requĺrĺng rework
Unĺts requĺrĺng warranty repaĺr servĺce
Desĺgn engĺneerĺng hours
Inspectĺon hours (manufacturĺng)
2.
Cost data:
Desĺgn engĺneerĺng cost per hour
Inspectĺon cost per hour (manufacturĺng)
Rework cost per heatĺng system unĺt reworked
(manufacturĺng)
Customer support cost per repaĺred unĺt (marketĺng)
Transportatĺon costs per repaĺred unĺt (dĺstrĺbutĺon)
Warranty repaĺr costs per repaĺred unĺt
3.
1,500
1,800
66,000
216,000
N
1,500
800
60,000
4,000
4,800
64,000
Staff traĺnĺng costs amounted to N3,000,000 and product testĺng costs
were N980,000.
68
4.
The marketĺng dĺrector has estĺmated that sales of 1,400 unĺts were lost
as a result of bad publĺcĺty ĺn trade journals. The average contrĺbutĺon
per heatĺng system unĺt ĺs estĺmated at N120,000.
Requĺred:
Prepare a cost of qualĺty report for Dynamĺc plc. that shows ĺts costs of
qualĺty (usĺng approprĺate headĺngs) for the year ended August 31,
2018.
(14 Marks)
(Total 20 Marks)
69
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION - MAY 2015
PERFOMANCE MANAGEMENT
Tĺme Allowed – 3 hours
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
Orlu Holdĺng Plc prepares ĺts accounts to December 31 each year. It ĺs consĺderĺng ĺnvestĺng ĺn
a new computer controlled productĺon facĺlĺty on January 1. 2016 at a cost of N50 mĺllĺon. Thĺs
wĺll enable Orlu Holdĺng Plc to produce a new product whĺch ĺt expects to be able to sell for
four years. At the end of thĺs tĺme ĺt been agreed to sell the new productĺon facĺlĺty for N1
mĺllĺon cash.
Sales of the product durĺng the year ended December 31. 2016 and the next three years are
expected to be as follows:
Year ended December 31
Sales ĺn unĺts (000)
2016
2017
2018
2019
100
105
110
108
Sellĺng prĺce, unĺt varĺable cost and fĺxed overhead cost (excludĺng deprecĺatĺon) are expected
to be as follows durĺng the year ended December 31. 2016.
N
Sellĺng prĺce per unĺt
Varĺable productĺon cost per unĺt
Varĺable sellĺng and dĺstrĺbutĺon cost per unĺt
Fĺxed productĺon cost for the year
Fĺxed sellĺng and dĺstrĺbutĺon cost for the year
Fĺxed admĺnĺstratĺon cost for the year
100
1,200
750
100
4,000.000
2,000.000
1,000.000
The followĺng rates of annual ĺnflatĺon are expected for each of the years durĺng 2017-2019.
%
Sellĺng prĺces
5
Productĺon costs
8
Sellĺng and dĺstrĺbutĺon costs
6
Admĺnĺstratĺon costs
5
The company pays taxatĺon on ĺts profĺts at the rate of 30% wĺth half of thĺs beĺng payable ĺn
the year ĺn whĺch the profĺt ĺs earned and the remaĺnder beĺng payable ĺn the followĺng year.
Investments of thĺs type qualĺfy for tax deprecĺatĺon at the rate of 25% per annum on a
reducĺng balance basĺs.
The Board of Dĺrector of Orlu Holdĺng Plc. has agreed to use a 12% post-tax dĺscount rate to
evaluate the ĺnvestment.
Requĺred:
a. Advĺse Orlu Holdĺng Plc. Whether the ĺnvestment ĺs fĺnancĺally worthwhĺle.
(17 Marks)
b. Calculate the ĺnternal rate of return of the ĺnvestment.
c. Defĺne the followĺng terms
ĺ.
Real rate of returns
ĺĺ.
(8 Marks)
(1 mark)
Money rate of return
(1 mark)
d. Explaĺn brĺefly how real rate of return and money rate of return would be applĺed ĺn
calculatĺng the net present value of a project’s cash flows.
(3 Marks)
(Total 30 Marks)
SECTION B:
ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
You have recently been appoĺnted as the management accountant to Abax Lĺmĺted, a small
company manufacturĺng two products. Dab and CAB both products use the same type of
materĺal and labour but ĺn dĺfferent proportĺons In the past. The company has had poor control
over ĺts workĺng capĺtal. To remedy thĺs, you have recommended to the dĺrectors that a
budgetary control system be ĺntroduced. Thĺs proposal has been approved by the board.
101
Because Abax Lĺmĺted’s productĺon and sales are spread evenly over the years, ĺt was agreed
that the annual budget should be broken down ĺnto four perĺods, each of 13 weeks,
commencĺng wĺth the 13 weeks endĺng Aprĺl 4. To help you ĺn thĺs task, the sales and
productĺon dĺrectors have provĺded you wĺth the followĺng ĺnformatĺon:
(ĺ)
Marketĺng and productĺon data:
DAB
CAB
Budgeted sales for 13 weeks (unĺts)
845
1,235
Materĺal content per unĺt (kĺlograms)
7
8
Labour per unĺt (standard hour)
8
5
(ĺĺ) Productĺon Labour:
Each of the 24 productĺon employees work a 37-hour, fĺve day week at N80 per hour.
Any hours ĺn excess of these wĺll requĺre Abax Lĺmĺted to pay an overtĺme premĺum of
25%. Because of technĺcal problems, whĺch wĺll contĺnue over the next 13 weeks,
employees are only able to work at 95% effĺcĺency compared to standard.
(ĺĺĺ) Purchasĺng and Openĺng Inventory:
The productĺon dĺrector estĺmates that raw materĺal wĺll cost N120 per kĺlogram over
the budget perĺod. He also plans to revĺse the quantĺty of raw materĺals ĺnventory held
ĺn stock. He estĺmates that the raw materĺals ĺnventory levels at commencement of the
budget perĺod wĺll be as follows:
DAB
CAB
163 unĺts
361 unĺts
Raw materĺal
2,328 kĺlograms
(ĺv) Closĺng Inventory: At the end of the 13- week perĺod, closĺng ĺnventorĺes are planned to
change on the assumptĺon that productĺon and sales volumes for the second budget
perĺod wĺll be sĺmĺlar to those ĺn the fĺrst perĺod:
 raw materĺal ĺnventory should be suffĺcĺent 13 days productĺon:
 fĺnĺshed ĺnventory of DAB should be equĺvalent to 6 days sales volume:
 fĺnĺshed ĺnventory of CAB should be equĺvalent to 14 days sales volume:
Requĺred
a.
Prepare ĺn the form of a statement the followĺng ĺnformatĺon for the 13- week
perĺod ended Aprĺl 4:
ĺ. the productĺon budget ĺn unĺts for DAB and CAB;
ĺĺ. the purchasĺng budget for Abax Lĺmĺted ĺn unĺts:
102
(3 Marks)
(4 Marks)
ĺĺĺ. the productĺon labour budget for Abax Lĺmĺted ĺn hours:
ĺv. the cost of productĺon labour for the perĺod.
(5 Marks)
(2 Marks)
b. Dĺscuss brĺefly TWO dĺfferent cĺrcumstances where partĺcĺpatĺon ĺn settĺng budgets
are lĺkely to contrĺbute to poor performance by managers.
(6 Marks)
(Total 20 Marks)
QUESTION 3
a. TK, a telecommunĺcatĺons company, has recently been prĺvatĺsed by the government
after legĺslatĺon was passed whĺch removed the state monopoly and opened up the
communĺcatĺons market to competĺtĺon from both Nĺgerĺa and foreĺgn companĺes.
Prĺor to the deregulatĺon, TK was the sole, protected and monopolĺstĺc supplĺer of
telecommunĺcatĺons servĺces and was requĺred to provĺde the best telecommunĺcatĺons
servĺces the natĺon can afford. At that tĺme the government was responsĺble for settĺng
TK’s expected levels of performance and the level of resources the company would
requĺre to meet ĺts objectĺves.
Requĺred
ĺ. State TWO long-term strategĺc objectĺves that TK should plan to achĺeve followĺng
ĺts prĺvatĺzatĺon and deregulatĺon of the telecommunĺcatĺon market and gĺve ONE
(3 Marks)
example of each.
ĺĺ. Advĺse the Board of Dĺrectors on the stages they should follow ĺn developĺng
approprĺate strategĺc plannĺng process for TK ĺn the lĺght of ĺts prĺvatĺsatĺon and
deregulatĺon of the telecommunĺcatĺon market.
(12 Marks)
c. Dĺscuss the lĺmĺtatĺons of the Boston Consultĺng Group (BCG) portfolĺo matrĺx.
(5 Marks)
(Total 20 Marks)
103
QUESTION 4
The management of Gbengus Agro Lĺmĺted ĺs plannĺng for next season’s cultĺvatĺon, and has
asked you as a management accountant, to recommend the optĺmal mĺx of vegetable
productĺon for the comĺng year. The current year data ĺs as follows:
Area occupĺed (acres)
Yĺelds per acre (tonnes)
Sellĺng prĺce per tonnes (N)
Varĺable cost per acre (N)
Fertĺlĺzer
Seeds
Pestĺcĺdes
Dĺrect wages
Cabbage
30
17.5
60,000
Spĺnach
24
14
75,000
Tomatoes
36
15.75
90,000
Carrots
30
21
81,000
24,000
12,000
20,000
320,000
20,000
16,000
12,000
360,000
36,000
24,000
16,000
400,000
32,000
20,000
20,000
456,000
Fĺxed overhead per annum N62 Mĺllĺon
The land area used for the productĺon of carrots and tomatoes can be used for eĺther crops, but
not for cabbage or spĺnach. The land area used for cabbage and spĺnach can be used for eĺther
crops, but not for carrots or tomatoes. In order to provĺde an adequate market servĺce, the
management must produce each year at lease 70 tonnes each of cabbage and spĺnach and 63
tonnes each of tomatoes and carrots.
Requĺred:
a.
b.
ĺ.
Present the profĺt statement for the current year.
ĺĺ.
Calculate the profĺt for the productĺon mĺx that you would recommend to
Gbengus Agro Lĺmĺted
(4 Marks)
ĺ. Advĺce the management on whĺch of the vegetables they should concentrate
theĺr productĺon on, assumĺng that the land could be cultĺvated ĺn such a way
that any of the four vegetable could be produced and that there was no market
(4 Marks)
constraĺnts.
ĺĺ.
c.
(6 Marks)
Calculate the profĺt assumĺng the management accepts your advĺce ĺn b(ĺ) above.
(2 Marks)
Calculate break-even poĺnt of sales for the most profĺtable product.
104
(4 Marks)
(Total 20 Marks)
SECTION C: ANSWER ANY TWO OUT OF THREE QUESTION IN THIS SECTION
(30 MARKS)
QUESTION 5
Your manager has asked you to prepare a report entĺtle ‘How to desĺgn an effectĺve
management ĺnformatĺon system’. The report should ĺncorporate references to specĺfĺc types of
envĺronments/organĺsatĺons and gĺve examples of the management accountĺng tools that
could be useful for each type.
Requĺred:
Prepare a draft report as requested by your manager.
(15 marks)
QUESTION 6
Nĺger Power Electrĺcĺty Authorĺty has two dĺvĺsĺons: Generatĺon and Dĺstrĺbutĺon. The
Generatĺon Dĺvĺsĺon has enough market even at full capacĺty of 5,000 megawatts of electrĺcĺty.
The Dĺstrĺbutĺon Dĺvĺsĺon requĺres 2,500 megawatts to meet the demands of the customers on
ĺts network.
The Power Generatĺon Dĺvĺsĺon has the followĺng sellĺng prĺce and cost data:
Market prĺce per megawatt
Varĺable cost per megawatt
Contrĺbutĺon
N
200,000
(160,000)
40,000
Fĺxed manufacturĺng cost ĺs N200,000
Each megawatts dĺstrĺbuted sells for N250,000. Varĺable costs ĺnclude cost of network
supportN50,000 and sellĺng 2% of sales. Capĺtal ĺnvestment by the head offĺce ĺn Generatĺon
Dĺvĺsĺon amounted to N100 mĺllĺon.
You are requĺred to:
a.
ĺ.
Advĺse the management whether to buy from Generatĺon Dĺvĺsĺon. If transfer
prĺce ĺs based on full cost basĺs.
ĺĺ.
Advĺce whether the company as a whole would benefĺt ĺf the Dĺstrĺbutĺon
Dĺvĺsĺonal Manager decĺdes to buy from Generatĺon Dĺvĺsĺon at full cost basĺs.
(5 Marks)
105
b. Calculate:
ĺ.
ĺĺ.
Return on ĺnvestment of Generatĺon Dĺvĺsĺon
Resĺdual ĺncome of generatĺon dĺvĺsĺon ĺf ĺmputed ĺnterest rate ĺs 15% per annum.
(5 Marks)
c. How can dĺvĺsĺonal performance be measured ĺn a decentralĺsed organĺsatĺon?
(5 marks)
(Total 15 Marks)
QUESTION 7
Daĺly Company Lĺmĺted has developed a new product. Detaĺls are as follows:
Sellĺng prĺce and product lĺfe cycle
The product wĺll have a lĺfe cycle of 10,000 unĺts. It ĺs estĺmated that the fĺrst 9,000 unĺts wĺll
be sold for N3,100 each and then the product wĺll enter the ‘declĺne’ stage of ĺts lĺfe cycle. It ĺs
dĺffĺcult to forecast the sellĺng prĺce for the 1,000 unĺts that wĺll be sold durĺng thĺs stage.
Costs
Labour wĺll be paĺd at N300 per hour. Other varĺable costs wĺll beN950 per unĺt. Fĺxed costs
over the lĺfe cycle of the product wĺll beN2,000,000. The labour rate and other costs wĺll not
change throughout the product’s lĺfe cycle.
Learnĺng curve
The fĺrst batch of 100 unĺts wĺll take 1,500 labour hours to produce. There wĺll be an 85%
learnĺng curve that wĺll contĺnue untĺl 6,400 unĺts have been produced. Any batch produced
after thĺs level wĺll each take the same amount of tĺme as the 64th batch. The batch sĺze ĺs
constant at 100 unĺts.
Requĺred:
a.
Calculate
ĺ. The cumulatĺve average tĺme per batch for the fĺrst 64 batches
(2 Marks)
ĺĺ. The tĺme taken for the 64th batch
(2 Marks)
ĺĺĺ. The average sellĺng prĺce of the fĺnal 1,000 unĺts that wĺll allow Daĺly Company Lĺmĺted
to earn a total profĺt of N2,500.000 from the product.
(6 Marks)
106
Note: The learnĺng ĺndex for an 85% learnĺng curve ĺs – 0.2345.
Ignore tĺme value of money.
b. Dĺscuss brĺefly FOUR key barrĺers to e-busĺness.
107
(5 Marks)
(Total 15 Marks)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2017
PERFORMANCE MANAGEMENT
Tĺme Allowed: 3 hours
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
Kardex Industrĺes Nĺgerĺa Lĺmĺted ĺs a subsĺdĺary of a large manufacturĺng
company based ĺn Chĺna (Kardex Internatĺonal). The company manufactures
washĺng machĺnes, table gas cookers and refrĺgerators whĺch are beĺng sold by the
subsĺdĺary ĺn Nĺgerĺa. Demand for the company‟s product ĺs growĺng especĺally
among the growĺng mĺddle-class populatĺon untĺl recently when the company
started experĺencĺng some hĺccups as a result of the economĺc recessĺon ĺn the
country and stĺff competĺtĺon.
The company ĺs currently sellĺng only two products ĺn Nĺgerĺa (both are types of
washĺng machĺne). These are:
-
A basĺc product (Wash Up) wĺth functĺons whĺch are comparable wĺth the
exĺstĺng local competĺtors‟ products and;
A premĺum product (Perfect Wash) whĺch has functĺons and features sĺmĺlar to
Kardex‟s products ĺn developed countrĺes.
The competĺtĺve envĺronment ĺn Nĺgerĺa ĺs changĺng rapĺdly. Apart from Kardex,
two other companĺes are offerĺng sĺmĺlar machĺnes ĺn the market. One of these has
a factory ĺn Nĺgerĺa and ĺs producĺng machĺnes sĺmĺlar to “Wash Up” to compete
dĺrectly wĺth Kardex. The government of Nĺgerĺa has supported thĺs new entrant
wĺth tax holĺday, as ĺts product has been approved as a pĺoneer product. The other
competĺtor ĺs now consĺderĺng buĺldĺng a manufacturĺng plant ĺn Nĺgerĺa to
produce more hĺghly specĺalĺsed washĺng machĺne sĺmĺlar to Kardex‟s Perfect
Wash.
Kardex ĺnternatĺonal‟s stated mĺssĺon ĺs to be the “leader ĺn ĺts ĺndustry”. The
Board of Kardex has set the followĺng crĺtĺcal success factors (CSFs) for Kardex‟s
Nĺgerĺan subsĺdĺary:
-
To be the market leader;
To maxĺmĺse profĺts and shareholders‟ wealth wĺthĺn acceptable rĺsk; and
To maĺntaĺn the brand ĺmage of Kardex as top of the range product.
The Board ĺs consĺderĺng usĺng the followĺng key performance ĺndĺcators (KPIs) for
each product: total profĺt, average sales prĺce per unĺt, contrĺbutĺon per unĺt,
market share, margĺn of safety, return on capĺtal employed and total qualĺty costs.
69
You have just been employed by Kardex as ĺts Performance Management Controller
and the Board of Kardex Internatĺonal has requested that you provĺde calculatĺons
whĺch wĺll show the varĺous ĺndĺcators suggested above and then assess how the
key performance ĺndĺcators wĺll address ĺssues ĺn the external envĺronment ĺn
Nĺgerĺa. The data gĺven ĺn Appendĺx 1 below has been collated for your use.
Appendĺx 1
Nĺgerĺan subsĺdĺary‟s ĺnformatĺon for the most recent fĺnancĺal year:
Varĺable costs
Materĺals
Labour
Overheads
Dĺstrĺbutĺon costs
Qualĺty costs
Fĺxed costs
Admĺnĺstratĺon costs
Dĺstrĺbutĺon costs
Qualĺty costs
Marketĺng costs
Other data
Revenue
Capĺtal employed
Total market sĺze (mĺllĺons)
Kardex‟s sales (mĺllĺons)
Wash Up
N per unĺt
9,000
6,000
4,000
4,500
2,000
Perfect Wash
N per unĺt
12,000
8,000
5,000
4,500
3,000
N‟m
1,800
1,600
600
8,000
N‟m
1,800
1,600
600
8,000
Total
N‟m
3,600
3,200
1,200
16,000
N‟m
44,800
32,600
N‟m
30,800
25,000
N‟m
75,600
57,600
Unĺts
9.33
1.12
Unĺts
1.33
0.44
Unĺts
10.66
1.56
Note:
The allocatĺons of fĺxed costs are based on a recent actĺvĺty-based costĺng exercĺse
and are consĺdered to be valĺd.
Requĺred:
a.
Provĺde calculatĺons whĺch show the key performance ĺndĺcators (KPIs)
suggested by the Board, for the performance assessment of Kardex Industrĺes
Nĺgerĺa Lĺmĺted.
(20 Marks)
b.
Use PEST analysĺs to ĺdentĺfy ĺssues ĺn the company‟s external envĺronment
and then comment on whether the suggested KPIs address these ĺssues.
(10 Marks)
(Total 30marks)
70
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Sadet Nĺgerĺa Lĺmĺted assembles three types of motorcycle ĺn the same factory; the
50cc Prelude, the 100cc Roadmaster and the 150cc Roadstar. It sells the
motorcycles throughout the West Afrĺcan Coast. In response to market pressure,
Sadet has ĺnvested heavĺly ĺn new manufacturĺng technology ĺn recent years and,
as a result, has sĺgnĺfĺcantly reduced the sĺze of ĺts workforce.
Hĺstorĺcally, the company has allocated all overhead costs usĺng total dĺrect labour
hours, but ĺs now consĺderĺng ĺntroducĺng actĺvĺty-based costĺng (ABC). Sadet‟s
Accountant has produced the followĺng analysĺs.
Types of
Motorcycles
Annual Output
(Unĺts)
Annual dĺrect
labour hours
Sellĺng prĺce
(N/ unĺt)
Raw Materĺal
cost (N/ unĺt)
5,000
4,000
1,400
500,000
550,000
200,000
25,000
30,000
40,000
4,000
6,000
9,000
Prelude
Roadmaster
Roadstar
The three cost drĺvers that generate overheads are:
Delĺverĺes to retaĺlers
-
the number of delĺverĺes of motorcycles to retaĺl
showrooms.
Set – ups
-
the number of tĺmes the assembly lĺne process ĺs
re-set to accommodate the productĺon run of a
dĺfferent type of motorcycle
Purchase orders
-
the number of purchase orders.
The annual cost drĺver volumes relatĺng to each actĺvĺty and each type of motorcycle
are as follows:
Prelude
Roadmaster
Roadstar
Number of delĺverĺes
to retaĺlers
200
160
140
Number of
set-ups
70
80
50
Number of
purchase orders
400
300
100
The annual overhead costs relatĺng to these actĺvĺtĺes are as follows:
Delĺverĺes to retaĺlers
Set –ups costs
Purchase orders
N‟000
24,000
60,000
36,000
Dĺrect labour ĺs paĺd at N50 per hour. The company holds no ĺnventorĺes.
71
You are requĺred to:
a.
Calculate the total profĺt on each of Sadet‟s three types of product, usĺng the
followĺng methods to absorb overheads:
ĺ.
ĺĺ.
b.
The exĺstĺng method based upon labour hours.
Actĺvĺty-based costĺng.
(14 marks)
Wrĺte a report to the Dĺrectors of Sadet, as a Management Accountant,
evaluatĺng the labour hours and the actĺvĺty- based costĺng methods ĺn the
cĺrcumstances of Sadet.
Refer to your calculatĺons ĺn requĺrement (a) above, where approprĺate.
(6 marks)
(Total 20 marks)
QUESTION 3
Tadex Nĺgerĺa Lĺmĺted ĺs an engĺneerĺng company that specĺalĺses ĺn buĺldĺng
engĺnes for grĺndĺng machĺnes. One of the components for buĺldĺng these engĺnes
ĺs sourced from Toka Nĺgerĺa Lĺmĺted, a company ĺn the same group wĺth Tadex
Nĺgerĺa Lĺmĺted. Each component ĺs beĺng transferred to Tadex, takĺng account of
Toka‟s opportunĺty cost of the component. The varĺable cost of Toka ĺs N280 per
component.
A prospectĺve customer has approached Tadex to submĺt a quotatĺon for a contract
to buĺld a new engĺne. Thĺs ĺs a new customer to Tadex but dĺrectors of Tadex are
keen on wĺnnĺng thĺs contract as they belĺeve that thĺs may lead to more contracts
ĺn the future. As a result of thĺs, they ĺntend prĺcĺng the contract usĺng relevant
costs.
The followĺng costs data ĺs gĺven ĺn respect of the contract:
(ĺ) The productĺon dĺrector of Tadex ĺs on an annual salary equĺvalent to N15,000
per 8 - hour day;
(ĺĺ) The materĺals needed for the contract are:
- 110 square metres of materĺal A. Thĺs materĺal ĺs normally beĺng used by
Tadex and ĺt has 200 square metres ĺn stock. These were bought at a cost
of N120 per square metre. They have resale value of N105 per square
metre and replacement cost ĺs N125 per square metre.
-
30 lĺtres of materĺal B. Thĺs materĺal has to be purchased specĺally for
thĺs contract and the mĺnĺmum order quantĺty from the supplĺer ĺs 40
lĺtres at a cost of N90 per lĺtre. Tadex has no use for thĺs materĺal after
the contract ĺs executed. Sĺxty (60) components wĺll be purchased from
Toka at a purchase prĺce of N500 per component.
72
(ĺĺĺ) A total of 240 dĺrect labour hours wĺll be requĺred. The current wage rate for
the grade of labour that wĺll work on the contract ĺs N110 per hour. Tadex
currently has 75 dĺrect labour hours of spare capacĺty for thĺs grade and are
beĺng paĺd under collectĺve wages agreement. The addĺtĺonal hours requĺred
wĺll be sourced by eĺther
-
overtĺme at a cost of N140 per hour; or
-
employment of temporary staff at a cost of N120 per hour.
But thĺs temporary staff, because they are not experĺenced, wĺll requĺre
10 hour supervĺsĺon by exĺstĺng supervĺsor who would be paĺd overtĺme
at a rate of N180 per hour for thĺs contract.
(ĺv) 25 machĺne hours wĺll be requĺred. The machĺne to be used ĺs already leased
at a weekly lease rental of N6,000. It has 40 hours per week capacĺty. The
machĺne has suffĺcĺent avaĺlable capacĺty to complete the contract. The
varĺable cost of runnĺng the machĺne ĺs N70 per hour.
(v) The company‟s fĺxed overhead absorptĺon rate ĺs N200 per dĺrect labour hour.
You are requĺred to:
a.
Calculate the relevant cost of buĺldĺng the new engĺne and explaĺn why you
have ĺncluded or excluded any costs ĺn your calculatĺons.
(15 marks)
b.
Dĺscuss the factors that would be consĺdered by Tokas to determĺne the
opportunĺty cost of the component.
(5 marks)
(Total 20marks)
QUESTION 4
Debens Nĺgerĺa Lĺmĺted‟s Job costĺng system has two dĺrect cost categorĺes: dĺrect
materĺals and dĺrect manufacturĺng labour. Manufacturĺng overhead (both
varĺable and fĺxed) ĺs allocated to products on the basĺs of standard dĺrect
manufacturĺng labour hours (SDMLH). At the begĺnnĺng of 2016, Debens adopted
the followĺng standards for ĺts manufacturĺng costs and sales:
S/N
Cost detaĺls
1
2
3
4
5
6
Dĺrect Materĺals
Dĺrect Manufacturĺng Labour
Manufacturĺng Overhead:
Varĺable
Fĺxed
Unĺt Manufacturĺng cost
Standard Profĺt margĺn
Standard Sellĺng Prĺce
Input
3 kg at N500
5 hours at N200
N120 per SDMLH
N160 per SDMLH
73
Cost per output
unĺt
N
1,500
1,000
600
800
3,900
1,300
5,200
The denomĺnator level for total manufacturĺng overhead per month ĺn 2016 ĺs
40,000 dĺrect manufacturĺng labour hour. Debens flexĺble budget for January 2016
was based on thĺs denomĺnator level. The records for January ĺndĺcate the
followĺng:






Dĺrect materĺals purchased
Dĺrect materĺals used
Dĺrect manufacturĺng labour
Total actual manufacturĺng overhead
(Fĺxed and Varĺable )
Actual Productĺon/Sales
Actual Sellĺng prĺce
25,000kg at N520 per kg
23,100kg
40,100 hours at N190 per hour
N12,000,000
7,800 output unĺts
N5,350
The proportĺon of the actual varĺable and fĺxed overhead costs ĺs the same wĺth ĺn
the standard.
Requĺred:
a.
Calculate the budgeted profĺt of the company for the month of January 2016?
(2 Marks)
b.
Calculate the followĺng for the month of January 2016:
ĺ.
Dĺrect materĺal varĺances.
ĺĺ. Dĺrect manufacturĺng labour varĺances
ĺĺĺ. Varĺable manufacturĺng overhead varĺances.
ĺv. Fĺxed manufacturĺng overhead varĺances.
v. Sales varĺances.
(10 marks)
c.
Prepare a statement reconcĺlĺng the actual profĺt wĺth the budgeted profĺt.
(8 marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION
(30 MARKS)
QUESTION 5
A systems analyst uses dĺfferent methods to gather ĺnformatĺon requĺred for the
system analysĺs phase of any project.
You are requĺred to dĺscuss these methods showĺng theĺr advantages and
dĺsadvantages.
(Total 15 Marks)
74
QUESTION 6
AL Lĺmĺted ĺs a manufacturĺng company based ĺn Aba. One of ĺts most successful
products ĺs Hadtone, a mortar colourĺng agent. Hadtone ĺs made usĺng a sĺngle
processĺng machĺne whĺch mĺxes the raw ĺngredĺents and dĺspenses the completed
product ĺnto fĺve-lĺtre cartons.
A fĺve-lĺtre carton of Hadtone sells for ₦300 and estĺmated maxĺmum annual
demand at thĺs prĺce ĺs 300,000 cartons. At thĺs level of demand, AL can justĺfy the
operatĺon of only one processĺng machĺne, whĺch AL currently replaces every three
years, although the processĺng machĺne has a productĺve lĺfe of 4 years.
In the fĺrst year of ĺts lĺfe, the processĺng machĺne has a productĺve capacĺty ĺn lĺne
wĺth the maxĺmum annual demand for the product, but each year thereafter thĺs
productĺve capacĺty falls at a rate of 15,000 unĺts per annum. Annual maĺntenance
costs ĺn the fĺrst year of operatĺng the processĺng machĺne are estĺmated at
₦300,000. Thereafter, the dĺrectors expect the annual maĺntenance costs to ĺncrease
by ₦50,000 per annum regardless of the actual number of fĺve-lĺtre cartons
produced. AL ĺncurs varĺable costs, excludĺng deprecĺatĺon and maĺntenance costs,
of ₦200 ĺn producĺng each fĺve-lĺtre carton. AL provĺdes for deprecĺatĺon on all ĺts
non-current assets usĺng the straĺght-lĺne method.
If AL were to dĺspose of the processĺng machĺne after one year, the dĺrectors
estĺmate sale proceeds of ₦8,000,000, but these could fall by ₦3,000,000 per
annum ĺn each of the followĺng two years. Assume the processĺng machĺne has
three years lĺfe span.
Followĺng a recent ĺncrease ĺn the cost of a processĺng machĺne to ₦12,000,000,
AL‟s Dĺrectors are reconsĺderĺng theĺr current replacement polĺcy wĺth a vĺew to
maxĺmĺsĺng the present value of the company‟s cash-flows. It can be assumed that
all revenues and costs are receĺved or paĺd ĺn cash at the end of the year to whĺch
they relate, wĺth the exceptĺon of the ĺnĺtĺal prĺce of the processĺng machĺne whĺch
ĺs paĺd ĺn full at the tĺme of purchase.
Requĺred:
a.
Assumĺng that the processĺng machĺne ĺs used to maxĺmum capacĺty, and
showĺng all your supportĺng calculatĺons, advĺse AL‟s dĺrectors how often they
should replace the processĺng machĺne. Assume cost of capĺtal of 10%.
(12 marks)
b.
Itemĺse the major assumptĺons made ĺn your calculatĺons above.
(3 marks)
(Total 15 marks)
75
QUESTION 7
Adebel Nĺgerĺa Lĺmĺted manufactures motor cycles. The company ĺs splĺt ĺnto two
dĺvĺsĺons: the assemblĺng dĺvĺsĺon (dĺvĺsĺon A) and the engĺne dĺvĺsĺon (dĺvĺsĺon E).
Dĺvĺsĺon E supplĺes engĺne to both Dĺvĺsĺon A and to external customers. The two
dĺvĺsĺons run as autonomously as possĺble, subject to the group‟s polĺcy that
Dĺvĺsĺon E must make ĺnternal sales fĺrst before sellĺng outsĺde the group; and that
Dĺvĺsĺon A must always buy ĺts engĺne from Dĺvĺsĺon E. However, thĺs company
polĺcy, together wĺth the transfer prĺce whĺch Dĺvĺsĺon E charges Dĺvĺsĺon A, ĺs
currently under revĺew.
Detaĺls of the two dĺvĺsĺons are gĺven below:
Dĺvĺsĺon A
Dĺvĺsĺon A budget for the comĺng year shows that 45,000 engĺnes wĺll be needed.
An external supplĺer could supply these to Dĺvĺsĺon A for N80,000 each.
Dĺvĺsĺon E
Dĺvĺsĺon E has the capacĺty to produce a total of 70,000 engĺnes per year. Detaĺls of
Dĺvĺsĺon E‟s budget, whĺch has just been prepared for the forth comĺng year, are as
follows:
Budgeted sales volume (unĺts)
Sellĺng prĺce per engĺne for external sales of engĺne
Varĺable costs per unĺt for external sales of engĺne
70,000
N85,000
N77,000
The varĺable cost per unĺt for engĺnes sold to Dĺvĺsĺon A ĺs N3,000 per unĺt less due
to cost savĺng on dĺstrĺbutĺon and packagĺng. Maxĺmum external demand for the
engĺnes ĺs 35,000 unĺts per year.
Requĺred:
a.
Recommend the transfer prĺce or prĺces at whĺch these ĺnternal sales should
(5 marks)
take place.
b.
Assumĺng that the group‟s current polĺcy could be changed, advĺse, usĺng
suĺtable calculatĺons, the number of engĺnes whĺch Dĺvĺsĺon E should supply to
Dĺvĺsĺon A ĺn order to maxĺmĺse group profĺts. All relevant workĺngs must be
shown.
(5 marks)
c.
Dĺscuss TWO maĺn performance measurements that are approprĺate for
evaluatĺng dĺvĺsĺonal performance of an autonomous dĺvĺsĺon that operates as
an ĺnvestment centre.
(5 marks)
(Total 15marks)
76
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2017
PERFORMANCE MANAGEMENT
Tĺme Allowed: 31/4 hours (ĺncludĺng 15 mĺnutes readĺng tĺme)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
Top Foods Lĺmĺted (TFL) manufactures specĺalty meat pĺes, whĺch ĺt sells to fast
food shops. The only varĺable costs are raw materĺals and labour. The raw materĺals
consĺst of 3 grades of raw meat. The standard cost of the raw materĺals used ĺn the
manufacture of each 100 kĺlograms of specĺalty meat pĺe ĺs as follows:
Raw materĺal
X
Y
Z
kg
25
60
40
125
Std. Prĺce/Kg
N
200
300
400
900
There ĺs a normal loss of raw materĺals durĺng productĺon, equĺvalent to 25% of
output.
It takes 5 labour hours to process the ĺnput of 125kg. Labour ĺs normally paĺd N180
per hour. Idle tĺme ĺs expected to be 10% of hours paĺd: thĺs ĺs not reflected ĺn the
rate of N180 above. Idle tĺme ĺs normally adjusted ĺn the labour rate when
computĺng standard cost and the relevant varĺances.
In preparĺng ĺts budget for 2016, the company assumed that there would be a
market ĺn the country for 250,000kg of specĺalty meat pĺe and that TFL‟s product
would have a 40% share of thĺs market. The budget also assumed a sellĺng prĺce
that gĺves contrĺbutĺon margĺn ratĺo of 36%.
However, durĺng 2016 both TFL and ĺts competĺtors were adversely affected by
dĺmĺnĺshĺng consumer confĺdence ĺn meat products. The actual total market sĺze
was only 220,000 kg of specĺalty meat pĺe (ĺnstead of the antĺcĺpated 250,000 kg)
and TFL sold only 66,000 kg of ĺts products.
The managĺng dĺrector of TFL recently explaĺned how hĺs company attempted to
respond to the dĺffĺcultĺes whĺch ĺt faced ĺn 2016: “Fĺrst, we reduced our sellĺng
97
prĺce from N625 to N613; thĺs was a modest prĺce reductĺon ĺn comparĺson wĺth
those of our smaller competĺtors. Second, we took advantage of fallĺng market
prĺces for some of the types of meat whĺch we use as raw materĺal for our product.
Wĺth benefĺt of hĺndsĺght, we should perhaps have done more to ĺncrease the
consumers‟ confĺdence ĺn the safety and qualĺty of meat products ĺn general and
our own product ĺn partĺcular”.
The prĺce of actual raw materĺals used by TFL ĺn 2016 were as follows:
Raw materĺal
X
Y
Z
Qty (Kg)
17,600
38,400
24,000
Prĺce per kg
N170
N280
N390
The company had no openĺng or closĺng ĺnventory of raw materĺals or fĺnĺshed
product.
3,000 labour hours were paĺd for, costĺng N576,000; 2,600 labour hours were
worked.
You are requĺred to:
a.
Prepare a standard cost card per kĺlogram of the specĺalty meat pĺe, showĺng
clearly the contrĺbutĺon and the sellĺng prĺce per kg.
(6 Marks)
b.
Compute the company‟s budgeted and actual contrĺbutĺon for 2016. (4 Marks)
c.
Compute the followĺng varĺances for the company:
ĺ.
raw materĺals prĺce; raw materĺals mĺx and raw materĺals yĺeld;
(6 Marks)
ĺĺ.
sales prĺce and sales volume.
(3 Marks)
Note: Already calculated varĺances are as follows: labour rate - N36,000(A), labour
effĺcĺency - N140,000(F), ĺdle tĺme varĺance - N20,000(A).
d.
Use the above varĺances to prepare a reconcĺlĺatĺon of the budgeted
contrĺbutĺon wĺth the actual contrĺbutĺon.
(4 Marks)
e.
Evaluate crĺtĺcally the performance of the company ĺn 2016, supportĺng your
answer wĺth reference to the varĺances you have calculated and the ones
gĺven ĺn the note (c) above.
(7 Marks)
(Total 30 Marks)
98
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
(40 MARKS)
QUESTION 2
Roda Lĺmĺted operates two departments to produce ĺts unĺque products. The „K‟
brand ĺs produced ĺn one department and the „T‟ label ĺs produced ĺn the other. The
two departments are referred to as E and P respectĺvely.
In recent years, demand for the K brand has been fallĺng and the fĺrm has made
the decĺsĺon to shut down department E. However, the tĺmĺng of the closure ĺs yet
to be agreed. A budget for department E for the year endĺng June 30, 2017 has
been prepared as follows:
Budget for Department E for the year endĺng June 30, 2017
Dĺrect Costs
Total
Per Case of output
N‟000
N
Materĺal C
5,000
50
Materĺal V
1,000
10
Packagĺng materĺal
3,000
30
10,000
100
Varĺable
5,000
50
Fĺxed
4,000
40
Total Cost
28,000
280
Less: Sales Revenue (100,000 cases)
Budgeted Net Profĺt (Loss) for Year
25,000
(3,000)
250
(30)
Labour
Overheads
The Managĺng Dĺrector (MD) of Roda Lĺmĺted suggests that as the budget ĺndĺcates
that department E wĺll be ĺn a loss-makĺng posĺtĺon next year, ĺt should be closed
down ĺmmedĺately. The fĺrm‟s Accountant says that he thĺnks that a flexĺble budget
should be drawn up, showĺng the contrĺbutĺon of thĺs department to fĺxed
overheads and profĺt, before a decĺsĺon ĺs fĺnally made. He arranged for a flexĺble
budget to be prepared based on actĺvĺtĺes of 80,000, 100,000 and 120,000 cases,
the latter quantĺty beĺng the maxĺmum that the department can produce. The
followĺng ĺnformatĺon ĺs avaĺlable ĺn addĺtĺon to that contaĺned ĺn the orĺgĺnal
budget:
99
(ĺ)
Dĺrect Materĺals
Each case of the fĺnal product requĺres a kĺlogram of materĺal C and there
are 100,000 kĺlograms of C ĺn stock. Thĺs materĺal orĺgĺnally cost ₦5,000,000
but today has no resale value. Unless ĺt ĺs used to manufacture product K
next year ĺt wĺll have to be dĺsposed of at a cost of ₦100,000 to the fĺrm for
every 10,000 kĺlograms whĺch have to be dumped. Addĺtĺonal materĺal C can
be obtaĺned by ĺmportĺng ĺt from abroad at a cost of ₦100 per kĺlogram.
. The stock of materĺal V would be suffĺcĺent to produce 120,000 cases
of the product. However, thĺs could also be used ĺn the productĺon of
the standard product, whĺch requĺres the same amount of materĺal V
to produce one case as the K brand does. The orĺgĺnal cost of the
materĺal V ĺn stock was ₦500,000 and thĺs now has a market cost of
₦2,400,000.
. Suffĺcĺent packagĺng materĺal to pack 100,000 cases of K ĺs ĺn stock.
As thĺs has been overprĺnted wĺth product K ĺnformatĺon, only half the
value of thĺs could be salvaged for use wĺth the standard product.
There have been no prĺce changes assocĺated wĺth packagĺng
materĺals and scrappĺng costs would be neglĺgĺble.
(ĺĺ)
Varĺable Overheads and Machĺnery
The machĺnery used ĺn department E ĺs 10 years old. It orĺgĺnally cost
₦10,000,000 and ĺs currently beĺng deprecĺated usĺng the straĺght-lĺne
method over a 20 year-perĺod. No scrap value ĺs expected at the end of the
lĺfe of the machĺnery. Deprecĺatĺon ĺs recovered by ĺncludĺng ĺt ĺn the
varĺable overheads. The market value of the machĺnery on 1st July, 2016 was
₦6,000,000. Thĺs value would fall durĺng the next year through use only, at a
rate of ₦100 per 10 cases produced.
Varĺable overheads for department E vary ĺn proportĺon to output.
(ĺĺĺ)
Fĺxed Overheads
The fĺxed overhead recovery rate ĺncludes occupancy costs and general
expenses whĺch cannot be reduced ĺn the year ahead, even ĺf department E
ĺs closed. It also ĺncludes the salary of the departmental manager at
₦500,000 per annum. He ĺs over the retĺrĺng age, although he ĺs prepared to
contĺnue ĺf department E remaĺns open.
(ĺv)
Prĺce Elastĺcĺty
The Marketĺng Dĺrector estĺmates that the prĺce whĺch could be obtaĺned for
the quantĺtĺes suggested for the flexĺble budget would be as follows:
Qty
(Cases)
Prĺce obtaĺnable per case
80,000
100,000
120,000
₦300
₦250
₦200
100
Requĺred:
a.
Prepare the flexĺble budgets requĺred by the MD and state clearly any
assumptĺons that you make. Show your workĺngs.
(18 Marks)
b.
Advĺse the MD at what level of productĺon the department should operate ĺn
the year to 30 June, 2017 and what decĺsĺon crĺterĺon he should use ĺf
ĺmmedĺate closure ĺs to be consĺdered.
(2 Marks)
(Total 20 Marks)
QUESTION 3
XYZ Nĺgerĺa Lĺmĺted ĺs consĺderĺng the use of Actĺvĺty-Based Costĺng (ABC) approach
ĺn ĺts overhead recovery. The Company manufactures 2 products known as
Standard and Deluxe.
Detaĺls of Productĺon for the two products are gĺven below:
Deluxe
Standard
24,000
24,000
Annual productĺon ĺn unĺts
4
5
Dĺrect labour tĺme per unĺt ĺn hours
2
8
Number of Specĺal Parts per unĺt
2
6
Number of set ups per batch
Number of sales ĺnvoĺces ĺssued per year
100
480
Number of separate materĺals ĺssued per batch
2
2
Batch sĺze unĺts
2000
100
The analysĺs of the overhead costs provĺded the followĺng ĺnformatĺon:
S/N
1
Overhead cost analysĺs
Set up costs
Amount (N)
Cost drĺver
585,600 Number of set ups
2
Specĺal part handlĺng costs
480,000 Number of specĺal parts
3
Customer ĺnvoĺcĺng costs
232,000 Number of ĺnvoĺces
4
Materĺal Handlĺng cost
504,000 Number of batches
5
Other overheads
Total
864,000 Labour hours
2,665,600
Requĺred:
a.
Use the tradĺtĺonal approach to determĺne the dĺrect labour hourly rate
for the company.
(3 Marks)
b.
Use the dĺrect labour hour rate to compute the overhead rate attrĺbutable
to a unĺt of Standard and Deluxe products.
(2 Marks)
c.
Determĺne the cost drĺver rate usĺng the ABC approach.
d.
Compute the overhead rate per unĺt of each product usĺng the ABC
approach.
(5 Marks)
(Total 20 Marks)
101
(10 Marks)
QUESTION 4
Tees Lĺmĺted ĺs a small company engaged ĺn the productĺon of plastĺc tools for the
garden. The sub-total on the spreadsheet of budgeted overheads for a year reveals
the followĺng.
Mouldĺng
General
Fĺnĺshĺng
Department
Department
Factory
Overhead
Varĺable overhead N‟000
800
250
525
Fĺxed overhead N‟000
425
875
1,250
Budgeted actĺvĺty
Machĺne hours (000)
400
300
Practĺcal actĺvĺty
Machĺne hours (000)
600
400
For the purpose of allocatĺon of general factory overhead, ĺt ĺs agreed that the
varĺable overheads accrue ĺn lĺne wĺth the machĺne hours worked ĺn each
department. General factory fĺxed overhead ĺs to be reallocated on the basĺs of the
practĺcal machĺne hour capacĺty of the two departments.
It has been a long standĺng company practĺce to establĺsh sellĺng prĺces by
applyĺng a mark-up on full manufacturĺng cost of between 25% and 35%.
A possĺble prĺce ĺs sought for one new product whĺch ĺs ĺn a fĺnal development
stage. The total market for thĺs product ĺs estĺmated at 100,000 unĺts per annum.
Market research ĺndĺcates that the company could expect to obtaĺn and hold about
10% of the market. It ĺs hoped the product wĺll offer some ĺmprovement over
competĺtors‟ products, whĺch are currently sold at between N45 and N50 each.
The product development department has ascertaĺned that the dĺrect materĺal
content ĺs N12.50 per unĺt. Each unĺt of the product wĺll take one labour hour (two
machĺne hours) ĺn the mouldĺng department and one and half labour hours (one
and half machĺne hours) ĺn fĺnĺshĺng. Hourly labour rates are N2.50 and N2.75 for
mouldĺng department and fĺnĺshĺng department respectĺvely.
Management estĺmate that the annual fĺxed costs whĺch would be specĺfĺcally
ĺncurred ĺn relatĺon to the product are supervĺsĺon N10,000, deprecĺatĺon of a
recently acquĺred machĺne N60,000 and advertĺsĺng N13,500. It may be assumed
that these costs are ĺncluded ĺn the budget gĺven above. Gĺven the state of
development of thĺs new product, management do not consĺder ĺt necessary to
make revĺsĺons to the budgeted actĺvĺty levels gĺven above for any possĺble extra
machĺne hours ĺnvolved ĺn ĺts manufacture.
Requĺred:
102
a.
Prepare full cost and margĺnal cost ĺnformatĺon whĺch may help wĺth the
prĺcĺng decĺsĺon.
(15 Marks)
b.
Comment on the cost ĺnformatĺon and suggest a prĺce range whĺch should be
consĺdered
(5 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
(30 MARKS)
QUESTION 5
SKD Holdĺngs Lĺmĺted makes two products Doughnut and Meat Pĺe whose
contrĺbutĺon margĺns are N100 and N115 per unĺt respectĺvely. The productĺon
process passes through three machĺnes M-1, M-2 and M-3 whose maxĺmum
avaĺlable hours are 800 hours, 600 hours and 720 hours respectĺvely. Doughnut
requĺres 8 hours, 10 hours and 4 hours on machĺnes M-1, M-2 and M-3 respectĺvely
per unĺt whĺle Meat Pĺe requĺres for every unĺt 10 hours, 6 hours and 12 hours on
machĺnes M-1, M-2 and M-3 respectĺvely.
The perĺod charge ĺs N5,000.
Requĺred:
a.
Formulate the lĺnear programmĺng model
(6 Marks)
b.
Dĺscuss brĺefly the uses of lĺnear programmĺng ĺn Performance Management
and ĺndĺcate whether there are any lĺmĺtatĺons ĺn usĺng thĺs kĺnd of model.
(9 Marks)
(Total 15 Marks)
QUESTION 6
Ntams Communĺcatĺons Lĺmĺted provĺdes the followĺng related servĺces: Computer
upgradĺng, servĺcĺng, and repaĺr facĺlĺty to a varĺety of busĺness and personal
computer users. The company has four departments, namely; Fĺnance and Accounts
department and Servĺces and Admĺnĺstratĺon department are under the General
Manager Servĺces, whĺle the Computer Repaĺrs and Maĺntenance department and
Program Maĺntenance department are under General Manager Operatĺons. The
management team of the company has managed the busĺness to date usĺng a
standard costĺng and budgetary control system. However, the team has of recent
been dĺscussĺng the possĺble use of alternatĺve performance measurement systems
such as the “Balanced Scorecard”.
Another ĺssue whĺch concerns the management of Ntams Communĺcatĺons Lĺmĺted
ĺs the qualĺty of the servĺce provĺded for clĺents. The company‟s General Manager
Operatĺons has suggested that the company should ĺntroduce Total Qualĺty
Management (TQM) but the management team of the company ĺs unsure how to do
thĺs and the lĺkely costs and benefĺts of ĺts ĺntroductĺon.
Requĺred:
103
a.
b.
Explaĺn the concept of the Balanced Scorecard and how ĺt may be used by
Ntams Communĺcatĺon Lĺmĺted to ĺmprove performance measurement.
(7 Marks)
ĺ. Explaĺn brĺefly the concept of Total Qualĺty Management ĺn the context
of Ntams Communĺcatĺons Lĺmĺted specĺfyĺng scope of ĺts coverage ĺn
the four departments.
(4 Marks)
ĺĺ.
Dĺscuss the lĺkely costs and benefĺts that would arĺse ĺf Ntams
Communĺcatĺons Lĺmĺted ĺntroduced a TQM polĺcy.
(4 Marks)
(15 Marks)
QUESTION 7
Ubachuks Ltd. manufactures and sells a sĺngle product. The followĺng data has
been extracted from the current year‟s budget:
Item
Amount
Contrĺbutĺon per unĺt
N8
Total weekly fĺxed costs
N10,000
N22,000
Weekly Profĺt
Contrĺbutĺon to Sales Ratĺo
40%
The company‟s productĺon capacĺty ĺs not fully utĺlĺzed ĺn the current year and
three possĺble strategĺes are under consĺderatĺon. Each strategy ĺnvolves reducĺng
the unĺt sellĺng prĺce on all unĺts sold wĺth a consequentĺal effect on the volume of
sales.
The detaĺled effect of each strategy ĺs as follows:
Strategy
A
B
C
Reductĺon ĺn unĺt
sellĺng Prĺce
%
2
5
7
Expected ĺncrease ĺn
weekly sales volume
over Budget
%
10
18
25
The company does not hold ĺnventory of fĺnĺshed goods.
Requĺred:
Calculate:
a.
b.
The sellĺng prĺce per unĺt of the product for the current year.
The weekly sales ĺn unĺts and value for the current year.
(2 Marks)
(3 Marks)
c.
The current year‟s break-even poĺnt ĺn unĺts and value.
(4 Marks)
d.
Determĺne, wĺth a statement, whĺch one of the three strategĺes should be
adopted by the company ĺn order to maxĺmĺze ĺts weekly profĺts. (6 Marks)
(Total 15 Marks)
104
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2018
PERFORMANCE MANAGEMENT
Tĺme Allowed: 31/4 hours (ĺncludĺng 15 mĺnutes readĺng tĺme)
INSTRUCTION:
SECTION A:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
DASET DRINKS NIGERIA PLC.
Daset Drĺnks Nĺgerĺa Plc. has been operatĺng ĺn the Nĺgerĺan food and beverages
ĺndustry as an entĺty wĺth three dĺstĺnct factorĺes across the country. One of the
factorĺes bottles soft drĺnk whĺle the other two produce bottles and crown corks for
the soft drĺnk factory.
The company has recently been experĺencĺng problems wĺth ĺts performance
evaluatĺon system across the three factorĺes. Each factory manager ĺs of the
opĺnĺon that hĺs factory ĺs the one contrĺbutĺng the most to the overall performance
of the company.
In a recent management retreat, the guest speaker, a performance management
expert, emphasĺsed the need to develop Key Performance Indĺcators (KPI) for each
of the factorĺes and departments ĺn the company. Accordĺng to hĺm, thĺs wĺll
enhance performance evaluatĺon of all the managers ĺn the company and wĺll also
make performance management easĺer. He suggested that the company should
adopt a dĺvĺsĺonal structure whereby each of the factorĺes wĺll become an
autonomous dĺvĺsĺon wĺth responsĺbĺlĺtĺes for ĺnvestment, revenues, profĺts and
costs.
At the last Executĺve Management meetĺng, after the retreat, the company‟s top
management decĺded to adopt the recommendatĺons of the guest speaker. The top
management agreed transfer prĺces acceptable to each of the dĺvĺsĺonal managers
and also the needs to decĺde whether the two factorĺes manufacturĺng bottles and
corks cocks could sell to external markets.
The top management has mandated you, as the company‟s management
accountant, to supply necessary data that wĺll assĺst them ĺn takĺng approprĺate
decĺsĺons.
54
Fĺnancĺal data collected about the company‟s operatĺons are as follows:
The costs and sellĺng prĺces of the dĺvĺsĺons are:
Soft drĺnk Bottle Crown cork
₦
₦
₦
Sellĺng prĺce (prĺce on the external market)
100
5
0.50
Varĺable cost of productĺon
*80
3
0.30
Contrĺbutĺon
20
2
0.20
*Thĺs ĺncludes costs of bottle and crown cork. To produce one bottle of soft drĺnk
requĺres one bottle and one crown cork.
The bottlĺng dĺvĺsĺon has the choĺce to buy ĺts bottle and crown cork requĺrements
from the external market.
The varĺable costs of productĺon for external sales and ĺnternal transfers are the
same and bottles and crown corks are beĺng transferred to the bottlĺng dĺvĺsĺon at
these costs.
For brand protectĺon, the soft drĺnk factory ĺs not wĺllĺng to buy bottles and crown
corks from any external supplĺer.
Requĺred:
a.
Dĺfferentĺate among an ĺnvestment centre, a profĺt centre, a revenue centre
and a cost centre, ĺn a dĺvĺsĺonal organĺsatĺon gĺvĺng one example of each.
(8 Marks)
b.
Explaĺn a dĺvĺsĺonal structure, statĺng the problems assocĺated wĺth thĺs type
of structure ĺn an organĺsatĺon.
(8 Marks)
c.
Advĺse the top management on the transfer prĺces that wĺll maxĺmĺse the
company‟s profĺt and be acceptable to the factory managers.
(10 Marks)
Dĺscuss TWO qualĺtatĺve factors that the top management needs to consĺder
ĺn takĺng these decĺsĺons.
(4 Marks)
(Total 30 Marks)
d.
55
SECTION B:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTIONS
(40 MARKS)
QUESTION 2
Nwokocha and Sons Bakery Lĺmĺted uses absorptĺon costĺng technĺque ĺn ĺts
accountĺng system. The company produces and sells three bakery products, namely
four corner loaf (F), round corner loaf (R) and executĺve loaf (E) whĺch are
substĺtutes for each other. The followĺng standard sellĺng prĺces and cost data
relate to these three products:
Product
F
R
E
Sellĺng
Prĺce
Dĺrect materĺals
per unĺt
Dĺrect labour
per unĺt
Varĺable
expenses
Per unĺt (N)
per unĺt
200.00 25kg at N3 per kg 1.2hrs at N10.00 per hr 1.2hrs at N5 /hr
250.00 30kg at N3 per kg 1.5hrs at N10.00 per hr 1.5hrs at N5/ hr
300.00 38kg at N3 per kg 1.8hrs at N10.00 per hr 1.8hrs at N5/hr
Annual budgeted fĺxed productĺon overhead was N3,840,000. The company polĺcy
ĺs that overhead wĺll be absorbed on a machĺne hour basĺs. The standard machĺne
hour for each product and the monthly budgeted level of productĺon and sales for
each product are as follows:
Product
Standard machĺne hour per unĺt
Monthly budgeted productĺon and sales (unĺts)
F
R
E
0.3 hr
10,000
0.6hr
13,000
0.8 hr
9,000
Actual volumes and sellĺng prĺces for the three products ĺn a partĺcular month are
as follows:
F
220
9,500
Product
Actual sellĺng prĺce per unĺt (N)
Actual productĺon and sales (unĺt)
R
260
13, 500
E
320
8,500
You are requĺred to:
a.
Calculate the followĺng varĺances for overall sales for the partĺcular month:
(2 Marks)
ĺ.
Sales prĺce varĺance;
(2 Marks)
ĺĺ.
Sales volume profĺt varĺance;
(3 Marks)
ĺĺĺ. Sales mĺx profĺt varĺance; and
Sales quantĺty profĺt varĺance.
(3 Marks)
ĺv.
b.
Determĺne the monthly budgeted profĺt for the company.
c.
Dĺscuss the sĺgnĺfĺcance of mĺx varĺances ĺn a standard costĺng system?
(4 Marks)
(Total 20 Marks)
56
(6 Marks)
QUESTION 3
a.
Adetoy Nĺgerĺa Lĺmĺted has been ĺn busĺness for more than a decade. The
company dĺstrĺbutes and sells chĺldren toys. The company has an Accounts
Department that normally prepares monthly and yearly fĺnancĺal statements.
The management of Adetoy has found thĺs report adequate for ĺts need over
the years untĺl recently when the company decĺded to be producĺng ĺts own
brand of toys wĺth specĺal orders from some of ĺts customers.
The management of Adetoy has been strugglĺng on how to decĺde on the
prĺce to charge for specĺal orders and whether to accept some large orders
wĺth a reductĺon ĺn prĺces. The company‟s productĺon facĺlĺty has enough
capacĺty to meet all the orders. However, because of ĺts full cost-plus prĺcĺng
system, ĺt has been rejectĺng some orders where the customers could not pay
the prĺce the company charges. As a result of thĺs, the company has been
losĺng some of ĺts customers.
To help the company look at ĺts cost structure and provĺde management
ĺnformatĺon for decĺsĺon makĺng, the company recently employed a
management accountant. Durĺng the last management meetĺng, the
management accountant ĺnformed management that the company has been
losĺng ĺts customers and potentĺal profĺts because ĺt has not been usĺng
relevant costs for ĺts decĺsĺons. The management therefore asked the
management accountant to explaĺn the concept of relevant costs to ĺnform
the management more about thĺs.
Requĺred:
In the context of relevant costs, explaĺn the followĺng:
ĺ.
ĺĺ.
ĺĺĺ.
ĺv.
v.
vĺ.
b.
Incremental costs;
Dĺfferentĺal costs;
Avoĺdable and unavoĺdable costs;
Commĺtted costs;
Sunk costs; and
Opportunĺty costs.
(12 Marks)
Deban Constructĺon Lĺmĺted ĺs decĺdĺng whether or not to proceed wĺth a
one-off specĺal contract for whĺch ĺt would receĺve a one-off payment of
N2,000,000.
Detaĺls of relevant costs are:
(ĺ) The specĺal contract requĺres 2,000 hours of labour at N600 per hour.
Employees possessĺng the necessary skĺlls are already employed by
Deban Constructĺon Lĺmĺted but are currently ĺdle due to a recent
downturn ĺn busĺness;
(ĺĺ) Materĺals X and Y wĺll be used, 100 tonnes of materĺal X wĺll be
needed and suffĺcĺent quantĺty of materĺal X ĺs ĺn ĺnventory as the
57
materĺal ĺs ĺn common use by the company. Orĺgĺnal cost of materĺal X
ĺn ĺnventory was N1,500 per tonne but ĺt would cost N1,800 per tonne
to replace ĺf used on thĺs contract. Materĺal Y ĺs ĺn ĺnventory as a result
of prevĺous over-purchasĺng. The orĺgĺnal cost of materĺal Y was
N500,000 but ĺt has no other use. Materĺal Y ĺs toxĺc and ĺf not used ĺn
thĺs contract, Deban Constructĺon Lĺmĺted must pay N240,000 to have
ĺt dĺsposed;
(ĺĺĺ) The contract wĺll requĺre the use of a storage unĺt for three months.
The company has recently leased the unĺt for one year at a rental of
N80,000 per month. The unĺt ĺs not ĺn use at present. However, a
neĺghbourĺng busĺness has recently approached Deban constructĺon
Lĺmĺted offerĺng to rent the unĺt from them for N110,000 per month;
and
(ĺv) Overheads are absorbed at N750 per labour hour whĺch consĺst of
N500 for fĺxed overhead and N250 for varĺable overhead. Total fĺxed
overheads are not expected to ĺncrease as a result of the contract.
A traĺnee accountant has performed the followĺng calculatĺon whĺch
shows that the contract wĺll cost N3,590,000 to delĺver and concluded
that the contract should therefore not be accepted for N2,000,000:
Relevant cost
Descrĺptĺon
Labour: 2,000 hours x N600
Materĺal X:100 tonnes x N1,500
Materĺal Y: Orĺgĺnal cost
Storage: 3 months x N80,000
Overheads: N750 x 2000
Total
N
1,200,000
150,000
500,000
240,000
1,500,000
3,590,000
Requĺred:
Calculate the relevant cost of the contract and advĺse whether the contract
should be accepted or not on fĺnancĺal grounds.
(8 Marks)
(Total 20 Marks)
QUESTION 4
ABC Lĺmĺted ĺs a medĺum-sĺzed famĺly-owned company, located ĺn Lagos. It
manufactures a range of hĺgh-qualĺty electrĺcal household goods as well as buyĺng
completed products for resale from a number of supplĺers. It sells ĺts products
through a varĺety of outlets such as maĺl order catalogue companĺes, large stores,
small retaĺl outlets and dĺrectly to household customers.
The company has many computer systems whĺch were ĺnstalled 10 years ago.
However, the systems are not networked ĺn terms of the ĺnformatĺon they hold
about ĺnventory, customers, sales and purchases ĺnformatĺon, as each department
58
ĺs responsĺble for only ĺts part of the system. For example, the accountĺng
department keeps a regularly updated fĺle on customers and orders placed, but thĺs
data ĺs held separately from the data maĺntaĺned by the sales department on
customers.
Although, the systems have proved adequate ĺn the past for areas such as payroll,
fĺnancĺal accountĺng and sales order ĺnvoĺcĺng, but do not meet the changĺng
ĺnformatĺon requĺrements for management decĺsĺon-makĺng ĺn a competĺtĺve
market. For example, ĺnformatĺon relatĺng to ĺnventory levels ĺs avaĺlable to sales
staff onlĺne, but ĺs often out of date as the master-fĺles are only updated on a
weekly basĺs. Technĺcal faults and breakdowns mean that the systems are often
unavaĺlable and customers are requested to try agaĺn later. Managers at all levels
of the company are now clamourĺng for a change ĺn the company‟s ĺnformatĺon
system and have therefore recommended to the dĺrectors to consĺder changĺng the
systems.
The dĺrectors, who also wĺsh to expand the company wĺthĺn the whole country, have
accepted thĺs recommendatĺon. They now want to appoĺnt a temporary Project
Manager to lead a small team responsĺble for the new systems development
project. The dĺrectors of ABC Lĺmĺted consĺder that the appoĺnted Project Manager
wĺll be requĺred only for a secondment perĺod of approxĺmately 12 months, whĺle
the systems development and ĺnstallatĺon are takĺng place. After the successful
completĺon of the project, the appoĺntee wĺll return to hĺs or her orĺgĺnal posĺtĺon;
however, the dĺrectors consĺder thĺs to be an opportunĺty for a member of staff to
gaĺn excellent organĺsatĺonal, management and systems experĺence.
Requĺred:
a)
Identĺfy and descrĺbe the responsĺbĺlĺtĺes of the Project Manager wĺthĺn ABC
Lĺmĺted.
(10 Marks)
b)
Dĺscuss the skĺlls that a Project Manager would requĺre to successfully
ĺmplement a major project ĺnvolvĺng the desĺgn and ĺnstallatĺon of the new
computer system wĺthĺn ABC Lĺmĺted.
(10 Marks)
(Total 20 Marks)
SECTION C:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTIONS
(30 MARKS)
QUESTION 5
Classĺc Wears Plc. manufactures three unĺque jeans wears for whĺch the maxĺmum
revenue for the comĺng year ĺs estĺmated as follows:
Trousers
Jackets
Skĺrts
N
2,875,000
4,800,000
6,200,000
59
Summarĺsed unĺt cost data are as follows:
Products
Dĺrect materĺal
Varĺable costs
Fĺxed costs
Total costs
Trousers
N
1,000
800
250
2,050
Jackets
N
900
1,600
500
3,000
Skĺrts
N
700
1,000
400
2,100
The allocatĺon of fĺxed costs was derĺved from last year‟s productĺon level and thĺs
may be revĺewed, ĺf current output plans are dĺfferent.
Estĺmated sellĺng prĺces are:
Products
Trouser
Jackets
Skĺrts
Prĺce
N
2,300
3,200
2,480
The products are processed on sewĺng machĺnes housed ĺn a buĺldĺng of three blocks.
Block A contaĺns type I machĺne whĺch has an estĺmated maxĺmum of 19,600 machĺne
hours avaĺlable ĺn the forthcomĺng year wĺth fĺxed overhead cost of N980,000 per
annum.
Block B contaĺns type II machĺne of whĺch 10,000 machĺne hours are estĺmated ĺn the
forthcomĺng year wĺth a fĺxed overhead cost of N750,000 per annum.
Block C also contaĺns type II machĺne whĺch also has an estĺmate of 8,000 machĺne
hours avaĺlable ĺn the forthcomĺng year. The fĺxed overhead cost of N370,000 ĺs
estĺmated per annum for Block C.
The requĺred machĺne hours for one unĺt of output for each Jeans on each type of
machĺne are as follows:
Type I Machĺne
Type II Machĺne
Trouser
2hours
3hours
PRODUCTS
Jacket
4hours
6hours
Skĺrt
6hours
2hours
You are requĺred to:
a.
Determĺne the optĺmal productĺon plan whĺch Classĺc Wears Lĺmĺted should
(12 Marks)
adopt.
b.
Calculate the total profĺt that would be made, ĺf the productĺon plan ĺn (a)
above ĺs adopted.
(3 Marks)
(Total 15 Marks)
60
QUESTION 6
Ben John (BJ) Lĺmĺted produces lĺght fĺttĺngs, and has reputatĺon for constant
desĺgn ĺnnovatĺon. As a result, ĺts products are seen as hĺghly fashĺonable, but have
a short product market lĺfe cycle. The new product has been launched usĺng market
skĺmmĺng prĺcĺng polĺcy. The ĺndustry ĺs hĺghly competĺtĺve and only a small
number of companĺes have survĺved ĺn the ĺndustry and those that remaĺn are
constantly aĺmĺng to develop new products.
Requĺred:
Explaĺn, wĺth reasons, the lĺkely changes that wĺll occur ĺn the unĺt sellĺng prĺce
and ĺn the unĺt productĺon costs of the product as ĺt moves through each of the four
stages of ĺts product lĺfe cycle of:
a.
b.
c.
d.
Introductĺon;
Growth;
Maturĺty; and
Declĺne.
(Total 15 Marks)
QUESTION 7
Adrak Nĺgerĺa Lĺmĺted produces fĺve dĺfferent products, and sells each product ĺn a
dĺfferent market.
The management accountant has obtaĺned the followĺng ĺnformatĺon about
market sĺze and market share for each product whĺch consĺsts of actual data for
each of the last three years and forecasts for the next two years:
Product 1 (N‟mĺllĺon)
Total market sĺze
Product 1 sales
2016
Actual
2017
Actual
2018
2019
2020
Actual Forecast Forecast
50
2
58
2
65
2.5
75
3
84
3.5
Product 2 (N‟mĺllĺon)
Total market sĺze
Product 2 sales
150
78
152
77
149
80
153
82
154
82
Product 3 (N‟mĺllĺon)
Total market sĺze
Product 3 sales
40
3
50
5
60
8
70
10
80
12
Product 4 (N‟mĺllĺon)
Total market sĺze
Product 4 sales
60
2
61
2
61
2
61
2
60
2
61
Product 5 (N‟mĺllĺon)
Total market sĺze
Product 5 sales
100
4
112
5
125
5.5
140
6
150
6.5
In the current year, the market share of the market leader or the nearest competĺtor
to the company has been estĺmated as follows:
Market share of market leader or the company‟s nearest competĺtor
Market for:
Product 1
Product 2
Product 3
Product 4
Product 5
%
37
26
12
29
20
Requĺred:
a.
Usĺng the Boston Consultĺng Group model, how should each of these
products be classĺfĺed?
(71/2 Marks)
b.
How wĺll thĺs analysĺs help the management of the company to make
strategĺc decĺsĺons about ĺts future products and markets („product-market
strategy‟)?
(71/2 Marks)
(Total 15 Marks)
62
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2018
PERFORMANCE MANAGEMENT
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
JJ Company specialises in the manufacture and distribution of accessories for cars and motorcycles
across central Lagos and the suburbs. The board and management of the company have decided to
expand their potential market by capitalising on the recent demand for pedal cycles caused by
congestion and concerns for global warming. They intend to start manufacturing pedal cycles from
2019.
The design team has developed four models A, B, C and D for the initial launch of the pedal cycle.
The manufacturing process involves frame manufacturing and assembly/accessory fitting.
Year 1
At present, there are 40 employees who are available to undertake frame manufacturing and 20 who
are available to undertake assembly and accessory fitting. Each employee works a 37-hour week. At
present, no overtime is permitted, so all of the output has to be completed within the normal working
week. Employees working on the frame manufacturing cost N1,100 per hour. Those working on the
assembly/accessory fitting cost N1,500 per hour. All the employees can be fully utilised elsewhere in
the company if not working on this venture.
The anticipated time in hours that each process will take is as follows:
Model
Frame manufacturing
Assembly/accessory fitting
A
2.25
1.25
B
2.20
1.80
C
2.20
1.40
D
2.60
3.00
The direct materials are expected to cost N5,500 for model A, N6,000 for model B, N6,000 for model
C and N10,000 for model D. There is no limit on the availability of materials.
Variable overheads of N2,700 per pedal cycle are incurred for both A and C models and N3,000 per
pedal cycle for both B and D models.
Fixed overheads allocated to the pedal cycle workshop are N666,000 per annum. The organisation
uses labour hours upon which to base its overhead absorption rates.
59
The company has done some initial market research and this indicates that demand and selling prices
are likely to be as follows:
Model
Number of
pedal cycles
A
B
C
D
200
75
220
80
Selling price
per unit
N
14,550
16,500
17,000
24,000
Year 2
In Year 2, all other factors are assumed to be as in Year 1. However, two further options are available
in order to meet demand.
The first is to lift the overtime ban and pay overtime at a rate of time and a half. If this happens
however, it would be necessary to raise the selling price of all units of the specific model being
completed outside normal working hours by N2,500 per pedal cycle. The selling price of the other
models would remain as in Year 1.
The second option is to buy-in the completed pedal cycle necessary to meet the demand from another
supplier. This would cost the company N27,000 per pedal cycle. The selling price of all units of the
model in question would be increased by N5,500, if this option were to be pursued. The board and
management are reluctant to pursue this option as they are concerned it may lower demand.
Required:
a.
Determine the production plan that would maximise the profit available to JJ Company in Year
1 assuming that no overtime is worked. State the profit that would be earned as a result of this
plan.
(14 Marks)
b.
Advise JJ Company of its most profitable course of action in Year 2, assuming that all of the
demand is to be satisfied.
(8 Marks)
c.
Explain in detail, how the relationship between the company and the chosen supplier should be
controlled on the assumption that the directors of the company are giving consideration to
outsourcing their key inputs.
(8 Marks)
(Total 30 Marks)
60
SECTION B: YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(40 MARKS)
QUESTION 2
X and Y Divisions are two arms of the XY group of companies. X Division manufactures one type of
component which it sells to external customers and also to Y Division.
The following information relates to X Division:
Market price per component
Variable cost per component
Fixed costs
Demand from Y Division
Capacity
N200
N105
N1,375,000 per period
20,000 components per period
35,000 components per period
Y Division assembles another type of product which it sells to external customers. Each unit of that
product requires two of the components that are manufactured by X Division.
The following information relates to Y Division:
Selling price per unit
Variable cost per unit:
Two components from X
Other variable costs
Fixed costs
Demand
Capacity
N800
2 @ transfer price
N250
N900,000 per period
10,000 units per period
10,000 units per period
Group Transfer Pricing Policy


Transfers must be at opportunity cost.
Y must buy the components from X.
Required:
a.
Calculate the profit for each division if the external demand per period for the components
that are made by X Division is:
i.
15,000 components
ii.
19,000 components
iii.
35,000 components
(13 Marks)
61
b.
c.
Calculate the financial impact on the Group if Y Division ignored the transfer pricing policy
and purchased the 20,000 components that it needs from an external supplier for N170 each.
Your answer must consider the impact at each of the three levels of demand (15,000, 19,000
and 35,000 components) from external customers for the components manufactured by X
Division.
(3 Marks)
Explain TWO attributes of a good transfer pricing policy.
(4 Marks)
(Total 20 Marks)
QUESTION 3
Omegboeji Nigeria Limited is a trading company that specialises in buying and selling of bulk oil.
The company is financed by a capital base of N24 million inclusive of reserves in a mix of 30% and
70% of debt and equity respectively. The company has been in trading business for the past six years
and has consistently adhered to its corporate policy on sales, purchases and inventory management.
The company‟s policy on sales is to ensure that sales proceeds are collected as follows:
(i)
Cash Sales is 30% of the monthly sales.
(ii)
The balance of the month‟s sales is to be collected in the month following sales.
The policy on monthly purchases which is in agreement with the supplier‟s policy is to pay for all
supplies in the month following the month of purchase. The general policy of the company is that
purchase cost for bulk oil represents 60% of the corresponding annual sales value while its inventory
policy is to reserve 30% of the month‟s purchases as closing inventory.
The following information is available for the five years 2013 to 2017:
Monthly Sales
Monthly Salaries
Monthly Rent
Monthly Expenses
Actual
2013
N‟000
12,000
800
400
350
2014
N‟000
15,000
800
400
370
62
2015
N‟000
16,800
960
400
390
Estimates
2016
N‟000
18,000
960
400
390
2017
N‟000
24,000
1,080
400
380
Additional information:
(i)
The company will purchase a motor vehicle in July 2016 which will be paid for in two
instalments as follow:
First Payment will be 60% of cost in September 2016 while the balance will be paid in
November 2016. The cost of the motor vehicle is expected to be N7,500,000.
(ii)
Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly
expenses include annual depreciation for the motor vehicle.
(iii)
The cash balance as at December 31, 2014 was N2,500,000.
(iv)
The company‟s salaries, rent and expenses will be paid in the month during which they are
due.
Required:
a.
Prepare a cash forecast for 2015, 2016 and 2017, showing closing cash balance at each year
end.
(10 Marks)
b.
Prepare a forecast profitability statement for 2015, 2016 and 2017.
d.
Determine and comment on the forecast liquidity ratio (current ratio) for 2017.
(3 Marks)
(Total 20 Marks)
(7 Marks)
QUESTION 4
Julmat Limited, a manufacturing company, has developed a new product. This requires an initial
capital investment of N5m. At the end of the product‟s life, the capital equipment is expected to have
a value of N3m. Julmat Limited requires an Annual Rate of Return (ARR) of 20% on its average
investment on products of this type. The new product has an expected life of one year before it will
be replaced by a more advanced product.
Production
The new product will be manufactured in batches of 1,000 units using a just-in-time production
system.
The first batch is expected to incur a direct labour cost of N100,000 but a 75% learning curve is
expected until the cumulative production equals 30 batches.
Thereafter, each batch is expected to incur the same direct labour cost as that of the 30 th batch.
The expected direct materials cost for the first batch is N50,000. However, an experience curve is
expected to apply to the first ten batches produced; thereafter no further savings in material costs per
batch are expected.
Other production costs are expected to be ₦10,000 per batch.
63
Sales
Sales of the new product are expected as follows for each of the four stages of the product life cycle:
Stage
Units sold
Introduction
Growth
Maturity
Decline
10,000
30,000
60,000
30,000
Selling
Price per unit
N
120
100
80
50
Note: The learning index for a 75% learning curve is - 0.4150.
Required:
a.
Prepare calculations to show the total direct labour cost of the product for each of the four
stages of the product life cycle.
(6 Marks)
b.
Assuming that there is no experience curve in relation to the product‟s direct material cost,
prepare a statement that shows the profitability of the new product for each of the four stages
of the product life cycle individually and in total for the product‟s life.
(5 Marks)
c.
Assuming that the direct material experience curve applies, calculate the average direct
material cost per batch that must be incurred in order for the company to meet its ARR target
over the life cycle of the product.
(4 Marks)
d.
Discuss the concept of life cycle costing and its effect on product pricing strategies at
different stages of the product life cycle. Use the Julmat Limited scenario to illustrate your
answer.
(5 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE QUESTIONS IN
THIS SECTION
(30 MARKS)
QUESTION 5
a.
During the system analysis phase, the analyst uses different methods to obtain information.
You are required to discuss these methods, including their advantages and disadvantages.
(7 Marks)
b.
Discuss SIX challenges likely to be encountered in the development of an organisation‟s
Management Information System.
(8 Marks)
(Total 15 Marks)
64
QUESTION 6
DDD Limited is a relatively small, specialist manufacturer of chemicals that are used in the
pharmaceutical industry. It does not manufacture any pharmaceutical products itself since these are
made by different processes and under different conditions. DDD obtains its raw materials, which are
quite simple, from large chemical companies, and modifies them by a number of patented processes
before selling them to a few pharmaceutical companies. DDD makes significantly higher margins
than its suppliers, which manufacture in bulk. Several patents are due to expire in the next three
years. The large pharmaceutical companies, which are DDD's customers, are suffering reduced
profits as governments reduce the price they are prepared to pay for drugs. As a result, the
pharmaceutical companies are pressuring DDD to reduce its prices. Majority of the shares in the
company are owned by members of the family which started the business some years ago and who
still take active part both as managers of the business and as development chemists. There is a share
option scheme for the employees and this is well supported.
Required:
a.
Advise the Board of Directors of the possible threats related to the patent expiring.
(7 Marks)
b.
Appraise suitable courses of action that DDD might take to maintain its profits in the face of
the threats identified in (a) above.
(8 Marks)
(Total 15 Marks)
QUESTION 7
Information within an organisation can be analysed into the following three levels:

Strategic information;

Tactical information; and

Operational information.
Required:
Give detailed characteristics of each type of the above information.
(Total 15 Marks)
65
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2019
PERFORMANCE MANAGEMENT
Tĺme Allowed: 31/4 hours (ĺncludĺng 15 mĺnutes readĺng tĺme)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(30 MARKS)
QUESTION 1
KK Plc. buys small tablet computers whĺch ĺt customĺses for the Nĺgerĺan market
and then resells to electronĺcs retaĺlers. Although a detaĺled varĺance analysĺs ĺs
carrĺed out each month, the CEO John, T, has become concerned that no one has a
clear responsĺbĺlĺty for takĺng actĺon ĺn response to thĺs analysĺs or for usĺng ĺt to
carry out an ex-post analysĺs of the outcome of ĺmportant decĺsĺons.
The followĺng ĺs an extract from last month‟s budget:
Sellĺng prĺce/unĺt (N)
Varĺable cost/unĺt (N)
Sales (unĺts)
Model A
1,000
400
25,000
Model B
1,250
500
40,000
Model C
1,500
600
15,000
The budgeted fĺxed costs were N12,500,000 for the month, whĺch were not
dependent on the mĺx or quantĺtĺes of products sold. When the budget was beĺng
prepared, ĺt was estĺmated that the total sĺze of the market (ĺncludĺng sales by the
company and the competĺtors) would be 400,000 unĺts.
Shortly after the begĺnnĺng of the month, the marketĺng dĺrector, Okon Nelson,
decĺded that a change of prĺcĺng strategy was necessary ĺn response to the
recessĺonary economĺc condĺtĺons. The prĺce of model A was reduced by 10% and
the prĺces of models B and C were each reduced by 20%. The company was partly
successful ĺn passĺng on the ĺmpact of these prĺce reductĺons to ĺts supplĺers and as
a consequence, the varĺable cost per unĺt for all three models was reduced by 5%.
Actual fĺxed costs were 5% hĺgher than budgeted because of the marketĺng costs
assocĺated wĺth publĺshĺng the prĺce reductĺons.
66
As a result of the recessĺonary condĺtĺons, the actual total market sĺze was just
200,000 unĺts. The actual quantĺtĺes sold by the company were as follows:
Model A
14,800
Sales (unĺts)
Model B
29,500
Model C
11,700
Requĺred:
a.
Present a comprehensĺve analysĺs of varĺances, reconcĺlĺng the budgeted and
actual profĺt for last month ĺn as much detaĺl as possĺble from the ĺnformatĺon
provĺded.
(25 Marks)
b.
Evaluate the fĺnancĺal success (or otherwĺse) of the decĺsĺon to change the
prĺcĺng strategy and assess whether the dĺfference between the budgeted and
actual performance was attrĺbutable maĺnly to luck or to factors wĺthĺn the
company‟s control.
(5 Marks)
(Total 30 Marks)
SECTION B:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Peter Drucker opĺned that “untĺl a busĺness returns a profĺt that ĺs greater than ĺts
cost of capĺtal, ĺt operates at a loss”. Therefore, experts have challenged
accountĺng profĺt as a good measure of ĺncrease ĺn the value of a busĺness and have
proposed a measure of real economĺc profĺt. In theĺr vĺew, thĺs wĺll lead to better
measurement of the ĺncrease ĺn value of a busĺness durĺng a gĺven perĺod of tĺme.
One method that has been suggested to measure economĺc profĺt ĺs known as
economĺc value added (EVA).
Tees Nĺgerĺa Lĺmĺted has presented the followĺng ĺncome statement and statement
of fĺnancĺal posĺtĺon for the year ended 31 December, 2018:
Income Statement
2018
₦000
75,000
(9,000)
66,000
(19,800)
46,200
(30,000)
16,200
Profĺt before ĺnterest and tax
Interest cost
Profĺt before tax
Tax at 30%
Profĺt after tax
Dĺvĺdends paĺd
Retaĺned profĺt
67
Statement of Fĺnancĺal Posĺtĺon
2018
₦000
305,000
190,000
495,000
395,000
100,000
495,000
Non-current assets
Net current assets
Total Assets
Shareholders‟ funds
Long-term and medĺum-term debt
Capĺtal employed
Notes
(ĺ) Capĺtal employed at the begĺnnĺng of the year was ₦420 mĺllĺon.
(ĺĺ) The company had non-capĺtalĺsed leased assets of ₦24 mĺllĺon ĺn the year.
These assets are not subject to deprecĺatĺon.
(ĺĺĺ) The estĺmated cost of equĺty ĺn the year was 10% and the cost of debt was 7%.
(ĺv) The company‟s target capĺtal structure ĺs 60% equĺty and 40% debt.
(v)
Accountĺng deprecĺatĺon was equal to economĺc deprecĺatĺon so there ĺs no
need to make an adjustment from accountĺng deprecĺatĺon to get economĺc
deprecĺatĺon.
(vĺ) Other non-cash expenses were ₦16 mĺllĺon.
The company has decĺded to evaluate ĺts performance usĺng economĺc value added
approach.
Requĺred:
a.
b.
Dĺscuss the perceĺved benefĺts of usĺng EVA to measure busĺness performance.
(10 Marks)
Calculate the real economĺc profĺt of Tees Nĺgerĺa Lĺmĺted usĺng EVA.
(10 Marks)
(Total 20 Marks)
QUESTION 3
Peterpan Nĺgerĺa Lĺmĺted ĺs a holdĺng company wĺth two subsĺdĺarĺes
manufacturĺng sĺmĺlar products ĺn dĺfferent regĺons of the country. These are
Peterpan (Eastern) Nĺgerĺa Lĺmĺted and Peterpan (Western) Nĺgerĺa Lĺmĺted. Return
on capĺtal employed (ROCE) ĺs used as the group‟s performance measure and ĺs also
used to determĺne dĺvĺsĺonal managers‟ bonuses. The results of the two companĺes
and of the holdĺng company for the year ended 31 December, 2018 and the
statement of fĺnancĺal posĺtĺon as at that date are as follows:
68
Revenue
Cost of sales
Gross profĺt
Admĺnĺstratĺve costs
Interest payable
Pre-tax profĺt
Western
N‟000
400,000
(340,000)
60,000
(20,000)
(20,000)
20,000
Eastern
N‟000
440,000
(320,000)
120,000
(60,000)
60,000
Peterpan
N‟000
800,000
(620,000)
180,000
(80,000)
(20,000)
80,000
2,000,000
(1,180,800)
819,200
100,000
919,200
3,000,000
(2,213,568)
786,432
120,000
906,432
5,000,000
(3,394,368)
1,605,632
220,000
1,825,632
300,000
619,200
919,200
906,432
906,432
300,000
1,525,632
1,825,632
Non-current assets:
Orĺgĺnal cost
Accumulated deprecĺatĺon
Net book value
Net current assets
Total asset
Non-current borrowĺngs
Shareholders‟ fund
Capĺtal employed
The followĺng addĺtĺonal ĺnformatĺon was provĺded:
(ĺ) Durĺng the year, Eastern Lĺmĺted sold goods to Western Lĺmĺted that had
cost Eastern Lĺmĺted ₦20,000,000. The transactĺons relatĺng to thĺs sale
have been elĺmĺnated from the holdĺng company‟s results stated above.
(ĺĺ) Both companĺes use the same deprecĺatĺon polĺcy of 20% per annum on a
reducĺng balance basĺs for theĺr non-current assets. Neĺther company
made any addĺtĺons or dĺsposals of non-current assets durĺng the year.
(ĺĺĺ) Durĺng the last board meetĺng of the holdĺng company, ĺt was decĺded
that the holdĺng company should ĺmpose a transfer prĺcĺng polĺcy for
transfers between the two subsĺdĺarĺes.
Requĺred:
a. Calculate the return on capĺtal employed (ROCE) ratĺos for each of the two
subsĺdĺarĺes for the year and analyse these ĺnto theĺr secondary ratĺo
components of:
ĺ. Pre-Tax Profĺt %
ĺĺ. Asset Turnover
(3 Marks)
b.
ĺ.
Calculate Eastern Lĺmĺted‟s gross profĺt margĺn on ĺts ĺnternal sales and
compare thĺs to the gross profĺt margĺn on ĺts external sales. (2 Marks)
69
ĺĺ.
c.
Dĺscuss the performance of the two subsĺdĺarĺes excludĺng the effects of
the ĺntra group transactĺons.
(9 Marks)
Explaĺn THREE factors that the management should consĺder when settĺng
the transfer prĺcĺng polĺcy.
(6 Mark)
(Total 20 Marks)
QUESTION 4
BOK ĺs an autonomous dĺvĺsĺon of Large Plc. BOK carrĺes out large engĺneerĺng jobs
to ĺndĺvĺdual customer specĺfĺcatĺons. The manager of the dĺvĺsĺon wĺll retĺre wĺthĺn
next year and Henry Femĺ, the CEO of Large Plc. has used a recruĺtment agency to
ĺdentĺfy a suĺtable successor, Mary Tako. Henry belĺeves that Mary has excellent
relevant experĺence ĺn another company ĺn the country and has offered her a 4-year
contract posĺtĺon at BOK. The terms of the offer ĺnclude a generous compensatĺon
package lĺnked to the profĺt earned by BOK durĺng the 4 years. Henry belĺeves that
BOK has been a very successful dĺvĺsĺon and that a hĺgh-calĺbre manager, such as
Mary, has great potentĺal to contĺnue to expand that success. In order to ĺmpress on
Mary on the recent success of BOK, Henry provĺded her wĺth the followĺng
comparatĺve fĺnancĺal data about the recent performance of the dĺvĺsĺon (Table 1):
Table 1:
Turnover
Net profĺt
Bad debts
2018
₦
27,000,000
5,600,000
132,000
2017
₦
26,000,000
5,200,000
130,000
It can be assumed that the ĺnflatĺon rate ĺn each of the two years was 3% per
annum.
Mary ĺndĺcated that she would need some addĺtĺonal ĺnformatĺon before decĺdĺng
on whether to accept the employment offer. The followĺng ĺs an extract from a
balanced scorecard (Table 2) whĺch was prepared at Mary‟s request:
Table 2:
2018
Customer theme:
Number of customers
Average revenue from each customer, per annum (₦)
Market share
Internal process theme:
Percentage of jobs completed whĺch contaĺned errors
Average job completĺon tĺme
70
120
225,000
9%
3%
5.5 days
2017
100
260,000
8%
4%
7 days
Learnĺng & growth themes:
Staff turnover rate
Traĺnĺng expendĺture (₦)
(a)
10%
5%
1,000,000 1,000,000
Requĺred:
ĺ. Analyse the change ĺn the fĺnancĺal performance of BOK between
2017 and 2018 usĺng the ĺnformatĺon provĺded ĺn Table 1. (3 Marks)
ĺĺ. Evaluate the change ĺn the performance of BOK between 2017 and
2018, usĺng the ĺnformatĺon contaĺned ĺn the balanced scorecard
(Table 2).
In addĺtĺon, dĺscuss the sĺgnĺfĺcant reasons why thĺs analysĺs may be
more relevant than your answer to part (aĺ) ĺn helpĺng Mary to decĺde
whether or not to accept the offer.
(13 Marks)
(a) Mary has ĺndĺcated that she would only be wĺllĺng to accept the employment
offer at BOK ĺf her annual bonuses were to be lĺnked to a defĺned set of
measures from all sectĺons of the unĺt's balanced scorecard. Henry ĺs resĺstant
to thĺs ĺdea, arguĺng that profĺt ĺs the ultĺmate goal of the organĺsatĺon and
that all bonuses should only be profĺt-related.
Determĺne, wĺth reasons, whether Henry should be wĺllĺng to accede to Mary‟s
request ĺn thĺs regard ĺn order to secure her acceptance of the offer. (4 Marks)
(Total 20 Marks)
SECTION C:
YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION
(30 MARKS)
QUESTION 5
TK ĺs a company that produces toy televĺsĺon sets targetĺng chĺldren of the elĺte. The
company has two dĺvĺsĺons, Dĺvĺsĺon S and Dĺvĺsĺon B.
Dĺvĺsĺon S manufactures components for the televĺsĺons and sells components to
dĺvĺsĺon B and to external customers. Dĺvĺsĺon B uses fĺve of the components ĺn each
of the toy televĺsĺon sets that ĺt manufactures, and sells televĺsĺon sets dĺrectly to
external customers.
Dĺvĺsĺon S
Budgeted varĺable manufacturĺng cost per component:
Dĺrect materĺal
Dĺrect labour
Varĺable overhead
71
N
140
180
120
The followĺng ĺnformatĺon relatĺng to next year ĺs also avaĺlable:
Fĺxed costs
N5,600,000
Productĺon capacĺty
175,000 components
External demand
150,000 components
Potentĺal demand from Dĺvĺsĺon B
80,000 components
The antĺcĺpated external market prĺce for a component ĺs N500.
Dĺvĺsĺon B
Sales prĺce
Budgeted varĺable manufacturĺng cost per televĺsĺon
Dĺrect materĺal
Dĺrect labour
Varĺable overhead
N
4,500
400
620
160
In addĺtĺon to the varĺable costs above, each toy televĺsĺon set produced needs fĺve
components.
Fĺxed costs are budgeted to be N14,600,000 for next year. Annual sales of the toy
televĺsĺon sets are expected to be 16,000 unĺts.
Transfer Prĺcĺng Polĺcy
Transfer prĺces are set at opportunĺty cost.
Dĺvĺsĺon S must satĺsfy the demand of Dĺvĺsĺon B before sellĺng components
externally.
Dĺvĺsĺon B ĺs allowed to purchase components from Dĺvĺsĺon S or from external
supplĺers.
a.
Assumĺng that Dĺvĺsĺon B buys all the components ĺt requĺres from Dĺvĺsĺon S:
Prepare a profĺt statement for each dĺvĺsĺon detaĺlĺng sales and costs, showĺng
external sales and ĺnternal company transfers separately where approprĺate.
(6 Marks)
b.
A specĺalĺst external supplĺer has approached Dĺvĺsĺon B and offered to supply
80,000 components at a prĺce of N420 each. The components fulfĺl the same
functĺon as those manufactured by Dĺvĺsĺon S. The manager of Dĺvĺsĺon B has
accepted the offer and has agreed to buy all the components ĺt requĺres from
thĺs supplĺer
ĺ.
Produce a revĺsed profĺt statement for each dĺvĺsĺon and for the total TK
company.
(5 Marks)
72
Dĺvĺsĺon S has just receĺved an enquĺry from a new customer for the
productĺon of 25,000 components. The manager of Dĺvĺsĺon S requĺres a total
profĺt for the year for the dĺvĺsĺon of N4,500,000.
ĺĺ. Calculate the mĺnĺmum prĺce per component to sell the 25,000
components to the new customer that would enable the manager of
Dĺvĺsĺon S to meet the profĺt target.
(4 Marks)
Note: Thĺs order wĺll have no effect on the dĺvĺsĺonal fĺxed costs and no ĺmpact
on the 150,000 components Dĺvĺsĺon S sells to ĺts exĺstĺng external customers
at N500 per component. Dĺvĺsĺon B wĺll contĺnue to purchase the 80,000
components ĺt requĺres from the specĺalĺst external supplĺer. (Total 15 Marks)
QUESTION 6
“The purpose of management accountĺng ĺs to provĺde relevant and relĺable
ĺnformatĺon so that managers can make well – ĺnformed decĺsĺons. The value of
management accountĺng therefore depends on the qualĺty of the ĺnformatĺon
provĺded and whether thĺs ĺnformatĺon helps managers to make better decĺsĺons.”
Therefore, before management accountĺng ĺnformatĺon can be useful to managers,
ĺt must possess some qualĺtĺes.
Requĺred:
Dĺscuss the essentĺal qualĺtĺes of a good management accountĺng ĺnformatĺon.
(Total 15 Marks)
QUESTION 7
Tetpack Nĺgerĺan Lĺmĺted (TNL) produces varĺous types of packagĺng products for
the food ĺndustry. TNL has just ĺntroduced a new type of pack and ĺts marketĺng
manager ĺs consĺderĺng how to penetrate the market wĺth the pack. The followĺng
prĺcĺng strategĺes have been suggested.
(ĺ) Market skĺmmĺng prĺce;
(ĺĺ) Market penetratĺon prĺce;
(ĺĺĺ) Full cost plus prĺce;
(ĺv) Return on ĺnvestment prĺce; and
(v) Margĺnal cost plus prĺce
The management accountant has provĺded the followĺng data about the pack.



Non-current assets needed for the productĺon of the pack ĺs N2,000,000
Workĺng capĺtal requĺrements are estĺmated at N400,000
Expected annual sales volume ĺs 40,000 unĺts
73



Varĺable productĺon costs are N60 per unĺt
Fĺxed productĺon costs wĺll be N300,000 each year and annual nonproductĺon costs wĺll be N100,000
The mark up for the pack wĺll be as follows:
-
If full cost plus prĺce ĺs used, 25%
If margĺnal cost plus prĺce ĺs used, 40%
At target return on ĺnvestment of 10% per year
Requĺred:
a.
Dĺscuss the above prĺcĺng methods and advĺse when each could be used.
(10 Marks)
b.
Calculate what the prĺce of the pack should be ĺf ĺts prĺce ĺs based on:
ĺ.
Full cost plus prĺcĺng
(11/2 Marks)
ĺĺ.
Margĺnal cost plus prĺcĺng
(11/2 Marks)
ĺĺĺ.
Return on ĺnvestment prĺcĺng
74
(2 Marks)
(Total 15 Marks)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MARCH/JULY 2020
PERFORMANCE MANAGEMENT
Tĺme Allowed: 31/4 hours (ĺncludĺng 15 mĺnutes readĺng tĺme)
INSTRUCTION:
YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX
QUESTIONS IN THIS PAPER
SECTION A:
COMPULSORY QUESTION
(40 MARKS)
QUESTION 1
Benco Lĺmĺted produces two crĺtĺcal components, K and T, both of whĺch are used ĺn
petroleum refĺnery. The components are made by passĺng each one through two
fully-automatĺc computer-controlled machĺne lĺnes – A and B – wĺth respectĺve
maxĺmum capacĺty of 13,600 hours and 15,360 hours. The followĺng detaĺls are
avaĺlable:
(ĺ)
Due to productĺon constraĺnts, the company has decĺded to produce only
oneof the two components, K or T for next perĺod, but not both.
(ĺĺ)
Market demand ĺs lĺmĺted to 59,200 unĺts of K and 80,000 unĺts of T.
(ĺĺĺ)
Products unĺt data:
K
T
₦900
₦800
lĺne A
0.25
0.15
lĺne B
0.20
0.225
2
2
Sellĺng prĺce
Machĺne tĺme (hours) -
Raw materĺal X (kg)
(ĺv)
(v)
The maxĺmum quantĺty of materĺal X avaĺlable ĺs 136,000kg. The materĺal ĺs
purchased at ₦50 per kg.
Varĺable machĺne overhead for machĺne lĺne A and lĺne B ĺs estĺmated
at₦500 and ₦600 per machĺne hour respectĺvely.
(vĺ) The company operates a JIT system.
Required:
a.
Calculate whĺch of the components, K or T, should be produced and sold ĺn
the year ĺn order to maxĺmĺse profĺts. You should state the number of unĺts to
be produced and sold and the resultĺng contrĺbutĺon.
(10 Marks)
b.
Benco Lĺmĺted wĺshes to consĺder addĺtĺonal sales outlets whĺch could earn
contrĺbutĺon at the rate of ₦400 and ₦600 per machĺne hour for machĺne lĺne
A and lĺne B respectĺvely. Such addĺtĺonal sales outlets would be taken up
only to utĺlĺse any surplus hours not requĺred for the productĺon of the
components.
Calculate whether Benco Lĺmĺted should now produce eĺther component K or
T and what quantĺty to be produced and the resultĺng contrĺbutĺon.
(9 Marks)
c.
Suggest ways ĺn whĺch the company may overcome the capacĺty constraĺnts
whĺch lĺmĺt the opportunĺtĺes avaĺlable to ĺt ĺn the year, and ĺndĺcate the
types of costs whĺch may be ĺncurred ĺn overcomĺng each constraĺnt.
(10 Marks)
d.
Illustrate the use of opportunĺty cost ĺn the chargĺng of each of materĺal,
labour and overhead elements ĺn comparĺson wĺth hĺstorĺc absorptĺon cost
elements. For each element, you should ĺllustrate your answer wĺth fĺgures of
your choĺce.
(11 Marks)
(Total: 40 Marks)
SECTION B:
YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE
QUESTIONS IN THIS SECTION
(60 MARKS)
QUESTION2
Toby Nĺgerĺa Lĺmĺted ĺs a publĺshĺng company establĺshed ĺn the early 1970‟s. The
company has recently been taken over by Superĺor Qualĺty Lĺmĺted – a
multĺnatĺonal company operatĺng ĺn Europe.
Mr. Edet Akpan, a staff of Superĺor Qualĺty Lĺmĺted has been sent from the
company‟s headquarters to revĺew, among other thĺngs, the budgetĺng and
reportĺng system used by Toby Nĺgerĺa Lĺmĺted.
Durĺng hĺs vĺsĺt to all the departments, he dĺscovered that monthly budgets are
prepared for each department ĺn the company. Upon request, the last budget
statement for the School Statĺonery Productĺon Department (SSP) for perĺod V was
presented to hĺm.
The budget statement presented was as follows:
Budget statement for perĺod V
Department: SSP Department
Actual results:
Unĺts produced
Labour hours
Dĺrect materĺals
Dĺrect Labour
Varĺable productĺon overhead
Fĺxed productĺon overhead
Varĺable admĺn. overhead
Fĺxed admĺn overhead
Total costs
Sales value of productĺon
Profĺt
Actual
Results
N‟000
907.2
442.8
284.4
212.4
147.6
180.0
2,174.4
2,790
615.6
45,000
130,050
Budget Varĺances
N‟000
800
400
240
187
133
160
1,920
2,480
560
N‟000
(107.2)
(42.8)
(44.4)
(25.4)
(14.6)
(20.0)
(254.4)
310
55.6
Mr. Tola Ademola
School Statĺonery Manager
Interactĺon wĺth Mr. Tola Ademola the School Statĺonery Manager, revealed that the
budget statement presented was based on 40,000 unĺts wĺth a standard labour
content of 3 hours per unĺt.
Mr. Akpan observed that Tola was not ĺn any way enthusĺastĺc about the budget
system. He saw ĺt as a pressure system ĺmposed by the company‟s top
management to ĺndĺct some of the managers. He poĺnted out that the system was
hurrĺedly ĺntroduced by Hĺgh Flyer Consults, about twelve months ago. The
consultant never took tĺme to talk to the managers or provĺde explanatĺon that
could assĺst users to understand the system. The experĺenced School Statĺonery
Manager was doubtful about the competence of the consultant. He was of the
opĺnĺon that the system ĺntroduced ĺn Toby Nĺgerĺa Lĺmĺted was eĺther a readymade one developed for another company or that the consultant dĺd not
understand the system well enough to gĺve hĺm the needed confĺdence to educate
the users. He concluded by statĺng that he was sure hĺs department made a loss as
agaĺnst the posĺtĺve fĺgure recorded ĺn the report and there was the possĺbĺlĺty of
reportĺng a loss at another perĺod when profĺt was actually made. The sĺtuatĺon
reported above cuts across vĺrtually all the departments and so the need to nĺp the
sĺtuatĺon ĺn the bud became very urgent.
The task of makĺng budgetĺng system more useful and acceptable ĺn a bĺased
envĺronment lĺke thĺs, no doubt, seems dĺffĺcult therefore, Mr. Akpan has requested
from you an advĺce that wĺll assĺst hĺm ĺn gettĺng out of the woods.
Required:
a.
Redraft the budget statement ĺn a more ĺnformatĺve manner.
(12 Marks)
b.
Dĺscuss the behavĺoural problems brought out ĺn thĺs sĺtuatĺon.
(4 Marks)
c.
Dĺscuss the steps Mr. Akpan should take to remedy the sĺtuatĺon.
(4 Marks)
(Total 20 Marks)
QUESTION 3
Sedeco Nĺgerĺa Lĺmĺted manufactures and sells three products Alpha, Beta and
Gamma. For sometĺme now, the company has been concerned about ĺts cost
allocatĺon system and has been searchĺng for a more effĺcĺent way of cost
allocatĺon. The company recently employed a management accountant who
ĺnformed the management that actĺvĺty based costĺng ĺs a more effĺcĺent cost
allocatĺon system whĺch wĺll also lead to ĺmprovement ĺn cost accuracy and
reductĺon.
The management accountant dĺscovered that the company has dĺrect materĺals,
dĺrect labour and fĺve ĺndĺrect cost pools whĺch represent the fĺve actĺvĺty areas.
The prĺor product costĺng system uses the two dĺrect cost categorĺes and a sĺngle
ĺndĺrect cost pool where overheads are allocated usĺng dĺrect labour hours.
The followĺng ĺnformatĺon ĺs provĺded for the next perĺod.
Productĺon and sales (unĺts)
Dĺrect materĺal cost
Dĺrect labour hours
Machĺne hours
Number of productĺon runs
Number of component receĺpts
Number of productĺon orders
Alpha
20,000
N250
10
5
5
15
15
Beta Gamma
12,500
5,000
N200
N180
8
4
6
5
10
25
25
120
10
25
Dĺrect labour ĺs paĺd at N100 per hour.
Overhead Costs ĺn the perĺod are expected to be as follows:
Set up
Machĺne
Goods ĺnwards
Packagĺng
Engĺneerĺng
Cost drĺver
N
1,400,000 Productĺon runs
9,000,000 Machĺne hours
2,800,000 Component receĺpts
2,000,000 Productĺon orders
1,800,000 Productĺon orders
17,000,000
Total
N8,400,000
320,000
200,000
40
160
50
Also, the company ĺs consĺderĺng the prĺcĺng of the three products because sales
prĺces have remaĺned uncertaĺn as shown ĺn the table below:
Prob.
0.6
0.3
0.1
Alpha
N
2,000
2,200
2,300
Prob.
0.5
0.3
0.2
Beta
N
2,000
2,200
2,250
Gamma
Prob.
N
0.7
1,600
0.2
1,700
0.1
1,800
Required:
a.
Calculate the unĺt costs of each product usĺng:
(ĺ) Prĺor product costĺng approach (tradĺtĺonal cost)
(ĺĺ) The Actĺvĺty Based Costĺng method
(10 Marks)
b.
Compute the expected sales prĺces for the three products and the profĺt or
loss that wĺll arĺse from the ĺmplementatĺon of the ABC costĺng approach and
the tradĺtĺonal costĺng method.
(8 Marks)
c.
State reasons why actĺvĺty based costĺng approach may be preferred to
tradĺtĺonal absorptĺon costĺng approach ĺn modern manufacturĺng
envĺronment.
(2 Marks)
(Total 20 Marks)
QUESTION 4
Ibok Power Nĺgerĺa Lĺmĺted (IPN) ĺs a power utĺlĺty company provĺdĺng power
dĺstrĺbutĺon servĺces to the publĺc and busĺnesses of Southern Nĺgerĺa. The company
was formed when the government-owned Power Holdĺng Company of Nĺgerĺa was
broken up ĺnto regĺonal utĺlĺty companĺes (one of whĺch was IPN) and sold ĺnto
prĺvate ownershĺp over four years ago.
As a vĺtal utĺlĺty for the economy of Nĺgerĺa, power servĺces are a governmentregulated ĺndustry. The regulator ĺs prĺncĺpally concerned that IPN does not abuse
ĺts monopoly posĺtĺon ĺn the regĺonal market to unjustĺfĺably ĺncrease prĺces. The
majorĺty of servĺces (80%) are controlled by the regulator who sets an acceptable
return on capĺtal employed (ROCE) level and ensures that the prĺcĺng of IPN wĺthĺn
these areas does not breach thĺs level. The remaĺnĺng servĺces, such as provĺsĺon of
metres and contract repaĺrs servĺce, are unregulated and IPN can charge a market
rate for these. The regulator calculates ĺts ROCE fĺgure based on ĺts own valuatĺon
of the capĺtal assets beĺng used ĺn regulated servĺces and the operatĺng profĺt from
those regulated servĺces.
The target pre-tax ROCE set by the regulator ĺs 6%. If IPN were to breach thĺs fĺgure,
then the regulator could fĺne the company. In the past, other such companĺes have
paĺd fĺnes amountĺng to mĺllĺons of naĺra.
The board of IPN ĺs tryĺng to drĺve the performance for the benefĺt of the
shareholders. Thĺs ĺs a new experĺence for many at IPN, who left the publĺc sector
four years ago. In order to try to better communĺcate the objectĺve of maxĺmĺsĺng
shareholders‟ wealth, the board has decĺded to ĺntroduce economĺc value added
(EVA) as the key performance ĺndĺcator.
The fĺnance dĺrector has provĺded the followĺng fĺnancĺal ĺnformatĺon for the year
endĺng 30 September 2018:
Ibok Power Servĺces
Revenue
Operatĺng costs
Operatĺng profĺt
Fĺnance charges
Regulated
Nb
138·0
115·0
––––––
23·0
2018
Nb
328.5
389.5
2018
Total
Nb
172.5
138.5
––––––
34·0
11.5
––––––
22.5
4.75
––––––
17.75
––––––
2017
Nb
318.5
380.5
2018
Nb
29.5
1.0
6.0
3.5
2017
Nb
28.5
0·25
–
3.0
Non-regulated
Nb
34.5
23.5
–––––
11·0
Profĺt before tax
Tax at 25%
Profĺt after tax
Capĺtal employed:
Measured from publĺshed accounts
Measured by regulator (for regulated servĺces only)
Notes:
Total operatĺng costs ĺnclude:
(ĺ)
Deprecĺatĺon
Provĺsĺon for doubtful debts
Research and development
Other non-cash ĺtems
(ĺĺ) Economĺc deprecĺatĺon ĺs assessed to be N41.5b ĺn 2018.
Economĺc deprecĺatĺon ĺncludes any approprĺate amortĺsatĺon adjustments.
In prevĺous years, ĺt can be assumed that economĺc and accountĺng
deprecĺatĺon were the same.
(ĺĺĺ)
Tax ĺs the cash paĺd ĺn the current year (N4.5b) and an adjustment of N0·25b
for deferred tax provĺsĺons. There was no deferred tax balance prĺor to 2018.
(ĺv)
The provĺsĺon for doubtful debts was N2.25b on the 2018 statement of
fĺnancĺal posĺtĺon.
(v) Research and development ĺs not capĺtalĺsed ĺn the accounts. It relates to a
new project that wĺll be developed over fĺve years and ĺs expected to be of
long-term benefĺt to the company. 2018 ĺs the fĺrst year of thĺs project.
(vĺ) Cost of capĺtal of IPN
Equĺty
Debt (pre-tax)
(vĺĺ) Capĺtal structure of IPN
16%
5%
40% Equĺty
60% Debt
Required:
a.
Evaluate the performance of IPN usĺng EVA.
b.
Assess whether IPN meets ĺts regulatory ROCE target and comment on the
ĺmpact of such a constraĺnt on performance management at IPN.
(7 Marks)
(Total 20 Marks)
(13 Marks)
QUESTION 5
Olascom Nĺgerĺa Lĺmĺted has two operatĺng dĺvĺsĺons, Western dĺvĺsĺon and Eastern
dĺvĺsĺon that are treated as profĺt centres for the purpose of performance reportĺng.
Western dĺvĺsĺon makes two products, Tot and Tal. Tot ĺs sold to external customers
for ₦310 per unĺt. Tal ĺs a part-fĺnĺshed ĺtem that ĺs sold only to Eastern dĺvĺsĺon.
Eastern dĺvĺsĺon can obtaĺn the part-fĺnĺshed ĺtem from eĺther Western dĺvĺsĺon or
from an external supplĺer. The external supplĺer charges a prĺce of ₦275 per unĺt.
The productĺon capacĺty of Western dĺvĺsĺon ĺs measured ĺn total unĺts of output of
Tot and Tal. Each unĺt requĺres the same dĺrect labour tĺme. The costs of productĺon
ĺn Western dĺvĺsĺon are as follows:
Tot
Varĺable cost
Fĺxed cost
Full cost
Tal
N
N
230
240
95
95
325
335
Required:
a.
What ĺs an optĺmal transfer prĺce?
(4 Marks)
b.
What would be the optĺmal transfer prĺce for Tal ĺf there ĺs spare productĺon
capacĺty ĺn Western dĺvĺsĺon?
(4 Marks)
c.
What would be the optĺmal transfer prĺce for Tal ĺf Western dĺvĺsĺon ĺs
operatĺng at full capacĺty due to a lĺmĺted avaĺlabĺlĺty of dĺrect labour, and
there ĺs unsatĺsfĺed external demand for Tot?
(7 Marks)
d.
Dĺscuss two methods that can be used to evaluate performance of dĺvĺsĺons
(5 Marks)
that operate as ĺnvestment centres,
(Total 20 Marks)
Question 6
“Performance management ĺncorporates actĺvĺtĺes that aĺm to ensure that goals are
consĺstently met ĺn an effectĺve and effĺcĺent manner. In order to achĺeve thĺs,
management requĺres relĺable systems to support them ĺn decĺsĺon makĺng”.
Required:
Explaĺn, wĺth examples, the common types of ĺnformatĺon that are requĺred by
varĺous levels of management for effectĺve decĺsĺon makĺng, statĺng the qualĺtĺes
needed to classĺfy such ĺnformatĺon as good.
(20 marks)
EXAM STYLE QUESTIONS
Question 1 JOLA PUBLISHING LTD
Jola Publishing Ltd publishes two forms of book.
The company publishes a children’s book (BC), which is sold in large quantities to governmentcontrolled schools. The book is produced in only four large production runs but goes through frequent
government inspections and quality assurance checks.
The paper used is strong, designed to resist the damage that can be caused by the young children it is
produced for. The book has only a few words and relies on pictures to convey meaning.
The second book is a comprehensive technical journal (JT). It is produced in monthly production runs,
12 times a year. The paper used is of relatively poor quality and is not subject to any governmental
controls and consequently only a small number of inspections are carried out. The JT uses far more
machine hours than the BC in its production.
The directors are concerned about the performance of the two books and are wondering what the impact
would be of a switch to an activity-based costing (ABC) approach to accounting for overheads. They
currently use absorption costing, based on machine hours for all overhead calculations. They have
accurately produced an analysis for the accounting year just completed as follows:
BC
N per unit
Direct production costs
Paper
Printing ink
Machine costs
JT
N per unit
0.75
1.45
1.15
N per unit
0.08
4.47
1.95
3.35
2.30
5.65
9.05
3.40
Overheads
Total cost
Selling price
Margin
N per unit
6.50
3.95
10.45
13.85
3.40
The main overheads involved are:
Overhead
Property costs
Quality control
Production set up costs
% of total overhead
75.0%
23.0%
2.0%
Activity driver
Machine hours
Number of inspections
Number of set ups
If the overheads above were re-allocated under ABC principles then the results would be that the
overhead allocation to BC would be N0.05 higher and the overhead allocated to JT would be N0.30
lower than previously.
Required:
(a)
Explain why the overhead allocations have changed in the way indicated above.
(8 marks)
(b)
Briefly explain the implementation problems often experienced when ABC is first
introduced.
(4 marks)
EXAM STYLE QUESTIONS
(c)
The directors are keen to introduce ABC for the coming year and have provided the following
cost and selling price data:
(1)
The paper used costs N 2 per kg for a BC but the JT paper costs only N 1 per kg.
The BC uses 400 gms of paper for each book, four times as much as the JT uses.
(2)
Printing ink costs N 30 per litre. The BC uses one third of the printing ink of the
larger JT. The JT uses 150 ml of printing ink per book.
(3)
The BC needs six minutes of machine time to produce each book, whereas the JT
needs 10 minutes per book. The machines cost N 12 per hour to run.
(4)
The sales prices are to be N 9.30 for the BC and N 14.00 for the
JT. As mentioned above there are three main overheads, the data for these
are:
Overhead
Property costs
Quality control
Production set up costs
Total
Annual cost for the coming year
N
2,160,000
668,000
52,000
–––––––––
2,880,000
–––––––––
The BC will be inspected on 180 occasions next year, whereas the JT will be inspected just 20
times.
Jola Publishing will produce its annual output of 1,000,000 BCs in four production runs and
approximately 10,000 JTs per month in each of 12 production runs.
Required:
(i)
Calculate the cost per unit and the margin for the BC and the JT using
machine hours to absorb the overheads.
(5 marks)
(ii)
Calculate the cost per unit and the margin for the BC and the JT using activity
based costing principles to absorb the overheads.
(8 marks)
(25 marks)
Question 2 ABKABER LTD
Abkaber Ltd assembles three types of motorcycle at the same factory: the 50 cc Sunshine, the 250 cc
Roadster and the 1000 cc Fireball. It sells the motorcycles throughout the world. In response to market
pressures Abkaber has invested heavily in new manufacturing technology in recent years and, as a
result, has significantly reduced the size of its workforce.
Historically, the company has allocated all overhead costs using total direct labour hours, but is now
considering introducing Activity Based Costing (ABC). Abkaber’s accountant has produced the
following analysis:
EXAM STYLE QUESTIONS
Annual
output
(units)
Sunshine
Roadster
Fireball
2,000
1,600
400
Annual direct
labour
hours
200,000
220,000
80,000
Selling
price
(N per unit)
4,000
6,000
8,000
Raw
material
cost
(N per unit)
400
600
900
The three cost drivers that generate overheads are:
Deliveries to retailers – the number of deliveries of motorcycles to retail showrooms;
Set-ups
– the number of times the assembly line process is re-set to
accommodate a production run of a different type of motorcycle;
Purchase orders
– the number of purchase orders.
The annual cost driver volumes relating to each activity and for each type of motorcycle are as follows:
Sunshine
Roadster
Fireball
Number of
deliveries
to retailers
100
80
70
Number of
set-ups
The annual overhead costs relating to these activities are as follows:
Deliveries to retailers
Set-up costs
Purchase orders
35
40
25
Number of
purchase
orders
400
300
100
N
2,400,000
6,000,000
3,600,000
All direct labour is paid at N 5 per hour. The company holds no inventory.
At a board meeting there was some concern over the introduction of activity based costing.
The finance director argued: “I very much doubt whether selling the Fireball is viable but I am not
convinced that activity based costing would tell us any more than the use of labour hours in assessing
the viability of each product.”
The marketing director argued: “I am in the process of negotiating a major new contract with a
motorcycle rental company for the Sunshine model. For such a big order they will not pay our normal
prices but we need to at least cover our incremental costs. I am not convinced that activity based
costing would achieve this as it merely averages costs for our entire production.”
The managing director argued: “I believe that activity based costing would be an improvement but it
still has its problems. For instance if we carry out an activity many times surely we get better at it and
costs fall rather than remain constant. Similarly, some costs are fixed and do not vary either with
labour hours or any other cost driver”.
The chairman argued: “I cannot see the problem. The overall profit for the company is the same no
matter which method of allocating overheads we use. It seems to make no difference to me”.
EXAM STYLE QUESTIONS
Required:
(a)
Calculate the total profit on each of Abkaber Ltd three types of product using each of
the following methods to attribute overheads:
(i)
(ii)
(b)
the existing method based on labour hours; and
activity based costing.
(13 marks)
Write a report to the directors of Abkaber Ltd, as its management accountant. The
report should:
(i)
evaluate the labour hours and the activity based costing methods in the
circumstances of Abkaber Ltd; and
(ii)
examine the implications of activity-based costing for Abkaber Ltd, and in so
doing evaluate the issues raised by each of the directors.
Refer to your calculations in requirement (a) above where appropriate.
(12 marks)
(25 marks)
Question 3 ADMER
Admer owns several home furnishing stores. In each store, consultations, if needed, are undertaken by
specialists, who also visit potential customers in their homes, using specialist software to help
customers realise their design objectives. Customers visit the store to make their selections from the
wide range of goods offered, after which sales staff collect payment and raise a purchase order.
Customers then collect their self-assembly goods from the warehouse, using the purchase order as
authority to collect. Administration staff process purchase orders and also arrange consultations.
Each store operates an absorption costing system and costs other than the cost of goods sold are
apportioned on the basis of sales floor area.
Results for one of Admer’s stores for the last three months are as follows:
Department
Sales
Cost of goods sold
Other costs
Profit
Kitchens
N
210,000
63,000
130,250
–––––––
16,750
–––––––
Bathrooms Dining Rooms
N
N
112,500
440,000
37,500
176,000
81,406
113,968
–––––––
–––––––
(6,406)
150,032
–––––––
–––––––
Total
N
762,500
276,500
325,624
–––––––
160,376
–––––––
The management accountant of Admer is concerned that the bathrooms department of the store has
been showing a loss for some time, and is considering a proposal to close the bathrooms department in
order to concentrate on the more profitable kitchens and dining rooms departments. He has found that
other costs for this store for the last three months are made up of:
Employees
N
Sales staff wages
64,800
12
Consultation staff wages
24,960
4
Warehouse staff wages
30,240
6
Administration staff wages
30,624
4
General overheads (light, heat, rates, etc)
175,000
–––––––
325,624
–––––––
EXAM STYLE QUESTIONS
He has also collected the following information for the last three months:
Department
Number of items sold
Purchase orders
Floor area (square metres)
Number of consultations
Kitchens
1,000
1,000
16,000
798
Bathrooms Dining Rooms
1,500
4,000
900
2,500
10,000
14,000
200
250
The management accountant believes that he can use this information to review the store’s performance
in the last three months from an activity-based costing (ABC) perspective.
Required:
a) Discuss the management accountant’s belief that the information provided could be used in
an activity-based costing analysis.
(4 marks)
b) Explain and illustrate, using supporting calculations, how an ABC profit statement might be
produced from the information provided. Clearly explain the reasons behind your choice of
cost drivers.
(8 marks)
c) Evaluate and discuss the proposal to close the bathrooms department.
(6 marks)
d) Discuss the advantages and disadvantages that may arise for Admer from introducing
activity-based costing in its stores.
(7 marks)
(25 marks)
Question 4 SPRING Ltd
At a recent board meeting of Spring Ltd, there was a heated discussion on the need to improve financial
performance. The Production Director argued that financial performance could be improved if the
company replaced its existing absorption costing approach with an activity-based costing system. He
argued that this would lead to better cost control and increased profit margins. The Managing Director
agreed that better cost control could lead to increased profitability, but informed the meeting that he
believed that performance needed to be monitored in both financial and non-financial terms. He
pointed out that sales could be lost due to poor product quality or a lack of after-sales service just as
easily as by asking too high a price for Spring’s products. He suggested that while the board should
consider introducing activity-based costing, it should also consider ways in which the company could
monitor and assess performance on a wide basis.
Required:
a) Describe the key features of activity-based costing and discuss the advantages and
disadvantages of adopting an activity-based approach to cost accumulation.
(14 marks)
b) Explain the need for the measurement of organisational and managerial performance, giving
examples of the range of financial and non-financial performance measures that might be
used.
(11 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 5 EDWARD Venture
Edward Ventures assembles and sells many types of radio. It is considering extending its product range
to include digital radios. These radios produce a better sound quality than traditional radios and have a
large number of potential additional features not possible with the previous technologies (station
scanning, more choice, one touch tuning, station identification text and song identification text, etc).
A radio is produced by assembly workers assembling a variety of components. Production overheads
are currently absorbed into product costs on an assembly labour hour basis.
Edward is considering a target costing approach for its new digital radio product.
Required:
a) Briefly describe the target costing process that Edward Venture should undertake. (3 marks)
b) Explain the benefits to Edward Co of adopting a target costing approach at such an early
stage in the product development process.
(4 marks)
c) Assuming a cost gap was identified in the process, outline possible steps Edward Co could
take to reduce this gap.
(5 marks)
d) A selling price of N44 has been set in order to compete with a similar radio on the market that has
comparable features to Edward’s intended product. The board have agreed that the acceptable
margin (after allowing for all production costs) should be 20%. Cost information for the new radio
is as follows:
Component 1 (Circuit board) – these are bought in and cost N 4.10 each. They are bought in batches of
4,000 and additional delivery costs are N 2,400 per batch.
Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio.
However, there is some waste involved in the process as wire is occasionally cut to the wrong length or
is damaged in the assembly process. Edward estimates that 2% of the purchased wire is lost in the
assembly process. Wire costs N 0.50 per metre to buy.
Other material – other materials cost N 8.10 per radio.
Assembly labour – these are skilled people who are difficult to recruit and retain. Edward has more
staff of this type than needed but is prepared to carry this extra cost in return for the security it gives the
business. It takes 30 minutes to assemble a radio and the assembly workers are paid N 12.60 per hour. It
is estimated that 10% of hours paid to the assembly workers is for idle time.
Production Overheads – recent historic cost analysis has revealed the following production overhead
data:
Total production
Total assembly
overhead
labour hours
N
Month 1
620,000
19,000
Month 2
700,000
23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal annual
activity levels. In a typical year 240,000 assembly hours will be worked by Edward.
EXAM STYLE QUESTIONS
Required:
Calculate the expected cost per unit for the radio and identify any cost gap that might
exist.
(13 marks)
(25 marks)
Question 6 MAY CO
May Co is involved in the processing of sheet metal into products A, B and C using three processes,
pressing, stretching and rolling. Like many businesses Yam faces tough price competition in what is a
mature world market.
The factory has 50 production lines each of which contain the three processes: Raw material for the
sheet metal is first pressed then stretched and finally rolled. The processing capacity varies for each
process and the factory manager has provided the following data:
Pressing
Stretching
Rolling
Processing time per metre in hours
Product A
Product B
Product C
0.50
0.50
0.40
0.25
0.40
0.25
0.40
0.25
0.25
The factory operates for 18 hours each day for five days per week. It is closed for only two weeks of
the year for holidays when maintenance is carried out. On average one hour of labour is needed for each
of the 225,000 hours of factory time. Labour is paid N10 per hour.
The raw materials cost per metre is N 3.00 for product A, N 2.50 for product B and N 1.80 for product
C. Other factory costs (excluding labour and raw materials) are N 18,000,000 per year. Selling prices
per metre are N 70 for product A, N 60 for product B and N 27 for product C.
Yam carries very little inventory.
Required:
a) Identify the bottleneck process and briefly explain why this process is described as a
“bottleneck”.
(3 marks)
b) Calculate the throughput accounting ratio (TPAR) for each product assuming that the
bottleneck process is fully utilised.
(8 marks)
c) Assuming that the TPAR of product C is less than 1:
a) explain how May could improve the TPAR of product C;
(4 marks)
b) briefly discuss whether this supports the suggestion to cease the production of product C and
briefly outline three other factors that May should consider before a cessation decision is taken.
(5 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 7 WARGRIN
Wargrin designs, develops and sells many PC games. Games have a short lifecycle lasting around three
years only. Performance of the games is measured by reference to the profits made in each of the
expected three years of popularity. Wargrin accepts a net profit of 35% of turnover as reasonable. A
rate of contribution (sales price less variable cost) of 75% is also considered acceptable.
Wargrin has a large centralised development department that carries out all the design work before it
passes the completed game to the sales and distribution department to market and distribute the product.
Wargrin has developed a brand-new game called Stealth and this has the following budgeted
performance figures.
The selling price of Stealth will be a constant N30 per game. Analysis of the costs shows that at a
volume of 10,000 units a total cost of N130,000 is expected. However, at a volume of 14,000 units a
total cost of N150,000 is expected. If volumes exceed 15,000 units the fixed costs will increase by 50%.
Stealth’s budgeted volumes are as follows:
Sales volume
Year 1
Year 2
8,000 units 16,000 units
Year 3
4,000 units
In addition, marketing costs for Stealth will be N 60,000 in year one and N40,000 in year two. Design
and development costs are all incurred before the game is launched and has cost N 300,000 for Stealth.
These costs are written off to the income statement as incurred (i.e. before year 1 above).
Required:
(a)
Explain the principles behind lifecycle costing and briefly state why Wargrin in
particular should consider these lifecycle principles.
(4 marks)
(b)
Produce the budgeted results for the game “Stealth” and briefly assess the game’s
expected performance, taking into account the whole lifecycle of the game.
(9 marks)
(c)
Explain why incremental budgeting is a common method of budgeting and outline the
main problems with such an approach.
(6 marks)
(d)
Discuss the extent to which a meaningful standard cost can be set for games produced by
Wargrin. You should consider each of the cost classifications mentioned above. (6 marks)
(25 marks)
Question 8 SCOVET
Scovet Co has identified a market for a new product D for which the following estimated information is
available:
(1)
Sales revenue for the years 2020, 2021 and 2022 of N6m, N7m and N6m respectively. No
sales are expected after 2022. The selling price will be N10 per unit throughout the period.
(2)
Contribution to sales percentage of 60% for each year.
(3)
Product specific fixed costs in the years 2020, 2021 and 2022 of N2.5m, N2.2m and N1.8m
respectively.
(4)
Capital investment of $4.5m on 1 January 20X2 with nil residual value at 31 December 20X4.
Note: Ignore taxation and the time value of money.
EXAM STYLE QUESTIONS
Required:
(a)
Calculate the total profit of product D over its life.
(b)
Calculate the cost per unit of product D, which includes absorption of all product
specific costs over the life of the product.
(3 marks)
(4 marks)
(7 marks)
Question 9 ENVIRONMENTAL MANAGEMENT ACCOUNTING
a) Explain the meaning of environmental costs.
b) Explain why the management of environmental important to
organizations.
(8 marks)
costs is becoming increasingly
(4 marks)
c) Explain why traditional management accounting does not enable managers of a business to manage
their environmental costs.
(4 marks)
d) Explain the meaning of the term environmental management accounting, and illustrate how it can help
managers to manage environmental costs more effectively.
(4 marks)
(20 marks)
Question 10 SNIFF CO
Sniff Co manufactures and sells its standard perfume by blending a secret formula of aromatic oils with
diluted alcohol. The oils are produced by another company following a lengthy process and are very
expensive. The standard perfume is highly branded and successfully sold at a price of N 39.98 per 100
millilitres (ml).
Sniff Co is considering processing some of the perfume further by adding a hormone to appeal to
members of the opposite sex. The hormone to be added will be different for the male and female
perfumes. Adding hormones to perfumes is not universally accepted as a good idea as some people
have health concerns. On the other hand, market research carried out suggests that a premium could be
charged for perfume that can “promise” the attraction of a suitor. The market research has cost $3,000.
Data has been prepared for the costs and revenues expected for the following month (a test month)
assuming that a part of the company’s output will be further processed by adding the hormones.
The output selected for further processing is 1,000 litres, about a tenth of the company’s normal
monthly output. Of this, 99% is made up of diluted alcohol, which costs N20 per litre. The rest is a
blend of aromatic oils costing N18,000 per litre. The labour required to produce 1,000 litres of the basic
perfume before any further processing is 2,000 hours at a cost of N15 per hour.
Of the output selected for further processing, 200 litres (20%) will be for male customers and 2 litres of
hormone costing N 7,750 per litre will then be added. The remaining 800 litres (80%) will be for female
customers and 8 litres of hormone will be added, costing N12,000 per litre. In both cases the adding of
the hormone adds to the overall volume of the product as there is no resulting processing loss.
Sniff Co has sufficient existing machinery to carry out the test processing.
The new processes will be supervised by one of the more experienced supervisors currently employed
by Sniff Co. His current annual salary is N35,000 and it is expected that he will spend 10% of his time
working on the hormone adding process during the test month. This will be split evenly between the
male and female versions of the product.
EXAM STYLE QUESTIONS
Extra labour will be required to further process the perfume, with an extra 500 hours for the male
version and 700 extra hours for the female version of the hormone-added product. Labour is currently
fully employed, making the standard product. New labour with the required skills will not be available
at short notice.
Sniff Co allocates fixed overhead at the rate of N25 per labour hour to all products for the purposes of
reporting profits.
The sales prices that could be achieved as a one-off monthly promotion are:
–
–
Male version:
Female version:
N 75.00 per 100 ml;
N 59.50 per 100 ml.
Required:
Outline the financial and other factors that Sniff Co should consider when making a
(a)
further processing decision.
Note: no calculations are required.
(4 marks)
Evaluate whether Sniff Co should experiment with the hormone adding process using
(b)
the data provided. Provide a separate assessment and conclusion for the male and the
female versions of the product.
(15 marks)
Calculate the selling price per 100 ml for the female version of the product that would
(c)
ensure further processing would break even in the test month.
(2 marks)
Sniff Co is considering outsourcing the production of the standard perfume. Outline the
(d)
main factors it should consider before making such a decision.
(4 marks)
(25 marks)
Question 11 BITS AND PIECES
Bits and Pieces (B&P) operates a retail store selling spares and accessories for the car market. The
store has previously only opened for six days per week for the 50 working weeks in the year, but B&P
is now considering also opening on Sundays.
The sales of the business on Monday through to Saturday averages at N10,000 per day with average
gross profit of 70% earned.
B&P expects that the gross profit % earned on a Sunday will be 20 percentage points lower than the
average earned on the other days in the week. This is because they plan to offer substantial discounts
and promotions on a Sunday to attract customers. Given the price reduction, Sunday sales revenues are
expected to be 60% more than the average daily sales revenues for the other days. These Sunday sales
estimates are for new customers only, with no allowance being made for those customers that may
transfer from other days.
B&P buys all its goods from one supplier. This supplier gives a 5% discount on all purchases if annual
spend exceeds N1,000,000.
It has been agreed to pay time and a half to sales assistants that work on Sundays. The normal hourly
rate is N20 per hour. In total five sales assistants will be needed for the six hours that the store will be
open on a Sunday. They will also be able to take a half-day off (four hours) during the week. Staffing
levels will be allowed to reduce slightly during the week to avoid extra costs being incurred.
EXAM STYLE QUESTIONS
The staff will have to be supervised by a manager, currently employed by the company and paid an
annual salary of N80,000. If he works on a Sunday he will take the equivalent time off during the week
when the assistant manager is available to cover for him at no extra cost to B&P. He will also be paid a
bonus of 1% of the extra sales generated on the Sunday project.
The store will have to be lit at a cost of N30 per hour and heated at a cost of N45 per hour. The heating
will come on two hours before the store opens in the 25 “winter” weeks to make sure it is warm enough
for customers to come in at opening time. The store is not heated in the other weeks
The rent of the store amounts to N 420,000 per annum.
Required:
Calculate whether the Sunday opening incremental revenue exceeds the incremental
(a)
costs over a year (ignore inventory movements) and on this basis reach a conclusion as
to whether Sunday opening is financially justifiable.
(12 marks)
(b)
Discuss whether the manager’s pay deal (time off and bonus) is likely to motivate him.
(4 marks)
(c)
Briefly discuss whether offering substantial price discounts and promotions on Sunday
is a good suggestion.
(4 marks)
(20 marks)
Question 12 STAY CLEAN
Stay Clean manufactures and sells a small range of kitchen equipment. Specifically the product range
contains a dishwasher (DW), a washing machine (WM) and a tumble dryer (TD). The TD is of a rather
old design and has for some time generated negative contribution. It is widely expected that in one
year’s time the market for this design of TD will cease, as people switch to a washing machine that can
also dry clothes after the washing cycle has completed.
Stay Clean is trying to decide whether or not to cease the production of TD now or in 12 months’ time
when the new combined washing machine/drier will be ready. To help with this decision the following
information has been provided:
(1)
The normal selling prices, annual sales volumes and total variable costs for the three products
are as follows:
DW
WM
TD
Selling price per unit
N200
N350
N80
Material cost per unit
N70
N100
N50
Labour cost per unit
N50
N80
N40
Contribution per unit
N80
N170
N10
Annual sales
5,000 units 6,000 units 1,200 units
(2)
It is thought that some of the customers that buy a TD also buy a DW and a WM. It is
estimated that 5% of the sales of WM and DW will be lost if the TD ceases to be produced.
(3)
All the direct labour force currently working on the TD will be made redundant immediately
if TD is ceased now. This would cost N6,000 in redundancy payments. If Stay Clean waited
for 12 months the existing labour force would be retained and retrained at a cost of N3,500 to
enable them to produce the new washing/drying product. Recruitment and training costs of
labour in 12 months’ time would be N1,200 in the event that redundancy takes place now.
EXAM STYLE QUESTIONS
(4)
Stay Clean operates a just in time (JIT) policy and so all material cost would be saved on the
TD for 12 months if TD production ceased now. Equally, the material costs relating to the
lost sales on the WM and the DW would also be saved. However, the material supplier has a
volume-based discount scheme in place as follows:
Total annual expenditure (N)
0–600,000
600,001–800,000
800,001–900,000
900,001–960,000
960,001 and above
Discount
0%
1%
2%
3%
5%
Stay Clean uses this supplier for all its materials for all the products it manufactures. The
figures given above in the cost per unit table for material cost per unit are net of any discount
Stay Clean already qualifies for.
(5)
The space in the factory currently used for the TD will be sublet for 12 months on a shortterm lease contract if production of TD stops now. The income from that contract will be
N 12,000.
(6)
The supervisor (currently classed as an overhead) supervises the production of all three
products spending approximately 20% of his time on the TD production. He would continue
to be fully employed if the TD ceases to be produced now.
Required:
Calculate whether or not it is worthwhile ceasing to produce the TD now rather than
(a)
waiting 12 months (ignore any adjustment to allow for the time value of money).
(13 marks)
(b)
Explain two pricing strategies that could be used to improve the financial position of the
business in the next 12 months assuming that the TD continues to be made in that
period.
(4 marks)
(c)
Briefly describe three issues that Stay Clean should consider if it decides to outsource
the manufacture of one of its future products.
(3 marks)
(20 marks)
Question 13 BUTTERY RESTAURANT
The current average weekly trading results of the Buttery Restaurant are shown below.
(a)
N
N
Revenue
2,800
Operating costs:
Materials
1,540
Power
280
Staff
340
Building occupancy costs
460
——–
(2,620)
——–
Profit
180
——–
EXAM STYLE QUESTIONS
The average selling price of each meal is N4. Materials and power may be regarded as a variable cost
varying with the number of meals provided. Staff costs are semi-variable with a fixed cost element of
N200 per week. The building occupancy costs are all fixed.
Required:
Calculate the number of meals that must be sold in order to earn a profit of N300 per week.
(4 marks)
(b)
The owners of the restaurant are considering expanding their business and using underutilised space by diversifying into:
either
or
(1)
(2)
take-away food;
high quality meals.
The estimated sales and costs of each proposal are shown below:
Sales volume per week
Average selling price per meal
Variable costs per meal
Incremental fixed costs per week
Take-away
Quality meals
720 meals
200 meals
N
N
1.60
6.00
0.85
4.66
610.00
282.00
The sales estimate for both of the above proposals is rather uncertain and it is recognised that actual sales
volume could be up to 20% either higher or lower than that estimated.
If either of the above proposals were implemented it has been estimated that the existing restaurant’s
operations would be affected as follows:
(1)
As a result of bulk purchasing material costs incurred would be reduced by 10 cents per meal.
This saving would apply to all meals produced in the existing restaurant.
(2)
Because more people would be aware of the existence of the restaurant it is estimated that
Revenue would increase. If the “take-away food” section were opened, then for every ten takeaway meals sold the existing restaurant’s sales would increase by one meal; alternatively, if the
“high quality meals” section were open, then for every five such meals sold the existing
restaurant’s sales would increase by one meal.
A specific effect of implementing the “take-away food” proposal would be a change in the
terms of employment of the staff in the existing restaurant, the result of which would be that the
staff wage of N340 per week would have to be regarded as a fixed cost.
Required:
Calculate, for each of the proposed methods of diversification:
the additional profit that would be earned by the owners of the restaurant if the estimated
(i)
sales were achieved
(8 marks)
(ii)
the sales volume at which the owners of the restaurant would earn no additional profit
from the proposed diversification.
(3 marks)
(15 marks)
EXAM STYLE QUESTIONS
Question 14 A TO C CO
A to C Co manufactures three products, A, B, and C. The selling price and direct cost per unit of each
of these products are as follows:
Product
A
B
C
N
N
N
Selling price
10
20
30
Materials cost
6.2
7.6
20.4
Direct labour
2.0
8.0
3.0
The company uses flexible budgets based on budgeted production and sales of 3,000 units and 5,000
units per month. An extract from these budgets relating to overhead costs is as follows:
Product
Total overhead costs
3,000 units
5,000 units
A
N 000
B
N 000
6
8
C
N 000
13
19
11
17
These include both fixed and variable overhead costs. Fixed costs represent common costs that are
apportioned to each of the three products, but which are not product specific.
Required:
(a)
Calculate the contribution per unit of each of the four products.
(3 marks)
(b)
Calculate the total fixed costs for the month.
(3 marks)
Budgeted production and estimated maximum demand for each product for the following month are as
follows:
Product
Budgeted sales
Maximum demand
A
Units
4,000
4,100
B
Units
2,000
4,600
C
Units
4,000
4,100
Required:
(c)
(d)
Calculate monthly break-even revenue assuming that sales of the three products are made
in the budgeted mix.
(4 marks)
Draw a profit volume chart, showing two lines:
(i)
On the assumption that sales of all products are made using the budgeted mix of products.
(3 marks)
(ii)
On the assumption that sales of the product with the highest contribution to sales ratio are
made first, followed by the product with the second highest, and so on, with sales of each
product being made up until maximum demand.
(7 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 15 HIGGINS CO
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type
of good quality wood (ash), which can be difficult to source in sufficient quantity. The supply of ash is
restricted to 5,400 kg per period. Ash costs N 40 per kg.
The cues are made by skilled craftsmen (highly skilled labour) who are well known for their
workmanship. The skilled craftsmen take years to train and are difficult to recruit. HC’s craftsmen are
generally only able to work for 12,000 hours in a period. The craftsmen are paid $18 per hour.
HC sells the cues to a large market. Demand for the cues is strong, and in any period, up to 15,000 pool
cues and 12,000 snooker cues could be sold. The selling price for pool cues is N 41 and the selling price
for snooker cues is N 69.
Manufacturing details for the two products are as follows:
Craftsmen time per cue
Ash per cue
Other variable costs per cue
Pool cues
0.5 hours
270 g
N 1.20
Snooker cues
0.75 hours
270 g
N 4.70
HC does not keep inventory.
Required:
(a)
Calculate the contribution earned from each cue.
(b)
Determine the optimal production plan for a typical period assuming that HC is seeking
to maximise the contribution earned. (You should use a linear programming graph to
identify the optimal solution and accurately solve the relevant equations.)
(12 marks)
(c)
Some of the craftsmen have offered to work overtime, provided that they are paid double time
for the extra hours over the contracted 12,000 hours. HC has estimated that up to 1,200 hours
per period could be gained in this way.
Required:
Explain the meaning of a shadow price (dual price) and calculate the shadow price of both
the labour (craftsmen) and the materials (ash).
(5 marks)
(i)
(ii)
(2 marks)
Advise HC whether to accept the craftsmen’s initial offer of working overtime, discussing
the rate of pay requested, the quantity of hours and one other factor that HC should
consider.
(6 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 16 ALBION CO
The managers of Albion Co are reviewing the operations of the company with a view to making
operational decisions for the next month. Details of some of the products manufactured by the company
are given below.
Product
Selling price (N /unit)
Material R2 (kg/unit)
Material R3 (kg/unit)
Direct labour (hours/unit)
Variable production overheads (N/unit)
Fixed production overheads (N/unit)
Expected demand for next month (units)
AR2
21.00
2.0
2.0
0.6
1.10
1.50
950
GL3
28.50
3.0
2.2
1.2
1.30
1.60
1,000
HT4
27.30
3.0
1.6
1.5
1.10
1.70
900
XY5
3.0
1.7
1.40
1.40
Products AR2, GL3 and HT4 are sold to customers of Albion, while Product XY5 is a component that is
used in the manufacture of other products. Albion manufactures a wide range of products in addition to
those detailed above.
Material R2, which is not used in any other of Albion’s products, is expected to be in short supply in the
next month because of industrial action at a major producer of the material. Albion has just received a
delivery of 5,500 kg of Material R2 and this is expected to be the amount held in Inventory at the start of
the next month. The company does not expect to be able to obtain further supplies of Material R2 unless
it pays a premium price. The normal market price is N 2.50 per kg.
Material R3 is available at a price of N2.00 per kg and Albion does not expect any problems in securing
supplies of this material. Direct labour is paid at a rate of N4.00 per hour.
Folam Co has recently approached Albion with an offer to supply a substitute for Product XY5 at a price
of N10.20 per unit. Albion would need to pay an annual fee of N50,000 for the right to use this patented
substitute.
Required:
(a)
Determine the optimum production schedule for Products AR2, GL3 and HT4 for the
next month, on the assumption that additional supplies of Material R2 are not purchased.
(8 marks)
(b)
If Albion Co decides to purchase further supplies of Material R2 to meet demand for
Products AR2, GL3 and HT4, calculate the maximum price per kg that the company
should pay.
(3 marks)
(c)
Discuss whether Albion Co should manufacture Product XY5 or buy the substitute
offered by Folam Co. Your answer must be supported by appropriate calculations.
(7 marks)
(d)
Discuss the limitations of marginal costing (variable costing) as a basis for making shortterm decisions.
(7 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 17 KOBRIN ENGINEERS CO
Kobrin Engineering Co is experiencing trouble with its suppliers. The firm produces a variety of valves
requiring a complex bought-in component and specially imported high-grade steel. The standard cost
cards for the types of valve produced are as follows:
Valve type
Steel
Bought-in component
Direct labour
Variable production costs
Fixed production costs
Selling and administration costs
Profit
TW
N
250
50
60
40
180
145
35_
VE
N
500
50
60
50
240
225
55
EC
N
190
50
50
40
150
120
30
SE
N
390
50
100
50
270
215
55
Selling price
760_
1,180
630
1,130
All the selling and administration costs are fixed and the same single component is used for each of the
four products. Direct labour is paid N4 per standard hour and each member of the workforce is capable
of producing any of the valves.
Kobrin’s major customer has ordered 30 TW, 30 EC, 20 VE and 20 SE valves for the coming month.
Despite the firm’s difficulties, it is felt that these must be supplied to ensure future business. It is
thought that this order represents some 10% of total demand for each valve.
Required:
Establish the best production plan for Kobrin if, in the coming month:
(a)
Supplies of steel are limited to N 250,000;
(b)
Only 400 bought-in components are likely to be available;
(c)
Labour disputes will restrict productive hours to 4,250;
(d)
All four products could be sub-contracted at a cost per unit of N 475, N 705, N 380 and N 640
for TW, VE, EC and SE respectively; labour is still restricted to 4,250 hours but the major
customer insists that the special order is completed by Kobrin and not sub-contracted.
Note: Each of the restrictions on production is to be treated independently.
(20 marks)
EXAM STYLE QUESTIONS
Question 18 BIL MOTOR COMPONENTS CO
(a)
In an attempt to win over key customers in the motor industry and to increase its market share,
BIL Motor Components Co have decided to charge a price lower than their normal price for
component TD463 when selling to the key customers who are being targeted. Details of
component TD463’s standard costs are as follows:
Batch size 200 units
Materials (per unit)
Labour (per unit)
Variable overheads (per unit)
Fixed overheads (per unit)
Setting-up costs per
batch of 200 units
Machine
Group 1
Machine
Group 7
Machine
Group 29
Assembly
26.00
2.00
0.65
3.00_
17.00
1.60
0.72
2.50
–
0.75
0.80
1.50
3.00
1.20
0.36
0.84
31.65_
21.82
3.05
5.40
N10
N6
–
N4
Required:
Compute the lowest selling price at which one batch of 200 units could be offered, and critically
evaluate the adoption of such a pricing policy.
(8 marks)
(b)
The company is also considering the launch of a new product, component TDX489, and have
provided you with the following information:
Product TDX489
Standard cost per box
N
6.20
1.60_
Variable cost
Fixed cost
7.80_
Market research – forecast of demand
Selling price (N)
Demand (boxes)
13
5,000
12
6,000
11
7,200
10
11,200
9
13,400
The company only has enough production capacity to make 7,000 boxes. However, it would be possible
to purchase product TDX489 from a sub-contractor at N7.75 per box for orders up to 5,000 boxes, and
N7 per box if the orders exceed 5,000 boxes.
Required:
Prepare and present a computation that illustrates which price should be selected in order to
maximise profits.
(8 marks)
(c)
Where production capacity is the limiting factor explain briefly the ways in which
management can increase it without having to acquire more plant and machinery.
(4 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 19 JASON GRIMES
Jason Grimes’ results for the past year are as follows:
N 000
Sales (1,000,000 units)
Less
Cost of goods sold
Labour
Materials
Gross profit
Less
Variable selling expenses (50¢ per unit)
Fixed overheads
550
2,000_
N 000
3,000
(2,550_)
450
500
250
(750)
(300)
––––
For the coming year Jason can hire a machine for N575,000 which will cause his material usage per
unit to halve. Whether the machine is hired or not, the labour cost will rise to 80K per unit and variable
selling expenses fall to 20K per unit.
Jason’s demand curve is P = 5 –
0.03
Q, where P is the price per unit and Q is annual sales.
15,000
This gives marginal revenue of 5 –
0.06
Q.
15,000
Required:
Advise Jason on:
(a)
(b)
whether or not to hire the machine;
the price to be charged to maximise profit.
(15 marks)
Question 20 KADOK CO
Kadok Co manufactures a number of products, with cameras being produced in department C. The
company draws up budgets for each department based on the fullest practical capacity. For the year
commencing 1 January 2019 the following budget has been formulated for department C:
Direct costs:
Materials
Labour
Production overheads
Administrative and marketing overheads
Full costs
Profit
Revenue *
* From budgeted sales of 20,000 units.
N 000
60
40
——
100
100
——
200
50
——
250
50
——
300
——
EXAM STYLE QUESTIONS
Production overheads are absorbed on the basis of 100% of direct costs. However, half are fixed, while
the remainder relate to the machining of the materials. The administrative and marketing overheads are
based on 25% of factory costs and do not vary within wide ranges of activity. For each department a
profit margin of 20% is applied to the “full costs”, as this is felt to give a fair return on assets employed
as well as to provide a reasonable reward for entrepreneurial effort. This also results in a price that
appears to be fair to consumers.
Halfway through the budget period it became obvious to the management of Kadok that there was
going to be a shortfall in sales that could be expected to be 25% below the forecast. At about the same
time that this shortfall in sales became evident, a chain of photographic shops showed an interest in
purchasing 5,000 units of a special camera that would be stripped down to bare essentials and sold
under the chain’s brand name Noxid. If Kadok were to produce such a model there would obviously be
a saving on the usual material and labour unit costs. The management accountant of Kadok estimated
that materials costing N 12,000 and labour of N 8,000 would be required to produce the 5,000 cameras.
As the production could take place within the firm’s existing capacity, fixed costs would not be
affected.
Required:
(a)
Give computations showing the price that should be quoted for the order based on the
following:
(i)
(ii)
(iii)
(b)
full cost plus pricing, on the current basis;
a price that would enable the original budget profit to be attained;
overheads being absorbed on a unit basis, with profit applied on the current
basis.
(8 marks)
Give your advice to the management of Kadok Co on a pricing policy for this quotation.
Discuss any factors that you feel should be brought to the attention of management
when it considers the pricing strategy for this special order.
(7 marks)
(15 marks)
Question 21 AUTODES CO
Autodes Co designs, manufactures and sells a range of components for the motor car industry, selling
exclusively to car manufacturers. The design team has recently developed and patented a new
component for incorporation into any car. The component will greatly improve fuel consumption and
reduce emissions of greenhouse gases. Initial trials have been successful and the company is now
planning to launch the product. The design team believes that they are at least 24 months ahead of any
of their competitors who are currently developing similar products. The product has been developed
under the working title “Autolong”.
You are a consultant to the company and have been tasked with developing a pricing policy for the
Autolong. You have gathered the following data for each unit:
Direct Materials:
Direct Labour
Code
WZ954
RT429
Other
Quantity
3 gms
5 gms
1.5 hours at N 21 per hour
Overheads are absorbed on a direct labour hour basis, at N 29 per hour.
Price
N 4.74 per gm
N 6.12 per gm
N 5.01 per unit
EXAM STYLE QUESTIONS
Costs of developing the Autolong were N3,675,000. Autodes has a policy of recovering development
costs in the first three years of a product’s life cycle.
Supplies of material WZ954 are limited to 180,000 gms per annum. Autodes currently uses all of its
available supplies in another product, which generates a contribution of N15 per unit. Each unit of this
product requires 4 gms of WZ954. (Development costs of this product have been fully recovered.)
Product prices are calculated to obtain a 25% profit margin on sales.
A market report indicates that:
–
–
–
the market is reasonably price sensitive;
provided the price is not above N225, demand is expected to exceed production capacity;
introduction of the Autolong will not affect the sales volumes of other products.
The Managing Director has also asked you to comment on the suggestion of a non-executive director
that the Autolong should be priced on a “more competitive basis, such as market skimming or market
penetration”.
Required:
Calculate the price of the Autolong based on the current pricing policy.
(8 marks)
(a)
(b)
In a report to the Managing Director, comment on the non-executive director’s
suggestion, and recommend an initial price for the Autolong.
(12 marks)
(20 marks)
Question 22 ESSENTIAL ASPECT
An essential aspect of financial and business planning is concerned with estimating costs and revenues
and deciding the optimum output and price levels. A company produces a single product and operates in
a market where it has to lower the sale price of all its units if it wishes to sell more. The company’s
costing and marketing departments currently use the following cost and revenue model (all output is sold
in the current period):
Current Model:
Total Costs = 5,000 + 0.6x
Total Revenue = 20x – 0.01x2
Where x = the number of units sold
The company has recently updated its cost and revenue model to:
Total costs = 4,750 + 0.8x
Total revenue = 19x – 0.009x2
The acceptability of the current model and the proposed changes as a basis for profit planning and for
monitoring performance is to be reviewed.
EXAM STYLE QUESTIONS
Required:
(a)
Explain the structure of the current and the revised model.
(b)
It has been estimated that the revised model will result in an optimal output of 1,011 units
being produced and sold.
(i)
Suggest two alternative ways of determining this optimal level of output.
(ii)
Discuss the extent to which adherence to this output target is a satisfactory indicator of
managerial performance.
(3 marks)
(c)
Name and comment on cost and revenue factors which should be considered in order to
improve the validity of the model as a profit forecasting model.
(10 marks)
(4 marks)
(3 marks)
(20 marks)
Question 23 STOW HEALTH CENTRE
Stow Health Centre specialises in the provision of sports/exercise and medical/dietary advice to clients.
The service is provided on a residential basis and clients stay for whatever number of days suits their
needs. Budgeted estimates for the year ending 30 June 2020 are as follows:
(i)
The maximum capacity of the centre is 50 clients per day for 350 days in the year.
(ii)
Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with the client
fee level per day and is estimated at different percentages of maximum capacity as follows:
Occupancy as
Client fee
percentage of
per day
Occupancy level
maximum capacity
N 180
High
90%
N 200
Medium
75%
N 220
Low
60%
(iii)
Variable costs are also estimated at one of three levels per client day. The high, most likely
and low levels per client day are N95, N85 and N70 respectively. The range of cost levels
reflects only the possible effect of the purchase prices of goods and services.
Required:
(a)
Prepare a summary which shows the budgeted contribution earned by Stow Health
Centre for the year ended 30 June 2020 for each of nine possible outcomes. (6 marks)
(b)
State the client fee strategy for the year to 30 June 2020 that will result from the use of
each of the following decision rules:
(i)
(ii)
(iii)
maximax;
maximin;
minimax regret.
Your answer should explain the basis of operation of each rule. Use the information from your
answer to (a) as relevant and show any additional working calculations as necessary.
(9 marks)
EXAM STYLE QUESTIONS
(c)
The probabilities of variable cost levels occurring at the high, most likely and low levels
provided in the question are estimated as 0·1, 0·6 and 0·3 respectively.
Using the information available, determine the client fee strategy that will be chosen where
maximisation of expected value of contribution is used as the decision basis.
(5 marks)
(20 marks)
Question 24 SHIFTERS HAULAGE
Shifters Haulage (SH) is considering changing some of the vans it uses to transport crates for customers.
The new vans come in three sizes; small, medium and large. SH is unsure about which type to buy. The
capacity is 100 crates for the small van, 150 for the medium van and 200 for the large van.
Demand for crates varies and can be either 120 or 190 crates per period, with the probability of the higher
demand figure being 0.6.
The sale price per crate is N10 and the variable cost N4 per crate for all van sizes subject to the fact that
if the capacity of the van is greater than the demand for crates in a period then the variable cost will be
lower by 10% to allow for the fact that the vans will be partly empty when transporting crates.
SH is concerned that if the demand for crates exceeds the capacity of the vans then customers will have to
be turned away. SH estimates that in this case goodwill of N100 would be charged against profits per
period to allow for lost future sales regardless of the number of customers that are turned away.
Depreciation charged would be N 200 per period for the small, N 300 for the medium and N 400 for the
large van.
SH has in the past been very aggressive in its decision-making, pressing ahead with rapid growth
strategies. However, its managers have recently grown more cautious as the business has become more
competitive.
Required:
(a)
(b)
Explain the principles behind the maximax, maximin and expected value criteria that are
sometimes used to make decisions in uncertain situations.
(4 marks)
Prepare a profits table showing the SIX possible profit figures per period.
(9 marks)
(c ) Using your profit table from (b) above discuss which type of van SH should buy taking into
consideration the possible risk attitudes of the managers.
(6 marks)
(c)
Describe THREE methods other than those mentioned in (a) above, which businesses can
use to analyse and assess the risk that exists in its decision-making.
(6 marks)
(25 marks)
Question 25 DECISION TREE
The owner of a tourist hotel is facing a difficult decision. It is low season and, because the weather is
unpredictable at this time of the year, it is difficult to predict the demand for the hotel’s facilities. If the
weather is poor then there will be 200 room nights demanded for the hotel’s facilities. There is a 70%
likelihood of the weather being poor. If the weather is good then there will be 600 room nights
demanded for the hotel’s facilities, but there is only a 30% chance that the weather will be good.
EXAM STYLE QUESTIONS
The owner of the hotel is considering advertising some reduced prices locally or nationally in order to
improve the demand during this period.
If the reduced prices are advertised locally and if the weather is poor, then there is a 60% chance that the
lower prices would affect demand and would cause there to be 300 room nights demanded; but if the
weather is good, then there is a 40% chance that the lower prices would affect demand and would cause
there to be 800 room nights demanded.
If these lower prices were advertised nationally there is a 50% chance that these demand levels would
increase to 400 room nights and 900 room nights respectively.
Expected earnings (before deducting the costs of any local or national advertising) at different levels of
demand are as follows:
Room nights demanded
Earnings
N
200
(35,000)
300
(15,000)
400
(5,000)
500
20,000
600
30,000
700
45,000
800
65,000
900
90,000
The costs of advertising locally and nationally are N10,000 and N25,000 respectively.
Required:
(a)
(b)
Prepare a decision tree to illustrate the above problem and use this to recommend, with
reasons, the best course of action for the owner of the hotel.
(7 marks)
Briefly discuss the limitations of using a decision tree to solve this problem.
(3 marks)
(10 marks)
Question 26 NORTHLAND
Northland’s major towns and cities are maintained by local government organisations (LGO), which are
funded by central government. The LGOs submit a budget each year that forms the basis of the funds
received. You are provided with the following information as part of the 2023 budget preparation:
Overheads
Overhead costs are budgeted on an incremental basis, taking the previous year’s actual expenditure and
adding a set % to allow for inflation. Adjustments are also made for known changes. The details for
these are:
Overhead cost category
Property cost
Central wages
Stationery
2022 cost (N)
120,000
150,000
25,000
Known changes
None
Note 1
Note 2
Inflation adjustment
between 2022 and 2023
+5%
+3%
0%
Note 1: One new staff member will be added to the overhead team; this will cost N 12,000 in 2023.
Note 2: A move towards the paperless office is expected to reduce stationery costs by 40% on the
2022 spend.
EXAM STYLE QUESTIONS
Road repairs
In 2023 it is expected that 2,000 metres of road will need repairing but a contingency of an extra 10%
has been agreed.
In 2022 the average cost of a road repair was N15,000 per metre repaired, but this excluded any cost
effects of extreme weather conditions. The following probability estimates have been made in respect
of 2023:
Weather type predicted
Good
Poor
Bad
Probability
0.7
0.1
0.2
Increase in repair cost
0
+10%
+25%
Inflation on road repairing costs is expected to be 5% between 2022 and 2023.
New roads
New roads are budgeted on a zero base basis and will have to compete for funds along with other
capital projects such as hospitals and schools.
Required:
(a)
Calculate the overheads budget for 2023.
(3 marks)
(b)
Calculate the budgets for road repairs for 2023.
(6 marks)
(c)
Explain the problems associated with using expected values in budgeting by an LGO
and explain why a contingency for road repairs might be needed.
(8 marks)
(d)
Explain the process involved for zero-based budgeting.
(3 marks)
(20 marks)
Question 27 BUDGET BEHAVIOUR
For many organisations in both the private and public sectors the annual budget is the basis of much
internal management information. When preparing and using budgets, however, management and the
accountant must be aware of their behavioral implications.
Required:
(a)
Briefly discuss four purposes of budgets.
(b)
Explain the behavioral factors that should be taken into account and the difficulties of
applying them in the process of budgeting and budgetary control.
(12 marks)
(8 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 28 ZBB
(a)
Explain why zero-based budgeting might be a useful tool to employ to ensure that
budgetary requirements are kept up to date.
(4 marks)
(b)
Describe the steps necessary to implement a zero-based budgeting system in respect of:
–
–
–
questioning why expenditure needs to be incurred;
deciding which activities should be provided with a budget; and
questions to be asked when budgeted activities are to be ranked to allocate
scarce resources.
(8 marks)
(c)
Critically assess the use of zero-based budgeting as a tool that might be used to motivate
employees.
(6 marks)
(d)
Explain the advantages of encouraging employee participation in budget setting.
(7 marks)
(25 marks)
Question 29 BUDGETING & COSTING
Required:
(a)
Discuss how costing information and principles may be applied in a not-for-profit
organisation in the following areas:
(i)
(ii)
(iii)
(b)
The selection of cost units;
The use of performance measures to measure output and quality;
The comparison of planned and actual performance.
(10 marks)
Discuss the key features of zero-based budgeting and explain how it may be applied in a
not-for-profit organisation.
(8 marks)
(c)
Briefly discuss how activity-based budgeting might be introduced into a manufacturing
organisation and the advantages that might arise from the use of activity-based
budgeting in such an organisation.
(7 marks)
(25 marks)
Question 30 THE WESTERN
The Western is a local government organisation responsible for waste collection from domestic
households. The new management accountant of The Western has decided to introduce some new
forecasting techniques to improve the accuracy of the budgeting. The next budget to be produced is for
the year ended 31 December 2020.
Waste is collected by the tonne (T). The number of tonnes collected each year has been rising and by
using time series analysis the new management accountant has produced the following relationship
between the tonnes collected (T) and the time period in question Q (where Q is a quarter number. So Q
= 1 represents quarter 1 in 2019 and Q = 2 represents quarter 2 in 2019 and so on)
T = 2,000 + 25Q
EXAM STYLE QUESTIONS
Each quarter is subject to some seasonal variation with more waste being collected in the middle
quarters of each year. The adjustments required to the underlying trend prediction are:
Quarter
Tonnes
1
–200
2
+250
3
+150
4
–100
Once T is predicted the new management accountant hopes to use the values to predict the variable
operating costs and fixed operating costs that The Western will be subjected to in 2020. To this end he
has provided the following operating cost data for 2019:
Volume of waste
Tonnes
2,100
2,500
2,400
2,300
Total operating cost in 2019
(fixed + variable)
N 000s
950
1,010
1,010
990
Inflation on the operating cost is expected to be 5% between 2019 and 2020.
The regression formula is shown on the formula sheet.
Required:
(a)
Calculate the tonnes of waste to be expected in the calendar year 2020.
(b)
Calculate the variable operating cost and fixed operating cost to be expected in 2020
using regression analysis on the 2019 data and allowing for inflation as appropriate.
(10 marks)
Many local government organisations operate incremental budgeting as one of their main
budgeting techniques. They take a previous period’s actual spend, adjust for any known
changes to operations and then add a % for expected inflation in order to set the next period’s
budget.
(c)
(4 marks)
Required:
Describe two advantages and two disadvantages of a local government organisation funded by
taxpayer’s money using incremental budgeting as its main budgeting technique.
(6 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 31 STORRS CO
It is mid-June and the new managing director of Storrs Co is reviewing sales forecasts for Quarter 3 of
201Z, which begins on 1 July, and for Quarter 4. The company manufactures garden furniture and
experiences seasonal variations in sales, which has made forecasting difficult in the past. Sales for the last
two calendar years were as follows:
Year
201X
201Y
Quarter 1
N 2,700,000
N 3,100,000
Quarter 2
N 3,500,000
N 3,900,000
Quarter 3
N 3,400,000
N 3,600,000
Quarter 4
N 3,000,000
N 3,400,000
Sales in Quarter 1 of 201Z were N3,600,000. There is two weeks to go until the end of Quarter 2 and the
managing director of Stores is confident that it will achieve sales of N4,400,000 in this quarter.
The existing sales forecasts for the two remaining quarters of the year 201Z were made by the sales
director (who has been with the company for several years) during last year’s budget-setting process.
These forecasts are N3,800,000 for Quarter 3 and N3,600,000 for Quarter 4. Budgets in Storrs have
traditionally been prepared and agreed by the directors of the company before being implemented by
junior managers.
As a basis for revising the sales forecasts for the two remaining quarters of 201Z, the management
accountant of Storrs has begun to apply time series analysis in order to identify the seasonal variations in
sales. He has so far calculated the following centred moving averages, using a base period of four
quarters:
Year
201X
201Y
Quarter 1
N 3,375,000
Quarter 2
N 3,450,000
Quarter 3
N 3,200,000
N 3,562,500
Quarter 4
N 3,300,000
N 3,687,500
Required:
(a)
(b)
Using the sales information and centred moving averages provided, and assuming an
additive model, forecast the sales of Storrs Co for Quarter 3 and Quarter 4 of 201Z, and
comment on the sales forecasts made by the sales director.
Note: you are NOT required to use regression analysis.
(8 marks)
Discuss the limitations of the sales forecasting method used in part (a).
(5 marks)
(c)
Discuss the relative merits of top-down and bottom-up approaches to budget setting.
(12 marks)
(25 marks)
Question 32 SOUTH
South has reported the following costs for the past four months:
Month
1
2
3
4
Activity level (units)
300
400
150
260
Total cost
N 3,800
N 4,000
N 3,000
N 3,500
EXAM STYLE QUESTIONS
Required:
(a)
Using regression analysis calculate the total cost equation.
(b)
Calculate the total cost at the following activity levels:
(6 marks)
200 units;
(i)
(ii)
500 units,
and comment on the usefulness of your equation with regard to these estimates. (4 marks)
(10 marks)
Question 33 HENRY CO
Henry Co (HC) provides skilled labour to the building trade. They have recently been asked by a builder
to bid for a kitchen-fitting contract for a new development of 600 identical apartments. HC has not
worked for this builder before. Cost information for the new contract is as follows:
Labour for the contract is available. HC expects that the first kitchen will take 24 man-hours to fit but
thereafter the time taken will be subject to a 95% learning rate. After 200 kitchens are fitted the learning
rate will stop and the time taken for the 200th kitchen will be the time taken for all the remaining
kitchens. Labour costs N 15 per hour.
Overheads are absorbed on a labour hour basis. HC has collected overhead information for the last four
months and this is shown below:
Hours worked
Overhead cost
N
Month 1
9,300
115,000
Month 2
9,200
113,600
Month 3
9,400
116,000
Month 4
9,600
116,800
HC normally works around 120,000 labour hours in a year.
HC uses the high low method to analyse overheads.
LogLR
= –0.074
The learning curve equation is y = axb, where
Log2
Required:
(a)
Describe FIVE factors, other than the cost of labour and overheads mentioned above,
that HC should take into consideration in calculating its bid.
(10 marks)
(b)
Calculate the total cost including all overheads for HC that it can use as a basis of the
bid for the new apartment contract.
(13 marks)
(c)
If the second kitchen alone is expected to take 21.6 man-hours to fit demonstrate how
the learning rate of 95% has been calculated.
(2 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 34 BIG CHEESE CHAIRS
Big Cheese Chairs (BCC) manufactures and sells executive leather chairs. They are considering a new
design of massaging chair to launch into the competitive market in which they operate.
They have carried out an investigation in the market and, using a target costing system, have targeted a
competitive selling price of N120 for the chair. BCC wants a margin on selling price of 20% (ignoring
any overheads).
The frame and massage mechanism will be bought in for N51 per chair and BCC will upholster it in
leather and assemble it ready for despatch.
Leather costs N10 per metre and two metres are needed for a complete chair although 20% of all leather
is wasted in the upholstery process.
The upholstery and assembly process will be subject to a learning effect as the workers get used to the
new design. BCC estimates that the first chair will take two hours to prepare but this will be subject to
a learning rate (LR) of 95%. 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 cost of labour is N15 per hour.
The learning formula is shown on the formula sheet and at the 95% learning rate the value of b is –
0.074000581.
Required:
(a)
Calculate the average cost for the first 128 chairs made and identify any cost gap that
may be present at that stage.
(8 marks)
(b)
Assuming that a cost gap for the chair exists suggest four ways in which it could be
closed.
(6 marks)
(c)
The production manager denies any claims that a cost gap exists and has stated that the cost of
the 128th chair will be low enough to yield the required margin.
Required:
Calculate the cost of the 128th chair made and state whether the target cost is being
achieved on the 128th chair.
(6 marks)
(20 marks)
Question 35 STANDARD COSTING
Outline the uses of standard costing and discuss the reasons why standards have to be reviewed.
(13 marks)
EXAM STYLE QUESTIONS
Question 36 INFORMATION SOURCE
A major information source for many businesses is a system of standard costing and variance analysis.
Required:
(a)
Describe briefly four purposes of a system of standard costing.
(b)
Explain three different levels of performance which may be incorporated into a system
of standard costing and comment on how these may relate to the purposes set out in (a)
above.
(6 marks)
(c)
Comment on whether standard costing applies in both manufacturing and service
businesses and how it may be affected by modern initiatives of continuous performance
improvement and cost reduction.
(4 marks)
(d)
A standard costing system enables variances for direct costs, variable and fixed overheads to
be extracted.
(4 marks)
Required:
Identify and briefly discuss some of the complexities and practical problems in
calculation, which may limit the usefulness of those variances.
(6 marks)
(20 marks)
Question 37 WOODEEZER CO
Woodeezer Co makes quality wooden benches for both indoor and outdoor use. Results have been
disappointing in recent years and a new managing director, Peter Beech, was appointed to raise
production volumes. After an initial assessment Peter Beech considered that budgets had been set at
levels that made it easy for employees to achieve. He argued that employees would be better motivated
by setting budgets which challenged them more in terms of higher expected output.
Other than changing the overall budgeted output, Mr Beech has not yet altered any part of the standard
cost card. Thus, the budgeted output and sales for the most recent month was 4,000 benches and the
standard cost card below was calculated on this basis:
N
Wood
25 kg at N 3.20 per kg
80.00
Labour
4 hours at N 8 per hour
32.00
Variable overheads
4 hours at N 4 per hour
16.00
Fixed overhead
4 hours at N 16 per hour
64.00
––––––
192.00
Selling price
220.00
––––––
Standard profit
28.00
––––––
Overheads are absorbed on the basis of labour hours and the company uses an absorption costing
system. There were no inventories at the beginning of the most recent month. Inventories are valued at
standard cost.
EXAM STYLE QUESTIONS
Actual results for the month were as follows:
Wood
Labour
Variable overhead
Fixed overhead
80,000 kg at N 3.50
16,000 hours at N 7
Total production cost (3,600 benches)
Closing Inventory (400 benches at $192)
Cost of sales
Sales (3,200 benches)
Actual profit
N
280,000
112,000
60,000
196,000
––––––––
648,000
76,800
––––––––
571,200
720,000
––––––––
148,800
––––––––
The average monthly production and sales for some years prior to the most recent month had been 3,400
units and budgets had previously been set at this level. Very few operating variances had historically
been generated by the standard costs used.
Mr Beech has made some significant changes to the operations of the company. However, the other
directors are now concerned that Mr Beech has been too ambitious in raising production targets. Mr
Beech had also changed suppliers of raw materials to improve quality, increased selling prices, begun to
introduce less skilled labour, and significantly reduced fixed overheads.
The finance director suggested that an absorption costing system is misleading and that a marginal
costing system should be considered at some stage in the future to guide decision-making.
Required:
Prepare an operating statement for the most recent month. This should show all operating
(a)
variances and should reconcile budgeted and actual profit for the month for Woodeezer
Co.
(14 marks)
(b)
In so far as the information permits, examine the impact of the operational changes made
by Mr Beech on the profitability of the company. In your answer, consider each of the
following:
(i)
(ii)
(c)
Motivation and budget setting; and
Possible causes of variances.
(6 marks)
Re-assess the impact of your comments in part (b), using a marginal costing approach to
evaluating the impact of the operational changes made by Mr Beech.
Show any relevant additional calculations to support your arguments.
(5 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 38 MERMUS CO
Mermus Co is comparing budget and actual data for the last three months.
Budget
Actual
N
Sales
Cost of sales
Raw materials
133,000
Direct labour
152,000
Variable production overheads
100,700
Fixed production overheads
125,400
––––––––
N
N
950,000
511,100
––––––––
438,900
––––––––
N
922,500
130,500
153,000
96,300
115,300
––––––––
495,100
––––––––
427,400
––––––––
The budget was prepared on the basis of 95,000 units produced and sold, but actual production and
sales for the three-month period were 90,000 units.
Mermus uses standard costing and absorbs fixed production overheads on a machine hour basis. A total
of 28,500 standard machine hours were budgeted. A total of 27,200 machine hours were actually used
in the three-month period.
Required:
(a)
Prepare a revised budget at the new level of activity using a flexible budgeting approach.
(4 marks)
(b)
Calculate the following:
(i)
(ii)
(iii)
(iv)
(v)
(c)
(8 marks)
Suggest possible explanations for the following variances:
(i)
(ii)
(iii)
(d)
Raw material total cost variance;
Direct labour total cost variance;
Fixed overhead efficiency variance;
Fixed overhead capacity variance;
Fixed overhead expenditure variance.
Raw materials total cost variance;
Fixed overhead efficiency variance;
Fixed overhead expenditure variance.
Explain three key purposes of a budgeting system.
(6 marks)
(7 marks)
(25 marks)
Question 39 MURGATROYD CO
Murgatroyd Co, which manufactures a single product, uses standard absorption costing. A summary of
the standard product cost is as follows:
N per unit
Direct materials
15
Direct labour
20
Fixed overheads
12
EXAM STYLE QUESTIONS
Budgeted and actual production for last month was 10,000 units and 9,000 units respectively. The
actual costs incurred were:
N
Direct materials
Direct labour
Fixed overheads
138,000
178,000
103,000
Required:
(a)
Prepare a statement that reconciles the standard cost of actual production with its
actual cost for last month and highlights the total variance for each of the three elements
of cost.
(4 marks)
Last month 24,000 litres of direct material were purchased and used by the company. The
(b)
standard allows for 2.5 litres of the material, at N6 per litre, to be used in each unit of product.
Required:
Provide an appropriate breakdown of the total direct materials cost variance included in
your statement in (a).
(3 marks)
(c)
Explain who in the company should be involved in setting:
(i)
(ii)
the standard price; and
the standard quantity for direct materials.
(3 marks)
(10 marks)
Question 40 CHAFF CO
Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively
simple process, removes the outer husk of the rice to produce the brown rice. This means that there is
substantial loss of weight in the process. The market for the purchase of seeds and the sales of brown
rice has been, and is expected to be, stable. Chaff Co uses a variance analysis system to monitor its
performance.
There has been some concern about the interpretation of the variances that have been calculated in
month 1.
(1)
The purchasing manager is adamant, despite criticism from the production director, that he
has purchased wisely and saved the company thousands of dollars in purchase costs by
buying the required quantity of cheaper seeds from a new supplier.
(2)
The production director is upset at being criticised for increasing the wage rates for month 1;
he feels the decision was the right one, considering all the implications of the increase.
Morale was poor and he felt he had to do something about it.
(3)
The maintenance manager feels that saving N8,000 on fixed overhead has helped the
profitability of the business. He argues that the machines’ annual maintenance can wait for
another month without a problem, as the machines have been running well.
EXAM STYLE QUESTIONS
The variances for month 1 are as follows:
N
Material price
Material usage
Labour rate
Labour efficiency
Labour idle time
Variable overhead expenditure
Variable overhead efficiency
Fixed overhead expenditure
Sales price
Sales volume
48,000
52,000
15,000
18,000
12,000
18,000
30,000
8,000
85,000
21,000
Favourable
Adverse
Adverse
Favourable
Favourable
Adverse
Favourable
Favourable
Adverse
Adverse
Chaff Co uses labour hours to absorb the variable overhead.
Required:
(a)
Comment on the performance of the purchasing manager, the production director and
the maintenance manager using the variances and other information above and reach a
conclusion as to whether or not they have each performed well.
(9 marks)
(b)
In month 2 the following data applies:
Standard costs for 1 tonne of brown rice:
–
1.4 tonnes of rice seeds are needed at a cost of N 60 per tonne;
–
It takes 2 labour hours of work to produce 1 tonne of brown rice and labour is
normally paid N 18 per hour. Idle time is expected to be 10% of hours paid; this is
not reflected in the rate of N 18 above;
–
2 hours of variable overhead at a cost of $30 per hour;
Standard selling price is N 240 per tonne.
Standard contribution per tonne is N 56 per
tonne.
Budget information for month 2 is:
–
–
Fixed costs were budgeted at N 210,000 for the month
Budgeted production and sales were 8,400 tonnes
Actual results for month 2 were as follows:
–
–
–
–
–
–
–
Production and sales, 8,000 tonnes;
12,000 tonnes of rice seeds were bought and used, costing N 660,000;
15,800 labour hours were paid for, costing N 303,360;
15,000 labour hours were worked;
Variable production overhead cost N 480,000;
Fixed costs were N 200,000;
Sales revenue achieved was N 1,800,000.
Required:
Calculate the variances for month 2 in as much detail as the information allows and
reconcile the budget profit to the actual profit using marginal costing principles. You
are not required to comment on the performance of the business or its managers for
their performance in month 2.
(16 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 41 CRUMBLY CAKES
Crumbly Cakes make cakes, which are sold directly to the public. The new production manager (a
celebrity chef) has argued that the business should use only organic ingredients in its cake production.
Organic ingredients are more expensive but should produce a product with an improved flavour and
give health benefits for the customers. It was hoped that this would stimulate demand and enable an
immediate price increase for the cakes.
Crumbly Cakes operates a responsibility-based standard costing system that allocates variances to
specific individuals. The individual managers are paid a bonus only when net favourable variances are
allocated to them.
The new organic cake production approach was adopted at the start of March 2020, following a
decision by the new production manager. No change was made at that time to the standard costs card.
The variance reports for February and March are shown below (Fav = Favourable and Adv = Adverse):
Manager responsible
Allocated variances
February
Production manager
March
N
N
Material price (total for all ingredients)
Material mix
Material yield
25 Fav
0
20 Fav
2,100 Adv
600 Adv
400 Fav
Sales price
Sales contribution volume
40 Adv
35 Adv
7,000 Fav
3,000 Fav
Sales manager
The production manager is upset that he seems to have lost all hope of a bonus under the new system.
The sales manager thinks the new organic cakes are excellent and is very pleased with the progress
made.
Crumbly Cakes operate a JIT stock system and holds virtually no inventory.
Required:
(a)
Assess the performance of the production manager and the sales manager and indicate
whether the current bonus scheme is fair to those concerned.
(7 marks)
(b)
In April 2020 the following data applied:
Standard cost card for one cake (not adjusted for the organic ingredient change): Ingredients
Flour
Eggs
Butter
Sugar
Total input
Normal loss (10%)
Standard weight of a cake
Standard sales price of a cake
Standard contribution per cake after all variable costs
Kg
0.10
0.10
0.10
0.10
0.40
(0.04)
0.36
N
0.12 per kg
0.70 per kg
1.70 per kg
0.50 per kg
0.85
0.35
EXAM STYLE QUESTIONS
The budget for production and sales in April was 50,000 cakes. Actual production and sales
was 60,000 cakes in the month, during which the following occurred:
Ingredients used
Flour
Eggs
Butter
Sugar
Total input
Actual loss
Actual output of cake mixture
Actual sales price of a cake
Kg
5,700
6,600
6,600
4,578
23,478
(1,878)
21,600
N
741
5,610
11,880
2,747
20,978
0.99
All cakes produced must weigh 0.36 kg, as this is what is advertised.
Required:
Calculate the material price, mix and yield variances and the sales price and sales contribution volume variances
for April. You are not required to make any comment on the performance of the managers.
(13 marks)
(20 marks)
Question 42 AVX CO
AVX Co assembles circuit boards for use by high technology audio video companies. Due to the rapidly
advancing technology in this field, AVX is constantly being challenged to learn new techniques.
AVX uses standard costing to control its costs against targets set by senior managers. The standard labour
cost per batch of one particular type of circuit board (CB45) is set out below:
Direct labour – 50 hours @ N 10 per hour.
The following labour efficiency variances arose during the first six months of the assembly of CB45:
November
December
January
February
March
April
-
Batches made
and sold
Number
1
1
2
4
8
16
Efficiency
variance
N
nil
170.00
452.20
1089.30
1711.50
3423.00
Favourable
Favourable
Favourable
Favourable
Favourable
An investigation has confirmed that all of the costs were as expected except that there was a learning
effect in respect of the direct labour that had not been anticipated when the standard cost was set.
Required:
(a)
Calculate the rates of learning that applied during the six months.
(b)
(c)
(8 marks)
Identify when the learning period ended and briefly discuss the implications of your
findings for AVX Co.
(2 marks)
Explain the difference between standard costs and target costs.
(4 marks)
(14 marks)
EXAM STYLE QUESTIONS
Question 43 MILBAO CO
Milbao Co makes and sells three types of electronic game for which the following budget/standard
information and actual information is available for a four-week period:
Model
Superb
Excellent
Good
Budget
sales
(units)
30,000
50,000
20,000
Standard unit data
Selling price Variable cost
N
N
100
80
70
40
25
22
Actual
sales
(units)
36,000
42,000
18,000
Budgeted fixed costs are N 2,500,000 for the four-week period. Budgeted fixed costs should be charged
to product units at an overall budgeted average cost per unit where it is relevant to do so.
Required:
(a)
Calculate the sales volume variance for each model and in total for the four-week period
where (i) turnover (ii) contribution and (iii) net profit is used as the variance valuation
base.
(10 marks)
(b)
Discuss the relative merits of each of the valuation bases of the sales volume variance
calculated in (a) above.
(6 marks)
(c)
Calculate the TOTAL sales quantity and sales mix variances for Milbao Co for the fourweek period, using contribution as the valuation base. (Individual model variances are
not required.)
(4 marks)
(20 marks)
Question 44 SPIKE CO
Spike Co manufactures and sells good quality leather bound diaries. Each year it budgets for its profits,
including detailed budgets for sales, materials and labour. If appropriate, the departmental managers are
allowed to revise their budgets for planning errors.
In recent months, the managing director has become concerned about the frequency of budget revisions.
At a recent board meeting he said, “There seems little point budgeting any more. Every time we have a
problem the budgets are revised to leave me looking at a favourable operational variance report and at
the same time a lot less profit than promised.”
Required:
(a)
Describe the circumstances when a budget revision should be allowed and when it
should be refused.
(5 marks)
(b)
Two specific situations have recently arisen, for which budget revisions were sought:
Materials
A local material supplier was forced into liquidation. Spike’s buyer managed to find another
supplier, 150 miles away at short notice. This second supplier charged more for the material
and a supplementary delivery charge on top. The buyer agreed to both the price and the
delivery charge without negotiation. “I had no choice”, the buyer said, “The production
manager was pushing me very hard to find any solution possible!” Two months later, another,
more competitive, local supplier was found.
A budget revision is being sought for the two months where higher prices had to be paid.
EXAM STYLE QUESTIONS
Labour
During the early part of the year, problems had been experienced with the quality of work being produced
by the support staff in the labour force. The departmental manager had complained in his board report
that his team were “unreliable, inflexible and just not up to the job”.
It was therefore decided, after discussion of the board report, that something had to be done. The
company changed its policy so as to recruit only top graduates from good quality universities. This has
had the effect of pushing up the costs involved but increasing productivity in relation to that element of
the labour force.
The support staff departmental manager has requested a budget revision to cover the extra costs involved
following the change of policy.
Required:
Discuss each request for a budget revision, putting what you see as both sides of the argument and
reach a conclusion as to whether a budget revision should be allowed.
(8 marks)
The market for leather bound diaries has been shrinking as the electronic versions become
(c)
more widely available and easier to use. Spike has produced the following data relating to
leather bound diary sales for the year to date:
Budget
Sales volume
180,000 units
Sales price
N 17.00 per unit
Standard contribution
N 7.00 per unit
The total market for diaries in this period was estimated in the budget to be 1.8m units. In
fact, the actual total market shrank to 1.6m units for the period under review.
Actual results for the same period
Sales volume
176,000 units
Sales price
N 16.40 per unit
Required:
Calculate the total sales price and total sales volume variance.
(i)
(4 marks)
(ii)
Analyse the total sales volume variance into components for market size and
market share.
(4 marks)
(iii)
Comment on the sales performance of the business.
(4 marks)
(25 marks)
Question 45 SECURE NET
Secure Net (SN) manufacture security cards that restrict access to government owned buildings around
the world.
The standard cost for the plastic that goes into making a card is N 4 per kg and each card uses 40 gms of
plastic after an allowance for waste. In November 100,000 cards were produced and sold by SN and
this was well above the budgeted sales of 60,000 cards.
EXAM STYLE QUESTIONS
The actual cost of the plastic was N 5.25 per kg and the production manager (who is responsible for all
buying and production issues) was asked to explain the increase. He said “World oil price increases
pushed up plastic prices by 20% compared to our budget and I also decided to use a different supplier
who promised better quality and increased reliability for a slightly higher price. I know we have
overspent but not all the increase in plastic prices is my fault”.
The actual usage of plastic per card was 35 gms per card and again the production manager had an
explanation. He said “The world-wide standard size for security cards increased by 5% due to a change
in the card reader technology, however, our new supplier provided much better quality of plastic and
this helped to cut down on the waste.”
SN operates a just in time (JIT) system and hence carries very little inventory.
Required:
(a)
(b)
(c)
Calculate the total material price and total material usage variances ignoring any possible
planning error in the figures.
(4 marks)
Analyse the above total variances into component parts for planning and operational
variances in as much detail as the information allows.
(8 marks)
Assess the performance of the production manager.
(8 marks)
(20 marks)
Question 46 OLIVER
Oliver is the owner and manager of Oliver’s Salon, which is a quality hairdresser that experiences high
levels of competition. The salon traditionally provided a range of hair services to female clients only,
including cuts, colouring and straightening
A year ago, at the start of his 2021 financial year, Oliver decided to expand his operations to include the
hairdressing needs of male clients. Male hairdressing prices are lower, the work simpler (mainly
haircuts only) and so the time taken per male client is much less.
The prices for the female clients were not increased during the whole of 2020 and 2021 and the mix of
services provided for female clients in the two years was the same.
The latest financial results are as follows:
20X0
N
Sales
Less: Cost of sales:
Hairdressing staff costs
Hair products – female
Hair products – male
Profit
N
200,000
65,000
29,000
–––––––
Gross profit
Less: Expenses:
Rent
Administration salaries
Electricity
Advertising
20X1
N
10,000
9,000
7,000
2,000
–––––––
94,000
––––––––
106,000
28,000
––––––––
78,000
––––––––
N
238,500
91,000
27,000
8,000
–––––––
10,000
9,500
8,000
5,000
–––––––
126,000
––––––––
112,500
32,500
––––––––
80,000
––––––––
EXAM STYLE QUESTIONS
Oliver is disappointed with his financial results. He thinks the salon is much busier than a year ago and
was expecting more profit. He has noted the following extra information:
(1)
Some female clients complained about the change in atmosphere following the introduction of
male services, which created tension in the salon.
(2)
Two new staff were recruited at the start of 2021. The first was a junior hairdresser to support
the specialist hairdressers for the female clients. She was appointed on a salary of
N 9,000 per annum. The second new staff member was a specialist hairdresser for the male
clients. There were no increases in pay for existing staff at the start of 2021 after a big rise at
the start of 2020 that was designed to cover two years’ worth of increases.
Oliver introduced some non-financial measures of success two years ago:
Number of complaints
Number of male client visits
Number of female client visits
Number of specialist hairdressers for female clients
Number of specialist hairdressers for male clients
2020
12
0
8,000
4
0
2021
46
3,425
6,800
5
1
Required:
(a)
Calculate the average price for hair services per male and female client for each of the
years 2020 and 2021.
(3 marks)
(b)
Assess the financial performance of the Salon using the data above.
(c)
(11 marks)
Analyse and comment on the non-financial performance of Oliver’s business, under the
headings of quality and resource utilisation.
(6 marks)
(20 marks)
Question 47 THATCHER INTERNATIONAL PARK
Thatcher International Park (TIP) is a theme park and has for many years been a successful business,
which has traded profitably. About three years ago the directors decided to capitalise on their success and
reduced the expenditure made on new thrill rides, reduced routine maintenance where possible (deciding
instead to repair equipment when it broke down) and made a commitment to regularly increase admission
prices. Once an admission price is paid customers can use any of the facilities and rides for free.
These steps increased profits considerably, enabling good dividends to be paid to the owners and bonuses
to the directors. The last two years of financial results are as follows:
2018
N
Sales
Less: Expenses:
Wages
Maintenance – routine
Repairs
Directors salaries
Directors bonuses
Other costs (including depreciation)
Net profit
2019
N
5,250,000
5,320,000
2,500,000
80,000
260,000
150,000
15,000
1,200,000
–––––––––
1,045,000
–––––––––
2,200,000
70,000
320,000
160,000
18,000
1,180,000
–––––––––
1,372,000
–––––––––
EXAM STYLE QUESTIONS
2018
2019
N
Book value of assets at start of year
Dividend paid
Number of visitors
13,000,000
500,000
150,000
N
12,000,000
650,000
140,000
TIP operates in a country where the average rate of inflation is around 1% per annum.
Required:
(a)
Assess the financial performance of TIP using the information given above.
(b)
During the early part of 2018 TIP employed a newly qualified management accountant. He
quickly became concerned about the potential performance of TIP and to investigate his
concerns he started to gather data to measure some non-financial measures of success. The
data he has gathered is shown below:
(14 marks)
Table 1
Hours lost due to breakdown of rides (Note)
Average waiting time per ride
2018
9,000 hours
20 minutes
2019
32,000 hours
30 minutes
Note: TIP has 50 rides of different types. It is open 360 days of the year for 10 hours each
day.
Required:
Assess the quality of the service that TIP provides to its customers using Table 1 and any
other relevant data and indicate the risks it is likely to face if it continues with its current
policies.
(6 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 48 EATWELL RESTAURANT
The owners of Eatwell Restaurant have diversified business interests and operate in a wide range of
commercial areas. Since buying the restaurant in 201V they have carefully recorded the data below:
Recorded Data for Eatwell Restaurant (2019 – 2022)
2019
2020
Total meals served
3,750
5,100
Regular customers attending weekly
5
11
Number of items on offer per day
4
4
Reported cases of food poisoning
4
5
Special theme evenings introduced
0
3
Annual operating hours with no customers
380
307
Proposals submitted to cater for special events 10
17
Contracts won to cater for special events
2
5
Complimentary letters from satisfied customers 0
4
Average number of customers at peak times
18
23
Average service delay at peak times (mins)
32
47
Maximum seating capacity
25
25
Weekly opening hours
36
36
Written complaints received
8
12
Idle time
570
540
New meals introduced during the year
16
8
Financial Data
N
N
Average customer spend on wine
3
4
Total Revenue
83,000
124,500
Revenue from special events
2,000
13,000
Profit
11,600
21,400
Value of food wasted in preparation
1,700
1,900
Total revenue of all restaurants in locality 895,000 1,234,000
2021
6,200
15
7
7
9
187
29
15
3
37
15
40
40
14
465
27
2022
6,700
26
9
7
13
126
38
25
6
39
35
40
36
14
187
11
N
N
4
7
137,000
185,000
25,000
55,000
43,700
57,200
3,600
1,450
980,000 1,056,000
Required:
(a)
Assess the overall performance of the business and submit your comments to the
owners. They wish to compare the performance of the restaurant with their other
business interests and require your comments to be grouped into the key areas of
performance such as those described by Fitzgerald and Moon.
(14 marks)
(b)
Identify any additional information that you would consider of assistance in assessing
the performance of Eatwell Restaurant in comparison with another restaurant. Give
reasons for your selection and explain how they would relate to the key performance
area categories used in (a).
(6 marks)
(20 marks)
Question 49 BALANCED SCORECARD
Discuss the advantages that may be claimed for Kaplan and Norton’s balanced scorecard as a
basis for performance measurement over traditional management accounting views of
performance measurement. Your answer should include specific examples of quantitative
measures for each aspect of the balanced scorecard.
(15 marks)
EXAM STYLE QUESTIONS
Question 50 BLA CO
BLA Co is a design consultancy that provides advice to clients regarding property maintenance and
improvements. Three types of consultant are employed by BLA. These are:
(1)
Architectural consultants who provide advice with regard to exterior building improvements.
(2)
Interior design consultants who provide advice regarding interior design, and
(3)
Landscape consultants who provide advice regarding landscaping of properties and garden
design improvements.
BLA does not undertake building work on behalf of its clients and will only recommend contractors
that undertake the three types of work when requested to do so by its clients. The following information
is relevant:
(i)
Each consultation, other than those detailed in notes (iv) and (v), is charged at a rate of N150
per consultation.
(ii)
The consultants are each paid a fixed annual salary of N45,000. In addition they receive a
bonus of 40% of the fee income generated in excess of budget. The bonus is shared equally
among the consultants employed by BLA on 31 October in the year to which the bonus
relates.
(iii)
Other operating expenses (excluding the salaries of the consultants) were budgeted at
N2,550,000 for the year to 31 October 2020. The actual amount incurred in respect of the year
to 31 October 2020 was N2,805,000, which excludes payments to subcontractors per note
(vii) below.
(iv)
In an attempt to gain new business, consultants may undertake consultations on a “no-fee”
basis. Such consultations are regarded as Business Development Activity by the management
of BLA.
(v)
Consultants will sometimes undertake remedial consultations with clients who experience
problems at the time when work commences on each client’s site. Remedial consultations are
also provided on a non-chargeable (i.e. “no fee” basis).
(vi)
In November 2021, BLA purchased “state of the art” business software for use by its
consultants in simulating design improvements. The software was used throughout the year
by consultants who specialise in landscape and garden design. It is now planned to introduce
the use of the software by the other categories of consultant in BLA.
(vii)
BLA has a policy of maintaining staff at a level of 45 consultants on an on-going basis,
irrespective of fluctuations in the level of demand. Also, BLA has retained links with retired
consultants and will occasionally subcontract work to them at a cost of N150 per consultation,
if current full-time consultants in a particular category are fully utilised. During the year
ended 31 October 2020 subcontractors only undertook non-chargeable client consultations.
EXAM STYLE QUESTIONS
BLA Co
Sundry statistics for year ended 31 October 2020
Number of consultants by category:
Exterior design
Interior design
Landscape & garden design
Total client enquiries:
New business
Repeat business
Number of chargeable client consultations:
New business
Repeat business
Mix of chargeable client consultations:
Exterior design
Interior design
Landscape and garden design
Number of non-chargeable client consultations
undertaken by BLA consultants:
Number of business development consultations
Number of remedial consultations
Number of non-chargeable client consultations
undertaken by subcontractors:
Other statistics:
Number of complaints
Budget
Actual
18
18
9
15
18
12
67,500
32,400
84,000
28,000
24,300
16,200
22,400
19,600
16,200
16,200
8,100
13,830
17,226
10,944
1,035
45
1,200
405
120
324
630
Required:
(a)
Fitzgerald and Moon have suggested that business performance should be measured in a
number of ways.
Using FIVE different performance indicators and the quantitative data contained above,
comment on the performance of BLA Co.
(15 marks
(b)
Briefly discuss THREE factors that should be considered in the determination of
expected standards in a performance measurement system.
(5 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 51 AV
AV is a charitable organisation, the primary objective of which is to meet the accommodation needs of
persons in its locality.
BW is a profit-seeking organisation that provides rented accommodation to the public.
Income and Expenditure accounts for the most recent financial year were as follows:
AV
N
Rents received
Less:
Staff and management costs
Major repairs and planned maintenance
Day-to-day repairs
Sundry operating costs
Net interest payable and other similar charges
2,386,852
BW
N
2,500,000
450,000
620,000
682,400
202,200
478,320
127,600
305,500
235,000
526,222
750,000
––––––––– –––––––––
2,442,442
1,934,800
(55,590)
565,200
Total costs
Operating (deficit)/surplus
Operating information in respect of the year was as follows:
(1)
Property and rental information:
Size of Property
1 bedroom
2 bedrooms
3 bedrooms
4 bedrooms
AV
Number of
properties
80
160
500
160
Rent payable
per week (N’s)
40
45
50
70
BW
Number of
properties
40
80
280
nil
AV had certain properties that were unoccupied during part of the year. The rents lost as a
consequence of unoccupied properties amounted to N36,348. BW did not have any
unoccupied properties at any time during the year.
(2)
Staff salaries were payable as follows:
Number of staff
2
2
3
18
AV
Salary (N’s) per
staff member
per annum
35,000
25,000
20,000
15,000
Number of staff
3
2
20
–
BW
Salary (N’s) per
staff member
per annum
50,000
35,000
20,000
–
EXAM STYLE QUESTIONS
(3)
Planned maintenance and major repairs undertaken:
Nature of work
Number of
properties
AV
Cost per
property
BW
Number of
Cost per
properties
property
N
Miscellaneous construction work
Fitted kitchen replacements
(all are the same size)
Heating upgrades/replacements
Replacement sets of windows and
doors for 3-bedroomed properties
N
20
1,250
–
–
90
15
2,610
1,500
10
–
5,220
–
100
4,000
25
6,000
All expenditure on planned maintenance and major repairs may be regarded as revenue
expenditure.
(4)
Day-to-day repairs information:
Classification
Emergency
Urgent
Non-urgent
AV
Number of repairs
of repair
960
1,880
1,020
Total cost
undertaken
N 134,400
N 225,600
N 118,320
BW
Number of repairs
undertaken
320
752
204
Each repair undertaken by BW costs the same irrespective of the classification of repair.
Required:
(a)
Critically evaluate how the management of AV could measure the “value for money” of
its service provision during the most recent financial year.
(7 marks)
(b)
(i)
Identify TWO performance measures in relation to EACH of the following
dimensions of performance measurement that could be used by the
management of AV when comparing its operating performance for the most
recent financial year with that of the previous year:
–
–
(ii)
(c)
flexibility:
service quality.
(2 marks)
Calculate and comment on THREE performance measures relating to “cost
and efficiency” that could be utilised by the management of AV when
comparing its operating performance against that achieved by BW. (6 marks)
Explain why differing objectives make it difficult for the management of AV to compare
its operating and financial performance with that of BW, and comment briefly on
additional information that would assist in the appraisal of the operating and financial
performance of BW for the most recent financial year.
(5 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 52 BRIDGEWATER CO
Bridgewater Co provides training courses for many of the mainstream software packages on the market.
The business has many divisions in Waterland, the one country in which it operates. The senior
managers of Bridgewater Co have very clear objectives for the divisions and these are communicated to
divisional managers on appointment and subsequently in quarterly and annual reviews. These are:
(1)
(2)
(3)
(4)
Each quarter, sales should grow and annual sales should exceed budget;
Trainer (lecture staff) costs should not exceed N 180 per teaching day;
Room hire costs should not exceed N 90 per teaching day;
Each division should meet its budget for profit per quarter and annually.
It is known that managers will be promoted based on their ability to meet these targets. A member of
the senior management is to retire after quarter 2 of the current financial year, which has just begun.
The divisional managers anticipate that one of them may be promoted at the beginning of quarter 3 if
their performance is good enough.
The manager of the Northwest division is concerned that his chances of promotion could be damaged
by the expected performance of his division. He is a firm believer in quality and he thinks that if a
business gets this right, growth and success will eventually follow.
The current quarterly forecasts, along with the original
as follows:
Q1
N 000
Sales
40.0
Less:
Trainers
8.0
Room hire
4.0
Staff training
1.0
Other costs
3.0
–––––
Forecast net profit
24.0
–––––
Original budgeted profit
25.0
Annual sales budget
–––––
Teaching days
40
budgeted profit for the Northwest division, are
Q2
Q3
Q4
Total
N 000
N 000
N 000
N 000
36.0
50.0
60.0
186.0
7.2
3.6
1.0
1.7
–––––
22.5
–––––
26.0
10.0
5.0
1.0
6.0
–––––
28.0
–––––
27.0
12.0
6.0
1.0
7.0
–––––
34.0
–––––
28.0
–––––
36
–––––
50
–––––
60
37.2
18.6
4.0
17.7
–––––
108.5
–––––
106.0
180.0
–––––
Required:
(a)
Assess the financial performance of the Northwest division against its targets and reach
a conclusion as to the promotion prospects of the divisional manager.
(8 marks)
(b)
The manager of the Northwest division has been considering a few steps to improve the
performance of his division.
Voucher scheme
As a sales promotion, vouchers will be sold for N125 each, a substantial discount on normal prices. These
vouchers will entitle the holder to attend four training sessions on software of their choice. They can
attend when they want to but are advised that one training session per quarter is sensible. The manager is
confident that if the promotion took place immediately, he could sell 80 vouchers and that the customers
would follow the advice given to attend one session per quarter. All voucher holders would attend
planned existing courses and all will be new customers.
EXAM STYLE QUESTIONS
Software upgrade
A new important software programme has recently been launched for which there could be a market for training
courses. Demonstration programs can be bought for N1,800 in quarter 1. Staff training would be needed, costing
N500 in each of quarters 1 and 2 but in quarters 3 and 4 extra courses could be offered selling this training.
Assuming similar class sizes and the usual sales prices, extra sales revenue amounting to 20% of normal sales
are expected (measured before the voucher promotion above). The manager is keen to run these courses at the
same tutorial and room standards as he normally provides. Software expenditure is written off in the income
statement as incurred.
Delaying payments to trainers
The manager is considering delaying payment to the trainers. He thinks that, since his commitment to quality
could cause him to miss out on a well-deserved promotion, the trainers owe him a favour. He intends to delay
payment on 50% of all invoices received from the trainers in the first two quarters, paying them one month later
than is usual.
Required:
(i)
Revise the forecasts to take account of all three of the proposed changes.
(ii)
Comment on each of the proposed steps and reach a conclusion as to whether, if all the
proposals were taken together, the manager will improve his chances of promotion.
(6 marks)
Suggest two improvements to the performance measurement system used by Bridgewater
Co that would encourage a longer-term view being taken by its managers.
(4 marks)
(25 marks)
(iii)
(7 marks)
Question 53 OSBORNE CO
Osborne Co is a subsidiary of Butler Co, which operates a decentralised system of management.
Group companies have control over their own working capital and make proposals to the main board
for capital expenditure projects. They are appraised by reference to two measures:
(1)
(2)
Return on investment, where a minimum return of 12% is expected;
Residual income, which must be positive.
Extracts from the accounts of Osborne for the most recent financial year yield the following
information:
Statement of financial position
Non-current assets
Current assets
Current liabilities
Long-term loan
Land and buildings
Plant and machinery
Fixtures and fittings
Inventory
Receivables
Cash
Trade payables
Other payables
N 000
2,000
1,200
300
800
500
100
400
200
1,000
EXAM STYLE QUESTIONS
Income statement
Revenue
Cost of sales
Controllable overheads
Non-controllable overheads
Head office recharge
N000
8,500
5,300
1,700
950
700
A project, involving an investment of N840,000 financed by an increase in the company’s loan, is under
discussion by the board of Osborne.
The project is expected to last three years, at the end of which there will be no scrap proceeds. Net cash
flows are expected as follows:
Year
Flow
1
300,000
2
600,000
3
700,000
The finance director, Mr Rhodes, says, “We must go for this project. It has a positive net present value
and enhances both ROI and RI of the company”.
The managing director of Osborne, Mr Iommi, whose bonus is linked to the division achieving its
targets and is due to retire at the end of year 1, is not so sure.
Required:
Establish whether the company will achieve its two performance targets for the most
(a)
recent financial year.
(4 marks)
(b)
Assuming that (with the exception of changes resulting from acceptance of the proposed
project) the profitability and assets employed by Osborne Co will be constant for the
foreseeable future, show why Mr Iommi might be reluctant about accepting the project.
(6 marks)
(10 marks)
Question 54 RESPONSIBILITY CENTRES
(a)
Identify the types of responsibility centres used in responsibility accounting and discuss
how the performance of each responsibility centre type might be measured, including in
your discussion examples of controllable and non-controllable factors.
(12 marks)
(b)
Critically discuss whether return on investment or residual income should be used to
assess managerial performance in an investment centre.
(13 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 55 PACE CO
Pace Co (PC) runs a large number of wholesale stores and is increasing the number of these stores all
the time. It measures the performance of each store on the basis of a target return on investment (ROI)
of 15%. Store managers get a bonus of 10% of their salary if their store’s annual ROI exceeds the
target each year. Once a store is built there is very little further capital expenditure until a full four
years have passed.
PC has a store (store W) in the west of the country. Store W has historic financial data as follows over
the past four years:
2018
2019
2020
2021
Sales (N 000)
200
200
180
170
Gross profit (N 000)
80
70
63
51
Net profit (N 000)
13
14
10
8
Net assets at start of year (N 000)
100
80
60
40
The market in which PC operates has been growing steadily. Typically, PC’s stores generate a 40%
gross profit margin.
Required:
(a)
Discuss the past financial performance of store W using ROI and any other measure you
feel appropriate and, using your findings, discuss whether the ROI correctly reflects Store
W’s actual performance.
(8 marks)
(b)
Explain how a manager in store W might have been able to manipulate the results so as to
gain bonuses more frequently.
(4 marks)
(c)
PC has another store (store S) about to open in the south of the country. It has asked you for
help in calculating the gross profit, net profit and ROI it can expect over each of the next four
years. The following information is provided:
Sales in the first year will be 18,000 units. Sales volume will grow at the rate of 10% for years
two and three but no further growth is expected in year 4. Sales price will start at N12 per unit
for the first two years but then reduce by 5% per annum for each of the next two years.
Gross profit will start at 40% but will reduce as the sales price reduces. All purchase prices on
goods for resale will remain constant for the four years.
Overheads, including depreciation, will be N70,000 for the first two years rising to N80,000 in
years three and four.
Store S requires an investment of N100,000 at the start of its first year of trading.
PC depreciates non-current assets at the rate of 25% of cost. No residual value is expected on
these assets.
Required:
Calculate (in columnar form) the revenue, gross profit, net profit and ROI of
(i)
store S over each of its first four years.
(9 marks)
(ii)
Calculate the minimum sales volume required in year 4 (assuming all other
variables remain unchanged) to earn the manager of S a bonus in that year.
(4 marks)
(25 marks)
EXAM STYLE QUESTIONS
Question 56 BUSINESS SOLUTIONS
Business Solutions is a firm of management consultants, which experienced considerable business
growth during the last decade. Recently the firm’s senior managers had begun to experience difficulties
in managing the business, so at the end of last year the firm was reorganised and a regional divisional
structure was introduced with individual profit targets being set for each of the semi-autonomous profit
centres. Although North division has its own customer base that is distinct from that of its sister
division South, it does occasionally call upon the services of a South consultant to assist with its
projects. North has to pay a cross charge to South per consulting day. HQ determines the amount of the
charge. North is free to choose whether it employs a South consultant or subcontracts the project to an
external consultant. The manager of North division believes that the quality of the external consultant
and the one from South division are identical and, on this basis, will always employ the one who is
prepared to work for the lower fee.
The following information is also available:
North division is very busy and it charges its clients N1,200 per consulting day;
North division pays its external consultant N500 per consulting day;
The variable cost per internal consulting day is N100.



Required:
(a)
Determine a possible optimal daily cross charge that should be paid by North for the
services of a consultant from South in the scenarios outlined below. The charges that you
select must induce both divisional managers to arrive at the same decision independently.
Explain how you have determined your cross charges and state any assumptions that you
think necessary.
(i)
(ii)
(iii)
(b)
South division has spare consulting capacity;
South division is fully occupied earning fees of N400 per consulting day;
South division is fully occupied earning fees of N700 per consulting day.
(10 marks)
Identify the possible factors that may have prompted the senior management to introduce
a divisional structure last year and suggest some potential problems that may arise.
(10 marks)
(20 marks)
EXAM STYLE QUESTIONS
Question 57 MANUCO CO
Manuco Co has been offered supplies of special ingredient Z at a transfer price of N15 per kg by
Helpco Co, which is part of the same group of companies. Helpco processes and sells special ingredient
Z to customers external to the group at N15 per kg. Helpco bases its transfer price on total cost plus
25% profit mark-up. Total cost has been estimated as 75% variable and 25% fixed.
Required:
Discuss the transfer prices at which Helpco Co should offer to transfer special ingredient Z to
Manuco Co in order that group profit maximising decisions may be taken on financial grounds in
each of the following situations:
(i)
Helpco Co has an external market for all of its production of special ingredient Z at a selling
price of N 15 per kg. Internal transfers to Manuco Co would enable N 1.50 per kg of variable
packing cost to be avoided.
(ii)
Conditions are as per (i) but Helpco Co has production capacity for 3,000 kgs of special
ingredient Z for which no external market is available.
(iii)
Conditions are as per (ii) but Helpco Co has an alternative use for some of its spare
production capacity. This alternative use is equivalent to 2,000 kgs of special ingredient Z
and would earn a contribution of N 6,000.
(13 marks)