MA R. Kit as at 7-04-06

Management AccountingSUBJECT NO. 14 Revision Kit STRATHMORE UNIVERSITY DISTANCE LEARNING CENTRE P.O. Box 59857, 00200, Nairobi, KENYA. Tel: +254 (020) 606155 Fax: +254 (020) 607498 Email: [email protected] Copyright ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the copyright owner. This publication may not be lent, resold, hired or otherwise disposed of by any way of trade without the prior written consent of the copyright owner. © THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992 i Acknowledgment ACKNOWLEDGMENT We gratefully acknowledge permission to quote from the past examination papers of the following bodies: Kenya Accountants and Secretaries National Examination Board (KASNEB); Chartered Institute of Management Accountants (CIMA); Association of Chartered Certified Accountants (ACCA). We would also like to extend our sincere gratitude and deep appreciation to Mr. Cyrus Iraya for giving his time, expertise and valuable contribution, which were an integral part in the initial development of this Revision Kit. He holds the following academic honours, MBA, B.COM (Accounting), CPA, currently pursuing his Phd in Finance at the University of Nairobi. He is a senior lecturer at Strathmore University, School of Accountancy. MANAGEMENT ACCOUNTING Acknowledgment Contents 346 Acknowledgment...................................................................i ACKNOWLEDGMENT...............................................................i 346......................................................................................ii Acknowledgment..................................................................ii ............................................................................................ii 346 Introduction..........................................................................v 346.......................................................................................v ............................................................................................v PART I: INTRODUCTION..........................................................v APPROACH TO EXAMINATIONS ............................................................... v Introduction ........................................................................vi 346......................................................................................vi ...........................................................................................vi 346.....................................................................................vii Approach to Examinations...................................................vii Syllabus.............................................................................viii 346....................................................................................viii .........................................................................................viii SYLLABUS ................................................................................................................................ viii Syllabus...............................................................................ix 346......................................................................................ix ...........................................................................................ix Syllabus................................................................................x 346.......................................................................................x ............................................................................................x Topical Guide to Past Paper Questions............................................................................xi 346......................................................................................xi ...........................................................................................xi TOPICAL GUIDE TO PAST PAPER QUESTIONS ................................................................... xi Topical Guide to Past Paper Questions..................................xii ii Contents iii 346.....................................................................................xii ..........................................................................................xii 346....................................................................................xiii Introduction.......................................................................xiii .........................................................................................xiii 346 Past Paper Questions and Answers...............................................................................1 PART II: PAST PAPER QUESTIONS AND ANSWERS....................1 Questions ............................................................................................... 1 ............................................................................................2 Questions – Past Papers 346......................................................................................2 Past Paper Questions and Answers. 3 ............................................................................................3 346......................................................................................3 Answers ............................................................................................... 76 346...................................................................................199 Answers – Past Papers 346.................................................76 Past Paper Questions and Answers..................................199 ........................................................................................199 ..........................................................................................76 Answers – Past Papers 346..........................................202 ........................................................................................202 Past Paper Questions and Answers..................................203 346...................................................................................203 ........................................................................................203 Answers – Past Papers.......................................................204 346...................................................................................204 ........................................................................................204 346...................................................................................209 ........................................................................................209 Past Papers Questions and Answers............................................................................209 Part III: Comprehensive Mock Examinations.......................212 Questions - Mocks .............................................................................. 212 ........................................................................................213 MANAGEMENT ACCOUNTING Acknowledgment 346...................................................................................213 ........................................................................................212 Questions - Mocks..........................................212 346...................................................................................212 Comprehensive Mock Examinations....................................213 ........................................................................................241 Answers - Mocks ................................................................................ 241 346...................................................................................241 Comprehensive Mock Examinations....................................241 Answers - Mocks............................................242 346...................................................................................242 ........................................................................................242 Part IV: Revision Questions and Answers............................283 Questions ........................................................................................... 283 346...................................................................................283 Revision Questions and Answers........................................283 ........................................................................................284 ........................................................................................283 Questions.......................................................284 346...................................................................................284 Answers ............................................................................................. 302 Answers..........................................................302 346...................................................................................303 Revision Questions and Answers........................................303 346...................................................................................302 ........................................................................................303 ........................................................................................302 346...................................................................................333 346...................................................................................334 ........................................................................................334 ........................................................................................333 Management Accounting Tables.........................................333 Management Accounting Tables..................................334 iv v Introduction PART I: INTRODUCTION APPROACH TO EXAMINATIONS No amount of examination room technique will enable you to pass unless you have prepared yourself thoroughly before hand. The period of preparation may be months or even years and must include a good grasp of the course content and a proper familiarity with the type of examination questions that have been set in the past. It is no use expecting to pass with a feverish last minute reliance on this revision kit. By the end of your study of this revision kit, you should be able to answer every question in a typical examination set-up. The Mock questions provided at the end are to be worked out on a simulated exam scenario. Before the examination: a) Make sure you know the exact time, date and location of examination. b) Carefully check your travel arrangements. Leave yourself adequate time. c) Check over your examination equipment: Calculator? Spare battery? Pens? Pencils? Watch? d) Check your examination number. In the examination room: You need to be calm and confident in the examination room. Before you start writing • Carefully read the whole examination paper including the rubric • Decide the sequence you will tackle the questions. Generally, answer the easiest questions first. • Decide the time allocation for each question. In general the time allocation should be in direct proportion to the marks for each question. • Read the questions you are answering again. Do you know exactly what the examiner is asking? Underline the key words in the question and keep these in mind when answering. 1. Dealing with questions: a) Make sure you plan each question first. Make a note of the main points or principles involved. If you are unable to finish the question you will gain some marks from these points. b) Attempt all questions required under each part of each question. MANAGEMENT ACCOUNTING v Introduction c) Do not let your answer rumble on. Be as brief as possible consistent with covering all the points you know. d) Follow a logical sequence in your answers. e) Write neatly, underline headings and if the question asks for a particular sequence of answer then follow that sequence. f) If diagrams, tables or graphs are required give them plenty of space, label them neatly and comprehensively, and give a key to symbols. A simple clear diagram showing the main points can often gain a good proportion of the marks for a question. vi Approach to Examinations When you have finished writing: a) Check that you have followed the examination regulations regarding examination title. b) Make sure you include all the sheets you require to be marked. c) If you have time carefully read each and every part of each answer and check each calculation. In general; • Concentrate on answering the questions set not some related topic, which you happen to know something about. • Do not leave the examination room early. Use every minute for checking and rechecking or adding points to questions answered. Always attempt every question set and every part of each question. MANAGEMENT ACCOUNTING vii Syllabus SYLLABUS PAPER NO. 14 MANAGEMENT ACCOUNTING OBJECTIVE To ensure that the candidate can apply modern tools of analysis in the solution of management problems in different functional areas. 14.0 SPECIFIC OBJECTIVES A candidate who passes this subject should be able to: Determine costs for an organization’s operations Analyze managerial functions which require decision making • Evaluate organizational processes with a view to determining the most efficient and effective means of resource utilization. Design management accounting systems. CONTENT 14.1 Managerial Decisions and Information • Value of information in decision-making: perfect and imperfect information. 14.2 Cost Estimation and Forecasting • An overview of the methods of cost estimation and prediction: Engineering, simulation and statistical methods, simple and multiple regression, the statistical properties of regression. Time series models, smoothing and extrapolation, stochastic time series, linear time series models, forecasting with time series models • Application of the methods in solving management accounting problems 14.3 Short Term Planning Decisions • Cost-Volume-profit analysis under uncertainty, sensitivity analysis, statistical analysis, probability tree simulation • Cost - Volume -profit analysis with multiple products • Risk assessments • Application of marginal costing • Product mix decisions, special orders • Make or buy decisions, pricing decisions and other similar short-run decisions • Learning curves and estimating learning effect 14.4 Advanced Budgeting and Variance Analysis • Motivational aspects • Advanced variances vii i Syllabus 14.5 Inventory Control Decisions • Cost of holding stock • Stock replenishment models MANAGEMENT ACCOUNTING ix Syllabus • Quantity discounts • Timing of replenishment • Shortage cost models • Stochastic inventory models • Pareto analysis • Simulation of reorder models • ABC analysis 14.6 Resource Allocation and Optimization Decisions • Decision making through utilization of the following quantitative techniques: Decision tree and sequential processes; mathematical programming (linear, non-linear; integer programming; transportation model 14.7 Strategic Decisions • Application of game theory to management: Collective bargaining, negotiations, tendering, diversification and retrenchment • The use of Markov analysis in the formulation of strategic moves 14.8 Performance Evaluation Decisions • Responsibility accounting and responsibility systems • Methods of evaluating responsibility center performance such as return on investment and residual income • Evaluation of foreign based centers such as foreign exchange gains and losses • Transfer pricing and risk-sharing in decentralized firms • International transfer pricing in foreign centers • Managerial incentives schemes • Strategic cost management • Activity based costing x Topical Guide to Past Paper Questions TOPICAL GUIDE TO PAST PAPER QUESTIONS Below is an outline of the major topics of the syllabus and an assortment of questions that have featured in the past CPA examinations (July 2000 - Dec 2005). The questions and answers are provided in PART II of the Kit. TOPIC YEAR 14.1 Managerial decisions and information June 2003 Question 3 June 2002 Question 3 May2002 Question 1 June 2001 Question 5 July 2000 Question 5 14.2 Cost estimation and forecasting June 2003 Question 4 May 2002 Question 2 June 2001 Question 3 14.3 Short term planning decisions June 2003 Question 1 December 2002 Question 5 December 2000 Question 5 July 2000 Question 1, 2 14.4 Advanced budgeting and variance analysis June 2003 Question 2 December 2002 Question 2 May 2002 Question 4 14.5 Inventory control decisions December 2002 Question 2 December 2001 Question 1 December 2000 Question 2 July 2000 Question MANAGEMENT ACCOUNTING xi Topical Guide to Past Paper Questions 4 14.6 Resource allocation and optimization decisions December 2002 Question 1 December 2001 Question 2 December 2000 Question 3 14.7 Strategic decisions June 2003 Question 5 December 2001 Question 3 14.8 Performance evaluation decisions May 2002 Question 5 xii Introduction December 2001 Question 4, 5 June 2001 Question 1, 2 July 2000 Question 3 14.9 Emerging trends in Managing accounting May 2002 Question 3 December 2002 Question 4 MANAGEMENT ACCOUNTING EXAM ANALYSIS: JUNE 2000 TO DEC 2005 Course content covered. Frequency . Value of information in decision making 4 Inventory control decisions 3 Cost estimation: Regression analysis 2 Relevant Costs for non-routine decisions 2 Advanced Budgeting and Control Theory 4 Cost-Volume-Profit analysis 2 Advanced Variances 2 Activity Based Costing 2 Simulation Analysis 2 Transportation Modeling 2 Linear Programming 1 Performance Evaluation 2 Transfer Pricing 2 Game Theory 2 Strategic Cost Management 1 Network Analysis 1 MANAGEMENT ACCOUNTING xiii 1 Past Paper Questions and Answers PART II: PAST PAPER QUESTIONS AND ANSWERS QUESTIONS JULY 2000 TIME ALLOWED: 3 HOURS QUESTION ONE A processing company, Timao Co. Ltd., is extremely busy. It has increased its output and sales from 12,900 kg in 1 st quarter of the year to 17,300 kg in the 2 nd quarter. Although demand is still rising, it cannot increase its output more than an additional 5% from its existing labour force, which is now at its maximum. Data for its four products in 2 nd quarter were: Product Product Product Product P Q R S Output (Kg) 4560 6960 3480 2300 Selling price (Sh. Per kg) 162 116. 40 99. 20 136. 80 Costs (Sh. Per kg) Direct labour @ Sh.60 per hour) 19.60 13.00 9.90 17.00 Direct materials 65.20 49.00 41.00 54.20 Direct packaging 8.40 7.40 5.60 7.00 Fixed overhead (Absorbed on basis of direct labour cost) 39.20 26.00 19.80 34.00 132.4 0 95.40 76.30 112.2 0 The Kagocho Company has offered to supply 2000 kg of product Q at a delivered price of 90% of Timao’s Co. Ltd. Selling price. Timao Co. Ltd., will then be able to produce extra of product P instead of product Q to the plant’s total capacity. Required: a) State with supporting calculations, whether Timao Co. Ltd should accept the Kagocho Company’s offer. (15 marks) b) Which would be the most profitable combination of subcontracting 2000kg of one product at a price of 90% of its Questions – Past Papers 2 selling price and producing extra quantities of another product up to the plant total capacity? Assume that the market can absorb the extra output. (5 marks) (Total: 20 marks) Past Paper Questions and Answers QUESTION TWO “Control theory offers valuable insights into the design and operation of management accounting information systems, but only under circumstances where an organization’s environment is stable and predictable and outcomes are clearly measurable.” Required: Comment on the relevance and validity of this statement within the analysis or established control theory systems within a business organization. (Total: 20 marks) QUESTION THREE a) The Z division of XYZ Ltd., produces a component which it sells externally, and can also be transferred to other divisions within the organization. The division has set a performance target for the coming financial year of residual income of Shs. 5,000,000. The following budgeted information relating to Z division has been prepared for the coming financial year. 1. Maximum production/sales capacity 800,000 units. 2. Sales to external customers: 500,000 units at Sh.37. 3. Variable cost per component Sh.25. 4. Fixed costs directly attributable to the division Sh.1,400,000. 5. Capital employed: Sh.20,000,000 with cost of capital of 13% The X division of XYZ Ltd has asked Z division to quote a transfer price for units of the component. Required: i Calculate the transfer price per component which Z division should quote to X division so that its residual income target is achieved. (6 marks) ii Explain why the transfer price calculated in (i) above may lead to sub-optimal decision making from the point of view of XYZ Ltd taken as a whole. (4 marks) b) A manufacturer produces and sells two products, A and B. The unit variable cost is sh.12 and sh.8 for A and B respectively. A review of selling prices is in progress and it has been estimated that, for each product and increase in the selling price would result in a fall in demand of Sh.500 units per every Sh.1 increase in price and similarly a decrease of Sh.1 in price would result in an increase in demand of 500 units. The current sales prices and sales demand are:- Price (Sh.) Demand (Units) A 30 15,000 B 58 21,000 Required: 3 Questions – Past Papers 4 Calculate the profit-maximizing price for reach product. (10 marks) QUESTION FOUR Muthothi Ltd. Operates a conventional stock control system based on re-order levels and Economic Order Quantities (EOQ). The various control levels were set originally based on estimates which did not allow for any uncertainty and this has caused difficulties because, in practice, lead times, demands and other factors to vary. As part of a review of the system, typical stock item, part no. X 206, has been studied in detail as follows: Data for Part No. X 206 Lead times Probabilit y Demand Probability (Days) (units) 15 0.2 5000 0.4 20 0.5 7000 0.6 25 0.3 The company works for 360 days per year and it costs Sh.1,000 to place an order. The holding cost is estimated at Sh.0.025 for storage plus 10% opportunity cost of capital. Each unit is purchased at Sh.2. The re-order level for this part is currently 150,000 units and it can be assumed that the demands would apply for the whole of the appropriate lead-time. Required: a) Calculate the level of buffer stock implicit in a re-order level of 150,000 units. (5 marks) b) Calculate the probability of stock-outs. (2 marks) c) Calculate the expected annual stock-outs in units. (4 marks) d) Compute the stock-out costs per unit at which it would be worthwhile raising the re-order level to 175,000 units. (3 marks) e) Discuss the possible alternatives to a re-order level EOQ inventory system and their advantages and disadvantages. (6 marks) (Total: 20 marks) QUESTION FIVE Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be oil as follow, based on past experience. Oil 0.2 No oil 0.8 Past Paper Questions and Answers It is possible for WLL to hire a firm of international consultants to carry out a complete survey of the site. WLL has used the firm many times before and has made the following estimates: 1. If there really is oil, then there is a 95% chance that the report will be favourable. 2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil. The following additional information is also provided: • The cost of drilling is Sh.10 million. • The value of the benefits if oil is found is Sh.70 million • The cost of obtaining information is Sh.3 million. Required: a) Advise the company on whether to acquire additional information from the consultants (16 marks) b) Compute the value of imperfect information. (4 marks) (Total: 20 marks) 5 Questions – Past Papers 6 DECEMBER 2000 TIME ALLOWED: 3 HOURS QUESTION ONE a) Differentiate between a feedback control system and a feed forward control system. (4 marks) b) In his study of: “the impact of budgets on people” C Argyris reported the following comment by a financial controller on the practice of participation in setting budgets in his company: “We bring in the supervisors of budget areas, we tell them that we want their frank opinion, but most of them just sit there and nod their heads. We know they are not coming out with exactly what they feel. I guess budget scares them”. Explain why managers may be reluctant to participate fully in setting budgets, indicating the negative side effects, which may arise from the imposition of budgets by senior management. (10 marks) c) A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss. (6 marks) (Total: 20 mark s) QUESTION TWO Sola Ltd. is a manufacturing company that requires component XLA20 in one of its production lines. The components are bought from outside suppliers. Form past experience, the company has determined that the demand for the component can be approximated by a normal distribution with a mean of 500 and a standard deviation of 10, over the range 470 to 530. The unit is an initial stock of 2000 components and the company has decided to order in batches of 2500 whenever the stock level falls below 1500 components. Again, past experience indicates that the time between the order being placed and delivery varies as follows: Lead time distribution Lead time, weeks 1 2 3 4 Probability 0.02 0.50 0.25 005 The unit cost of holding stock is Sh.5 per week applied to the total stock held at the end of each week. The cost associated with placing an order is Sh.5.00 and the unit cost of being out of stock is Sh.200 per week. The company does all its accounting at the end of the week and all ordering and delivery occur at the beginning of a week. Required: Estimate the average cost per week of the above policy, using simulation analysis and the following random numbers: Past Paper Questions and Answers For Demand: 034 74 3 73 8 63 6 96 4 736 61 4 69 8 63 7 162 33 2 61 6 80 4 56 0 111 41 0 95 9 77 4 24 6 76 2 For Leadtime: 95 73 10 76 51 74 (Total: 20 marks) Hint: • Use 15 trial runs • Round off the demand probabilities to 3 decimal places. (Estimate these probabilities in ranges of 5) QUESTION THREE 1. Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs. (3 marks) 2. The Executive Furnitures Ltd. (EFL) produces a unique type of computer desks. Four of EFL’s main outlets are S 1 , S 2, S 3 , and S 4. These outlets already have requirements in excess of the combined capacity of its three production plants P 1 ,P 2, and P 3. The company needs to know how to allocate its production capacity to maximize profits. Distribution costs (in Sh.) per unit from each production plant to each outlet are given in the following table: To S 1 S 2 S 3 S 4 Sh. Sh. Sh. Sh. P1 220 240 220 360 From P2240 200 180 280 P3 260 200 260 240 Since the four outlets are in different parts of the country and as there are differing transportation costs between the production plants and the outlets along with slightly different production costs at different production plants there is a pricing structure which enables different prices to be charged at the four outlets. Currently, the price per unit charged is Sh.2,300 at S 1 , Sh.2,350 at S 2 , Sh.2,250 at S 3 , and Sh.2,400 at S 4. The variable unit production costs are Sh.1,500 at plants P 1 and P 3 and Sh.1,550 at plant P 2. The demand at S 1, S 2, S 3 and S 4 are 850, 640, 380 and 230 desks respectively while the plant capacity at plant P 1 , P 2 and P 3 are 625, 825 and 450 desks respectively. Required: Using the transportation algorithm, determine the contribution to profit for the optimal allocation. (17 marks) (Total: 20 marks) 7 Questions – Past Papers 8 QUESTION FOUR 1. Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000 units in the coming year. At this level of activity, his unit variable costs are budgeted at Sh.50 and his unit fixed costs at Sh.25. His sales manager estimates that the demand for the product would increases by 1000 units for every decreased of Sh.1 in unit selling price (and vice versa) and that at a unit selling price of Sh.200 demand would be nil. Information about two price increases has just been received from suppliers: one is for materials (which are included in Alvis Kiptoo’s variable costs) and one is for fuel (which included in his fixed costs). Their effect will be to increase both the variable and fixed costs by 20% each over the budgeted figures. Alvis Kiptoo aims at maximizing profits from his business. Required: a. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100,000 units. (3 marks) b. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases. (4 marks) c. Show whether and by how much Alvis Kiptoo should adjust his selling price in respect to increases in: • Fuel costs. (2 marks) • Material costs. (2 marks) 2. Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets than for export sales. The businesses may justify their pricing policy by stating that they need to earn foreign exchange from foreign markets and recover their research and development costs, plus production overheads against home demand. Required: i Critically explain briefly the rationale for such a differential pricing policy. (5 marks) ii Should earning of foreign exchange be a factor in a firm’s pricing policy. (4 marks) (Total: 20 marks) QUESTION FIVE a) Explain the advantages of using Value Added Statements (VAS) for interdivision for comparisons in decentralized firm. (8 marks) Past Paper Questions and Answers b) ABC Lt. Is a manufacturing company that makes only three products P, Q, and R. Data for the period ended last month are as follows: P Q R Units produced and sold 12,000 16,000 8,000 Sh. Sh. Sh. Sales price per unit 50 70 60 Direct material cost per unit 16 24 20 Direct labour cost per unit 8 12 8 Production overheads costs Total Cost drivers Machine hours Machine hours Number of production runs Sh. Machining costs 102,000 Production scheduling 84,000 Set-up costs 54,000 Quality control 49,200 Number of production runs Receiving materials 64,800 Number of components receipts Packing materials 36,000 Number of customer orders 390,000 Information on the cost drier is given as follows: P Q R Direct labour hours per unit 1 1½ 1 Machine hours per unit ½ 1 1½ Number of components per unit 3 5 8 Number of component receipts 18 80 64 Number of customer orders 6 20 10 Number of production runs 6 16 8 Required: Using activity based costing (ABC) show the cost and gross profit per unit for each product during the period. (12 marks) (Total: 20 marks) 9 Questions – Past Papers 10 JUNE 2001 TIME ALLOWED: 3 HOURS QUESTION ONE Kanorer Enterprises Ltd has two divisions Mugaa and Gwashati. Mugaa division manufactures an intermediate product for which there is no external market. Gwashati division incorporates the intermediate product into a final product, which it sells. One unit of the intermediate product is used in the production of the final product. The expected units of the final product which Gwashati division estimates it can sell at various selling prices are as follows: Net selling Price Quantity sold Sh. Units 100 1000 90 2000 80 3000 70 4000 60 5000 50 6000 The variable and fixed costs of each division are as follows: Mugaa Gwashati Sh. Sh. Variable cost pr unit 11 7 Fixed cost per annum 60,000 90,000 The transfer price is Sh.35 for the intermediate product, and is determined on a full cost-plus basis. Required: a) Profit statements for each division and the company as a whole for the various selling prices. (12 marks) b) Which selling prices maximize the profits of Gwashati division and the company as a whole? Comment on why the selling price (which is selected by the company) is not selected by Gwashati division. (3 marks) c) It has been argued that full cost is an inappropriate basis for selling transfer prices. Outline the objections which can be raised against this basis. (5 marks) (Total: 20 marks) QUESTION TWO K.K Limited manufactures security systems for homes. To enable the company offer a better quality product at a lower cost than its competitors, the company has decided to expand its present facility to accommodate a new line. A project team has been formed within the company to direct and coordinate the plant expansion. This team met weekly to monitor the status of the project. Prior to the start of the plant expansion, the management developed the following list of required activities: Past Paper Questions and Answers Activity Normal Crash Predecess or Time in weeks Costs (Sh) ‘000’ Time in weeks Cost (Sh) ‘000’ A Prepare architectural plan - 10 10,000 7 12,000 B Construct building A 35 50,000 33 52,000 C Develop equipment Specifications A 4 7,000 3 6,000 D Design and construct Equipment C 25 20,000 25 26,000 E Install/Test equipment B,D 5 5,000 4 4,500 F Develop staffing plan C 2 4,000 2 4,000 G Hire staff F 4 30,000 2 30,000 H Train staff G 2 15,000 1 25,000 I Pilot production run E,H, L 1 4,000 1 4,000 J Market research - 8 12,000 4 24,000 K Complete product development - 12 24,000 10 20,000 L Complete package design J,K 4 6,000 2 2,000 M Complete marketing plan J 8 10,000 6 8,000 Required: a) Determine the critical path and list the critical activities. (8 marks) b) Determine the minimum time and minimum cost network. (7 marks) c) K. K Ltd knows that other companies are working on a competing product. The company estimates that the delay of every week beyond the 40 th week in bringing out the new line will cost the firm sh. 1,000,000 in lost profit.. What will be the cost to the firm if the project is completed in 50 weeks? (3 marks) d) Is it advisable to crash the profits from 51 to 45 weeks? Why? (2 marks) (Total: 20 marks) QUESTION THREE Explain why a high correlation between the independent and dependent variables may or may not necessarily prove that a change in the independent variables may or may not necessarily prove that a change the independent variable causes a change in the dependent variable. (3 marks) Kelele Company Ltd. manufacturers crockery. The company is considering the use of simple and multiple linear regression analysis to forecast annual sales for they are 2001 because previous forecasts have been inaccurate. The sales forecast will be used to initiate the budgeting process and to identify more accurately the underlying process that generates sales. The financial controller of the company has considered many possible independent variables and equations to predict sales and has 11 Questions – Past Papers 12 narrowed his choices to four equations. He used annual observations from twenty prior years to estimate each of the four equations. The following is a statistical summary of the four equations and definitions of the variables used in the exercise. Equatio n I Equation II Equation III Equation IV Dependent variable Yt Yt Yt Yt Independent variable Yt 1 Zt Zt 1 Nt t Zt Zt t Intercept (sh ) 2,500,00 0 5,000,000 4,500,000 3,000,000 Coefficient of independent variable 5.5 0.00005 0.00006 * T-statistic 11.00 50.00 25.00 * Standard error of estimate (sh ) 2,500,00 0 2,550,000 2,600,000 2,450,000 Coefficient of determination 0.94 0.90 0.81 0.96 The other statistics for Equation IV were estimated as follows: Variable N t - 1 Z t Z t - 1 Coefficient 50 0.00001 0.00001 5 T-statistic 20.00 7.50 15 Where: Y t = forecast sales (in shillings) for the company in time period t Y t – 1 = actual sales (in shillings) for period t – 1 Z t = forecast Kenya gross national product in time period t Z t - 1 = actual Kenya gross national product in time period t – 1 N t – 1 = company’s net income in time period t – 1 Required: a) Using the relationship T = a + bx, write Equations II and IV (3 marks) b) If the actual sales for the year 2000 were sh.7,500,00, what would be the forecast sales for the year 2001? (2 marks) c) Explain the meaning and significance of the coefficient of determination. (4 marks) d) Explain why the Financial Controller might prefer Equation III to Equation II.(2 marks) e) Explain the advantages and disadvantages of using Equation IV to forecast annual sales. (6 marks) (Total: 20 marks) QUESTION FOUR Skyline Ltd. operates daily round-trip flights on the Nairobi-Mogadishu route using a fleet of three light aircraft. These three aircraft are Skyline 1, “Skyline 2 and Skyline 3. The standard quantity of fuel used on each round-trip over this twelve-month period has a mean of 100 KL and a standard deviation of 10 KL. (1 KL = 1,000 litres) Past Paper Questions and Answers James Thuo, the operations manager of Skyline Ltd., uses a statistical quality control (SQC) approach in deciding whether to investigate the variances from the standards fuel usage per round-trip flight. He investigates all those flights with fuel usage greater than two standard deviations from the mean. In addition, James Thuo monitors trends in the SQS charts to determine if additional investigations decisions should be made. James Thuo received the following reports for round-trip fuel usage for the month of May 2001 from the pilots of the three planes operating on the Nairobi-Mogadishu route: Flight Skyline 1 Skyline 2 Skyline 3 KL KL KL 1 104 103 97 2 94 94 104 3 97 96 111 4 101 107 104 5 105 92 122 6 107 113 118 7 111 99 126 8 112 106 114 9 115 101 117 10 119 93 123 Required: a) Using the σ 2 t rule, indicate the variance investigation decisions which should be made. (5 marks) b) Present the SQC charts for round-trip fuel usage by each of the three aircraft I May 2001. (6 marks) c) What inferences can be made from the three SQC charts developed in (b) above? (5 marks) (Total: 16 marks) QUESTION FIVE a) Mount Sinai Health Centre specializes in the provision of sports/exercise and medical/dietary advice to clients. The service is provided on a residential basis and clients reside for whatever number of days that suit their needs. Budgeted estimates for the year ending 300 June 2002 are as follows: 1. The maximum capacity of the center is 50 clients per day for 350 days in the year. 2. 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: 13 Questions – Past Papers 14 Client fee Occupancy level Occupancy as a percentage per day (sh) of maximum capacity 3,600 High 90% 4,000 Most likely 75% 4,400 Low 60% 3. Variable costs are also estimated at one of the three levels per client day. The high most likely and low levels per client per day are Sh.1,900, Sh.1,700 ad Sh.1,400 respectively. 4. The range of cost levels reflects only the possible effect of the purchase prices of goods and services. Required: i. A summary which shows the budgeted contribution to be earned by Mount Sinai Health Centre for the year ended 30 June 2002 for each of the nine possible outcomes. (11 marks) ii. State the client fee strategy for the year to end 30 June 20002 which will result from the use of each of the following decision rules. (a) Maximax; (b) Maximin; (c) Minimax regret. (8 marks) b) The probabilities of variable costs levels occurring at the high, most likely and low levels provided in the question are estimated at 0.1, 0.6 and o.3 respectively Required: Compute the maximum amount you would be willing to pay to acquire perfect information. (5 marks) (Total: 24 marks) Past Paper Questions and Answers MANAGEMENT ACCOUNTING DECEMBER 2001 TIME ALLOWED: 3 HOURS QUESTION ONE Kiko Ltd. is a large cash and carry warehouses which sells electronics. Kiko Ltd. Purchases the most popular model of calculators (FX 100) directly form the manufacturer at a cost of Sh.250 each. Average sales per a 300 day year are 475 calculators. Whenever an order with the manufacturers is placed, Kiko Ltd, Incurs a cost of Sh.50. The stock holding costs are estimated at Sh.12.50 plus 10% opportunity cost of capital. The lead-time is three days. During the last 50 stock cycles, the demand during the lead-time has generated the following frequency distribution: Lead time demand 0 1 2 3 4 5 6 7 8 Number of stock cycles 1 2 6 8 10 8 8 5 2 Each time the warehouses runs out of stock, an emergency order is placed with an extra cost of Sh.20 per calculator. Required: a) The economic order quantity (EOQ) and the reorder level. (16 marks) b) The total annual relevant costs for the order quantity in (a) above. (4 marks) (Total: 20 marks) QUESTION TWO Boots Ltd. manufactures a range of five similar products, A, B, C, D and E. the table below shows the quantity of each of the required inputs necessary to produce one unit of each product, together with the weekly inputs available and selling prices of each product. Inputs A B C D E Weekly inputs available Raw materials (Kg) 6.0 6.5 6.1 6.1 6.4 35,000 Kgs Forming (hours) 1.00 0.75 1.25 1.0 0 1.00 6,000 hours Firing (hours) 3.00 4.50 6.00 6.0 0 4.50 30,000 hours Packing (hours) 0.50 0.50 0.50 0.7 5 1.00 4,000 hours Selling price (Sh.) 40 42 44 48 52 The costs of each input is as follows: Material Sh.2.10 per Kg Forming Sh.3.00 per hour 15 Questions – Past Papers 16 Firing Sh.1.30 per hour Packing Sh.8.00 per hour Required: a) Formulate this problem as a Linear Programming problem. (7 marks) b) The problem has been solved using a computer package and the following final table of a simplex solution has been produced: Past Paper Questions and Answers Bas is A B C D E X S T U Value A 1 1.1 8 1.0 4 0.46 0 0.36 0 0 - 2.29 3,357 B 0 - 0.34 0.2 3 0.02 0 -0.18 1 0 0.1 4 321 T 0 1.3 7 2.9 7 2.28 0 -0.27 0 1 - 2.79 9,482 E 0 - 0.09 -0.02 0.52 0 -0.18 0 0 2.1 4 2,321 Zj 0 1.2 6 1.0 6 0.51 0 2.02 0 0 8.8 1 105,79 1 Where A, B, C, D and E are the weekly production levels for the five products; X is the amount of raw material that falls short of the maximum available; S, T an U are the respective number of hours short of maximum weekly input of forming, firing and packing time. i Use this table to find the optimum weekly production plan. (4 marks) ii Describe the implications of using this plan in terms of unused resources and overall contribution to profit. (3 marks) iii In the context of this problem explain the meaning of “The dual or shadow price of a resource” (3 marks) iv There is a proposition that the company manufactures an additional product which would sell at Sh.50 per unit. Each unit will need 6 kg of raw material, one hour of forming time, five hours of firing time and one hour of packing time. Is it a worthwhile proposition? (3 marks) (Total: 20 marks) QUESTION THREE (a) Briefly explain four ways in which competitive situations (or games) can be classified. (8 marks) (b) Kamau and Njoroge are two cousins specializing in hawking business along River road. Kamau specializes in second hand shirts while Njoroge specializes in cheap electronic goods. However, sales have been decreasing partly due to the harsh economic condition in Kenya and partly due to restrictions by the City Council. Each of the cousins is considering expanding to include in their lines of business, items on which their rivals now have a monopoly. Each knows that the other is considering this expansion and this influences each of their decisions. Kamau figures out that if he does not expand his business and his cousin does, it will hurt his trade by Sh.500 of profit per day. If neither of them expands inventory to include the extra product, 17 Questions – Past Papers 18 Kamau thinks it will boost his net profit by Sh.500 per day due to his superior location. If he expands and his cousin does also, he believes the combination of location and expanded inventory will increase his profits by Sh.1,000 per day. However, if he alone expands and his cousin does not, this will result in no net increase in business. Required: i Prepare a game matrix and show that a pure strategy does not exist. (4 marks) ii Solve the above game to determine the average winnings (or losses) each of the cousins would expect. (8 marks) (Total: 20 marks) QUESTION FOUR 1. Mega Techniques Ltd. makes special purpose equipment according to customer specifications. During the past year, one of its loyal customers, Pawa Ltd., ordered a specialized equipment to be fabricated for it. Mega Techniques Ltd. Finished construction the equipment only to be notified that Pawa Ltd. Had recently gone into liquidation and will not therefore take the equipment. The original price to Pawa Ltd. had been agreed at Sh.9,108,000 which included an estimated normal profit mark-up of 10 per cent on total costs. The costs incurred to manufacture the machine were Sh. Direct materials 3,420,000 Direct wages 2,160,000 Overheads: Variable 540,000 Fixed; production 1,800,000 Fixed; selling and administration 360,000 8,280,000 After a sustained search, the sales manager of Mega Techniques Ltd. Has managed to locate one potential buyer, Zimwi Systems Ltd, which has indicated that it could buy the machine if certain conversion work could be carried out. Mega Techniques Ltd’s production department has made a preliminary assessment which reveals that conversion would entail extra work costed as follows: Direct materials Sh.576,000 Direct wages: Department X: 3 men for 4 weeks at Sh.27,000 per man/week Department Y: 1 man for 4 weeks at Sh.21,600 per man/week Variable overhead: Past Paper Questions and Answers 20 per cent of direct wages Fixed production overhead: Department X: 75 per cent of direct wages. Department Y: 25 per cent of direct wages. The following additional information is provided: 2. In the original machine, there were three types of basic materials: i Type P could now be sold to a scrap merchant for Sh.540,000. ii Type Q could be sold to a scrap merchant for Shs. 360,000 but it would take 120 hours of labour paid at Shs. 270 per hour to put it into a suitable condition for sale. iii Type R would need to be scrapped at a cost to Mega Techniques Ltd. of Shs.108,000 3. The materials for the conversion are at present in stock. If not needed for the conversion they could be used in the production of another machine in place of materials that would currently cost Sh.684,000. 4. The conversion would be carried out in two departments: Department X is currently extremely busy and it is estimated that its contribution overheads and profits is Sh.2.50 for every Sh.1 of labour. Department Y has idle staff, for organizational reasons its labour force cannot be reduced below its present level of four employees, all of whom are paid at the standard rate of Sh.21,600 per week. 5. The designs and specifications of the original machine could be sold in a neighbouring country for a sum of Sh.270,000 if the machine is scrapped. 6. An additional temporary supervisor would have to be engaged for the conversion work at a cost of Sh.162,000. It is the company’s normal practice to charge supervision to fixed overhead. 7. Pawa Ltd. Had paid Mega Techniques Ltd. A non-returnable deposits of 12% of the selling price. Required: a) The minimum price that Mega Techniques Ltd. should accept from Zimwi Systems Ltd. for the converted machine. Explain clearly how you arrive at your figure. (16 marks) b) State clearly any assumptions that you have made in arriving at your conclusions in (a) above. (4 marks) (Total: 20 marks) QUESTION FIVE Madoadoa Limited is a multi-division manufacturing company. The manufacture of M101. One of the company’s finished products involves 19 Questions – Past Papers 20 two divisions; Mwanzo and Mwisho. Mwanzo division manufactures the chassis for M101 and transfers it to Mwisho division where it is reworked, fitted and assembled into the finished product. The two divisions are housed in the same building whose lease is due to expire in two years’ time. Data on the operations of the two divisions for the year just ended is as follows: Mwanzo division Quantity of units (chassis) transferred per year 30,000 Transfer price from Mwanzo to Mwisho Sh.30000 Current level of operations 75% of full capacity Loss for the year Sh.90,000,000 Mwisho division Quantity of units produced and sold 30,000 Price charged outsiders Sh.150,000 Profit made for the year Sh.610,000,000 Mr. Makini, the general manager of Mwisho division, has been considering the possibility of sourcing the chassis from outside suppliers. He has received a quotation from Samawati Ltd., a competitor of Mwanzo division offering to supply a minimum of 30,000 and a maximum of 40,000 units of chassis per year for two years with adequate guarantees as to quality and continuity of suppliers. The unit price would be Sh.22,000. Mr.Makini is of the opinion that his division should be allowed to take all its requirement (30,000 units per year) of chassis from Samawati Ltd., unless Mwanzo division agrees to cut the unit transfer price to Sh.22,000. He suggests that if Mwanzo division cannot reduce the price it would be better for it to cease operations and the space it now occupies be taken up by Mwisho division, which is currently seeking extra warehouse space. The summarized profit and loss accounts of the divisions for the past year ended 31 October 2001 is as follows: Past Paper Questions and Answers Mwanzo division Mwisho division Production and sales (Physical units) 30,000 30,000 Sh. ‘000’ Sh. ‘000’ Sales revenue 900,000 4,500,000 Direct materials 450,000 2,100,000 Chassis - 900,000 Direct labour 90,000 240,000 Variable overhead 90,000 150,000 Fixed overhead (excluding depreciation) 285,000 300,000 Fixed overhead - depreciation 75,000 200,000 990,000 3,890,000 (90,000) 610,000 900,000 4,500,000 You have been asked to investigate and advise on Makini’s proposal. You have gathered the following additional information: The limitation of the proposed contract with Samawati Ltd. To a two- year period would be agreeable to Madoadoa Ltd. As the lease for the factory is unlikely to be renewed in two years’ time and there is no wish to enter into firm commitments beyond that date. If Mwanzo division is closed, most of the work force could be productively absorbed by other divisions of Madoadoa Ltd., which operate in the vicinity at no additional cost to those divisions. The manager of Mwanzo division complains that his division has to bear exceptionally heavy depreciation charges and fixed overheads (including central office charges) which are beyond his control. Without these expenses, he believes that Mwanzo division could match price quoted by Samawati Ltd., and still make a reasonable profit. He also believes that with a price of Sh.22,000, it should be possible to operate at full capacity, selling 25% of the output in the open market. The additional output would increase the direct materials cost and variable overhead proportionately but he estimates that the total direct labour cost would only increase by 10%. The plant used by Mwanzo division has a book value of Sh.150,000,000. Its current resale is probably Sh.50,000,000. in two years it is estimated that it will have negligible value. The storage space required by Mwisho division will probably cost Sh.10,000,000 per annum if rented. Mwanzo division has in stock sufficient raw material for nine months’ production if production is continued at the same level as he has achieved last year. If this raw material is sold off (following the decision to close Mwanzo division), it would probably fetch 25% of its cost. Required: 21 Questions – Past Papers 22 a) Mwanzo division’s combined profit and loss account for the ensuring two-year period on the assumption that the division continues to operate after reducing its transfer price to Sh.22,000 and operating at full capacity as expected. (10 marks) b) A statement of costs and benefits to Madoadoa Ltd. If a decision to adopt the proposal made by Mr. Makini rather than the plan put forward by the manager of Mwanzo division is taken. (10 marks) (Total: 20 marks) Past Paper Questions and Answers MAY 2002 TIME ALLOWED: 3 HOURS Answer ALL questions. QUESTION ONE New Books Publishers (NBP) Ltd. are planning to introduce a new management accounting text book. The company’s management accountant estimates that the initial distribution for likely sales is normal with a mean of 20,000 books. In addition, it has been determined that there is a probability of 0.5 that the likely sales will lie between 16,000 and 24,000 books. The textbooks will sell for Sh.1,000 per copy but the publishing company pays the author 10% of revenue in royalties while the fixed costs of printing and marketing the book are calculated at Sh.2.5 million. Using current printing facilities, the variable production costs are Sh.400 per book, however the NBP Ltd. Has the option of hiring a special machine for Sh.1.4 million which will reduce the variable production costs to Sh.250 per book. Required: a) Show the standard deviation ( δ) of likely sales is approximately 6,000. (4 marks) b) Using δ = 6000, determine the probability that the company will at least break even if: i Existing printing facilities are used. (3 marks) ii The special machine is hired. (3 marks) c) By comparing expected profits, decide whether or not the publishing company should hire the special machine. (3 marks) d) By using the normal distribution, it can be shown that he following probability distribution may be applied to the book sales. Sales Sh ‘000’ 0 – 10 10 - 16 16 – 20 20 – 24 24 – 30 30 - 40 Probability 0.05 0.20 0.25 0.25 0.20 0.05 By assuming that the actual can only take the mid-points of theses classes, determine the expected value of perfect information and interpret it. (7 marks) ( Total: 20 marks) QUESTION TWO a) Describe the advantages and disadvantages of using simulation to investigate queuing situations compared with the use of queuing formulae. (4 marks) b) Kisumu Municipal council operates a mini-bus service to take shoppers and tourist from the bus and the railway stations to various locations in the Municipality. The following data have been 23 Questions – Past Papers 24 collected for the arrival of passengers at the bus stop outside the railway station: Time between successive arrivals (minutes) 0 1 2 3 4 5 6 Probability 0.0 4 0.1 6 0.2 4 0.2 8 0.1 6 0.1 0 0.0 2 The mini-buses are scheduled to run every 10 minutes but variation in traffic conditions results in the following distribution. Time between successive buses (minutes) 8 10 12 14 16 Probability 0.10 0.38 0.28 0.15 0.09 The number of empty seats on the bus is found to follow the distribution below: Number of empty seats 0 1 2 3 4 5 6 Probability 0.0 6 0.1 8 0.2 7 0.3 4 0.1 1 0.0 3 0.0 1 Required: i. Simulate the arrival of to passengers at the bus stop assuming that the simulation clock begins at time zero. Use the following random numbers: 18262318624207384092976446757444417165809 (12 marks) ii. Estimate the average time a passenger must wait for a bus and the average length of queue (4 marks) (Total: 20 marks) QUESTION THREE a) Discuss the three main elements of strategic costs management. (6 marks) b) Explain the major characteristics of modern businesses that necessitate the introduction of a strategic cost management system. (6 marks) c) “If a manager searches for a system that will provide the ‘true costs’ of each service produced by his firm he is attempting the impossible”. Discuss. (8 marks) (Total: 20 marks) QUESTION FOUR Computer Games Ltd. (CGL) makes and sells three types of computer games for which the following budget/standard and actual information is available for a week period: Budget/standard Actual Model Sales Selling price Variable Sales Past Paper Questions and Answers cost (Units) Sh. Per unit Sh. Per unit (Units) A 15,000 3,900 3,120 18,000 B 25,000 3,120 1,950 21,000 C 10,000 2,730 1,716 9,000 Required: a) Prepare a summary of sales variances for quantity, mix and volume for each model and in total, where individual product standard contribution per unit is used as the variance valuation base. (6 marks) b) Prepare an alternative summary giving the same range of variances as in (a) above, but using the budgeted weighted averaged contribution per unit as the variance valuation base. (8 marks) c) Prepare a report to the management which specifically comments on each of the following points: i. Similarities between the variances calculated in (a) as compared with those calculated in (b) above. (4 marks) ii. The arguments which may be put in favour of the individual product quantity and mix variances as calculated in (b) above. (4 marks) iii. The relevance of the individual product, quantity and mix variances to management. (3 marks) ( Total: 25 marks) QUESTION FIVE Zimco Media Group has three major divisions: Newspapers. Television. Film studios. Summary financial data (in millions of shillings) for years 2000 and 2001 is given as follows: Operating income Revenue Total assets Year 2000 2001 2000 2001 2000 2001 Sh. Sh. Sh. Sh. Sh. Sh. Newspape rs 900 1,100 4,500 4,600 4,400 4,900 Television 130 160 6,000 6,400 2,700 3,000 Film studios 220 200 1,600 1,650 2,500 2,600 The manager of each division has an annual bonus plan based on his division’s return on investment (ROI). The company defines ROI as 25 Questions – Past Papers 26 operating income divided by total assets. Senior executives from divisions reporting increases in the division’s ROI from the prior year are automatically eligible for a bonus. Senior executives of division reporting a decline in ROI have to provide persuasive explanations for the decline. In order to be eligible for any bonus, and they are limited to 50% of the bonus paid to the division managers reporting an increase in ROI. J. Kanyama, manager of the newspapers division is considering a proposal to invest Sh. 200 million in a fast speed printing process with colour options. The estimated increment to year 2002 operating income would be Sh. 30 million. The media group has a 12% required rate of return for investments in all three divisions. Required: a. Use the Dupont Method to explain differences among the three divisions in their 2001 ROI. (Use 2001 total assets as the denominator). (6 marks) b. Explain whether J Kanyama should undertake the fast-speed printing press investments proposal. (3 marks) c. T. J. Zimco the Chairman of the media group, has received a proposal to base senor executive compensation in each division on Residual Income (RI) defined as operating income less imputed interest charge. Compute the residual income (RI) of each division in the year 2001 (3 marks) d. Would adoption of the residual income (RI) basis change J. Kanyama’s decision on the acceptance of the fast-speed printing press investment proposal? (3 marks) (Total: 15 marks) Past Paper Questions and Answers DECEMBER 2002 TIME ALLOWED: 3 HOURS. QUESTION ONE In all the Republic of Ramuka there are five coal mines, which have the following outputs and production costs: Mine Output Tonnes/da y Production Cost (Sh. ‘000’/tonne) 1 120 2.5 2 150 2.9 3 80 3.4 4 160 2.6 5 140 2.8 Before the coal can be sold, it must be cleaned and graded at one of the three coal preparation plants. The capacities and operating costs of these plants are as follows: Plant Capacity Tones/day Operating Cost Sh. ‘000’/tonne A 300 0.2 B 200 0.3 C 200 0.3 All coal is transported by rail at a cost of Sh.50 per tonne kilometer, and the distance (in kilometer) from each mine to the three preparation plants are: Mine Preparati on Plant 1 2 3 4 5 A 22 44 26 52 24 B 18 16 24 42 48 C 44 32 16 16 22 Required: a) Determine how the output of each mine should be allocated to the three preparation plants. (14 marks) b) Following the installation of a new equipment at coal mine No.3, the production cost is expected to fall to Sh.3,000 per tonne. What effect, if any, will have on the allocation of coal to the preparation plant? (3 marks) c) It is planned to increase the output of coal mine No.5 to 180 tonnes per day, which can be achieved without any increase in production cost per tonne. How will this affect the allocation of coal to the preparation plants? (3 marks) 27 Questions – Past Papers 28 (Total: 20 marks) QUESTION TWO a) Explain the advantages and disadvantages of the Just-In-Tie (JIT) inventory system. (6 marks) b) A company has determined that the EOQ for its only raw material is 2000 units every 30 days. The company knows with certainty that a four-day lead time is required for ordering. The following is the probability distribution of estimated usage of the raw material for the month of December 2002. Past Paper Questions and Answers Usage (units) Probability 1800 0.06 1900 0.14 2000 0.30 2100 0.16 2200 0.13 2300 0.10 2400 0.07 2500 0.04 Stock-outs will cost the company Sh.100 per unit and the average monthly holding cost will be Sh.10 per unit Required i Determine the optimal safety stock (12 marks) ii Compute the probability of being out of stock. (2 marks) (Total: 20 marks) QUESTION THREE Tritech Ltd. has semi-automatic machine process in which a number of tasks are performed. A system of standard costing and budgetary control is in operation. The process is controlled by machine attendants who are paid a fixed rate per hour of process time. The process has recently been reorganized as part of an ongoing total quality management programme in the company. The nature of the process is such that the machines incur variable costs even during non-productive (idle time) hours. Non-productive hours include time spent on the rework of products. (Note: Gross machine hours = productive hours + non-productive hours) The standard data for the machine process are as follows: 1. Standard non-productive (idle time) hours as a percentage of gross machine hour is 10%. 2. Standard variable machine cost per gross hour is Sh.270. 3. Standard output productivity is 100% that is one standard hour of work is expected in each productive machine hour. 4. Machine costs are charged to production output at a rate per standard hour sufficient to absorb the cost of the standard level of non-productive time. Actual data for the period August to November 2002 have been summarized below: August Septem ber Octob er Novemb er 29 Questions – Past Papers 30 Standard hours of Output achieved 3,437 3,437 4,061 3,980 Machine hours (gross) 4,000 3,800 4,200 4,100 Non-productive machine hours 420 430 440 450 Variable machine costs Sh. ‘000’ 1,100 1,070 1,247 1,247 Variance analysis Sh. Sh. Sh. Sh. Productivity 42,900 (A) ? ? 99,000 (F) Excess idle time 6,000 (A) ? ? 12,000 (A) Expenditure 20,000 (A) ? ? 111,000 (A) Past Paper Questions and Answers Variance analysis (in % terms) % % % % Productivity 4.2 (A) ? 7.4 (F) ? Excess idle time 5.0 (A) ? 4.8 (A) ? Expenditure 1.9 (A) ? 10.0 (A) ? Required: a) Calculate the machine variances for productivity, excess idle time and expenditure for each of the two months of September and October. (6 marks) b) In order to highlight the trend of variances in the months from August to November 2002, express each as a percentage term as follows: i Productivity variance as a percentage of standard cost of production achieved. (3 marks) ii Excess idle time variance as a percentage of expected idle time. (4 marks) iii Expenditure variance as a percentage of hours paid for all standard machine cost. (3 marks) c) Comment on the trend of variances in the August to November period and possible inter-relationships. Particularly in the context of the total quality management programme which is being implemented. (4 marks) (Total: 20 marks) QUESTION FOUR Large service organizations such as banks and hospitals used to be noted for their lack of standard costing systems and their relatively unsophisticated budgeting and control systems compared to the practice in large manufacturing organizations. But this is changing any many large service organizations are now reversing their use of management accounting techniques. Required: a) Explain which features of large service organizations encourage the application of activity-based approaches to the analysis of cost information. (7 marks) b) Explain which features of service organizations may create problems for the application of activity-based costing. (7 marks) 31 Questions – Past Papers 32 c) Explain the uses of activity-based cost information in service industries. (6 marks) (Total: 20 marks) QUESTION FIVE A university offers a range of degree courses. The university’s organization structure consists of three faculties each with a number of teaching departments. In addition, there is a university administrative/management function and a central services function. The following cost information is available for the year ended 30 June 2002 1. Occupancy costs total Sh.15,000,000. Such costs are apportioned on the basis of area used which is: Faculti es Teaching Departme nts Administrati ve/ Managemen t Central services Area (Square feet) 7,500 20,000 7,000 3,000 Past Paper Questions and Answers 2. Administration/management costs: Direct costs: Shs.17,750,000 Indirect costs: an apportionment of occupancy costs. Direct and indirect costs are charged to degree courses on a percentage basis. 3. Faculty costs: Direct costs: Shs. 7,000,000. Indirect costs: an apportionment of occupancy and central services costs. Direct and indirect costs are charged to teaching departments. 4. Teaching departments: Direct costs: Shs. 55,250,000. Indirect cost: an apportionment of occupancy costs and central services costs plus all faculty costs. Direct and indirect costs are charged to degree courses on a percentage basis. 5. Central services: Direct costs: Sh.10,000,000 Indirect costs: an apportionment of occupancy costs. 6. Direct and indirect costs of central services have in previous years been charged to users on a percentage basis. A study has now been completed which has estimated what user areas would have paid external suppliers for the same services on an individual basis. For the year ended 30 June 2002, the apportionment of central services costs is to be recalculated in a manner which recognizes the cost/savings achieved by using the central services facilities instead of using external service companies. This is to be done by apportioning the overall savings to user areas in proportion to their share of the estimated external costs. 7. The estimated external cost of service provision are as follows: Sh. ‘000’ Faculties 2,400 Teaching departments 8,000 Degree courses: Business studies 320 Mechanical engineering 480 Catering studies 320 All other degrees 4,480 16,000 33 Questions – Past Papers 34 Additional data relating to the degree courses are as follows: Business Studies Mechanic al Engineeri ng Caterin g studies Number of graduates 80 50 120 Apportioned costs (as a % of total) Teaching departments 3% 2.5% 7% Administrative/manag ement 2.5% 5% 4% Central services are apportioned as detailed in (5) above. The total number of graduates from the university in the year to 30 June 2002 was 2,500. Required: a) Prepare a flow diagram which shows the apportionment of costs to user areas. (No value needs to be shown). (3 marks) b) Calculate the average cost per graduate for the year ended 30 June 2002, for the university and for each of the degree courses in business studies, mechanical engineering and catering studies (round your values to the nearest Sh.1,000) (13 marks) c) Suggests reasons for any differences in the average cost per graduate from one degree course to another, and discuss briefly the relevance of such information to the university’s management. (4 marks) (Total: 20 marks) Past Paper Questions and Answers JUNE 2003 TIME ALLOWED: 3 HOURS Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show all your workings. QUESTION ONE Briefly explain three methods that can be used to analyze uncertainty in cost-volume-profit (C-V-P) analysis. (3 marks) Aberdares Company Ltd. is a manufacturing company which produces and sells a single product known as T 1 at a price of Sh.10 per unit. The company incurs a variable cost of Sh.6 per unit and fixed costs of Sh.400,000. Sales are normally distributed with a mean of 110,000 units and a standard deviation of 10,000 units. The company is considering producing a second product, T 2 to sell at Sh.8 per unit and incur a variable cost of Sh.5 per unit with additional fixed costs of Sh.50,000. The demand for T 2 is also normally distributed with a mean of 50,000 units and standard deviation of 5,000 units. If T 2 is added to the production schedule, sales of T 1 will shift downwards to a mean of 85,000 units and standard deviation of 8,000 units. The correlation coefficient between sales of T 1 and T 2 is –0.9. Required: i The company’s break-even point for the current and proposed production schedules. (7 marks) ii The coefficient of variation for the two proposals. (8 marks) iii Based on your computation’s in (i) and (ii) above advise the company on whether to add T 2 to its production schedule. (2 marks) (Total: 20 marks) QUESTION TWO “It is now fairly and widely accepted that conventional cost accounting, distorts management’s view of business through unrepresentative overhead allocation and inappropriate product costing. This is because the traditional approach usually absorbs overhead costs across products solely on the basis of the direct labour involved in their manufacture. As direct labour cost expressed as a proportion of total manufacturing cost continues to fall, this leads to more an more distortion and misrepresentation of the impact of particular products on total overhead costs” (from Financial Times) Required: a) Briefly discuss the above statement and state what approaches are being adopted by management accountants to overcome such criticism. (8 marks) b) Traditional budgeting systems are incremental in nature and tend to focus on cost centers. Activity based budgeting (ABB) links 35 Questions – Past Papers 36 strategic planning to the overall performance measurement aimed at continuous improvement. Required: i Explain the weakness of traditional incremental budgeting systems. (4 marks) ii Describe the main feature of activity based budgeting system and comment on its advantages. (8 marks) (Total: 20 marks) Past Paper Questions and Answers QUESTION THREE Joan Odero, an independent movie producer, is negotiating with Roadshow Productions Limited on a contract for the production and marketing of her next film, titled “The rise and fall of a cock”. The budget for the film is, Sh.100 million. Roadshow Productions Limited is offering Joan Odero a choice of one of the three contracts. Contract A 1. Roadshow Productions Limited will pay all the production and marketing costs. 2. Joan Odero will receive a fixed fee of Sh.10 million. 3. Joan Odero will receive 10% of gross revenue from the film in excess of Sh.1 billion (no payment is made for gross revenue up to Sh.1 billion). Contract B 1. Roadshow Productions Limited will pay 80% of all the production and marketing costs up to Sh.100 million and 30% of production and marketing costs in excess of Sh.100 million 2. Joan Odero will receive 10% of all gross revenue for the film. Contract C 1. Roadshow Productions Limited will pay 50% of production and marketing costs up to Sh.100 million. 2. Joan Odero will receive 30% of all gross revenue from the film. Joan Odero estimates the following probabilities for the gross revenues: P(high demand of Sh.2 billion) 0.1 P(medium demand of Sh.500 million) 0.3 P(low demand of Sh.100 million) 0.6 She estimates the following probabilities for the cost of production: P(budgeted cost of Sh.100 million) 0.6 P(high cost of Sh.200 million)0.4 Required: a) The expected monetary value for Joan Odero under each contract for each of the six possible events. (Hint: The possible events are high demand – budgeted costs, high demand – high costs, medium demand – budgeted costs, medium demand – high costs, low demand – budgeted costs, and low demand – high costs). (15 marks) b) Joan Odero will choose the contract that maximizes her expected monetary value from the film. Which contract should she choose? (Show calculations). (2 marks) 37 Questions – Past Papers 38 c) What information might Joan Odero use in assessing the probability distribution for the production and marketing costs of “The rise an fall of cock” film? (3 marks) (Total: 20 marks) QUESTION FOUR High-tex Engineering Company Limited wishes to set flexible budgets for each of its operating departments. A separate maintenance department performs all routine and major repair works on the company’s equipment and facilities. The company has determined that maintenance department performs all routine and major repair works on the company’s equipment and facilities. The company has determined that maintenance cost is primarily a function of machine hours worked in the various production departments. The maintenance cost incurred and the actual machine hours worked during the months of January, February, March and April 2003 were as follows: Month Machine hours in Production departments Maintenance department’s Costs Sh. January 800 350 February 1,200 350 March 400 150 April 1,600 550 Required: a) Determine the cost estimation function using: i High-low method. (5 marks) ii Regression analysis (5 marks) b) Using the regression function estimate: i The maintenance costs that would have been incurred if the machine hours were expected to be 900 in the month of May 2003. (1 mark) ii The maximum machine hours that would have been worked If the maintenance cost incurred had been limited to Sh.400,000 for the month of May 2003. (6 marks) c) Assuming that in the month of May 2003 machine hours were 900, establish a 95% confidence interval for this point estimate. (Assume t c = 2.7764 and standard error of estimate, s e = 63.25). (3 marks) (Total: 20 marks) QUESTION FIVE a) Construct a flowchart to show the logic solution of a zero-sum game. (6 marks) b) Two manufacturers compete in a market for a specialized calculator. Company A controls 75% of the market while company B controls 25% of the market. Company A is considering a vigorous Past Paper Questions and Answers annual marketing campaign which will cost Sh.35,000,000. The total market for the specialize calculator is 100,000 units per year. The profit contribution per unit is Sh.3,000. Company B is debating how much money to invest in research and development every year. It is considering three alternatives: Sh.25,000,000, Sh.50,000,000 and Sh.80,000,000. It is estimated that if company A runs a vigorous annual marketing campaign, its share of the market after one yea will be either 79% or 73%, depending on company B’s investment in research and development (Sh.25,000,000, 50,000,000 and Sh.80,000,000 respectively). On the other hand, if company A does not run the marketing campaign, company B’s share of the market will decrease by 1% of the total market if it invests Sh.25,000,000 in research and development, increase by 1% if it invests Sh.50,000,000 in research and development and increase by 3% if Sh.80,000,000 is invested. Required: i Using the share of the market percentages only, convert the above into a zero sum game, and hence solve for the optimal strategies for both companies. (6 marks) ii Obtain a pay off table consisting of contribution to profit in monetary terms, and hence solve the game. (8 marks) (Total: 20 marks) 39 Questions – Past Papers 40 December 2003 Time Allowed: 3 hours Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings QUESTION ONE Sanders Ltd is a manufacturing company producing two joint products P 1 and P 2 in the ratio of 3:1 at the split-off point. The two products are taken to the mixing plant for blending and refining after the split off point. The following information is also provided: Product P 1 Product P 2 Sales volume (litres) Selling price per litre Joint process costs* Blending and refining costs Other separable costs (all variable) *Joint costs are apportioned on the basis of volume 300,000 Sh.3,500 Sh.300,000,000 Sh.250,000,000 Sh.50,000,000 100,000 Sh.7,000 Sh.100,000,000 Sh.250,000,000 Sh.20,000,000 The joint process costs are 70% fixed and 30% variable whereas the mixing plant costs are 30% fixed and 70% variable. There are only 5000 hours available in the mixing plant. Usually 4000 hours are taken in processing of Product P 1 and P 2 , 2000 hours for each product while the remaining 1000 hours are used for other work that generates a contribution of Sh.100,000 per hour. The company is now planning to change the production mix of the joint process to 3:2 for product P 1 and P 2 respectively. This change will result in an increase in the joint cost by Sh.500 for each additional litre of P 2 produced. Required: (a) Advise the company on whether to change the production mix. (14 marks) (b) Explain other qualitative factors that are important to consider before changing the production mix. (6 marks) (Total: 20 marks) QUESTION TWO A sugar manufacturing company has two plants, one in Bungoma and the other one in Busia, producing equivalent grades of sugar. The Bungoma plant has been operating at 75% of its producing 270,000 tonnes of sugar per month. The Busia plant has been operating at 60% of its capacity producing 360,000 tonnes of sugar per month. The major raw material used in producing sugar is cane. For each 800 tonnes of sugar, 1000 tonnes of care is required. At the Bungoma plant, the local cane costs are Sh.1,875 per tonne but the supply is limited to 144,000 tonnes per month. At Busia plant, local cane costs sh.3000 per tonne and is limited to 400,000 tonnes per month. Additional cane must be purchased through brokers at sh.2,750 per Past Paper Questions and Answers tonne (delivered at either plant). The cost schedules for a typical month’s production are as follows: 41 Questions – Past Papers 42 Bungoma Plant Raw materials 249,600 tonnes of cane Fixed cost per month Variable cost Total cost Sh.’000’ 468,000 594,000 1,026,000 2,088,000 Busia plant Raw materials 249,600 tonnes of cane Fixed cost per month Variable cost Total cost 576,000 1,080,000 1,404,000 3,060,000 Required: (a) (i) If the total combined production of both plants is to be maintained at a rate of 630,000 tonnes per month, would there be any apparent advantage in shifting part of the schedule production from one plant to the other? If so, which plant’s production should be increased and by how much? (10 marks) (ii) What is the amount of the cost saving as a result of this switch? (5 marks) (b) If production requirements increased to 910,000 tonnes, how much would you recommend to be produced at each plant? (5 marks) (Total: 20 marks) QUESTION THREE Nzewani Electronic Ltd. manufactures and sells a brand of television sets called LD-TVs. The three closest competitor brands in the market are SUM-TVs, SON-TVs. Because of the custom manufacturing process and their inherent high costs, no other competitor has any effect on the current market. The year 2002 was an exceptionally good year in terms of gain-loss trade offs. The year’s activity is summarized in the following table: Brand Number of customers January 2002 Gain Loss Number of customers December 2002 LD-TV SUM-TV SON-TV PAL-TV 2200 3000 2300 2500 500 600 250 400 450 700 250 350 2250 2900 2300 2550 Further analysis resulted in the gain – loss summary as follows: Number of customers Gain from Number of customers Losses to LD-TV SUM- TV SON- TV PAL- TV LD-TV SUM- TV SON- TV PAL- TV LD-TV SUM-TV SON-TV PAL-TV 0 200 100 150 400 0 50 250 0 250 0 0 100 150 100 0 0 400 0 100 200 0 250 150 100 50 0 100 150 250 0 0 Past Paper Questions and Answers The market shares for LD-TV, SUM-TV, SON-TV and PAL-TV in January 2002 were 22,30,23 and 25 per cent respectively. Required: (a) Advise the management of Nzewani Electronic Ltd. on the expected market share for each brand at the end of December 2002. (10 marks) (b) Assuming the same pattern of switching persists, what would be the long run market share for each brand? (5 marks) (c) What are the assumptions of the technique you have used in (a) and (b) above? (5 marks) (Total: 20 marks) QUESTION FOUR Marashi Company Ltd. is a merchandising company selling a 40ml bottle of perfume in four zones within Kenya. The variable cost per bottle is Sh.70 but the selling price is different in each of the four zones. The difference in the selling price is due to the transportation costs involved. The company has four salesmen available for an assignment in the four zones. The zones are not equally good in their sales potential. It is estimated that a typical salesman operating in each zone would bring the following annual sales: Zone Mt. Kenya Western Nyanza Eastern Annual sales in bottles Selling price per bottle 60,000 100 50,000 110 40,000 130 30,000 120 The four salesmen also differ in their marketing ability. It is estimated that, working under the same conditions, the yearly sales would be proportionately shared as follows: Salesman: Kariuki Wafula Oketch Wambua Proportion: 6 5 5 4 The objective of Marashi Company Ltd. is to maximize contribution from each zone. Required: (a) Determine how the four salesmen can be assigned to the zones in order for the company to maximize the total contribution. (15 marks) (b) Calculate the total contribution of the company after the assignment. (5 marks) (Total: 20 marks) QUESTION FIVE 43 Questions – Past Papers 44 (a) In preparing the cash budget for the next year, Kericho Tea Farm Limited finds that it has limited surplus funds of Sh.70,000,000 which the managing directors wishes to spend on one of two schemes. Scheme A - Pay Sh.70,000,000 immediately to reputable sales promotion agency which would provide extensive advertising and planned ‘reminder’ advertising over the next ten years. This is expected to increase the net operational cash flows by sh.200,000,000 per annum for the first five years and Sh.100,000,000 for the following five years. Thereafter, the effect would be zero. Scheme B - Buy immediately labour saving machinery at a cost of Sh.70,000,000 which would reduce the operating cash outflows by sh.150,000,000 per annum for the next ten years, at the end of which the equipment will have a salvage value of zero. Required (i) The average accounting rate of return (ARR) per annum for each scheme over 10 years. (2 marks) (ii) The net present value (NPV) for each scheme assuming the desired rate of return is 18%. (4 marks) (iii) The internal rate of return (IRR) for each alternative. (4 marks) (b) The paradox is that, “while cost plus pricing is devoid of any theoretical justification, it is widely used in practice”. Discuss the possible justification for its use. (6 marks) (c) Explain the factors to be taken into consideration when establishing the length of a budget period. (4 marks) (Total: 20 marks) Past Paper Questions and Answers June 2004 Time Allowed: 3 hours Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings QUESTION ONE Nairobi Enterprise Ltd. (NEL) is a divisionalised enterprise. Among its divisions, are South and North. Both of these divisions have a wide range of independent activities. One product, Xcel, is made by South division for North division. South division does not have any external customers for the product. The central management of NEL delegates all pricing decisions to divisional managers and the pricing of Xcel has been a contentious issue. It has been suggested that South division should give a transfer price schedule for the supply of Xcel based on South division’s own production costs and that all goods transferred would be made at South division’s marginal costs. The North division would then order the quantity it requires each month. South estimates its monthly total costs (TC) in shillings for producing Xcel using the following equation: TC S = 1,000,000 + 550Q S + 0.002Q S 2 Where Q s is the quantity of Xcel manufactured. North division total costs (TC N ) in shillings using Xcel, excluding transfer price are: TC N = 1,500,000 + 1100Q N + 0.001Q 2 S Where Q N is the quantity produced by the North division which incorporates one unit of Xcel. The North division estimates that the demand function for its product incorporating Xcel is: P N = 4,500 – 0.0008Q N Where P N is the price per unit of the product incorporating Xcel. Neither division holds any stocks of Xcel. Required: (a) (i) The quantity of Xcel which would maximize profits for NEL. (5 marks) (ii) The transfer price in shillings corresponding to the maximum production in (i) above if South division’s marginal cost are adopted for transfer pricing. Show the resulting profit for each division. (5 marks) 45 Questions – Past Papers 46 (b) (i) The quantity of Xcel which North division would take (at South division’s marginal costs) if it wanted to maximize its own profits. (5 marks) (ii) The transfer price in shillings corresponding to the quantity of Xcel that would maximize the profits of North division, and the resulting profit for each division. (5 marks) (Total: 20 marks) Past Paper Questions and Answers QUESTION TWO (a) From past experience, a company operating a standard cost accounting system has accumulated the following information in relation to variances in its monthly management accounts: 1. Its variances fall into two categories: Category Percentage of total number of variances Those which are not worth investigating Those which are worth investigating 64 36 100 2. For the first category corrective action has eliminated 70% of the variances, but the remainder have continued unchanged. 3. The cost of an investigation averages Sh.3,500 and that of correcting variances averages sh.5,500. 4. The average cost of any variance not corrected is Sh.5,250 per month and the company’s policy is to assess the present value of such costs at 2% per month for a period of five months. Required: (i) Two decision trees to represent the position if an investigation is carried out and the position when an investigation is not carried out. (6 marks) (ii) Recommend with supporting calculations, whether or not the company should follow a policy of investigating variances as a matter of routine. (2 marks) (iii) Explain briefly two types of circumstances that would give rise to variances in the first category and two types of circumstances that would give rise to variances in the second category. (4 marks) (b) Kenya Fashions Ltd. sells a wide range of high quality customized outfits. One particular outfit is bought at Sh.800 and sold at Sh.1,300. Mean holding costs per season per outfit amounts to Sh.50 and it costs Sh.8,000 to order and receive goods into stock. The manufacturers require orders in advance and once a batch has been made, it is not possible to place a repeat order. Further, it is not possible for delivery to be staggered over the fashion season. When a customer buys an outfit, she has a fitting, any alterations or adjustments are made, and then she collects the outfit a day or so later. Generally if an outfit is out of stock at one branch, it can be readily obtained from another branch, usually in a matter of hours. However, if the company as a whole runs out of an item, then the cost of the stock out is Shs. 200 per item. If the company over buys for a season, then it is 47 Questions – Past Papers 48 expected that it will be able to dispose of the surplus outfits at Sh.500 each. The problem facing the management accountant of the company is to decide how many outfits to order for the season ahead in order to maximize expected profit, bearing in mind the penalties for over and under ordering. Required: (i) Determine the number of outfits to order to maximize expected profits. (6 marks) (ii) Compare and contrast the model that you have developed with the classical economic quantity model. (2 marks) (Total: 20 marks) QUESTION THREE Mwamba Development Group (MDG) plans to undertake a project consisting of eleven (11) tasks. The expected completion time of each task is uncertain and this makes the project completion time uncertain. MDG has approached a consultancy firm for advice on the expected project completion time. The consultancy firm intends to use simulation analysis to deal with the uncertainty of the project completion time. The following data were obtained by the consultancy firm, for the purpose of simulation analysis: Activi ty Immediate Predecessor Duration in days and probabilities Duration in days 3 4 5 6 7 8 9 10 Probabilities A B C D E F G H I J K - - A B,C B E C G F,D,H I J - - 0.10 - - 0.50 0.40 - - - - 0.10 - - 0.50 - - 0.20 - 0.50 - 0.70 - 0.40 - - 0.80 0.30 - 0.20 - 0.60 - 0.70 - - 0.40 - - 0.20 - - - 0.30 - 0.20 - - - 0.20 - 0.30 - 0.20 - - - 0.90 0.10 - - - - 0.50 - - 0.20 - - - - - 0.20 - - - - - 0.40 - - 0.20 - - 0.50 - 0.20 - Required: (a) Explain the basic steps that can be used to solve this type of problem simulation technique. (6 marks) (b) Draw the network for the project and determine the critical path of the project. Use the activity’s expected time to determine the expected completion time of the project. (4 marks) Past Paper Questions and Answers (c) Carry out four simulation runs for each activity and using the results of the simulation, determine the expected project completion time. (6 marks) (d) State two advantages and two disadvantages of the simulation technique. (4 marks) Use the following random numbers. 95, 30, 59, 93, 28, 72, 09, 54, 66, 95, 36, 98, 56, 23, 60, 79, 14, 50, 61, 81, 84, 14, 24, 75, 85, 49, 05, 09, 53, 45, 60, 98, 90, 86, 74, 55, 69, 09, 10, 96, 40, 27, 15, 83 (Total: 20 marks) QUESTION FOUR (a) The current thinking in Management Accounting contends that Activity-Based Costing (ABC) provides better information concerning products costs and decision making than traditional management accounting techniques. However, whereas ABC may give a different impression of product costs, it is not necessarily a good idea and it may be advisable to continue improving traditional cost accounting techniques before moving to ABC. Required: (i) Explain cost behaviour issues underlying the use of ABC. (4 marks) (ii) Explain why ABC might, be more suitable for modern manufacturing environment than traditional cost accounting techniques? (3 marks) (iii) Comment on the reported claim that ABC gives better information as a guide to decision making than the traditional product costing techniques. (3 marks) (b) The Marima Manufacturing Company produces four products; W, X, Y and Z using the same plant and processes. The following information relates to the company: Product W X Y Z Volume (units) Material cost/unit (Sh.) Direct labour/unit (hours) Machine time/unit (hours) Labour cost/unit (Sh.) 1,000 10 1 ½ 6 10,000 10 1 ½ 6 1,200 32 4 2 24 14,000 34 3 3 18 The cost accountant analysed the production overheads recorded under the following headings: 49 Questions – Past Papers 50 Overhead costs: Sh.’000’ Factory overhead (machine-oriented activity) Set-up costs Material costs: Cost of ordering materials Materials handling costs Administration costs for spare parts. 74,848 8,710 3,840 15,160 17,200 Overhead costs are absorbed by products on a machine hour rate of Sh.9.60 per hour giving an overhead cost per unit for the products as follows: Product W X Y Z Shillings 2.40 2.40 9.60 14.40 Investigations into the production overhead activities for the period reveal the following totals: Product W X Y Z Number of set-ups Number of material orders Number of times material was handled Number of spare parts used 2 2 4 4 12 16 20 10 4 2 6 2 16 16 24 8 Required: (i) Unit costs per product using activity-based costing tracing costs to production units by means of cost drivers. (6 marks) (ii) Comment briefly on the differences disclosed between overheads traced by the present system and those traced by activity based costing. (4 marks) (Total: 20 marks) QUESTION FIVE Various attempts have been made in the public sector to achieve a more stable, long-term planning base in contrast to the traditional short-term annual budgeting approach, with its emphasis on flexibility. Past Paper Questions and Answers Required: (a) Explain the deficiencies of the traditional approach to planning which led to the attempts to introduce planning programming budgeting system (PPBS). (6 marks) (b) Give an illustration of how PPBS plan could be drawn up in respect of one sector of public authority activity. (6 marks) (c) Discuss the problems which have made it difficult in practice to introduce PPBS. (8 marks) (Total: 20 marks) 51 Questions – Past Papers 52 December 2004 Time allowed: 3 hours QUESTION ONE Maisha Meta Products Ltd. has prepared a schedule of estimated overhead costs for the coming year. The schedule was prepared on the assumption that production would amount to 800,000 units. Costs have been classified as either fixed or variable according to the judgement of the financial controller. The following overhead cost items and their classification as either fixed or variable form the basis for the overhead cost schedule: Item Total cost Sh. ‘000’ Indirect materials (variable) Indirect labour (Sh. 171,000 fixed) Rent (fixed) Electricity (variable) Equipment depreciation (fixed) Equipment maintenance (Sh. 8,500 fixed) Personal Property taxes (Sh. 6,350 fixed) Data Processing (Sh. 9,470 fixed) Technical support (fixed) 37,500 194,200 236,420 27,210 181,000 24,330 14,100 11,220 16,940 742,920 The following additional information is provided: 1) In the past, the overhead cost have been related to production levels. However, price instability has made the management to suggest that an explicit consideration be given to include an appropriate price index in the cost equation. 2) For cost estimation purpose, it is estimated that the coming period’s value index will be the same as that of the last period, which is 113. 3) Following the management instructions, information was gathered on past costs, production levels and an appropriate price index. The information gathered is given below: Overhead cost Sh. ‘000’ Production Units ‘000’ Price index 718,480 735,110 768,310 717,670 715,960 726,880 753,420 777,640 720,410 718,100 736,800 714,220 62,800 72,800 93,400 56,900 58,800 69,000 87,000 98,000 59,200 62,600 73,100 60,400 89 90 93 95 98 100 101 103 103 106 108 113 Past Paper Questions and Answers 4) There have been no significant changes in operations over the period covered by the above information nor are there any significant changes expected in the incoming period. 5) When the information above was entered into a regression program using only the production level as the independent variable, the following results were obtained: Equation (figure in ‘000’) Overhead = Sh. 626,547 + (Sh. 1.504 x production units) Statistical data for the above equation 53 Questions – Past Papers 54 Correlation coefficient R-square Adjusted R-square 0.988 0.976 0.974 6) When both predictors are entered in the regression program, the following results were obtained: Multiple regression results: Equation (figures in ‘000’ except the index) Overhead = Sh. 632,640 + (Sh.1.501 x production units) – (Sh.59.067 x index) Statistical data for the above equation: Correlation coefficient (multiple R) R-square Adjusted R-square Correlation matrix:: Production Index 0.988 0.976 0.972 Production 1.00 -0.087 Index -0.087 1.00 Required: a) Determine the cost estimation equation using the account analysis method (6 Marks) b) Use the high-low method to estimate the cost of 800,000 units of production expected in the coming period. (4 Marks) c) Using the simple linear regression, estimate the cost of 800,000 units of production. (4 Marks) d) Use the multiple regression results to prepare an estimated cost for the 800,000 units in the incoming period. (4 Marks) e) Comment on which of the methods is more appropriate under the above circumstances. (2 Marks) (Total: 20 marks) QUESTION TWO Industrial Chemical Ltd. (ICL) produces chemical Y. the standard ingredients of 1 kilogram of Y are: 0.65 kilograms of ingredient F @ Sh. 40 per Kg 0.30 kilograms of ingredient D @ Sh. 60 per Kg. 0.20 kilograms of ingredient N @ Sh. 25 per Kg. The following additional information is provided: 1. Production of 4,000 kilograms of chemical Y was budgeted for October 2004. 2. The production of chemical Y is entirely automated and production costs attributed to its production comprise only direct materials and overheads. Past Paper Questions and Answers 3. ICL’s production process works on a just-in-time (JIT) inventory system and no ingredients or inventories of chemical Y are held. 4. Overheads budgeted for the production of Y in the month of October 2004 were as follows: 55 Questions – Past Papers 56 Activity Total amount Sh. Receipt of deliveries from suppliers (Standard delivery quantity is 460 kilograms) Dispatch of goods to customers (Standard dispatch quantity is 100 kilograms) 40,000 80,000 120,000 5. In October 2004, 4,200 kilograms of Y were produced and the cost details were as follows: Materials used 2,840 kilograms of F, 1,210 kilograms of D and 860 kilograms of N at a total cost of Sh. 203,800. Actual overhead costs 12 supply deliveries at a cost of Sh.48,000 and 38 customer dispatches at a cost of Sh. 78,000 were made. 6. ICL’s budget committee met recently to discuss the preparation of the cost control report for October 2004 and the following discussion took place: Chief accountant: “the overheads do not vary directly worth output and are therefore by definition ‘fixed’. They should be analyzed and reported accordingly”. Management accountant: “the overheads do not vary with output, but they are certainly not fixed. They should be analyzed and reported on an activity based basis.” Required: Having regard to this discussion, a) Prepare a variance analysis of the production costs of Y in October 2004. (Separate the material cost variance into price, mixture and yield components and the overhead cost variance into expenditure, capacity and efficiency components using consumption of ingredient F as the overhead absorption base). (12 marks) b) Prepare a variance analysis of the overhead production costs on Y in October 2004 on an activity based basis. (8 marks) Note: In both parts (a) and (b) round you values to the nearest shilling. (Total: 20 marks) QUESTION THREE Farmers Limited had received an order for a piece of special machine from Naivasha Flowers Limited. Just as farmers completed the machine, Naivasha Flowers Limited was declared bankrupt, defaulted Past Paper Questions and Answers on the order, and forfeited 10% deposit paid on the selling price of Sh. 72,000,000. Farmers Limited engineering department manager identified the costs already incurred in the production of the special machine for Naivasha Flowers limited as follows: 57 Questions – Past Papers 58 Sh. ‘000’ Sh. ‘000’ Direct materials used Direct labour incurred Overhead applied: Variable Fixed Fixed administrative expenses Total cost 10,700 5,350 16,600 21,400 16,050 5,4 05 59,455 The following additional information is provided: 1. Narok Corporation would be interested in buying the special machine if it is reworked to Narok’s corporation specifications. Farmers Limited has offered to sell the reworked special machine to Narok Corporation as special order for a net price of Shs. 68,400,000. Narok Corporation has agreed to pay the net price when it takes delivery in two months time. 2. The additional identifiable costs to rework the machine to the specifications of Narok Corporation are as follows: Sh. ‘000’ Direct materials Direct labour 6,200 4, 200 10,400 3. Farmers limited can convert the special machine to a standard model. The standard model sells for Sh. 62,500,000. The additional identifiable cost to convert the special machine to the standard model are: Direct materials Direct labour Sh. ‘000’ 2,850 3,300 6,150 4. Farmers Limited can sell the machine as it is (i.e. without modifications) for a net price of Sh.52,000,000. However, the potential buyer of the unmodified machine wants it after 60 days. They buyer offers Sh. 7,000,000 down payment with the final payment upon delivery. 5. The sales commission rate on sales of standard models is 2% while the sales commission rate on special orders is 3%. All sales commissions are calculated on the net price (i.e. list price less cash discount, if any). 6. Normal credit terms of sales of standard models are 2/10 net 30. Customers take the discounts except in rare instances. Credit terms for special orders are negotiated with the customer. 7. The applicant rates of the manufacturing overhead and the fixed selling and administrative costs are as follows: Past Paper Questions and Answers Manufacturing: Variable Fixed 50% of direct labour 25% of direct labour Selling and administrative: (fixed) 10% of the total of direct materials, direct labour and manufacturing overheads. 8. Normal time required for rework is one month. 9. A surcharge of 5% of the sales price is placed on all customer requests for minor modifications of standard models. Conversion of a special machine to a standard model is not a minor modification. 10.Farmers Limited normally sells a sufficient number of standard models for the company to operate at a volume in excess of a breakeven point. 11.Farmers Limited does not consider the time value of money in the analysis of special orders and projects whenever the time period is less than one year because the effect is not significant. Required: (a) Determine the total contribution in shillings for each of the three alternatives (12 marks) (b) If Narok Corporation makes a counter offer, what is the lowest price farmers limited should accept for the reworked machine from Narok Corporation? Explain your answer. (3 marks) (c) Discuss the influence that fixed factory overhead costs should have on the sales quoted by Farmers Limited for special orders when: (i) A firm is operation at or below the breakeven point (3 marks) (ii) A firm’s special orders constitute efficient utilization of unused capacity above the breakeven volume. (2 marks) (Total: 20 marks) QUESTION FOUR (a) Explain the following terms as applied in competitive situations: i) Degeneracy (2 marks) ii) Pure strategy (2 marks) iii) Mixed strategy (2 marks) iv) Dominance rule (2 marks) (b) Best Sell Ltd. has decided to launch a new product in addition to its range of products. The following information is available: 1. The new product may be distributed through any combination of the two company warehouses W 1 and W 2 . 2. The available monthly production capabilities for the new products are: 1000 units at plant A 59 Questions – Past Papers 60 2000 units at plant B 1000 units at plant C 3. Three major concentration points of customer demand are at locations E, F and G which are estimated to have a monthly demand of: 900 units at E 800 units at F 900 units at G 4. The unit production costs amount to Sh.30, Sh.40, Sh.10 at A, B and C respectively. 5. The unit handling costs at the warehouses amount to Sh.20 and Sh.30 at W 1 and W 2 . 6. The unit transportation costs from plant to warehouse and unit delivery cost from warehouse to customers are as shown below: Past Paper Questions and Answers Transportation cost schedule. Warehouses W 1 W 2 Plants A B C Sh. 60 50 130 Sh. 60 50 40 Delivery costs schedule Locations E F G Warehouses A B Sh. 30 50 Sh. 50 30 Sh. 80 90 Required: Determine the optimum production and distribution schedule to minimize total cost. (12 Marks) (Total: 20 Marks) QUESTION FIVE Equi-solutions Ltd. was formed ten years ago to provide business equipment solutions to local business. It has separate divisions for research, marketing, product design, technology and communication services, and now manufactures and supplies a wide range of business equipment. To date the company has evaluated its performance using monthly financial reports that analyze profitability by type of equipment. The managing director of Equi-solutions Ltd. has recently returned from a course in which it has been suggested that the “Balanced Scorecard” could be a useful way of measuring performance. Required: a) Explain the “Balanced Scorecard” and how it could be used by Equi- solutions Ltd. to measure its performance. b) The managing director of Equi-solutions Ltd. also overheard someone mention how the performance of their company had improved after they introduced “Benchmarking.” Required: Explain “Benchmarking” and how it could be used to improve the performance of Equi-solutions Ltd. (10 marks) (Total: 20 marks) 61 Questions – Past Papers 62 KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD CPA PART III MANAGEMENT ACCOUNTING 2 June 2005 Time Allowed: 3 hours. Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. QUESTION ONE Tony Kichumi, a financial analyst at Green City Bus Company Ltd. is examining the behaviour of the company’s monthly transportation costs for budgeting purposes. The transportation costs are a sum of a two types of costs: 1) Operating costs, such as fuel and labour. 2) Maintenance costs, such as overhaul of engines and spraying. Kichumi collects monthly data on items 1 and 2 above and the distance covered by the buses. Monthly observations for the year ended 31 December 2004 were as follows: Month Operating costs Maintenance costs Distance covered in kilometers (d) Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ January 471 437 3,420 February 504 388 5,310 March 609 343 5,410 April 690 347 8,440 May 742 294 9,320 June 774 211 8,910 July 784 176 8,870 August 986 210 10,980 September 895 280 4,980 October 651 394 5,220 November 481 381 4,480 December 386 514 2,980 Kichumi ran three linear regression equations based on the data above and came up with the following results: Regression equation I Operating costs = a + bd Variable Coefficien t Standard error t - value Constant 309.19 96.05 3.22 Distance covered in 0.054 0.014 3.86 Past Paper Questions and Answers kilometers r 2 = 0.61, Durbin – Watson statistic = 1.61 Regression equation II Maintenance costs = a + bd 63 Questions – Past Papers 64 Variable Coefficien t Standard error t - value Constant 531.55 46.95 11.32 Distance covered in kilometers - 0.031 0.007 - 4.43 r 2 = 0.68, Durbin – Watson statistic = 1.72 Regression equation III Total transportation costs = a + bd Variables Coefficient Standard error t - value Constant 840.73 80.25 10.48 Distance covered in kilometers 0.023 0.011 2.09 r 2 = 0.29, Durbin – Watson statistic = 2.34 Required: (a) Evaluate the three linear regression equations using: (i) Economic plausibility. (3 marks) (ii) Goodness of fit (3 marks) (iii) Significance of independent variables. (3 marks) (iv) Specifications analysis criteria (3 marks) (Use a 95% confidence level where applicable). (b) List three variables, other than distance covered, that could be important drivers of the company’s operating costs. (3 marks) (c) Suggest an alternative database that Kichumi could have used to examine the drivers of the company’s maintenance costs. (2 marks) (d) Explain three limitations of the linear regression analysis used by the company. (3 marks) (Total: 20 marks) QUESTION TWO Nyali Ltd. is a distributor of an industrial chemical in the South Coast. The chemical is supplied in drums which have to be stored at a controlled temperature. The company’s objective is to maximize profits, however the management team disagrees on the stock control policy and holds the following different views: The Managing Director’s view: The company’s managing director (MD) wishes to improve the stock holding policy by applying the economic order quantity (EOQ) model. Each drum of the chemical costs Shs. 5,000 from a supplier and is sold for Shs. 6,000. The annual demand is estimated to be 10,000 drums Past Paper Questions and Answers which the MD assumes to be evenly distributed over the 300 working days in a year. The cost of delivery is estimated at Shs. 2,500 per order and the annual variable holding cost per drum at Shs. 4,500 plus 10% of the purchase price. Using these data, the MD calculated the EOQ and proposes that it should be used as the basis for future purchasing decisions of the industrial chemical. The Purchasing Manager’s view: Provided in the employment contract of the company’s purchasing manager (PM), is a clause stating that he will receive a bonus (rounded at the nearest Shs. 100) calculate as follows: b = [1,000,000 – (O C + H C )] x 0.1 where: b is the annual bonus. O C is the annual ordering cost. H C is the annual holding cost. Using the same assumption as the MD, the PM points out that in making his calculation, the MD has not only ignored the bonus but also the fact that suppliers offer quantity discounts on purchase orders, where if the order size is 200 drums or above, the price per drum for an entire consignment is only Shs. 4,990 compared to Shs. 5,000 when the order is between 100 and 199 drums and Shs. 5,010 when an order is between 50 and 99 drums. The Finance Director’s view: The company’s finance director (FD) accepts the need to consider quantity discounts and pay a bonus, but he also holds the view that the MD’s approach is too simplistic. He points out that there is a three days lead time for an order and that demand has not been entirely even over the past year. Moreover, if the company has no drums of the chemical in stock, it will lose specific orders as potential customers will source the chemical from competitors. He gives the frequency of lead time demand over the last year as follows: Demand during lead time Frequen cy (No. of drums) 106 4 104 10 102 16 100 40 98 14 96 14 94 2 Under the circumstances, the MD decided that he would seek further advice on the course of action to be taken by the company. Required: (a) The EOQ as originally determined by the company’s managing director. (2 marks) 65 Questions – Past Papers 66 (b) Determine the optimum order quantity, taking into consideration the MD’s assumptions and after allowing for the purchasing manager’s bonus and supplier quantity discount. (4 marks) (c) The safety stock the company should maintain after applying the finance director’s assumptions and assuming further that the supplier’s contract requires that the order quantity be constant for all the orders in a year. (6 marks) (d) As a consultant, write a brief report to the managing director on the company’s stock ordering and stock holding policies, referring where necessary to your answers in (a) to (c) above. The report should refer to other factors that should be considered when making the final decisions on stock ordering and holding policies. (8 marks) (Total: 20 marks) QUESTION THREE (a) List five assumptions underlying the cost-volume-profit (CVP) analysis. (5 marks) (b) Makazi Ltd. manufactures a hedge-trimming tool which has been selling at Shs. 1,600 per unit for a number of years. The selling price is to be reviewed and the following information is available on costs and the likely demand: 1. The standard variable cost of manufacturing the tool is Shs. 1,000 per unit and an analysis of the cost variances in the past 20 months shows the following pattern which the production manager expects to continue in the future. • Adverse variances of 10% of the standard variables cost occurred in ten of the twenty months. • Nil variances occurred in six of the twenty months. • Favourable variances of 5% of the standard variable cost occurred in four of the twenty months. 2. Fixed costs have been Shs. 400 per unit at an average sales level of 20,000 units, but are expected to rise in the future. 3. The following estimates have been made of the total fixed cost: Shs. Probabil ity Optimistic estimate 8,200,000 0.3 Most likely estimate 8,500,000 0.5 Pessimistic estimate 9,000,000 0.2 4. The demand estimates at the two proposed selling prices being considered are as follows: Proposed selling price Shs. 1,700 Shs. 1,800 No. of units demanded No. of units demanded Probabil ity Optimistic estimate 21,000 19,000 0.2 Most likely estimate 19,000 17,500 0.5 Past Paper Questions and Answers Pessimistic estimate 16,500 15,500 0.3 Assume that all the estimates and probabilities are independent. Required: (i) Based on the information given above, advise the management of Makazi Ltd. on whether they should change the selling price. Indicate the price you would recommend. (6 marks) (ii) The expected profit at the price you have recommended in (i) above and the resulting margin of safety expressed as a percentage of expected sales. (4 marks) (iii) Comment on the method of analysis you have used to deal with the probabilities given in the question. (2 marks) (iv) Explain briefly how the use of a computer program would improve your analysis. (3 marks) (Total: 20 marks) QUESTION FOUR (a) Identify and explain three types of decision making environments. (6 marks) (b) Topcom Kenya International Limited (TKIL) is a telecommunications company situated in Nakuru. Recently, the company was faced with a workers strike which necessitated a renegotiation of the workers’ salaries through their union. The management with the help of a consultant, has prepared the pay-off matrix shown below: 67 Questions – Past Papers 68 Pay-off matrix Workers union strategies U 1 U 2 U 3 U 4 C 1 + 2.5 + 2.7 + 3.5 - 0.2 Company strategies C 2 + 2.0 + 1.1 + 0.8 + 0.8 C 3 + 1.4 + 1.2 + 1.5 + 1.3 C 4 + 3.0 + 1.0 + 1.9 0 A positive sign represents a wage increase while a negative sign represents a wage decrease. Required: (i) Advise the management on the best strategies. (6 marks) (ii) The value of the game (2 marks) (c) Briefly explain the limitations of the use of fame theory in decision making. (6 marks) (Total: 20 marks) QUESTION FIVE (a) State four objectives of a transfer pricing system. (b) Transfer pricing of products between processes in a manufacturing company can be done at: 1. Cost or 2. Sales value at the point of transfer. Required: Discuss how each of the above methods could be used effectively in the operations of a responsibility accounting system. (8 marks) (c) Shadow prices may be used in the setting of transfer prices between divisions in a company, where the intermediate products being transferred are in short supply. Required: Explain why the transfer prices thus calculated are more likely to be favoured by the management of the divisions supplying the intermediate products rather than the management of the divisions receiving the intermediate products. (8 marks) (Total: 20 marks Past Paper Questions and Answers KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD CPA PART III MANAGEMENT ACCOUNTING December 2005 Time Allowed: 3 hours QUESTION ONE (a) Manukato Ltd. produces a designer perfume called “Hint of Elegance.” Production of the perfume involves the use of two ingredients, X 1 and X 2 represented by the production function given below: Y = 2 1 X X Where Y = Number of bottles of designer perfume produced. X 1 = Units of ingredient 1. X 2 = Units of ingredient 2. Currently, the company is operating at a level where the daily usage of X 1 and X 2 is set at 250 units and 360 units respectively. The price of the designer perfume and the cost of ingredients X 1 and X 2 are random variables. The data below relate to the three random variables. Selling price of Y (per bottle) Probabilitie s Shs. 4,000 0.15 4,500 0.35 5,000 0.20 5,500 0.30 Cost of ingredient X 1 Probabilitie s Shs. 1,000 0.10 1,500 0.05 2,000 0.35 2,500 0.50 Cost of ingredient X2 Probabilitie s Shs. 1,500 0.20 2,000 0.25 2,500 0.15 69 Questions – Past Papers 70 3,000 0.40 Required: (i) Calculate the daily expected profit of the company. (5 marks) (ii) Simulate the company’s profit for 10 days using the following random numbers: 58, 71, 96, 30, 24, 18, 46, 23, 34, 27, 85, 13, 99, 24, 44, 49, 18, 09, 79, 49, 74, 16, 32, 23, 02, 56, 88, 87, 59, 41, 06 (8 marks) (b) Nairobi Manufacturers Ltd. produces component X on machine Y at a rate of 4,000 units per month. Machine Z uses component X at the rate of 1,000 units per month, the remainder being put into stock. It costs Shs. 2,000 to set up machine Y while the stock holding cost is estimated at Shs. 2.50 per unit per annum plus a 20% opportunity cost of capital per annum. Each component costs Shs. 25 to produce. Required: (i) Compute the optimal batch size that should be produced using machine Y. (3 marks) (ii) Assume that the actual set-up cost of machine Y is Shs. 1,000 instead of Shs. 2,000. Calculate the cost of prediction error. (4 marks) (Total: 20 marks) QUESTION TWO Kutwa Ltd. is a manufacturing company with two divisions; A and B. Division A manufactures a single standard product K, some of which is sold externally and the remainder used as an input in division B in the manufacture of product M. The unit production costs of product K are given below: Shs. Direct material 40 Direct labour 20 Direct expense 20 Variable manufacturing overheads 20 Fixed manufacturing overheads 40 Selling and packaging expenses (variable) 10 150 Annually, 10,000 units of product K are sold externally at a price of Shs. 300 per unit and 5,000 units are transferred to division B at an internal transfer price of Shs. 290 arrive at by deducting the selling and packaging expense from the external price of Shs. 300 which is not incurred for products transferred internally. Past Paper Questions and Answers The unit production cost for product M which uses product K as an input is given below: Shs. Cost of internally transferred products from division A to division B 290 Direct material 230 Direct labour 30 Variable overheads 120 Fixed overheads 120 Selling and packaging expenses (variable) 10 800 The manager of division B has disagreed with the basis used in arriving at the transfer price. He argues that the transfer price should be arrived at by charging the variable cost plus an agreed mark-up. He also claims that division A would not be in a position to externally sell the extra units that are transferred to division B at the price of Shs. 300. A survey on the relationship between the selling price and demand for each division was carried out by the company’s Sales Director. The results are shown in the table below: Division A Selling price (Shs.) 200 300 400 Demand (units) 15,000 10,000 5,000 Division B Selling price (Shs.) 800 900 1,000 Demand (units) 7,200 5,000 2,800 The manager of division B suggests that based on the above results, a transfer price of Shs. 120 would offer division A a reasonable contribution towards its fixed cost and earn division B a reasonable profit. This would lead to an increase in the output and overall profitability of the company. Required: (a) Calculate the effect of the existing transfer pricing system on the company’s profits. (12 marks) (b) Calculate the effect of adopting the transfer price of Shs. 120 on the company’s profits. (8 marks) (NB: use the results of the Sales Director’s survey in your calculations). (Total: 20 marks) QUESTION THREE (a) Explain the applications of the learning curve. (4 marks) (b) Pwani Marine Ltd., a boat construction company, has developed a new type of speed boat called “Speed Surf.” The following information has been availed to you: 71 Questions – Past Papers 72 1. Boat construction is a continous assembling process carried out at the company’s yard. 2. Boat assembling is labour intensive involving the use of two classes of labour namely: • Skilled labour at a standard rate of Shs. 1,250 per hour. • Semi-skilled labour at a standard rate of Shs. 950 per hour. 3. Experience on boat construction from other models indicates that the use of skilled labour is associated with an 80% learning curve effect whereas use of semi-skilled labour is associated with a 90% learning curve effect. 4. Labour usage for the first speed boat assembled was as follows: • Skilled labour – 952 hours. • Semi-skilled labour – 650 hours. 5. In October 2005, the sixth and the seventh speed boats were assembled from start to finish. During the month, the following labour usage and costs were recorded: • Skilled labour – 680 hours at a total cost of Shs. 800,400. • Semi-skilled labour – 1,256 hours at a total cost of Shs. 1,281,200. The management of Pwani Marine Ltd. is concerned about the cost variances and would like to learn more on the composition of the variances. Required: (i) Calculate the standard labour cost of the month of October 2005. (3 marks) (ii) Reconcile the standard cost with the actual cost for the month of October 2005 showing the labour rate and labour efficiency variances. (5 marks) (iii) Express the labour efficiency variance in terms of labour mix and labour output variances. (Value the labour mix variances using standard rates). (8 marks) NB: The value of b in the formula for the learning curve is -0.322 for an 80% learning rate and -0.152 for a 90% learning rate. (Total: 20 marks) QUESTION FOUR Angels of Mercy Mission Hospital operates on charity basis. The hospital’s board of directors has recently complained about the increasing size of the cost budget insisting that the management should cut down on costs. Past Paper Questions and Answers The major concern of the board is the cost of maintaining patients at the intensive care unit (ICU). The following information is available on the operations of the hospital: 1. The average cost of maintaining a patient at the ICU per week is Shs. 200,000 compared to Shs. 100,000 per week incurred in maintaining a patient at the high dependency unit (HDU) and Shs. 50,000 per week of maintaining a patient at the general ward (GW). 2. Past information on patients indicates that: (i) 50% of the patients in ICU at the beginning of the week will remain in ICU at the end of the week and 50% will be transferred to HDU by the end of the week. (ii) 10% of the patients in HDU at the beginning of the week will be transferred to ICU, 50% will remain in HDU, and 40% will be transferred to GW. (iii) 85% of the patients in the GW at the beginning of the week will remain in GW at the end of the week, 10% will be transferred to HDU and 5% to ICU. 3. The board of directors believe that the criteria for maintaining patients in the ICU is too strict and should be relaxed so that only 40% of the patients in ICU at the beginning of the week remain there at the end of the week while 60% are transferred to HDU. 4. The staff at the hospital insist that if the proposed criterion is adopted: (i) 20% of patients in HDU at the beginning of the week will be transferred to ICU, 50% will remain in HDU while only 30% will be transferred to GW. (ii) No changes will be expected in the GW. 5. Past hospital records indicate that the hospital serves an average of 4,000 patients weekly. Required: (a) The steady state weekly costs under the current policy. (7 marks) (b) The steady state weekly costs under the proposed policy. (7 marks) (c) Advise the board on the best policy. (2 marks) (d) State the assumptions of the quantitative technique used in solving problems (a) and (b) above. (4 marks) (Total: 20 marks) QUESTION FIVE (a) Highlight the assumptions of cost-volume-profit (C-V-P) analysis, (4 marks) (b) Mwito Club is a charitable organization based in Nairobi. For the last 20 years, the club has held an annual dinner and dance event with the primary aim of raising funds to help the less fortune members of the society. This year, there is concern that an economic recession may adversely affect the success of the event with a fall in the 73 Questions – Past Papers 74 number of guests attending and sale of advertising space in the published events programme. A study of past experience, current prices and quotations shows that the following costs and revenues will apply for the event: Revenue • Dinner and dance Sale of dinner and dance tickets: Shs. 5,000 per ticket. Sale of raffle tickets: Shs. 800 per ticket. Photographs: Shs. 100 per photograph. • Events programme Advertising space: Shs. 70,000 per page. Costs • Dinner and dance Shs. Hire of premises 210,000 Music band and entertainers 840,000 Raffle prizes 790,000 Hire of a photographer 50,000 Food per person (subject to a minimum of 4,000 guests) 2,400 • Events programme A fixed cost of Shs. 4,000,000 and a variable cost of Shs. 5,000 per page. A committee appointed to assess the likely outcome of the event has come up with the following data from the club’s records: Number of tickets sold Number of past events 2,500 to 3,500 4 3,501 to 4,500 6 4,501 to 5,500 8 5,501 to 6,500 2 20 Number of events programme pages sold Number of past events 240 4 320 8 400 6 480 2 20 Required: (i) The expected profit from the event. (Assume one raffle ticket and one photograph per attendant). (10 marks) Past Paper Questions and Answers (ii) Describe how cost-volume-profit (C-V-P) analysis can be applied in absorption costing. (6 marks) (Total: 20 marks) 75 Answers – Past Papers 76 Answers JULY 2000 QUESTION ONE (a) Existing capacity Kshs P 4560 x 19.6 = 89,376 Q 6960 x 13.0 = 90,480 R 3480 x 9.9 = 34,452 S 2300 x 17.0 = __39,100 Total Existing Capacity 253,408 Add 5% increase to full Capacity 5% x 253,408 12,670.4 Total Direct Labour of Full capacity 266,678.4 Switching of 2000 kg of Q releases Direct Labour cost by-: which is switch to P. 2000 x 13 26,000 Add 5% increase 12,670.4 Available cost to be switched 38,670.4 Labour cost of P = 19.6 Therefore units to be switched = 38,670.4 = 1973 Kg 19.6 Increased contribution therefore is: - Shs Shs. Sales 197 x 162 319,626 Less: Variable Cost Direct labour (1973 x 19.6) 38,670.8 Direct materials (1973 x 65.20) 128,639.6 Direct packaging 91973 x 8.4) 16,573.2 (183,883.6) Contribution of P 135,742.4 Less: Lost contribution from Q = 2000{(0.9 x 116.40) – (13 + 49 + 7.4)} (70,720)_ Incremental Contribution 65,022.4 Decision Timao Company Limited should subcontract 2000kg from Kagocho Company due to the incremental contribution of Kshs. 65,022.4 Past Paper Questions and Answers (b) P Q R S Timao’s selling prices (A) 162 116.40 99.20 136.80 Subcontracts price = (90% x 4) 145.80 104.76 89.28 123.12 Less: Variable cost of marking Direct labour 19.60 13.00 9.90 17.00 Direct materials 65.20 49.00 41.00 54.20 Direct packing 8.40 7.40 5.60 7.00 Total Variable cost 93.20 69.40 56.50 78.20 Lost Contribution 52.60 35.40 32.90 44.90 Switching of 2000kg to different products. This can be done in a matrix form as follows. Additional Production (Kg) from switching direct labour cost. Source of units P Q R S Shs.39,200 from P (a) 0 3015 (e) 3959 (f) 2305 (g) Shs.26,000 from Q (b) 1326 (h) 0 2626 (i) 1529 (j) Shs.19,800 from R (c) 1010 (k) 1523 (l) 0 1164 (m) Shs.34,000 from S (d) 1734 (n) 2615 (o) 3434 (p) 0 Extra 5 % of capacity Shs.12,670.4 646 (q) 974 (r) 1280 (s) 745 (t) Workings (a) 2000 x 19.60 (e) 39,200 ÷ 13 (i) 26,000 ÷ 9.9 (b) 2000 x 13.00 (f) 39,200 ÷ 9.9 (j) 26,000 ÷ 17 (c) 2000 x 9.90 (g) 39,200 ÷ 17 (k) 19,800 ÷ 19.6 (d) 2000 x 17.00 (h) 26,000 ÷ 19.6 (l) 19,800 ÷13 (m) 19,800 ÷17 (q) 12,670.4 ÷ 19.6 (n) 34,000 ÷ 19.60 (r) 12,760.4 ÷ 13 (o) 34,000 ÷ 13 (s) 12,670.4 ÷ 9.9 (p) 34,000 ÷ 9.9 (t) 12,670.4 ÷ 17.00 Extra contribution gained in Shs. P Q R S Contribution per Kg/Sh. 68.80 47 42.70 58.6 2000Kg of P subcontract 0 82,283(i) 118,500(ii) 73,530 2000Kg of Q subcontract 64,954 0 96,070 62,536 77 Answers – Past Papers 78 2000Kg of R subcontract 48,373 51,788 0 46,307 2000 Kg of S subcontract 73,900 78,843 111,448 0 Workings Incremental contribution - lost contribution i.e. (i) { ( 3015 + 974 ) 47 } – { (2000 x 52.6) } = 82,280 (ii) {(3959 + 1280) 42.7)} – {(2000 x 52.6)} = 118,500 etc Decision The best profitable contribution is to subcontract 2000kg of P and replace it with 5239kg (3959 + 1280) kg of R leading to the highest contribution of Shs. 118,500. Past Paper Questions and Answers QUESTION TWO Two important concepts in control theory are firstly, that a system must have a purpose and must have controls if it’s to remain cohesive and secondly, that is a system can be divided into a number of sub-systems and sub-sub- systems, each with it’s own purpose and controls. Controls provide the binding force, which kept every various elements within the system all working towards a common objective. Control theory can be used to analyse or to establish control systems within a business organization. A model can be constructed and used as follow: i. The system as a whole, and for each sub-system (and sub-sub-systems) one or more objectives are identified. ii. Actual achievements of the system and sub-system are monitored. iii. Actual achievements are compared with the objective. iv. Reasons for any differences between the objectives and achievements are identified v. Where suitable, corrective measures are taken to bring the system under control • When actual achievements are measured as actual outcomes and results, the comparison of results with objectives is called a feedback control loop. When actual achievements are measured as what the system is not expected to achieve and future expectations are compared with objectives (Such as projected completion dates for a project) we have feed forward control. • A control model can also be made to recognize environmental influences, and the ways in which environment can affect the system’s achievements and objectives. • The concepts of control theory can provide valuable insights into the design and operation of a management accounting information system (MAIS) because:- i. Business organizations need to be controlled by their management. ii. Management accounting provides an information system for control, based largely on a system of budgets. This information acts as a feedback loop. iii. The way in which a MAIS is structured and used can be determined by modeling techniques. • A control model for a MAIS would: - i. Identify the sub-systems within the organization ii. Establish objectives for each sub-system, and for the system as a whole. These objectives must be measurable, and would usually take the form of budgets, with the control system being a budgetary control system. 79 Answers – Past Papers 80 iii. Measure actual achievements for each sub-system, for the system as a whole. iv. Compare actual results with the objectives (budgets) v. Identify significant differences, and the reasons for them, indicating where control action should be taken. • A MAIS cannot initiate control action itself, but can only indicate where control measures might see appropriate, control measures must be taken by managers, perhaps using their judgment. In this respect, a MAIS falls short of the ideals’ of a cybernetic control model. • The practical application of control principles to a MAIS, using a budgetary control system does depend on the stability of the environment and accurate measurement of results. • When an organization’s environment is unstable ad unpredictable forecasts of achievements will be uncertain; and a comparison of actual results against plan might be meaningless. It might also be necessary to alter the system’s objectives in response to environmental change. • If environmental changes are continual, or frequent, the problems of redefining systems objectives will be considerable and budgets would have to be revised at frequent intervals. In addition, the significance of differences between actual results and budget would be difficult to assess for control purposes. • Outcome needs to be fairly clearly measurable for control system to operate successfully. In practice, there may be problems in applying quantative measures to qualitative outputs, and control information might be imperfect and incomplete. This always the prospect that unless results can be measured objectively managers will manipulate and ‘judge’ the figures, so that the problems of human behaviour damage the operation of the control system. • In conclusion, control theory can provide a useful framework for a MAIS but control of a business is not “automatic”. Business organizations are largely ‘human systems,’ ad there will inevitably be difficulties with applying the theoretical • structure of a control model in practice. Further more, although some environmental change can be achieved for in a control mode, frequent changes caused by unstable environment could remove the practical value of feedback systems for control. QUESTION THREE a) Sh. ‘000’ (i) Desired Residual Income 5,000 Current Income from external sales Contribution = 500 (37 – 25) 6,000 Fixed costs (1,400) Capital cost 13% x 20 m (2,600) 2,000 Contribution to be generated by internal transfers 3,000 Past Paper Questions and Answers Contribution per unit = 3,000 = Sh.10 per unit 300 Transfer price = Sh.25 + Sh.10 = Sh.35 per unit (ii) The transfer price above may motivate the Z division manager to want to sell the components externally at Sh.37 rather than to transfer them to other divisions at Sh.35. This may result in the other divisions being forced to buy components externally and thus incur buying costs while Z will incur selling cots. The net effect is that the company as a whole losses. b) The demand function can be determine as follows: P = A – bV WhereP is the price per unit V is the volume of sales at that price A is the price at which V = O (Maximum price) b is the rate at which the price falls for volume increases a proportion of sales volume. Product A Demand is currently 15,000 units at a price of Sh.30. The demand changes by 500 units for each Sh.1 change in price. A = 30 + 15,000 x 1 = Sh.60 500 The maximum price = Sh.60 b = 1_ 500 The demand function will be P = 60 - 500 1 Q Total revenue = PQ = 60Q – 1 Q 2 500 Profit is maximized where MR = MC MR = dTR = 60 – 2Q = 60 – Q dQ 500 250 MC is the unit variable cost = Sh.12 At Maximum profit MR = MC 60 - Q = 12 250 81 Answers – Past Papers 82 Q = 12,000 units Substituting to find P P = 60 – 12,000 = Sh.36 500 The profit maximizing price is Sh.36 and profit maximizing Quantity is 12,000 units. Product B This is solved in the same way as A A = 58 + 21,000 x 1 = Sh.100 500 P = 100 - 1 Q 500 TR = 100Q - Q 2 500 MR = dTR = 100 - Q_ dQ 250 MC = Sh.8 At maximum profit MR = MC 100 - Q_ = 8 250 Q = 23,000 units Substituting P = 100 – 23,000 = Sh.54 500 The profit maximizing price is Ksh.54 while the profit maximizing quantity is Sh.23,000 units QUESTION FOUR (a) Expected Value of Usage Lead-Times Probability Demand (units) Joint Probability Expected Value (Usage) (Days) 0.4 5,000 0.08 (15 x 5000) 0.08 = 6,000 15 working days 0.2 0.6 7,000 0.12 (15 x 7,000) 0.12 = 12,600 0.4 5,000 0.20 (20 x 5,000) 0.20 = 20,000 Past Paper Questions and Answers 20 working days 0.5 0.6 7,000 0.30 (20 x 7,000) 0.30 = 42,000 0.4 5,000 0.12 (25 x 5,000) 0.12 = 15,000 25 working days 0.3 0.6 7,000 0.18 (25 x 7,000) 0.18 = 31,500 1.00 127,100 Bufter stock at 150,000 units re- order level = (150,000 – 127,100) = 22,900 units (b) The P (stock out cost i.e. Demand in excess of 150,000 units) = (25 x 7,000) = 175,000 units ∴P (stock out cost) = 0.18 (c) EOQ = 2 x (6,200 x 360) x 1,000 = 140,855 units 0.0025 + (0.1 x 2) Daily Demand = 5,000 (0.4) + 7,000 (0.6) = 6,200 No of average orders per annum = 6,200 x 360 = 15.85 140,855 ∴ The expected annual stock outs in units per annum = {(0.225) (175,000 – 150,000)} x 15.85 = 89,156 units (d) The additional annual holding cost if the re-order level is increased to 175,000 units: 15 (175,000 – 150,000) (0.025 x 1.1 x 2) = 1,375 Therefore, are-order level of 150,000 units the expected value of stock outs per annum is 10,766 units. Then the increase in stock is justified where stock out cost per unit is greater then Shs.0.3 (1,375/10,766) (e) JIT (Just in time) it involves a continuous commitment to re-pursuit of excellence in all phases off manufacturing systems design and operation. Advantages of JIT i. Leads to substantial savings in stockholding costs. ii. Elimination of waste iii. Savings in factory and warehouse space, which can be used for other profitable activities. iv. Reduction in obsolete stocks v. Considerable reduction in paper work arising from a reduction in purchasing, stock and accounting transactions 83 Answers – Past Papers 84 Disadvantages of JIT i. Additional investment costs in new machinery, changes in plant layout and goods inwards facilities. ii. Difficulty in predicting duty or weekly demand, which is a key feature of the JIT philosophy. iii. Increased risk due to the greater probability of stock out costs arising from strikes, or other unforeseen circumstances, then restrict production or supplies. QUESTION FIVE (a) Modification of the probability by use of Bayes Theorem Β (B/A) = P (B) x P (A/B) P (A) Steps to follow in modification of probabilities Step 1 Interpretation of the formula into the question: B is either oil (O) or not oil (N) A is the result of the report either favourable (F) or unfavourable (U) under each of the above situations. P (O/F) = P (O) x P (F/O) P (F) P (O/U) = P (O) x P (U/O) P (U) P (N/F) == P (N) x P (F/N) PF P (N/U) = P (N) x P (U/N) P (U) Past Paper Questions and Answers Step two Construction of probability tree. Step three Derivation of probabilities from step two P (O) = 0.2 P (F/O) = 0.1 P (N) = 0.3 P (U/N) = 0.9 P (F/O) = 0.95 P (F) = 0.95 (0.2) + 0.1 (0.8) = 0.27 P (U/O) = 0.05 P (U) = 1 – 0.27 = 0.73 Step four Incorporation of the probabilities into the formulas in step 1 P (O/F) = P (O) x P(F/O) = 0.2 x 0.95 = 0.704 P (F) 0.27 P (O/U) = P (O) x 9U/O) = 0.2 x 0.05 = 0.014 P (U) 0.73 P (N/F) = P (N) x (F/N) = 0.8 x 0.1 = 0.296 P (F) 0.27 P (N/U) = P (N) x (U/N) = 0.8 x 0.9 = 0.986 P (U) 0.73 Step five Construct a Decision tree and evaluate 85 Oil 0.2 No Oil 0.8 Unfavourable, 0.05 Favourable, 0.1 Unfavourable, 0.9 Favourable, 0.95 Favourable Shs.49.28 Oil (Shs.10 m) 0.704 Unfavourable Drill Shs.0.98 Oil 0.014 (Shs.10 m) Don’t Drill No oil 0.2 No oil 0.8 Answers – Past Papers 86 Dril l Don’t drill No oil 0.27 0 14 Oil A B Shs. 7.6056 m Get Information Shs. 3m. Don’t get Information Drill (Shs. 10 m) C Don’t Drill Sh.10.6056 D Shs.39.28 0.296 0.986 70 0 0 70 0 0 70 0 0 0.73 Shs. 4m Past Paper Questions and Answers Evaluation using EMV Emv @ A = 70 (0.704) + 0 (0.296) = 49.28 Emv @ B = 70 (0.014) + 0 (0.986) = 0.98 Emv @ C = 70 (0.2) + 0 (0.8) = 14 Emv @ D = 39.28 (0.27) + 0 (0.73) = 10.6056 At D 2 ⇒ Drill = 49.28 – 10 m = 39.28 ⇒ Don’t Drill = 0 At D 3 ⇒ Drill = 0.98 – 10 m = -9.02 ⇒ Don’t Drill = 0 At D 4 ⇒ Drill = 14 – 10 m = 4 ⇒ Don’t Drill = 0 At D 1 ⇒ Hire 10.6056 – 3 = 7.6056 Don’t Hire = 0 Note 1. At Decision Box choose the highest value 2. At outcome point use probabilities on values to get the expected monetary value. 14 Oil 87 Answers – Past Papers 88 Step six Make Decision or Advice – Walt Lovell Limited (WLL) should use a consultants given the report is favourable drill as this will release a net benefit of Kshs. 7.6056 million. (b) The value of imperfect information is: Value of imperfect (sample) information = Expected monetary value with IPI – Expected monetary value without IPI Sh.7,605,600 – Sh.4,000,000 Sh.3,605,600 Past Paper Questions and Answers DECEMBER 2000 QUESTION ONE (a) Feed forward control describes a control system in which deviations in the system are anticipated in a forecast of future results, so that ‘corrective action’ can be taken in advance of any deviations actually happening while on the other hand, Feedback control system is information about actual achievements. In business organization, it is information about actual results, produced from within the organization (for example management accounting control reports) with the purpose of helping the control decisions. (b) In his statement Chris Argyris, he identified situations why mangers could be reluctant in setting budgets: as follows: (i) The budget is seen as a pressure device, based by management to force ‘ lazy’ employees to work harder. The intention of such pressure is to improve performance, the unfavourable reactions of subordinates against is seems to be at the core of the budget problem. (ii) The accounting department is usually responsible for recording actual achievement and comparing this against budget. Accountants therefore are ‘budget man’ is the failure of another manager and this failure causes loss of interest and declining performance. The accountant, on the other hand, fearful of having his budget derailed by factory management, obscures his budget and variance reporting, and deliberately makes it difficult to understand. (iii)The budget usually sets targets for each department, achieving the departmental target becomes of paramount importance regardless of the effect this may have on the other departments and the overall company performance. (iv) Budgets are used by managers to express their character and patterns of leadership on subordinate; subordinates, resentful of their leadership style, blame the budget rather than the leader thus it looses meaning. (c) The decision calls for the analysis of benefits and problems of budgeting. Benefits (i) It’s the major formal way in which the organizational objectives are translated into specific plans, basics, and objectives related to individual managers and supervisors. It should provide clear guidelines for current operations. (ii) It’s an important medium of communication for organizational plans and objectives and the progress towards meeting those objectives. (iii) The development of budgets (done properly) helps to achieve co-ordination between the various departments and functions of the organization. (iv) The involvement of all levels of management with setting budgets, the acceptance of derived targets, the two way flow of information and other facets of a properly organized budgeting system all help to promote a coalition of interest and to increase motivation. 89 Answers – Past Papers 90 (v) Management’s time can be saved and alterations directed to areas of most concern by the ‘exception principle’ which is at the heart of budgetary control. (vi) Performance of all levels is systematically reported and monitored thus aiding the control of current activities. (vii) The investigation of operations and procedures, which is part of budgetary planning and the subsequent monitoring of expenditure, may lead to reduced costs and greater efficiency. Problems (i) There may be too much reliance on the technique as a substitute for good management. (ii) The budgetary system perhaps of undue pressure or poor human relations, may cause antagonism and decrease motivation. (iii) Variances are just as frequently due to changing circumstances, poor forecasting or general uncertainties due to managerial performance. (iv) Budgets are developed round existing organizational structures and departments, which may be inappropriate for current conditions and may not reflect the underlying economic realities. (v) The very existence of well documented plans and budgets may cause rigidity and lack of flexibility in adapting to change. In conclusion, budget should not be abolished as a company or an organization might not adjust to its set objectives without a budget system. QUESTION TWO The variables in the problem are the demand and the lead time. Since the demand is approximated by the continuous normal distribution we will consider demand insteps of 5 x LA 20 Allocation of random numbers to lead time. Lead Time Cumulative Random Week Probability probability number 0.20 0.20 00 –19 2 0.50 0.70 20 – 69 3 0.25 0.95 70 – 94 4 0.05 1.00 95 – 99 Allocation of random numbers ranges to weekly demand Demand/ Week Probability Cummulativ e Probability Random Number 470 475 480 485 490 495 500 0.003 0.009 0.028 0.066 0.121 0.175 0.197 0.003 0.012 0.040 0.106 0.227 0.402 0.599 000 – 002 003 – 011 012 – 039 040 – 105 106 – 226 227 – 401 402 – 598 Past Paper Questions and Answers 505 510 515 520 525 530 0.175 0.121 0.066 0.028 0.009 0.003 0.774 0.895 0.961 0.989 0.998 1.000 599 – 773 774 – 894 895 – 960 961 – 986 989 – 997 998 – 999 91 Answers – Past Papers 92 Simulation of Stock Control Numbe r Week Openin g Stock Demand RN Amount Closing Stock Reorder ? YES/NO Lead- Time RN Weeks Shorta ge 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 2,000 1,520 1,015 510 5 0 2,500 1,995 1,490 985 495 2,500 1995 1,485 3,485 034 480 743 505 738 505 636 505 964 520 736 505 614 505 698 505 637 505 162 490 332 495 616 505 804 510 560 500 111 490 1,520 1,015 510 5 0 0 1,995 1,490 985 495 0 1,995 1,485 985 2,995 YES YES YES 95 4 73 3 10 1 515 505 Total 7,525 15,475 1,020 Mean demand = 7525 = 501.7 x LA20 / Week 15 Mean closing stock = 15,475 = 1,031.6 x LA/Week 15 Mean shortage = 1,020 = 68 x LA20/Week 15 Number of orders placed during the 15 weeks period = 3 Therefore, mean number of orders/week = 3/15 = 0.2 The expected Average cost per week = (1,031.67 x Shs.5) +(68 x Shs.200) + (0.2 x 500) = Shs.18,858.35 QUESTION THREE (a) How can the transportation algorithm be modified to maximize rather than minimize? Instead of minimizing the positive unit costs of all the cells, calculate the unit profits, make them negative and put these in each cell. Use the transportation algorithm as usual to minimize these negative profits. Alternatively, load the cells with the largest profits (instead of smaller costs) to give an initial allocation. Test the empty cells as usual, but use any cell which has positive shadow price. If all the shadow prices are negative or zero, that allocation gives the maximum profit. (b) Factories P 1 P 2 P 3 supply outlets S 1 S 2 S 3 & S 4 Past Paper Questions and Answers The contribution = selling price – variable cost – factory outlet transport per desk at shop at the factory costs Example the contribution per desk Supplied from factory P = 2300 – 1500 – 220 = Sh.580 to outlet S The matrix for contribution is given below: S 1 S 2 S 3 S 4 P 1 580 610 530 600 P 2 510 600 520 570 P 3 540 650 490 660 The total demand from the four outlets is 850 + 640 + 380 + 230 = 2,100 desks. The total supply from the three plants is: 625 + 825 + 450 = 1,900 desks. There is therefore a need for a dummy factory to take up the 200 shortfall. The transportation table is as follows: TO FROM K 1 = 58 S 1 K 2 = 67 S 2 K 3 = 59 S 3 K 4 =68 S 4 Total Capaci ty R 1 = 0 P 1 58 625 6 1 53 4 9 625 1 3 3 R 2 = -7 P 2 51 25 6 0 420 52 380 5 7 825 38881 R 3 = -2 P 3 54 6 5 220 49 6 6 230 450 111 R 4 = -58 Dummy 0 200 0 0 0 200 00000 Total Demand 850 640 380 230 2,100 4, 4, 7, 51,51 4, 4, 4, 60 1,1,1, 52, 52 6 93 -6 -6 -8 -4 -2 -8 -9 -1 - 1 0 Answers – Past Papers 94 Note - The initial solution is determined by use of VAM. - The contributions are divided by 10 simplify the computations. - The mode is used to solve for optimality. Note m + n – 1 = 7 No of filled cells = 7 The problem is not degenerate. All the shadow prices are negative, therefore any change would reduce the contribution. This is thus the optimal solution. The optimal allocation is: FROM TO Units Contribution per unit Total contribution Sh. Sh. Sh. P 1 S 1 625 580 362,500 P 2 S 1 25 510 12,750 P 2 S 2 420 600 252,000 P 2 S 3 380 520 197,600 P 5 S 2 220 650 143,000 P 3 S 4 230 660 151,800 Dummy S 1 200 0 0 Total contribution 1,119,650 QUESTION FOUR a) (i) If the selling price is sh.200, demand will be zero. To increase demand by one unit, selling price must be reduced by Sh. 1000 1 or Shs. 0.001. Hence the demand function is P = 200 – 0.001Q At the output level of 100,000 units. P = 200 – 0.001 (100,000) = Sh.100 per unit. The total contribution at an output level of 100,000 units Shs. Contribution = 100,000 (100 – 50) 5,000,000 Less fixed cost 2,500,000 Profit 2,500,000 (ii) Profit is maximized when MC = MR MC = Sh.50 per unit variable cost. Past Paper Questions and Answers MR = dTR dQ TR = 200Q – 0.001Q 2 dTR = 200 – 0.002Q dQ The profit is maximized at 50 = 200 – 0.002Q Q = 75,00 units The profit maximizing selling price = 200 – 0.001 (75,000) = Sh.125 The maximum profits Sh. Total contribution 75,000 x Sh.75 = 5,625,000 Less fixed costs 2,500,000 Maximum profit 3,125,000 (iii) Change in fuel costs Revised fixed costs = Sh.3,000,000 The optimal output level will not be affected by a change in fixed costs. Therefore the selling price should not be changed. Profits will decline by Sh.500,000. Change in Material Costs Revised marginal costs = Sh.60 The new optimum is where 60 = 200 – 0.002 Q = 70,000 At this output level, P = 200 – 0.001 (70,000) = Sh.130 The price should be increased to Sh.130 to maximize profits. b) (i) The price in the home market is based on full absorption cost plus pricing, whereas the price in the overseas market is based on partial absorption or variable cost-plus pricing. Therefore both price methods are on cost-plus basis. The rationale for such an approach is as follows: Home Market Absorption cost-plus pricing is the norm in the home market, with all companies adopting this approach. Consequently the pricing method encourages price stability. 95 Answers – Past Papers 96 The home market provides high volume sales and can therefore bear the full costs. Export Market The export market is more competitive, and a price penetration policy might be adopted in order to obtain a significance share of the market. Consequently, the pricing objective might be to set a selling pricing in excess of incremental costs. Firms might view export business as a means of utilizing any unused capacity. Consequently, overheads have already been recovered in the home market and contribution pricing methods are adopted in the overseas market. The firm might consider sales in the export market to be uncertain, and short-term prices are set so as to cover short-run costs only. (ii) The main objection to the above pricing methods is that they are cost- based and ignore price demand relationships. Prices should be set by equating the marginal cost schedule with the sum of the marginal revenue schedules of the two countries. QUESTION FIVE (a) Advantages of Value added Statement (i) Managers might be in a better position to control their organization’s own inputs than the cost or usage efficiency of purchased material and services. If this is so, value added statements focus attention on what managers can do something about. They would also reflect the quality of such management’s effort. (ii) Value added statements also focus attention on how the benefits are shared out, and in particular: - • Whether the employees are getting paid too much for what they are doing. If the value added per unit of labour is declining, management will be made aware of the need to keep labour costs under control. On the other hand, an improving value added per shilling of labour cost would suggest that there is some scope for rewarding employees more highly. • Whether enough funds are being returned in the business (depreciation plus retained profits) to provide for asset replacement and internally –funded growth. (iii) In organizations where the material cost content is a high proportion on total costs, the total profit will be influenced by changes in material prices (largely outside management control) and possibly also by occasional stock losses or profits when material prices alter value added statements, by taking out material costs as a separate item, allow alterations to be directed at activities within management’s control. Past Paper Questions and Answers (iv) Value added in relations to labour effort and labour costs provides excellent measures of productivity, and so far comprising the relative productivity of two or more divisions. Overhead costs (Activities) P(Shs) Q(Shs) R(Shs) TOTAL(SHS) Machinery cost 18,000 48,000 36,000 102,000 Production scheduling 16,800 44,800 22,400 84,000 Set up cost 10,800 28,800 14,400 54,000 Quality control 9,848 26,240 13,120 49,200 Receiving materials 7,200 32,000 25,600 64,800 Packing materials 6,000 16,000 8,000 36,000 Total overhead cost 68,64 199,840 121,520 390,000 Units produced 12,000 16,000 8,000 Overhead cost/unit Shs.5.72 Shs.12.49 Shs.15.19 Workings for Recovery Rates (i) Machining cost = Budgeted machining cost = 102,000 Budgeted machine hours 34,000 = shs.3/machine hour {Budgeted machine hours = ½ (12,0000 + (16,000) + 1½(8,000) = 34,000} Production scheduling = budged production scheduling cost = 84,000 No. of production runs 30 = Shs.2,800/production run iii. Set up costs = Budgeted Set Up Cost = 54,000 = shs.1,800/production run No. of production runs 30,000 iv. Quality control = Budgeted Quality Control Cost = 49,200 = 1,640/production run No. of production runs 30 v. Receiving materials = Budgeted Receiving Materials cost = 64,800 = 400 Receipt No. of components Receipts 162 vi. Packing Materials = Packing Material’s cost = 36,000 = 1,000/Customer order 97 Answers – Past Papers 98 No. of customers orders 36 Total cost statement and profit (shillings per unit) P Q R Direct materials 16.00 24.00 20.00 Direct labour 8.00 12.00 8.00 Overhead cost (as above) 5.72 12.49 15.19 Total production cost 29.72 12.49 15.19 Sales price 50.00 70.00 60.00 Gross profit per unit 20.28 21.51 16.81 Past Paper Questions and Answers JUNE 2001 QUESTION ONE (a) Contributions for each division and the company as a whole for the various selling prices are as follows: Mugaa Division Output Total Variables Total Units Revenue Costs Contribution Shs. Shs. Shs. 1,000 35,000 7,000 24,000 2,000 70,000 22,000 48,000 3,000 105,000 33,000 72,000 4,000 140,000 44,000 96,000 5,000 175,000 55,000 120,000 6,000 210,000 66,000 144,000 Gwashati Division Output Total Variables Total Total Units Revenue Costs Cost Transfers Contribution Shs. Shs. Shs. Shs. 1,000 100,000 7,000 35,000 58,000 2,000 180,000 14,000 70,000 96,000 3,000 240,000 21,000 105,000 114,000 4,000 280,000 28,000 140,000 112,000 5,000 300,000 35,000 175,000 90,000 6,000 300,000 42,000 210,000 48,000 Whole Company Output Total Company Total Units Revenue Variables Costs Contribution Shs. Shs. Shs. 1,000 100,000 18,000 82,000 2,000 180,000 36,000 144,000 3,000 240,000 54,000 186,000 4,000 280,000 72,000 208,000 5,000 300,000 90,000 210,000 6,000 300,000 108,000 192,000 (b) Based on the statements in (a) Gwashati division should select a selling price of Shs.80 per unit. This selling price produces a maximum divisional contribution of shs.114,000. it is in the best interest of the company as a whole if the selling price of Shs.60 per unit is selected. 99 Answers – Past Papers 100 If Gwashati division selects a selling price of shs.60 per unit instead of shs.80 per unit, it’s overall marginal revenue would increase by shs.60,000 but it’s marginal cost would increase by shs.84,000. Consequently, Gwashati Division will not wish to lower the price. (c) Where there is no market for the intermediate product and the supplying division has no capacity constraints, the correct transfer price is the marginal cost of the supply division for that output at which marginal revenue received from the intermediate product. When unit variable cost is constant and fixed cost remains unchanged, this rule will result in a transfer price that is equal to the supplying division’s unit variable cost. Therefore the transfer price will be set at shs.11 per unit when the variable cost transfer pricing rule is applied. Gwashati division will be faced with the following revenue schedules: Output units Marginal cost (NOTE) Marginal Revenue Shs. Shs. 1,000 18,000 100,000 2,000 18,000 80,000 3,000 18,000 60,000 4,000 18,000 40,000 5,000 18,000 20,000 6,000 18,000 NIL Note: • Marginal cost = transfer price of shs.11 per unit plus conversion variable cost of shs.7 per unit. • Gwashati will select the optimum output level for the group as a whole (i.e. 5,000 units) • And the optimal selling price of shs.60 will be selected. A transfer price equal to the variable cost per unit of the supplying division will result in the profits of the group being allocated to Gwashati, and Mugaa will incur a loss equal to the forced costs. Consequently, a divisional profit incentive cannot be applied to the supplying division. QUESTION TWO (a) B 4 45 E 10 35 45 5 2 50 I 10 51 A 10 C 14 9 51 10 4 3 H 50 1 20 F G 8 20 2 Past Paper Questions and Answers 1 0 J 2 16 48 0 8 5 8 6 4 M 44 K 38 8 L 12 7 16 4 46 The critical path = A – B – E – I The project duration = 51 weeks The project normal costs = Sh 197 millions 101 Answers – Past Papers 102 (b) 7 B 40 2 7 33 5 D 40 E C 25 4 44 A 7 3 4 10 F 8 I 9 45 15 12 44 1 45 2 6 G H 0 39 16 1 1 J 4 7 0 43 L 4 3 4 2 36 M 6 10 42 K 10 The minimum time is 45 weeks The critical path is still A – B – E – I The minimum time cost = Sh. 217.5 million (c) Cost if project is completed in 50 weeks = Sh.197 + Sh1 x 5m + 0.5m = 207.5m (d) Cost of completing in 45 weeks Crash A, B & E Incremental costs = 2m + 2m + 0.5 = 4.5m Cost of completing in 45 weeks = 197m + 4.5 + 5m = Sh. 206.5m It is advisable to crash the project to 45 weeks since it will reduce the projects costs by Sh. 1m. QUESTION THREE (a) A high correlation between the independent and dependent variable simply means that the two variables move in the same direction and at almost the same rate. It does not mean that the independent variable will cause a change in the dependent variable. Such information can be determined by use of coefficient of determination. (b) (i) equation II Y ˆ = 5,000,000 + 0.00005Z t Past Paper Questions and Answers equation IV Y ˆ = 3,000,000 + 50 N t – 1 + 0.00001Z t + 0.000015Z t – 1 (ii) Using equation I Y ˆ = 2,500,000 + 5.5 Y t – 1 = 2,500,000 + 5.5 (7,500,000) = 43,750,000 (iii) The coefficient of determination (r 2 ) explains the variations in the dependent variable explained by the independent variable i.e. the explained variations. e.g. in equation ! 94% of the variations in Y can be explained by the introduction of the dependent variable in the model while 6% of the variation is unexplained variation. (iv) The Financial Controller may refer equation III to equation II because equation II requires him to forecast even the independent variable while equation III uses actual gross domestic product as the independent variable. (v) Equation IV is a multiple regression equation it has the following advantages:- - It considers more independent variables. This may make it more reliable. - Compared to the other equations it has a higher coefficient of determination of 0.96 meaning that the explained variation is 96%. - It has a lower standard error of estimate than the other functions Disadvantages - The t- statistics are not as high as other functions. - The problem of multi-collineerity may occur since the independent variables used are likely to be highly correlated to each other. - It may also be harder to formulate the function. QUESTION FOUR (a) The +σ rule will trigger a decision to investigate when the round –trip fuel usage is outside the control limit: Mean + 2σ = 100 + 2σ or 80 to 120 kl Any fuel usage less than 80 kl or greater than 120kl will trigger a decision to investigate. The only plane to be outside the specified µ + 2σ control limit is Skyline 3 on flights # 5 (126 kl) and #10 (123 gallon units). (b) Solution Exhibit 26-25 presents the SQC charts for each of the three aircrafts (c) Skyline 1 has no observation outside the µ + 2σ control limits. However, there was an increase in fuel use in each of the last eight- 103 Answers – Past Papers 104 roundtrip flights. The probability of eight consecutive increases from an in-control process is very low. Skyline 2 appears in control regarding fuel usage. Skyline 3 has three observations outside the µ + 2σ control limits. Moreover, the mean on the last six flights is 120 compared to mean of 104for the first four flights. Past Paper Questions and Answers SKYLINE 1 140 130 120 x x 110 x x x 100 x x 90 80 2 4 6 8 10 ROUND TRIP FLIGHT NUMBER SKYLINE 2 140 130 120 x 110 x x x x 100 x x x x 90 80 2 4 6 8 10 ROUND TRIP FLIGHT NUMBER 105 F U E L U S A G E P E R R O U N D T R I P F L I G H T F U E L U S A G E P E R R O U N D T R I P F L I G H T Answers – Past Papers 106 SKYLINE 3 140 130 x 120 x x x x 110 x x x 100 x 90 80 2 4 6 8 10 ROUND TRIP FLIGHT NUMBER QUESTION FIVE (a) i) Client fee per day strategy contribution (shs. 000’) State of variable costs Shs.3,600 Shs.4,000 Shs.4,000 High 26,775 27,562.5 26,250 Most likely 29,925 30,187.5 28,350 Low 34,650 34,125 31,500 (ii) Maximum Rule Client fee shs.3, 600 Shs.4, 000 Shs.4, 400 Maximum payoff (000’) 34,650 34,125 31,500 Decision Choose a client fee is Shs.3, 600 since at maximizes the maximum outcome or return. (iii) Maximum Client fee shs.3, 600 Shs.4, 000 Shs.4, 400 Maximum payoff (000’) 26,775 27,562.5 26,250 Decision Choose a client fee of shs.4, 000 since it maximizes the minimum outcome or returns. (iv) Minimax Regret Opportunity Loss Table F U E L U S A G E P E R R O U N D T R I P F L I G H T Past Paper Questions and Answers 107 Answers – Past Papers 108 Client fee per day strategy contribution (shs. 000’) State of variable costs Shs.3,600 Shs.4,000 Shs.4,000 High 7877.5 0 1,312.5 Most likely 262.5 0 1,837.5 Low 0 525 3,150 Maxmini Regret 787.5 525 3,150 Decision: Choose fee of shs.4,000 since it minimizes the maximum regret. (b) Client fee per day strategy contribution (shs. 000’) State of variable costs Probabilit y Shs.3,60 0 Shs.4,00 0 Shs.4,00 0 High 0.1 26,775 27,562.5 26,250 Most likely 0.6 29,925 30,187. 5 28,350 Low 0.3 34,6 50 34,125 31,500 EMV 31,027 .5 31,106. 25 29,08 5 Value of Perfect information = ENV with IP – EMV without PI EMV without PI = 31,106.25 (Highest EMV as above) EMV with PI = 27,562.5 (0.1) + 30,187.5 (0.6) + 34,650 (0.3) = 31,263.75 Value of PI = 31,263.75 – 31,106.25 = 157.5 ∴ The maximum amount to pay is Shs.157, 500 Past Paper Questions and Answers DECEMBER 2001 QUESTION ONE a) D = 475 C o = Sh.50 C h = Sh.12.50 + 10% (250) = Sh.37.50 Lead time demand 0 1 2 3 4 5 6 7 8 Probability 0.02 0.0 4 0.1 2 0.1 6 0.20 0.1 6 0.1 6 0.10 0.04 units 36 units 35.59 EOQ 37.50 50 X 475 X 2 ≈ · · Safety stock Stockholdi ng Cost Stock out cost Total cost 0 0 1 x 0.04 x 20 x 13 = 10.4 2 x 0.12 x 20 x 13 = 48 3 x 0.16 x 20 x 13 = 124.8 4 x 0.20 x 20 x 13 = 208 5 x 0.16 x 20 x 13 = 208 6 x 0.16 x 20 x 13 = 249.6 7 x 0.10 x 20 x 13 = 182 8 x 0.04 x 20 x 13 = 83.2 1 114__ 1114 1 37.50 1 x 0.12 x 20 x 13 = 31.2 2 x 0.16 x 20 x 13 = 83.2 3 x 0.20 x 20 x 13 = 156 4 x 0.16 x 20 x 13 = 166.4 5 x 0.16 x 20 x 13 = 208 6 x 0.10 x 20 x 13 = 156 109 Answers – Past Papers 110 7 x 0.04 x 20 x 13 = 72.8 873.6 911.1 2 75 1 x 0.16 x 20 x 13 = 41.6 2 x 0.20 x 20 x 13 = 104 3 x 0.16 x 20 x 13 = 124.8 4 x 0.16 x 20 x 13 = 166.4 5 x 0.10 x 20 x 13 = 130_ 6 x 0.04 x 20 x 13 = 629.2 704.2 3 3 x 37.50 = 112.5 1 x 0.20 x 20 x 13 = 52 2 x 0.16 x 20 x 13 = 83.2 3 x 0.16 x 20 x 13 = 124.8 4 x 0.10 x 20 x 13 = 104 5 x 0.04 x 20 x 13 = 52__ 4 16__ 528.5 4 4 x 37.5 = 150 1 x 0.16 x 20 x 13 = 41.6 2 x 0.16 x 20 x 13 = 83.2 3 x 0.10 x 20 x 13 = 78 4 x 0.04 x 20 x 13 = 41.6 2 44.4 394.4 5 5 x 37.5 = 187.5 1 x 0.16 x 20 x 13 = 41.6 2 x 0.10 x 20 x 13 = 52 3 x 0.04 x 20 x 13 = 31.2 1 24.8 312.3 Past Paper Questions and Answers 6 6 x 37.5 = 225 1 x 0.1 x 20 x 13 = 26 2 x 0.04 x 20 x 13 = 20.8 4 6.8 271.8 7 7 x 37.5 = 262.5 1 x 0.04 x 20 x 13 = 10.4 272.9 8 8 x 37.5 = 300 0 300 The optimal safety stock is 6 units. The reorder level will be: ROL = Cycle Stock + safety stock = DL + S Q = 475 x 3 + 6 = 45.58 ≈ 46 units 36 b) Total annual relevant Cost (TRC) TRC = D Co + ½ Q+S C h Q = 475 (50) + (½(36) + 6) 37.50 = Kshs. 1,559.72 QUESTION TWO (a) Produce (a) of A (b) units of B, (c) units of C (d) units of product D and (e) units of products E each week Calculate the unit contribution of each product. A: unit contribution is 40 – {(2.10 x 6) + (3.0 x 1.0) + (1.3 x 3) + 8.0 x 0.5)} = Shs.16.50 per unit. B: unit contribution is 42 – {(2.10 x 6.5) + (3.0 x 0.75) + (1.3 x 4.5) + (8 x 0.5)} = Shs.16.25 per unit C: unit contribution is 44 – {(2.10 x 6.10) + (3.0 x 1.25) + (1.3 x 6) + (8 x 0.5)} = Shs.15.64 per unit D: unit contribution is 48 – {(2.10 x 6.1) + (3.0 x 1) + (1.3 x 6) + (8 x 0.75)} = Shs.18.39 units 111 Answers – Past Papers 112 E: unit contribution is 52 – {(2.10 x 6.4) + (3.0 x 1) + (1.3 x 4.5) + (8.0 x 1)} = Shs.21.71 per unit Maximize total weekly contribution, Shs. P where; P = 16.5a + 16.25b + 15.64c + 18.39d + 21.71e Shs/Week Subject to: Materials: 6.0a + 6.5b + 6.1c + 6.1d + 6.4e ≤ 35,000 kg/week Forming: 1.0a + 0.75b + 1.25c + 1.0d + 1.0e ≤ 6,000 hours/week Firing: 3.0a + 4.5b + 6.0c + 6.0d + 4.5e ≤ 30,000 hours/week Packing: 0.5a + 0.5b + 0.5c + 0.75d + 1.0e ≤ 4,000 kg/week Non-negativity: a, b, c, d, e, ≥ 0 (b) (i) The optimum weekly production plan is to produce 3,357 units of product A,2,321 units of product E and none of B, C or D. The resulting maximum weekly contribution is Kshs.105,791. (ii) There is spare capacity of 321 hours per week on the forming process and 9,482 hours per week on the firing process. All raw materials and all packing time are used up. Raw materials and packing time are the limiting constraints in the problem. (iii) The shadow price is the amount, which would be added to the value of the total weekly contribution if one extra unit of a limiting resource were made available that: • No additional costs were incurred. • The resource remains limiting Alternatively the shadow price is the amount by which the total weekly contribution would fall if the provision of a limiting resource was reduced by one unit. From the table, we can see the shadow price for raw materials is Ksh.2.02 per kilogram and for packing time is Kshs.8.81 per hour. One additional kilogram of raw material will generate an extra Kshs.2.20 of contributions, subject to the conditions above. One extra hour of packing time will, similarly generate additional shs.8.81 of contribution. The additional product would also have to be made at the expense of one or both of the other products, since all raw materials and packing time are currently used. Unit contribution of the new product = 50 – {(2.1 x 1.6) + (3.0 x 1) + (1.3 x 5) + (8 x 1)} = Kshs. 19.90 Past Paper Questions and Answers If one unit of this new product was made, the provision of raw materials for the other two products would effectively be reduced by 6 kilogrammes, this would reduce the current total contribution by 6 x Kshs.2.02 = Kshs.12.12. Similarly, the available packing time would be reduced by 1 hour, this reduces the total contributions by Kshs.8.81. The total reduction is the weekly contribution which would be: Kshs.12.12 + Kshs.8.81 = Kshs. 20.93 The gain from one unit of the new product is shs.19.90 therefore, if one unit of the new product is made, there will be a net loss of Shs.19.90 – Shs.20.93 = Shs.1.30. the proposition is not worthwhile. QUESTION THREE a) Four ways in which competitive situation can be classified are: - Number of competitors e.g. two persons and N – persons game. - Nature of payoff e.g. zero sum and non zero sum games - Number of strategies available to each player e.g. 2 x 2 game, 2 x 3 game etc. - Amount of information the competitors have e.g. games with perfect information or Games with imperfect information. b) (i) Game matrix Njoroge Kamau N 1 N 2 Min K 1 500 -500 K 2 0 1,000 0 Max 500 1,000 Where: K 1 is Kamau does not expand K 2 is Kamau expands N 1 is Njoroge does not expand N 2 is Njoroge expand Note: Since there is no entry that simultaneously a maximum of the now minima and a minumum of the column maxima, then a saddle point does not exist. There is therefore no pure strategy. (ii) Let K be proportion of time Kamau does not expand 1 – K is the proportion of time Kamau expands. 500 K 1 + 0 (1 – K 1 ) = -500 K 1 + 1,000 ( 1 – K 1 ) 500K 1 + = - 1,500 K 1 + 1,000 113 Answers – Past Papers 114 2,000 K 1 = 1,000 K 1 = 0.5 K 2 = 0.5 Let N 1 be proportion of time Njoroge does not expand 1 – N 1 be proportion of time Njoroge expands. 500N - 500 (1 - N 1 ) = O 1 N + 1,000 (1 – N 1 ) 1,000 N 1 - 500 = 1,000 – 1,000 N 2,000 N 1 = 1,500 N 1 = 1,500 = 0.75 2,000 N 2 = 0.25 Strateg ies Joint probability Payoff Weighte d Pay offs K 1 N 1 0.5 (0.75) = 0.375 500 187.5 K 1 N 2 0.5 (0.25) = 0.125 -500 -62.5 K 2 N 1 0.5 (0.75) = 0.375 0 0 K 2 N 2 0.5 (0.25) = 0.12 1,000 125 250 Kamau would expect to increase his profits by Sh.250 per day on average while Njoroge expects to lose Sh.250 per day on average. QUESTION FOUR (a) The minimum price of Mega Techniques Ltd is the price which reflects the relevant costs(opportunity costs) of the work. These are established as follows: 1) Cost of original machine. Past costs are not relevant, and the shs.8, 280,000 of costs incurred should be excluded form the minimum price calculation. It is necessary, however, to consider the alternative use of the direct materials (opportunity cost), which would be forgone if the conversion work is carried out. Type P Shs. Revenue from sales as scrap (note 1) 540,000 Type Q Revenue from sales as scrap, Past Paper Questions and Answers Minus the additional cash costs necessary to Prepare it for sale (360,000 – {120 x 270}) note 1 327,600 Type R Cost of Disposal if the machine is not converted (a negative opportunity cost) note 2 108,000 Total opportunity costs of materials Types P, Q, R 885,600 By agreeing to the conversion of the machine Mega Techniques Ltd would therefore lose net revenue of Shs.885, 600 from alternative use of these materials. Notes 1. Scrap sales would be lost if the work for Zimwi systems Limited goes ahead. 2. These costs would be incurred unless the work goes ahead. 2) The cost of additional materials for conversion is Shs. 576, 000 but this is an historical cost. The relevant cost of close materials is the Shs. 684, 600 that would be spent on new purchases if the conversion is carried out. If the work in stock would be unavailable goes ahead, the materials in stock would be unavailable for production of the other machine mentioned item (2) of the question and so the extra purchases of Shs. 684, 000 would be needed. 3) Direct labour in Department X and Y is a fixed cost and the labour force will be paid regardless of the work they do or not do. The cost of labour for conversion in Department Y is not a relevant cost because the work could be done without any extra cost the company. In Department X, however, acceptance of the conversion work would be oblige the company to divert production from other profitable jobs. The minimum contribution from using Department X labour must be sufficient to cover the cost of the labour and variable overheads and then make an additional Shs.2.50 in contribution per direct labour hour. Department X – costs for direct labour hours spent in conversion; 3 men x 4 weeks x 27,000 Shs.324, 000 Variable overhead cost: Shs.324, 000 x 20% Shs. 64,800 Contribution forgone by diverting Labour from other work Shs.2.5 per shs.1 of labour cost = 324,000 x 150% Shs.486, 000 4) Variable overheads in Department Y are relevant costs because they will only be increased if production work is carried out (It’s assumed that if the work done is idle, no variable overheads would be manned). Department Y = 20% of (1 man x 4 weeks x shs.21,600) = 86,400 115 Answers – Past Papers 116 5) If the machine is converted, the company cannot sell the designs and specifications to the overseas companyhs.270,000 is relevant (opportunity) cost of accepting the conversion order. 6) Fixed overhead, being manly undercharged regardless of what the company decided to do should be ignored because they are not relevant (incremental) costs. The additional cost of supervision should, however, be included as a relevant cost of order because the shs.162,000 will not be spent unless the conversion work is done. 7) The money received from Pawa Limited should be ignored and should not be deducted in the calculation of the minimum price. Just as costs incurred in the past are irrelevant to a current decision about what to do in the future, revenue collected in the past are also irrelevant. Shs. Shs. Opportunity cost of using the direct Material types P, Q, R 885,600 Opportunity cost of additional materials for 684,000 Conversion Opportunity cost of work in Department X: Labour 324,000 Variable overhead 64,800 Contributions forgone 486,000 874,800 Opportunity cost: sale of design & specifications 270,000 Incremental costs: Variable production overheads in Department Y 86,400 Fixed production overheads 162,000 Minimum price 2,962,800 (b) (i) cost behavior patterns are known. (ii) The amount of fixed costs, unit variable costs, sales price and sales demand are known with certainty. The objective of decision-making in the short-run is to minimize “satisfaction” which is often regarded QUESTION FIVE (a) MWANZO DIVISION PROFIT & LOSS ACCOUNT TO 31/10//03 2002 2003 TOTAL Unit sales ( x30,000 75 100 ) 40,000 40,000 80,000 Sh, ‘M’ Sh. ‘M’ Sh. ‘M’ Past Paper Questions and Answers Sales revenue (40,000 x 22,000) 880 880 1,760 Direct material ( x150,000 75 100 ) 600 600 1,200 Direct labour (110% x 90,000) 99 99 198 Total direct cost 120 120 240 Contribution (819) (819) (1,638) Fixed overheads (No depreciation) 61 61 122 Fixed overheads (depreciation) (285) (285) (570) Loss _(75) _(75) _(150) (299) (299) (598) (b) OPTION 1: MAKINI PROPOSAL MWANZO MWISHO TOTAL Shs. ‘000’ Sh. ‘000’ Sh. ‘000’ Sales (25% x 12 9 x 450,000) 84,375 4,500,000 4,584,375 Direct materials - 2,100,000 2,100,000 Chassis - 660,000 660,000 Direct labour - 240,000 240,000 Variable overhead - 150,000 150,000 Fixed overhead (excluding dep) (285,000) 300,000 585,000 Depreciation - 200,000 200,000 Total cost (285,000) (3,650,00 0) (3,935,000 ) Plant disposal __50,000 ______- _50,000 PROFIT (150,625) 850,000 699,375 OPTION 2: MWANZO’S PROPOSAL MWANZO MWISH O TOTAL Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sales 880,000 4,500,0 00 5,380,0 00 Direct materials 600,000 2,100,0 00 2,700,0 00 Chassis - 660,000 660,000 Direct labour 99,000 240,000 339,000 Variable overhead 120,000 150,000 270,000 Fixed overhead (No Dep) 285,000 300,000 585,000 Depreciation 75,000 200,000 275,000 Total cost (1,179,000) (3,650,0 00) (4,829,0 00) 117 Answers – Past Papers 118 Profit (299,000) __850,0 00 __551,0 00 NOTES: 1. If Makini’s proposal is taken, the disposal of direct material by Mwanzo division will result in revenue of Sh. 84,375M though there will be a loss in cost. 2. Makini’s proposal will result in a reduction, in raw materials cost and also a reduction in depreciation cost. 3. The cost of Makini’s plan will result in group profit loss. Past Paper Questions and Answers MAY 2002 QUESTION ONE (a) Distribution of sales f (s) 0.5 0.25 0.25 16,000 20,000 24,000 Sales Sales of 24,000 is Z, standard deviation above the mean where: Z = 24,000 – 20,000 = 4,000 8 P (sales > 24,000) = 0.25, therefore P (Z > Z) = 0.25 Using the standard normal tables, Z = 0.675 approximately ∴ 0.675 = 4,000 8 = 4,000 = 5926 8 0.675 To two significant figures 8 = 6,000 sales (b) (i) The company will at least break even if (revenue – cost ) > 0 If the company sells b books, they will at least break even if 1,000 b – (400 + 2,500,000 + 0.1 x 1,000b) > 0 500 b > 2,500,000 b = 5,000 Assuming a normal distribution 5,000 is Z standard deviations below the mean where: ≥ = 5,000 – 20,000 = - 2.5 6,000 119 Answers – Past Papers 120 From the tables P (Z > 2.5) = 0.0475 Therefore P (Z> - 2.5) = 1 – 0.0475 = 0.9525 There is 95.25% probability that the company will at least break – even if the existing facilities are used. (ii) If the company sells b books, they will at least break even if: 1,000 b – (2,500,00 + 250 b + 1,400,000 + 0.1 x 1,000 b) > 0 Assuming a normal distribution, 6,000 is b > 6,000 Z standard deviations below the mean where: Z = 6,000 – 20,000 = - 2.33 6,000 From the tables P (Z > 2.00) = 0.0918 Therefore is there 90.82% probability that the company will at least break-even if the special machine is hired. (c) Expected profit = (Unit contribution x Expected sales) – Fixed costs = Expected sales = 20,000 books. If the existing facilities are used, the unit contribution is shs.500, therefore the expected profit = (20,000 x 500) – 2,500,000 = 7,500,000 If the special machine is hired the unit contribution is shs.650, therefore the expected profit = (20,000 x 650) – 2,600,000 = 10,400,00 On this basis, the special machine should be hired. (d) Set up a payoff table for the following three possible decisions. (i) Use existing facilities; payoff = Shs. (500 x sales – 2,500,000) (ii) Hire special machine; payoff = Shs. (650 x sales – 3,900,000) (iii) Do not publish payoff = 0 Payoff Shs. ‘000’ Possible decision Possible outcomes Existing facilities Special machine Do not publish Probabilit y Sales 5,000 0 -1,400 0 0.05 13,000 4,000 2,600 0 0.20 18,000 6,500 5,000 0 0.25 22,000 8,500 7,100 0 0.25 27,000 11,000 9,600 0 0.20 35,000 15,000 6,100 0 0.05 Expected payoff 7,500 6,100 0 Past Paper Questions and Answers Calculate the expected pay off by multiplying each payoff by the probability of it’s occurring and summing them up. On the basis of choosing the decision which leads to the maximum expected payoff the company should have the existing facility. The expected pay off is Shs.6,100,000. QUESTION TWO (a)Advantages (i) Simulation can be used to investigate the behavior of problems, which are too complex to be modeled mathematically. (ii) The technique can also be used when the variables in the problem e.g. arrival time, service time, do not follow the standard distribution, negative exponential distribution. (iii) The basic principles of the simulation technique one fairly simple and it’s, therefore, more attractive to people who are not expert in quantitative techniques. Disadvantages (i) Simulation is not an optimizing technique. It simply allows us to select the best of the alternative systems examined. (ii) Reliable results are possible only if the simulation is continued for a long period. (iii) A computer is essential to cope with the amount of calculation required in (ii) above. (b) i. The variables in this problem are: a) The time between successive people arriving at the bus stop. b) The time between successive buses arriving at the bus stop. c) The number of empty seats on the bus. The first step is to allocate random numbers to the variable values. Passengers i at mins Probability Cumulative Random Probability Numbers 0 0.04 0.04 00 – 03 1 0.16 0.20 04 – 19 2 0.24 0.44 20 – 43 3 0.28 0.72 44 – 71 4 0.16 0.88 72 – 87 5 0.10 0.98 88 – 97 6 0.02 1.00 98 – 99 Buses i at mins Probability Cumulative Random Probability Numbers 8 0.10 0.10 00 – 09 121 Answers – Past Papers 122 10 0.38 0.48 10 – 47 12 0.28 0.76 48 – 75 14 0.15 0.91 76 – 90 16 0.09 1.00 91 – 99 Number of Probability Cumulative Random Empty seats ProbabilityNumbers 0 0.06 0.06 00 – 05 1 0.18 0.24 06 – 23 2 0.27 0.51 24 – 50 3 0.34 0.85 51 – 84 4 0.11 0.96 85 – 95 5 0.03 0.99 96 – 98 6 0.01 1.00 99 a) We can now set up the simulations for arrival of 10 passengers at the bus stop. Passengers Bus Seats Passengers No. iat RN Minute Time Arriva l Time (mins ) iat RN Minute Time Arrival Time (Mins) RN No. Board s Bus Queue Size Wait time (Mins) 1 18 1 1 A 26 10 10 23 1 A 1 9 2 18 1 2 B 62 12 22 42 2 B 2 20 3 07 1 3 C 38 10 22 42 2 B 3 19 4 92 5 8 D 97 16 48 64 3 C 4 24 5 46 3 11 E 75 12 60 74 3 C 4 21 6 44 3 14 F 84 14 74 82 3 D 5 34 7 17 1 15 G 16 10 84 97 5 D 6 33 8 16 1 16 H 07 8 92 77 3 D 7 32 9 58 3 19 1 44 10 102 77 3 E 8 4 10 09 1 20 5 99 16 118 81 3 E 9 40 49 273 (i) The expected waiting time for passengers = 273 = 27.3 units 10 (ii) The waiting time is progressively increasing at mean queue length = 49 = 4.9 (This means the queue is increasing in length) 10 QUESTION THREE (b) The three main elements of strategic cost management include: i. Value chain analysis ii. Strategic positioning iii. Cost driver analysis Past Paper Questions and Answers Value chain analysis Every firm is a collection of activities that are performed to design, produce, market, deliver and support its products/services. Value chain analysis is a systematic way of examining all activities that a firm performs and how they interact. The value chain disaggregates the firm into strategically separable activities in order to understand the behaviour of costs so as to create competitive advantage. A firm creates competitive advantages by: i. Finding new ways to conduct activities e.g. improving efficiency through automation. ii. Managing the linkages between activities better e.g. spending on better product design may reduce after sales service costs. iii. Managing the linkages between customers and suppliers better. 123 Answers – Past Papers 124 Value activities are physically and technologically distinct activities a firm performs. These are the building blocks by which a firm creates products and services valuable to its customers. The value chain has been shown by Michael Porter as follows. Value Chain S e c o n d a r y A c t i v i t i e s Firm Infrastructure Human Resource Management Technological Development Procurement P r i m a r y A c t i v i t i e s Inboard Logistic Operators Outboard Logistics Marketing of Sales Service Strategic Positioning The company must identify its strategic choices. This can be done from the firm’s objectives, which emanates from the firms mission. Strategies have to be developed to achieve a competitive advantage over competitors, which may occur due to cost, price, quality, brand name, image of the product etc. Michael Porter highlighted two basic rules to competitive advantage: i. Cost Leadership strategy ii. Differentiation Within each of these strategies a firm may decide to focus. Cost driver analysis Cost drivers are factors, which determine the costs of an activity i.e. a change in the cost driver will cause a change in the level total cost related cost object. The cost drivers can either be volume based or transaction based. The company must therefore understand its cost drivers so as to control costs. b) Characteristics of modern business that necessitate the information of a strategic cost management system are: i. Changing strategies ii. International customers iii. International competitors Past Paper Questions and Answers iv. Greater product variety v. Higher selling costs vi. Shorter product life cycle vii. Higher design costs 125 Answers – Past Papers 126 Note: Each of these points should be explained. c) It is not possible to come up with the ‘true costs’ of each good or service produced by the firm due to the following reasons: • Some costs such as overheads cannot easily be traceable to the final product. The method used to apportion overheads will result in an approximate cost but not the true costs. • Most costs are computed from predicting models which are not 100% accurate and thus may not result in ‘true cost’. • The process of measuring and communicating information is bound to create errors in the costs computed. • Even if it were possible to acquire perfect information so as to come with the ‘true cost’ it may not be desirable because the value of perfect information may be less than the cost of getting that information. QUESTION FOUR (a) Mod el Actu al Budget ed Sales Standard Sales Quantity Unit s Units Units Variance (units Contribution (shs) Variance (shs) A 18,000 15,000 3,000 (F) (3,900 – 3,120) = 780 2,340,000 (F) B 21,000 25,000 4,000 (A) (3,120 – 1,950) = 1,170 4,680,000 (A) C 9,000 10,000 1,000 (A) (2,730 – 1,716) = 1,014 1,014,000 (A) 48,000 50,000 2,000 (A) 3,354,000 (A) Sales quantity variance in total is 2,000 units (A) with a cost of Kshs.3, 354,000 (A). (b) Weights Based on Budgeted units Model Proportio n Actual Sales in Budgeted proportion Budgete d sales In units Sales Quantity Variance Standard Contributio n (Shs) Sales Quantity Variance (Shs) A 3/10 14,400 15,000 600 (A) 780 468,000 (A) B ½ 24,000 25,000 1,000 (A) 1,170 1,170,000 (A) C 1/5 9,600 10,000 400 (A) 1,014 405,600 (A) 48,000 50,000 2,000 (A) (c) (i) Similarities They both give the difference between the amount of contribution margin in the flexible budget based on actual sales volume at budgeted mix, and Budgeted selling prices and Budgeted unit variable cost are held constant. Differences Sales – quantity income is the difference between the amount of contribution margin in the flexible budget based on actual sales Past Paper Questions and Answers volume at budgeted mix and that amount in the static (master budget); Sales – mix variance is the difference between the amount of contribution margin in the flexible budget based on actual sales volume at budgeted mix. (ii) Arguably, the most meaningful information is provided by not valuing the volume or sub-variances at all, but expressing them in unit terms. Alternatively, if managers are interested in market share, none of the information calculated is of much value. Managers would need to be told the percentage of the overall electronic game market and the markets for individual products that was taken during the period. However, management may wish to have some idea of the impact of the change in sales volumes in terms of financial results. Information should be presented in a way that is understandable to it’s users, so if they are used to an absorption costing system the users will prefer reporting in terms of profits and if they are used to marginal costing is should be presented in terms of contribution. If managers are interested in turnover it will be useful to have an analysis of the oral impact turnover (unit sales of 2,000 of extra units give rise to a decrease in turnover of Shs.3,354,000), and of the breakdown by individual product. If they are concerned with bottom line figure, the variances, in terms of profit will be most useful. For decision-making purposes, valuation according to contribution is the options to choose, because this only includes cash flows that will change as a result of any decisions. Fixed costs are sunk and irrelevant. (iii) By analyzing the variances in this way management are able to see how well the business has performed against what should in hindsight have been the standard. Otherwise part of each variance identified would simply reflect the fact that the original budget was wrong, perhaps through factors beyond the control of management. The analysis into planning and operational variances this provides more useful feedback about operational performance, and this can be used to point investigation, cost benefit analysis and control action where possible. This approach is also useful for feed forward control. When budgets are next prepared the revised standards can be used. If it is not possible to set right all of the operational problems, the relevant proportion of operational variances can also be taken into account in future plans. QUESTION FIVE a) ROI , residual income. 127 Answers – Past Papers 128 ROI = ts Total Asse Income Operative Revenues Income Operating x ts Total Asse Revenues · 2001 Newspapers 0.939 0.239 0.224 Television 2.133 0.025 0.053 Film Studios 0.635 0.121 0.077 b) Although the proposed investment is small, relative to the total assets invested. It earns less than the 2001. Return on Investment of 0.224. 2001 ROI (before proposal) = 0.224 4900 1100 · Investment Proposal ROI = 200 30 = 0.150 2001 ROI (with proposal) = · 5100 1130 0.222 Given the existing bonus plan, any proposal that reduces the ROI is unattractive. c) 2001 Residual Income Operating Income Imputed Interest Divisional Charge Residual Income Newspaper 1100 – 0.12 x 4900 = 512 Television 160 – 0.12 x 3000 = (200) Film Studios 200 – 0.12 x 2600 = (112) d) RI for proposal = 30 – 0.12 x 200 = 6 Adopting this proposal will increase the division residual income. This will reduce Kanyama’s reluctance to adopt the proposal. Past Paper Questions and Answers DECEMBER 2002 QUESTION ONE 1. Five mines supply three preparation plants. The total mines output per day = 650 tonnes/day The total preparation plant capacity = 700 tonnes/day Therefore introduce a dummy mine to indicate which plant will not be fully used. The unit costs for each combination of mine and preparation plant comprise: Unit variable production cost at the mine + unit operating cost at the plant + unit transport cost The values are shown in the following table. Vogel’s penalty cost method is used to find the first allocation and the MODI method to test for optimality. To Prep Plant Tons/d ay Penal ty A B C Availab le Costs MODI 1 3 8 70 5 50 4 120 70 0 1,1.2 U 1 = 0 2 150 3 _ _ 150 0 .8 3 U 2 = 30 129 3.7 3.8 5.0 + 1 6 5.3 + 1 2 4.0 4.8 + 1 1 Answers – Past Papers 130 From mine 3 40 _ _ 40 80 0 .4 U 3 = 11 4 _ __ _ _ 160 2 160 0 1.3 2 U 4 = 3 5 140 __ __ 140 0 0 U 5 = 4 Dum my 50 _ __ 50 0 0 U 6 = - 38 Tons/day required 300 250 180 40 0 200 50 0 200 40 0 4.9 4.9 4.5 + 1 3 + 1 5.4 5.0 +1 0 3.7 4.2 5.5 4.2 + 1 4 + 4 0 0 0 + 1 + 4 Past Paper Questions and Answers Penalty costs 3.8 1 .4 . 7 3.7 .3 1.2 4 3.7 .5 .3 V 1 = 3.8 V 2 = 3.7 V 3 = 3.4 There must be (m + n – 1) = 8 entries for a basic solution. There are 8 entries. All the shadow costs are positive, therefore, this is the optimum allocation. Mine 1 Supplies 70 tonnes per day to A and 50 to B; mine 2 supplies 150 tonnes per day to B; mine 3 supplies 40 tonnes per day to A and 40 to C; mine 4 supplies 160 tonnes per day to C; and mine 5 supplies 140 tonnes per day to A. Preparation plant A has 50 tonnes per day spare capacity even thought it has the cheapest operating costs. The total cost of the above allocation are: 70 X 38 + 50 X 37 + 150 X 40 + 40 X 49 + 40 X 45 + 160 X 37 + 140 X 42 = Shs. 26,070/day 2. Production costs at Mine 3 fall from Shs. 34 to Shs. 30 per tonne. All mine output is already taken by the plants and production costs are like a fixed cost and do not affect the allocation, therefore total cost will be reduced by 80 x 4 =Shs. 320 per day. 3. Mine 5 plans to increase output by 40 tonnes per day from 140 to 180. all of Mine 5’s output is allocated to Plant A which has 50 tonnes per day spare capacity. The extra 40 tonnes per day output will go form Mine 5 to Plant A, increasing costs by 40 x 42 =Shs. 1,680 per day. QUESTION TWO a) Advantages of Just-In-Time (JIT) i. Leads to substantial savings in stockholding costs ii. Elimination of waste iii. Savings in factory and warehouse space, which can be used for other profitable activities iv. Reduction in obsolete stocks v. Considerable reduction in paper work arising from a reduction in purchasing stock and accounting transaction or procedures. Disadvantages i. Additional investment costs in new machinery, changes in plant layout and goods services, thus affecting cash flow of the organization ii. Difficulty in predicting daily or weekly demand, which is a key feature of the JIT philosophy. 131 Answers – Past Papers 132 iii. Increased risk due to the greater probability of stock out costs arising from strikes, or other unforeseen circumstances, that restrict production or supplies. (b) i. Safet y stock Stock out Stock out cost @ shs.100 Probabilit y Expected Cost (Shs) Total (Shs) 500 400 300 200 100 0 0 100 200 100 300 200 100 400 300 200 100 500 400 300 200 100 0 10,000 20,000 10,000 30,000 20,000 10,000 40,000 30,000 20,000 10,000 50,000 40,000 30,000 20,000 10,000 0 0.04 0.04 0.07 0.04 0.07 0.10 0.04 0.07 0.10 0.13 0.04 0.07 0.10 0.13 0.16 0 400 800 700 1,200 1,400 1,000 1,600 2,100 2,000 1,300 2,000 2,800 3,000 2,600 1,600 0 400 1,500 3,600 7,000 12,000 SUMMARY Safety Stock Stock out cost Holding Cost @ sh.10 Total Cost 0 12,000 0 12,000 100 7,000 1,000 8,000 200 3,600 2,000 5,600 300 1,500 3,000 4,500 400 400 4,000 4,400 500 0 5,000 5,000 The optional safety stock is 400 units ii. P (being out of stock) i.e. at optimal safety stock of 400 units = 0.04 QUESTION THREE (a) Productivity September Standard hours of output achieved 3,437hours Productive hours worked (3800 – 430) 3,370 hours Variable 67 hours (F) X Standard charge rate (W1) x Shs.300 (F) Productivity Variance Shs.20,100 (F) Past Paper Questions and Answers October Standard hours of work achieved 4,061 hours Productive hours worked (4200 – 440) 3,760 hours Variance 301 hours X Standard rate (W1) x Shs.300 (F) Productivity variance shs.90, 300 (F) Excess Idle Time September Excess time should have been (3800 x 10%) 380 hours But was 430 hours Variance (50) hours (A) X variance rate (W1) x Shs.300 Variance Shs (15,000) (A) October Excess time should have been (4,200 x 10%), 420 hours But was 440 hours Variance (20) hours (A) X standard rate (W) x shs.300 Variance Shs.(6,000) (A) Expenditure September: Shs. Expenditure should have been (3,800 x Shs.270) 1,026,000 But was 1,070,000 Variance (44,000) A October Shs. Expenditure should have been (4200 x Shs.270) 1,134,000 But was 1,247,000 Variance (113,000) (A) b) (i) Productivity = Productivity variance (part (a)) Standard cost of output (W2) August = 42,900 x 100 = (4.2%) 1,031,100 September = 20,100 x 100 = 1.9% 1,031,100 October = 90,300 x100 = 8.3% 1,194,000 (ii) Excess Idle Time = Variance (Part (a)) Expected cost (W2) August = 6,000 = (5.0%) 133 Answers – Past Papers 134 120,000 September = 15,000 = (13.2%) 114,000 October = 6,000 = (4.8%) 126,000 November = 12,000 = (9.8%) 123,000 (iii) Expenditure = Variance (par (a))________ Standard machine cost (W2) August = 20,000 = (1.9%) 1,080,000 September = 44,000 = (4.3%) 1,026,000 October = 113,000 = (10.0%) 1,134,000 November = 111,000 = (10.0%) 1,107,000 Workings 1. Standard Charge Rate Standard variable machine cost per gross hour is Shs.270 divided by (100- 10%) = Shs.300 2. Standard costs August September October November Productivity Standard hours of output 3,437 3,437 4,061 3,980 Standard cost x shs.300 (W1) 1,031,100 1,031,100 1,218,300 1,194,000 Expected Idle Time (10% x 4,000 etc) 4,000 380 420 410 Expected cost x Shs.300) 120,000 114,000 126,000 123,000 Expenditure Gross machine hours 4,000 3,800 4,200 4,100 Standard cost (x Shs.270) 1,080,000 1,026,000 1,134,000 1,107,000 c) The following comments may be made: Past Paper Questions and Answers 1. Improvement in productivity: Productivity has improved in each month, suggesting that the extra alteration to quality is having a positive effect. 2. Fluctuation in excess idle time: Excess idle time has fluctuated in the period; it is higher (more adverse) In October and November. 3. Increasing Expenditure: Expenditure has been increasing, notably between September and October, but seems to hold steady in November. In the absence of other information we can suggest the following possible interdependencies. 1. The productivity improvement may have been brought about by means of measured expenditure, perhaps on better quality materials, machine maintenance or supervision. The fact that improvements continue may be due to a learning curve effect, however; 2. The fluctuation levels of idle time do not have a clear cause, though they do suggest that the quality improvement process is not yet fully under control. QUESTION FOUR (a) Large – scale service organizations have a number of features that have been identified as being necessary to drive significant benefits from the introduction of ABC: i. They operate in a highly competitive environment ii. They incur a large proportion of indirect costs that cannot be directly assigned to specific cost objects. iii. Products and consumers differ significantly in terms of consuming overhead resources. iv. They market many different products and services. Furthermore, many of the constraints imposed on manufacturing organizations, such as also having to meet financial accounting stock valuation requirements, or a reluctance to change or scrap existing systems, do not apply. Many services organizations have only recently implemented cost systems for the first time. This has occurred at the same time as when the weaknesses of existing systems and the benefits of ABC systems were being widely publicized. These conditions have provided a strong measure for introducing ABC systems. 135 Answers – Past Papers 136 (b) The following may create problems for the application of ABC. i. Facility sustaining costs (such as property rents etc) represent a significant proportion of total costs and may only be avoidable if the organization ceases business. It may be impossible to establish appropriate cost drivers ii. It’s often difficult to define products where they are of an intangible nature. Cost objects can therefore be difficult to specify; iii. Many service organizations have not previously had a costing system and much of the information required to set up an ABC system will be non-existent. Therefore introducing ABC is likely to be expensive. (c) The uses for ABC information for service industries are similar to those for manufacturing organizations: i. It leads to more accurate product costs as a basis for pricing decisions when cost-plus pricing methods are used; ii. It results in more accurate product and customer profitability analysis statements that provide a more appropriate basis for decision-making. iii. ABC attaches costs to activities and identifies the cost drivers that cause the costs. Thus ABC provides a better understanding of what causes costs and highlights ways of performing activities more effectively by reducing cost driver transactions. Costs can therefore be managed more effectively in the long term. Activities can be analyzed into value added and non-value added activities alteration is drawn to areas where there is a potential for cost reduction without reducing the products’ service potentials to customers. QUESTION FIVE (a) Flow diagram OCCUPANCY ADMINSTRATION/ CENTRAL FACULTY MANAGEMENT SERVICES DEGREE COURSES TEACHING DEPARTMENT Past Paper Questions and Answers (b) Step 1 Apportion occupancy costs = Sh. 15,000,000 = Sh.400 per sq. ft 37,500 ft 137 Answers – Past Papers 138 Sh‘000 ’ Administration/manag ement 2,800 Central Services 1,200 Faculty 3,000 Teaching Departments 8,000 15,000 Step 2 Apportion Central Services costs: 10,000,000 + 1,200,000 = Sh. 0.7 per external costs 16,000,000 Sh‘00 0’ Faculty 1,680 Teaching departments 5,600 Degree courses 3,92 0 11,20 0 Step 3 Apportion teaching department costs (includes 100% of faculty costs) and administration/management costs to degree courses. Teaching department = 8,000,000 + 5,600,000 + (3,000,000 + (1,680,000 + 7,000,000) + 55,250,000 = Sh. 80,530,000 Administration/management = Sh. 2,800,000 + 17,750,000 = Sh.20,550,000 Total degree courses costs = Sh 80,530,000 + 20,550,000 + 3,920,000 = Sh. 105,000,000 Average university cost per student = 105,000,000 = Sh.42,000 2,500 Step 4 Analyse Sh. 105,000,000 by degree courses (in round Sh ‘000’) Business studies Sh ‘000’ Mechani cal Engineer ing Sh ‘000’ Catering Studies Sh ‘000’ Past Paper Questions and Answers Teaching department 2,416 2,013 5,637 Administration/management 514 1,028 822 Central services (base on external cost) 224 336 224 Average cost per graduate 3,154 3,377 6,683 (c) The average cost per graduate will differ from one-degree course to another for several reasons, the most obvious of which is the very different nature of the courses. The engineering and catering courses will require much greater use of expensive machinery and equipment, which in turn will need more room. In addition these courses will probably require much greater lecturer input than on the business studies courses. The much lower staff/student ratio will push up the teaching costs per student. Another factor to be considered is the variability in the student numbers. This variable is unlikely to have an impact on many of the university costs, which are mainly fixed in nature. For example, if in the following year intake is up to sixty on the mechanical engineering degree, with a similar level of costs, the average cost per student would fall to nearly that being reported for a catering studies student. These average costs figures must be interpreted with great care by the management. They give a ‘rough’ guide to the relative cost of degree courses but the arbitrary apportionments render them very nearly useless for decision-making. For decision making incremental costs are required. 139 Answers – Past Papers 140 JUNE 2003 QUESTION ONE a) Methods used to analyses uncertainty in CV-P analysis (i) Sensitivity analysis This is what if analysis that considers the effect of a marginal change on each of the relevant variables to the decision. (ii) Point estimate of probability This approach requires a number of different values for each of the uncertain variables to be selected. Usually three values are selected: these are the worst possible, most likely and best possible outcomes. For each of these values a probability of occurrence is estimated. The expected values and standard deviation can then be computed. (iii) Continuous probability distribution (e.g. normal distribution) The uncertain variables can be estimated as a continuous probability distribution. Estimates are made of the mean and standard deviation, which can then be used to compute expected profit, standard deviation of profits and probability that the company will break even. (iv) Simulation analysis This is a method of analyzing a system by experimentally duplicating its behaviour. Simulation is used where analytical techniques are not available or would be very complex. b) (i) Current production: Ti only contribution = 10 – 6 = Sh.4 E (Profit) = 4 x 110,000 – 400,000 = Sh.40,000 Sh.40,000 10,000 x 4 profit · · δ BEP units = Total fixed costs = 400,000 Contribution margin 4 = 100,000 units BEP sh. = 100,000 (10) = Sh.1,000,000 (ii) Coefficient of variation C.V 1 000 , 40 000 , 40 E(profit) C.V · · · δ (i) Proposed production: Ti and T2. Expected profit = 4(85,000) + 3(50,000) – (400,000 + 50,000) Past Paper Questions and Answers = Sh.40,000 2 1 2 1 12 2 2 2 2 2 1 2 1 CM CM 2 CM δ δ δ δ δ + + + · Π r CM ( ) ( ) ( ) units 45919 ) 123980 ( 135 50 two Thing units 78061 123980 135 85 one Thing units 123980 3,62962963 50,000 400,000 units BEP 62962963 . 3 135 50 3 135 85 4 . margin on contributi average costs fixed Total units . . 4 . 19621 ) 5000 )( 8000 )( 3 )( 4 )( 9 . 0 ( 2 ) 5000 ( 3 ) 800 ( 4 2 2 2 · · · · · + · · + · · · − + + · CM AV P E B 1,147,962 Sh BEP Total 367,352 8 45919 T2 780,610 Sh10 x 78061 Sh BEP sh T1 sh in x BEPSh · · · · (ii) Coefficient of variation (C.V) C.V = 49 . 0 000 , 40 4 . 19621 ) ( · · profit E δ (iii) Since the mean demand is greater than breakeven point then BEP is not a good criteria in making the decision. We should use the coefficient o f variation. The decision therefore is to add T 2 to the production schedule since it r educes the coefficient of variation from 1 to 0.49. QUESTION TWO a) Overhead absorption is the technique of attributing departmental overhead costs to a cost unit. 141 Answers – Past Papers 142 Traditionally, the basis of overhead absorption was the number of labour hours expected within the budget period and this was then used to calculate an absorption rate per labour hour. This was then used to attribute costs to the cost units on the basis of the number of labour hours used to produce the cost unit. Alternative bases of apportioning exist such as the number of machine hours or the percentage of particular elements of prime costs incurred in respect of cost units. If the method of manufacture is machine intensive for example, it is more realistic to absorb the overhead cost on the basis of the number of machine hours instead of the number of labour hours. A further development is to divide the overheads into those costs, which are labour related, and those, which are machine hour, related and apply a separate absorption rate to each part of the overhead cost. This is the use of multiple rates similar to the principle of activity bases costing (ABC). ABC is based on the principle that activities cause costs and therefore the use of activities should be the basis of attributing costs to cost units. Costs are identified with particular activities and the performance of those activities is linked with products. b) (i) Incremental budgeting uses the previous year’s budget as the starting point for the preparation of next year’s budget. It assume that the basic structure of the budget will remain unchanged and that adjustments will be made to allow for changes in volume, efficiency and price levels. The budget is therefore concerned with increments to operations that will occur during the period and the focus is on existing uses of resources rather than considering alternative strategies for the future budget period. Incremental budgeting suffers from the following weaknesses: i It perpetuates past inefficiencies ii There is insufficient focus on improving efficiency and effectiveness. iii The resource allocation tends to be based on existing strategies rather than considering future strategies. iv It tends to focus excessively on the short term and often leads to arbitrary cuts being made in order to achieve short-term financial targets (ii) The answer should stress that:; i. The focus is on managing activities ii. The focus is on the resources that are required for undertaking activities and identifying those activities resources that are un- utilized or which are insufficient to meet the requirements specified in the budget. iii. Attention is given to eliminating non-value-added activities. Past Paper Questions and Answers iv. The focus is on the control of the causes of costs (i.e. the cost drivers). QUESTION THREE For (a) and (b) 143 Answers – Past Papers 144 Fixed Fee Share of Revenu e to Joan Share of Costs Borne By Joan Net profit to Joan Join t Pro b Expecte d Monetar y value Contract A Sh. ‘m’ Sh. ‘m’ Sh. ‘m’ Sh ‘m’ Sh. ‘m’ HD – BC 10 100 - 110 0.06 6.6 HD – HC 10 100 - 110 0.04 4.4 MD – BC 10 0 - 10 0.18 1.8 MD – HC 10 0 - 10 0.12 1.2 LD – BC 10 0 - 10 0.36 3.6 LD – HC 10 0 - 10 0.24 2.4 1.0 _ 20.0 Contract HD – BC 0 200 20 180 0.06 10.8 HD – HC 0 200 70 130 0.04 4.4 MD – BC 0 50 20 30 0.18 5.4 MD – HC 0 50 70 -20 0.12 -4.8 LD – BC 0 10 20 -10 0.36 -3.6 LD - HC 0 10 70 -60 0.24 -19.2 -7.0 Contract C HD – BC 0 600 50 550 0.06 33.0 HD – HC 0 600 150 450 0.04 18.0 MD – BC 0 150 50 100 0.18 18.0 MD – HC 0 150 150 0 0.12 0 LD – BC 0 30 50 -20 0.36 -7.2 LD – HC 0 30 150 -12 0.24 -28.8 33.0 Note HD = High demand MD = Moderate demand LD = Low demand BC = Budgeted Cost HC = High Cost b) From the solution above the EMV for Contract A = Sh.2 million EMV for Contract B = Sh.1 million EMV for Contract C = Sh.3 million Joan should choose contract C, given the objective of maximizing expected monetary value. c) Three sources of information Joan might use are: 1. Her own track record of actual production and marketing relative to amounts Past Paper Questions and Answers 2. The tract record of the film station parts in “the rise and fall of cock” film running over budget 3. The geographical location of the technical nature of the stunts set the film. Examine the tract record costs against budgeted costs for films in the same location and of similar difficulty. QUESTION FOUR (a) (i) Machine Hours Maintenan ce Month X Cost Y XY X 2 Y 2 1 800 350 280,00 0 640,0 00 122,50 0 2 1,200 350 420,00 0 1,440,0 00 122,50 0 3 400 150 60,00 0 160,0 00 22,500 4 1,600 550 880,0 00 2,560,0 00 302,50 0 Sum 4,000 1,400 1,640,0 00 4,800,0 00 570,00 0 High Low method X Y Highest point 1,600 550 Lowest point 400 150 Difference 1,200 400 b = 400 = 0.33 1200 Y ˆ = a + bx Substitute Highest point 550 = a + 0.33 (1,600) a = 17 The cost function is Y ˆ = 17 + 0.3X. Regression analysis (ii) 145 Answers – Past Papers 146 0.3x 50 Y ˆ is function The 50 ) 4 000 , 4 ( 3 . 0 4 400 , 1 n Y a 0.3 2 ) 000 , 4 ( ) 000 , 480 ( 4 ) 400 , 1 ( 000 , 4 ) 000 , 640 , 1 ( 4 2 ) ( 2 x n y x - y x n b + · · − · − Σ · · − − · − · n x b x ε ε ε ε ε ε b) (i) ) '000' Sh. in ( 320 (900) 0.3 50 Y ˆ 900 x If 0.3X 50 Y ˆ · + · · + · (c) 50 4 400 , 1 3 4 4,000 1 3 000 , 320 000 , 960 ) 1400 ( ) 000 , 570 ( 4 ) 1400 ( 4000 ) 000 , 640 , 1 ( 4 ) ( 2 b Y b a ˆ 1 2 2 1 1 1 − · , ` . | − · Σ − Σ · · · − − · Σ − Σ Σ Σ − Σ · + · n Y b n x a Y Y N Y X XY n X hours. machine 150 , 1 3(400) 50 - X ˆ 400 Y If 3Y 50 - X ˆ · + · · + · 6 . 495 39 . 144 ) 25 . 63 ( 27764 . 2 320 ) 25 . 63 ( 7764 . 2 320 t Y ˆ Y t - Y ˆ c c ≤ ≤ + ≤ ≤ − + ≤ ≤ Y Y s s e e We are 95% confident that maintenance cost next period will lie between Sh.144,390 and Sh.495,600 Past Paper Questions and Answers QUESTION FIVE YES NO YES NO 147 START Prepare the payroll Matrix. Is there a saddle point Can the game be reduce d to domina nce Solve for mixed strategies Determine the value of the game STOP Reduce by dominance Answers – Past Papers 148 b) (i) Let A 1 be company A undertakes a vigorous market campaign. A 2 be Company A does not run the market campaign B 1 = Company B invests Sh.25 m in Research and Development (R & D) B 2 = Company B invests Sh.50 m in R & D B 3 = Company B invests Sh.80 m in R & D Game Matrix Company B B 1 B 2 B 3 b A 1 0.79 0.76 0.73 0.73 Company A 1 A 2 0.76 0.74 0.72 0.72 Max 0.78 0.76 0.73 The game has a saddle point occurring at strategy A 3 . These are the optimal strategies with a game value of 73% of the market share of A implying that B will get a market share of 27%. (ii) Payoff matrix B 1 B 2 B 3 A 1 (202, 38) (193, 22) (184, 1) A 2 (228, 47) (222, 28) (216, 4) A’s Reasonings - If B plays strategy B 1 , then A should play strategy A 2 to maximize his winnings. - If B plays strategy B 2 , then A should play strategy A 2. . In all cases A plays strategy A 2 B’s reasonings. - If A plays strategy A 1 then B should play strategy B 1 to maximize his profits. - If A plays strategy A 2 then B should play strategy B 1 . Past Paper Questions and Answers The saddle point occurs when A plays strategy A 2 and B plays strategy B 1 . The profit contribution will be: Company A: Sh.228 million Company B: Sh. 47 million 149 Answers – Past Papers 150 DECEMBER 2003 QUESTION ONE (a) Proposed production P 1 = ⅗ x 400,000 = 240,000 litres P 2 = ⅖ x 400,000 = 160,000 litres The production of P 1 will go down by 60,000 litres while that of product P 2 will increase by 60,000 litres. Incremental revenue from P 2 = 60,000 x 7,000 Loss of revenue from P 1 = 60,000 x 3,500 Extra joint processing costs = 60,000 x 500 Blending and refining 420,000, 000 210,000, 000 210,000,0 00 (30,000,0 00) Extra cost of P 2 = 0 x70%x60,00 100,000 0 250,000,00 (105,000, 000) Saving on cost of P 1 = 0 x70%x60,00 300,000 0 250,000,00 35,000, 000 (70,000,0 00) Other separable costs Extra cost of P 2 = x60,000 100,000 20,000,000 (12,000, 000) Savings on cost of P 1 = x60,000 300,000 50,000,000 10,000, 000 2,000,0 00 Opportunity cost Mixing hours of P 2 = x60,000 100,000 2,000 = 1,200 Mixing hours of P 1 = x60,000 300,000 2,000 = (400) Extra hours 800 Opportunity costs 800 x 100,000 80,000,0 00 Net benefit of changing the mix 28,000,0 00 Decision The company should change the mix because the net benefit of the change is positive. Past Paper Questions and Answers (b) Other factors include: - Demand for the extra units of P 2 - Effect of change on employees - Contracts already signed for supply of materials etc. - Future production structure 151 Answers – Past Papers 152 QUESTION TWO (a) General analysis Plant capacity: Bungoma 0.75 270,000 = 360,000 tonnes max. Busia 0.6 360,000 = 600,000 tonnes max Raw materials: Bungoma Busia From brokers Sh. 1,875 2,000 2,750 Maximum production for cheap material Bungoma 1000 0 144,000x80 = 115,200 tonnes of output Busia 1000 0 400,000x80 = 320,000 tonnes of output Unit cost of Production Bungoma 1,875 800 1,000 x = Sh.2,344 Busia 2,500 800 1,000 x = Sh.2,500 Brokers material 2,750 800 1,000 x = Sh.3,438 Other variable costs apart from aw materials Bungoma 270,000 0 102,600,00 = Sh.380 per unit Busia 360,000 0 140,400,00 = Sh.390 per unit Total variable costs per kg of output: Bungoma 380 + 2,344 = Sh.2,724 per tonne range 1 – 115,200 tonnes And 380 + 3,438 = Sh.3,818 per tone range 115,200 – 360,000 tonnes Busia 390 + 2,500 = Sh.2,890 per tonne range 1 – 320,000 tonnes And 390 + 3,438 = Sh.3,828 per tonne range 320,000 – 600,000 tonnes Past Paper Questions and Answers (i) Desired output is 630,000 tonnes Bungoma produce 115,200 tonnes @ Sh.2,724 per tonne Bungoma produce 194,800 tonnes @ Sh.3,818 per tonne and Busines produce 320,000 tonnes @ Sh.2,890 per tonne Total relevant cost: 115,200 x 2,724 194,800 x 3,718 320,000 x 2,890 = = = 313,804,800 724,266,400 924,800,000 1,962,871,200 Current relevant costs: Raw materials for both plants 468,000 + 576,000 = Variable costs for both plants 1,026,000 +1,404,000 = 1,044,000,000 2,430,000,000 Total 3,474,000,000 (ii) Cost savings 3,474,000,000 – 1,962,871,200 = Sh.1,511,128,800 (b) Production of 910,000 Kgs Bungoma 115,200 @ 2,724 per tonne Busia 320,000 @ 2,890 per tonne Bungoma 244,800 @ 3,718 per tonne Busia 230,000 @ 3,824 per tonne. ∴ Recommended production Bungoma plant Busia plant 360,000 tonnes 550,000 tonnes 910,000 tonnes QUESTION THREE (a) T o LD SUM SON PAL FROM LD SUM SON PAL 1,750 400 0 100 200 2,300 250 150 100 50 2,050 100 150 250 0 2,150 LD SUM SO N PAL LD SUM SON 1,750 2,200 400 3,000 0 200 2,200 2,300 3,000 250 10 0 2,20 0 5 0 150 2,200 250 3,000 O 153 Answers – Past Papers 154 PAL 100 2,500 2,300 150 2,500 3,00 0 2,05 0 2,30 0 10 0 2,50 0 2,150 2,500 Past Paper Questions and Answers LD SUM SON PAL LD SUM SON PAL 0.80 0.13 0.00 0.04 0.09 0.77 0.11 0.06 0.05 0.02 0.89 0.04 0.06 0.08 0.00 0.86 Market shares at the end of December 2003 0.22 0.30 0.23 0.25 0.80 0.13 0 0.04 0.09 0.77 0.11 0.06 0.05 0.02 0.89 0.04 0.06 0.08 0 0.86 0.22 5 0.29 1 0.23 2 0.25 2 (b) Market shares at steady state Let X, Y, Z and 1-X-Y-Z be long run market shares of LD - TV, SUM TV, SON TV and PAL TV respectively. = X, Y, Z, 1-X-Y-Z Equation (ii) x3 + (iii) LD TV SUM TV SON TV PAL TV 22.5% 29.1% 23.2% 25.2% X, Y, Z, 1-X-Y-Z 0.80 0.13 0 0.04 0.09 0.77 0.11 0.06 0.05 0.02 0.89 0.04 0.06 0.08 0 0.86 0.24 x 0.03 x 0.01 x + - - - - 0.09Y 0.29Y 0.02Y - - + - - 0.04Z 0.05Z 0.15Z = = = -0.04…………(i) -0.06………… (ii) -0.04………… (iii) 155 Answers – Past Papers 156 0.09X -- 0.87Y + 0.15Y = - 0.18 0.01X – 0.02Y – 0.15Z = - 0.04 0.1X – 0.89Y = -0.22……………(iv) EQUATION [(I) X5) – [(III) X 4] - 3.6X + 1.35Y – 0.6Z = - 0.6 0.04X – 0.08Y – 0.6Z = - .016 - 3.64X + 1.43Y = - 0.44…………………(v) Equation (iv x 36.4) + (v) 3.64X – 32.396Y = 8.008 -3.64x + 1.43Y = - 0.44 - 30.966Y = - 8.448 Y = 8.448 30.966 = 0.273 Substitution for X 0.1X – 0.24297 = -0.22 0.1X = 0.02297 X = 0.02297 0.1 X = 0.23 Substitution for Z using equation (i) -0.24(0.23) + 0.09 (0.273) – 0.047Z = -0.04 -0.03063 – 0.04Z = 0.04 -0.04Z = -0.00937 0.04 Z = 0.234 ∴ Long run market shares are: PAL TV (100 – 23 – 27.3 – 23.4) 26.3% ASSUMPTIONS OF MAKOV PROCESS (i) There is a finite number of possible states of nature LD TV SUM TV SON TV 23% 27.3% 23.4% Past Paper Questions and Answers (ii) The probability of changing states remains constant through out the period of analysis i.e. the transaction matrix is static. (iii) The size and make up of the Markov system do not change for the period to which the analysis applies. More precisely in market forecasting for instant we assume that there are no new competitors or consumers and none of the old one leaves. (iv) We can predict any future state from the current state using the matrix of transition probabilities. (v) The various states are assumed to be mutually exclusive and collectively exhaustive QUESTION FOUR (a) Total proportion 6+ 5+ 5+ 4 = 20 Kariuki Wafula Oketch Will be same as Wafula because they have same ability. Wambua 1. 2. 3. 4. Mt. Kenya zone Western zone Nyanza zone Eastern zone 2 0 6 x 60,000 (100 – 70) = 540,000 2 0 6 x 50,000 (110 -- 70) = 600,000 2 0 6 x 40,000 (139 – 70) = 720,000 2 0 6 x 30,000 (120 – 70) = 450,000 1. 2. 3. 4. Mt. Kenya zone Western zone Nyanza zone Eastern zone 2 0 5 x 60,000 (10 – 70) = 450,000 2 0 5 x 50,000 (110 -- 70) = 500,000 2 0 5 x 40,000 (130 – 70) = 600,000 2 0 5 x 30,000 (120 – 70) = 375,000 1. 2. 3. 4. Mt. Kenya zone Western zone Nyanza zone Eastern zone 20 4 x 60,000 (100 – 70) = 540,000 20 4 x 50,000 (110 - 70) = 600,000 20 4 x 40,000 (139 – 70) = 720,000 20 4 x 30,000 (120 – 70) = 450,000 157 Answers – Past Papers 158 OBJECTIVE OF THE COMPANY IS TO MAXIMIZE CONTRIBUTION S.Man/Zone Mt. Kenya Data in ‘000’ Western Nyanz Easte rn Max. Kariuki Wafula Oketch Wambua 540 450 450 360 600 500 500 400 720 600 600 480 45 0 37 5 37 5 30 0 720 600 600 480 S.Man/Zon e Mt. Kenya Western Nyanza Eastern Kariuki Wafula Oketch Wambua 180 150 150 120 120 100 100 80 0 0 0 0 270 225 225 180 Min 120 80 0 180 S.Man/Zone Mt. Kenya Western Nyanza Eastern Kariuki Wafula Oketch Wambua 60 30 30 0 40 ⑳ ⑳ 0 0 0 0 0 90 45 45 0 Past Paper Questions and Answers Min No. of lines 2 < 4, solution not optimal Entering variable is 20. Min No. of lines 3<4 hence solution not optimal entering variable is 10. Min. of lines 4=4 hence the solution is optimal. (b) Allocation Or S.Man/Zon e Mt. Kenya Western Nyanza Eastern Kariuki Wafula Oketch Wambua 40 ⑩ ⑩ 0 20 0 0 0 0 0 0 20 70 25 25 0 S. Man/Zone Mt. Kenya Western Nyanza Eastern Kariuki Wafula Oketch Wambua 30 0 0 0 20 0 0 10 0 0 0 30 60 15 15 0 Salesman Kariuki Wafula Oketch Wambua Total contribution Zone Nyanza Western Mt. Kenya Eastern Contribution Sh 720,000 500,000 450,000 300,000 1,970,000 Salesman Kariuki Wafula Oketch Wambua Total contribution Zone Nyanza Mt. Kenya Western Eastern Contribution Sh 720,000 450,000 500,000 300,000 1,970,000 159 Answers – Past Papers 160 QUESTION FIVE (a) (i) The average ARR for both projects = 8,000,0000 x 100 35,000,000 = 22.86% (ii) NPV TABLE 1 TABLE 2 Year Cashflow A Discount factor at 22% Present value Sh. ‘000’ Sh. ‘000’ 0 (70,000) 1,000 (70,000) 1-10 150,000 4,494 674,100 604,100 ARR Investment Average capital employed (dividend by 2) Increase in net cashflows Average ikncrease per year (dividend by 10) Less depreciation per year Average net income A Sh.’000’ 70,000 35,000 150,000 15,000 7,000 8,000 B Sh ‘000’ 70,000 35,000 150,000 15,000 7,000 8,0000 Year 0 1-10 1-5 Cashflow A Sh.’000’ (70,000) 100,000 100,000 Discount factor at 18% 1.000 4.494 3,127 NET PRESENT VALUE Present value Sh.’000’ (70,000) 44,940 31,270 6,210 Past Paper Questions and Answers (iii) IRR TABLE 3 TABLE 4 (b) Several reasons can be advanced in favour of computing target sell prices by means of cost plus formulae, even if the prices are later modified firstly, the decision maker is faced with uncertainties. The use of cost-pus formulae enables the decision-maker to absorb some of these uncertainties and come up with a price that will be acceptable given the constraints at hard. Secondly, cost may be reviews as abase from which the price setter moves, guarding against the possibility of setting the price too low and incurring losses. Cost-plus pricing will not guarantee against loss making; for instance, there are problems of volume estimating. However, these will point the price setter in the right direction. A third explanation of the popularity of cost-based price is the estimates of the company’s own cost may help the decision – maker to predict either competitor’s cost or a competitor’s price. For example, if a company is operating in an industry where a 30% mark-up is the norm, then the company may be able to assume that this parttern will hold for new products and thereby either to predict competitor price or Year 0 1-10 1-5 Cashflow A Sh. ‘000’ (70,000) 10,000 10,000 Discount factor at 22% 1.000 3.923 2.864 NPV Present value Sh. ‘000’ (70,000) 39,230 28,640 (2,130) Year 0 1-10 1-5 Cashflow B Sh. ‘000’ (70,000) 150,000 - Discount factor at 18 1.000 0.4833 - NPV Present value Sh.’000’ (70,000) 72,490 ____ 2,490 A B 18 + 6,210,000 x 4 6,210,000 + 2,590,000 16 + 2,490,000 x 2 2,490,000 + 2,590,000 = 20.98 = 16.98% 161 Answers – Past Papers 162 to price in such a way as to gain quick acceptance of a new product line. -- Motivation & Autonomy The main reason is that information is rarely (if ever) available to allow an approach based on marginal cost and marginal revenue. (c) The factors to be taken into consideration in establishing the lengths of the proposed budget are: (i) The type of budget e.g. sales, capital expenditure cash or production. (ii) The economic situation in general. (iii) The stability of the market for the product (iv) The probability of changes in products and/or product mix. (v) Political climate. Past Paper Questions and Answers JUNE 2004 QUESTION ONE (a) (i) Profits for the group as a whole will be maximized where the marginal cost of South division is equal to the marginal revenue of North division. Price = 4,500 – 0.0008Q N Therefore total revenue = 4,500Q N – 0.0008Q² N Therefore: MR N = N dQ dTR = 4,500 – 0.0016Q N MC N = N dQ N dTC = 1,100 + 0.002Q N NMR N = MR N - MC N = 3,400 – 0.0036Q N MC S = S dQ S dTC = 550 + 0.004Q S So profits are maximized where 550 + 0.004Q S = 3,400 – 0.0036Q N Since there is no intermediate market both divisions must agree on the output level so that Q S = Q D = Q Therefore 0.0076Q = 2,850 Q = 375,000 (ii) The optimum transfer price is the marginal cost of South division for that output at which the marginal cost equals North division’s net marginal revenue from processing the intermediate product (at output level of 375,000 units). The marginal cost of South division at an output level of 375,000 units is: 550 + (0.004 x 375,000) = 550 + 1500 = Sh.2,050 At 375,000 units the price that North division would charge for selling the final product is: 4,500 – 0.0008 x 375,000 = Sh.4,200. The resulting profit from each division would be: 163 Answers – Past Papers 164 South division Sh.’00 0’ North division Sh.’000 ’ Revenue 375,000 x 2,050 Costs (W 1 ) Profit 768,75 0 488,50 0 _____ 280,25 0 Revenue 375,000 x 4,200 Conversion costs (W 2 ) Transferred costs Profit 1,575,0 00 554,6 25 768,7 50 476,6 25 W 1 TC S = 1,000,000 + 550 x 375,000 + 0.002(375,000)² = Sh.487,500,000 W 2 TC N = 1,500,000 + 1,100 x 375,000 + 0.001(375,000)² = Sh.554,625,000 Group profit = Sh.281,250,000 + Sh.476,625,000 = Sh.757,975,000 (b) (i) In (a) the marginal cost for South division at different output levels were equated to the NMR of North division. It is assumed that the question implies that South division would quote transfer prices based on its marginal costs would at a given output levels, so that North would regard these transfer prices (550 + 0.004Q S ) to be constant per unit for all output levels. Drink’s net profit (NP) will be as follows: NP = (4,500Q – 0.0008Q²) – (1,500,000 + 1,100Q + 0.001Q²) – Q(550 + 0.004Q) OR Profit = Revenue – Total Costs = 2,850Q – 0.0038Q² - 2,500,000 dQ dπ = 2850 – 0.0076Q = 0 Q = 375,000 units = 2,850Q – 0.0058Q² - 1,500,000 Profit is maximized where 0 dQ dNP · That is, where: 2,850 – 0.0116Q = 0 Q = 245,690 units An alternative approach is to equate the net marginal revenue with the marginal cost of the transfers. South division will Past Paper Questions and Answers transfer out at a marginal cost of 550 + 0.004Q S and North division will treat this price at a constant sum per unit. Therefore the total cost of transfers to North division will be: Q S (550 + 0.004Q S ) = 550Q S + 0.004Q S Therefore the marginal cost of transfer will be 550 + 0.008Q S The transfer price for North division that maximized its profits is where NMR = MC i.e. where 3,400 – 0.0036Q = 550 + 0.008Q Q = 245,690 units (ii) The level that maximizes profit for North division determines the transfer price. At an output level of 245,690 units the transfer price will be: 550 + (0.004 x 245,690) = Sh.1,533 At 245,690 units the price that North division would charge for selling the fund product is 4,500 – 0.0008 x 245,690 = Sh.4,303 South division Sh.’000’ North division Sh.’000’ Revenue 245,690 x 1533 Costs (W1) Profit 376,642.77 256,856.65 2 119,785.11 8 Revenue 245,690 x 4,303 Conversion costs (W2) Transferred costs Profit 1,057,204.07 332,122.5761 376,642.77 _ 348,438.664 W 1 = TC S = 1,000,000 + 550 x 245,690 + 0.002(245,690)² = Sh.256,856,652.2 W 2 = TC N = 1,500,000 + 1,100 x 245,690 + 0.001(245,690) = Sh.332,122,576.1 QUESTION TWO (a) (i) Decision tree if investigation is carried out. Not Worth investing further Investigation undertaken 0.64 Fault eliminated Cost = Sh.3,500 Worth investigation and 0.7 Corrective action taken 0.36 (Cost = Sh.5,500) Fault not eliminated 0.3 165 Answers – Past Papers 166 It is assumed that the Sh.5,500 correction costs applies to all variances that the initial investigation indicates are worth of further investigation. The expected cost if the investigation is carried out is: 3,500 + 0.36 x 5,500 + 0.36 x 0.3 x 24,746* = Sh.8,153 * 24,746 represent the PV of Sh.5,250 for 5 months at 2% (5,250 x 4.7135) for variances that are not eliminated. Decision tree if an investigation is not carried out: Not worth investigation further No investigation 0.64 Worth investigating but not done So variance continues 0.36 The expected cost if no investigation is undertaken is: 0.36 x 5,250 x 4.7135 = Sh.8,908.5 (ii) Applying the expected value decision rule, the company should follow a policy of investigating variances as a matter of routine. The expected cost of investigation is Sh.8,153. On average the benefit of investigating is 8,908.5 – 8,153 = Sh.755.5 per variance. (iii) Examples of category 1 variances include: - Variance due to random uncontrollable factors and is under control - Where the cause is obvious (e.g. a machine fault) and future action has been taken to remedy the situation. Examples of category 2 variances include: - Excessive usage of materials and labour due possibly to wrong working practices on a repetitive operation which is likely to continue if not corrected. - Where the variance is significant and exceeds a specified percentage of standard usage. (b) (i) Unit contribution = 1,300 – (800 + 50) = Sh.450 Unit loss when surplus is sold = 850 – 500 = Sh.350 Unit penalty for stock out = Sh.200 Order quantity DEMAND PROBABILIT 1100 1200 1300 1400 Past Paper Questions and Answers Y 1100 1200 1300 1400 0.3 0.4 0.2 0.1 495 (a) 475 (b) 455 435 460 540 520 500 425 505 585 565 390 470 550 630 Expected contribution 473 508 503 478 On the basis of expected contribution over 1200 outfits: Note: The order costs are constant and therefore ignored. Workings: (a) 450 x 1100 = 495,000 (b) 1100 x 450 – 100 x 200 = 475,000 The others are computed in a similar manner. (ii) The EOQ model does not include stock outs and their penalties and was developed for manufacturing rather than for the special needs of retailers. P = ML MP ML + ML = 350 + 200 MP = 450 P = 550 450 550 + = 0.55 DEMAND PROBS P(Demand > x) 1100 1200 1300 1400 0.3 0.4 0.2 0.1 1.00 1.0 > 0.55 2.0 0.7 > 0.55 3.0 0.3 < 0.55 The best level is to order 1200 outfits. More precise 1 Interpolation: 1200 + 100 x 3 . 0 7 . 0 55 . 0 7 . 0 − − Make an order of 1238 outfits. QUESTION THREE (a) • Formulate the problem and discuss with those concerned in order to determine the constraints. 167 Answers – Past Papers 168 • Formulate the model and decide which variables to include. • Collect the information required and determine the functional relationship and the types of statistical distribution to apply. • Construct the simulation flow chart. • Prepare the computer program. • Validate the model. • Design the experimental runs. • Analyze results. • Formulate proposals. • Modify the model. Past Paper Questions and Answers (b) Activit Expect activity Completion time A B C D E F G H I J K 4 X 0.10 + 6 X 0.7 + 9X 0.2 5 X 0.4 + 7 X 0.2 + 10 X 0.4 3 X 0.1 + 8 X 0.9 4 X 0.5 + 6 X 0.4 + 8 X 0.1 5 X 0.8 + 10 X 0.2 3 X 0.5 + 5 X 0.3 + 7 + 0.2 3 X 0.4 + 6 X 0.2 + 9 X 0.2 + 4 X 0.2 5 X 0.2 + 8 X 0.3 + 10 X 0.5 4 X 0.5 + 8 X 0.5 5 X 0.6 + 7 X 0.2 + 10 X 0.2 4 X 0.7 + 6 X 0.3 = 6.4 = 7.4 = 7.5 = 5.2 = 6.0 = 4.4 = 5.0 = 8.4 = 6.0 = 6.4 = 4.6 169 Answers – Past Papers 170 A 6.4 B 7.4 7.5 C E G 6.0 5.0 D 5.2 F 8.4 4.4 H I 6.0 J 6.4 K 4.6 0 0 13.9 13.9 6.4 6.4 27.3 27.3 18.9 18.9 22.9 19.9 33.3 33.3 39.7 39.7 44.3 44.3 Past Paper Questions and Answers (c) ACTIVITY DAYS PROBABILIT Y Cum- probabilities RN - Range A 4 6 9 0.10 0.70 0.20 0.10 0.80 1.00 01 – 10 11 – 80 81 – 00 B 5 7 10 0.40 0.20 0.40 0.40 0.60 1.00 01 – 40 41 – 60 61 – 00 C 3 8 0.10 0.90 0.10 1.00 01 – 10 11 – 00 D 4 6 8 0.50 0.40 0.10 0.50 0.90 1.00 01 – 50 51 – 90 91 – 00 E 5 10 0.80 0.20 0.80 1.00 01 – 80 91 – 00 F 3 5 7 0.50 0.30 0.20 0.50 0.80 1.00 01 – 50 51 – 80 81 – 00 G 3 4 6 9 0.40 0.20 0.20 0.20 0.40 0.60 0.80 1.00 01 – 40 41 – 60 61 – 80 81 – 00 H 5 7 10 0.20 0.30 0.50 0.20 0.50 1.00 01 – 20 21 – 50 51 – 00 I 4 8 0.50 0.50 0.50 1.00 01 – 50 51 – 00 J 5 7 10 0.60 0.20 0.20 0.60 0.80 1.00 01 – 60 61 – 80 81 – 00 K 4 6 0.70 0.30 0.70 1.00 01 – 70 71 – 00 Activi ty RN . NO . DAY S RN . NO . DAY S RN . NO . DAY S RN . NO . DAY S TOTA L DAYS AVERAG E DAYS A 95 9 30 6 59 6 93 9 30 7.5 B 28 5 72 10 09 5 54 7 27 6.75 C 66 8 95 8 36 8 98 8 32 8 D 56 6 23 4 60 6 79 6 22 5.5 E 14 5 50 5 61 5 81 10 25 6.25 F 84 7 14 3 24 3 75 5 18 4.5 G 85 9 49 4 05 3 09 3 19 4.75 H 53 10 45 7 60 10 98 10 37 9.25 I 90 8 86 8 74 8 55 8 32 8 171 Answers – Past Papers 172 J 69 7 09 5 10 5 96 10 27 6.75 K 40 4 27 4 15 4 83 6 18 4.5 CRITICAL ACTIVITIES A – C – G – H – I – J – K Total completion time = sum of completion period for critical Activities. = 7.5 + 8 + 4.75 + 9.25 + 8 + 6.75 + 4.5 = 48.75 days. (d) Advantages of simulation technique 1. Simulation is particularly well suited for problems that are difficult or impossible to solve analytically. 2. Allows an analyst or decision maker to experiment with system behaviour in a controlled environment instead of real life setting that can be very costly and has inherent risk. 3. Enables a decision maker to compress time in order to evaluate long term effects of alternative policies. 4. Serves a model for training decision makers. 5. Provides a means of solution to problems which are of a kind for which the application of analytical methods is unsuitable. 6. Degree of assumption is not so great in simulation exercises as it is with analytical methods. Disadvantages of Simulation Technique 1. Simulation is not precise, it is not an optimization tool. 2. A good simulation model may be quite expensive in terms of design personnel and software. 3. Each simulation model is quite unique in its solutions and inferences are not usually transferable to other problems. This makes it even more expensive. 4. Data problems: Obtaining reliable/accurate data e.g. probability distribution of relevant factors is not easy. 5. Substantial amount of calculation is required. 6. Results estimates which are subject to statistical error. QUESTION FOUR (a) (i) Cost behaviour - Suggests an inappropriate degree of variability. To calculate unit product costs, batch level activity costs are divided by the number of units in the batch and product sustaining costs are divided by the number of products produced. - Managing unused capacity may be applicable in the case of human resources since human resources are more flexible and Past Paper Questions and Answers can be adjusted in small increments as opposed to physical resources which are required in huge amounts. - Human and physical resources should be separated. - Changes in physical usage may be viewed as fixed costs especially where such costs are unavoidable and the treatment will thus be similar to that of traditional costing systems. - Cost of operating an ABC system is very high. (ii) Why ABC might be more suitable - ABC system likely to generate the most accurate costs. - Most manufacturing companies suffer intense competition - Most manufacturing companies have a wide range of products. (iii) ABC likes more information for decision making because - Detailed tracking of information is therefore not required - Information provided is more accurate - Cost of any unused capacity is highlighted for management attention. - Focuses on the future profitability of products and customers. (b) (i) Cost drivers rates Factory overhead: 49,900 74,848,000 = Sh.1,500/m. hr Set up costs 34 8,710,000 = Sh.256,176/set up Cost of ordering 36 3,840,000 = Sh.106,667/Mat. Ord Mat. Handling 54 15,160,000 = Sh.280,741/Mat hr. Admin. Costs 24 17,200,000 = Sh.716,667/Spare part (ii) OVERHEADS W Sh. X Sh. Y Sh. Z Sh. Factory overheads Set up costs Ordering costs Material handling Admin. Costs 750,000 512,352 213,334 1,122,964 2,866,668 5,465,318 ÷1,000 7,500,000 3,074,112 1,706,672 5,614,820 7,166,670 25,062,274 ÷ 10,000 3,600,000 1,024,704 213,334 1,684,446 1,433,334 7,955,818 ÷ 1,100 63,000,000 4,098,816 1,706,672 6,737,784 5,733,336 81,276,608 ÷ 14,000 173 Answers – Past Papers 174 5,465 2,506 6,630 5,805 Unit Production Cost W Sh. X Sh. Y Sh. Z Sh. Materials Direct labour Prime cost Overheads Production cost/unit 10 6 16 5,465 5,481 10 6 16 2,506 2,522 32 24 56 6,630 6,686 34 18 52 5,805 5,857 The difference comes in because ABC allocates more overheads to low volumes of production and less to high volumes of production. QUESTION FIVE (a) The answer should cover the following: (i) Insufficient strategic thinking and long-term planning. The annual budgeting process based on short-term plans was frequently used for policy planning. Allocation of resources should be based on long-term planning process and not the annual budgeting process. (ii) Traditional approaches failed to identify the cost of activities and the programmes to be implemented. (iii) Traditional approaches tend to be based on increamental budgeting rather than considering alternative ways of achieving objectives. (iv) Emphasis tended to be on separate planning for each department rather than focusing on activities or functions necessary to achieve organisational objectives. (b) The aim of PPBS is to enable the management of a public authority to make more informed decisions about the allocation of resources to meet the overall objectives of the organisation. First, overall objectives are established, secondary, secondary, the programmes that might achieve these objectives are identified and finally, the costs and benefits of each programme are determined so that budget allocation can be made on the basis of the cost-benefits of the different programmes. For example, one objective of a local authority may be the care of the elderly. The following services may contribute to this objective: (i) Provision of sheltered accommodation. (ii) Erection of aged-persons dwellings. (iii) Provision of domestic health services. (iv) Provision of home nursing services. (v) Provision of social and recreational facilities. The provision of these activities may be undertaken by different departments such as housing, health and social services. However, Past Paper Questions and Answers PPBS relates the estimates of total costs to the care of the elderly programme, rather than relating costs to various departments. A programme budgeted cuts across departmental barriers by providing estimates of the programme for the provision of the elderly rather than these estimates being included within the three budgets for each of the housing, health and social welfare departments. PPBS forces management to identify the activities, functions or programmes o be provided thereby establishing a basis for evaluating their worthiness. (c) Problems that have made PPBS difficult to introduce include: (i) PPBS cuts across departmental activities and focuses on programmes rather than departments. Consequently, the system does not focus on traditional lines of authority and there is a tendency for heads of departments to be resistant to such changes. (ii) Difficult in matching programme structure to the organisation’s structure to cost control. (iii) Difficulty in defining objectives and stating objectives in quantitative terms. It is extremely difficult to measure the output of services and compare actual accomplishments with planned accomplishments. 175 Answers – Past Papers 176 December 2004 QUESTION ONE (a) Account analysis method Variable Costs Sh. ‘000’ Fixed costs Sh. ‘000’ Indirect materials Indirect labour Building occupancy Power Equipment depreciation Equipment maintenance Personal property taxes Data processing Technical support 37,500 23,200 - 27,210 - 15,830 7,750 1,750 - 113,240 - 171,000 236,420 - 181,000 8,500 6,350 9,470 16,94 0 629,680 Variable cost per unit = 113,240,000 800,000 ∴ b = 141.55 ∴ Equation Ŷ = 629,680,000 + 141.55X Ŷ = 629,680 + 0.14155X (000) (6 Marks) (b) High-Low method Let Y = Overheads X = Production in units High Low X 98,000 56,900 41,100 Y 777,64 0 714,22 0 63,420 Slope b = Δ Y 63,420 = 1.543 ΔX 41,100 Using the high point 777,640 = a + 98,000 (1.543) a = 626,426 ∴ Ŷ 626,426 + 1.543X ∴ Total cost for 800,000 units Past Paper Questions and Answers Ŷ = 626,426 + 1.543 (800) = 627,660.4 (000) = Sh. 627,660,400 (4 Marks) ALTERNATIVE Y 777,640 717,670 59,970 b = ΔY = 1.459 ΔX Ŷ = 634645.839 + 1167.2 = Sh. 635813.939 (c) Using linear regression (simple) Ŷ = 626,547 + 1.504 X 800 = 626,547 + 1,203.2 = Sh. 627,750.2 (000) = Sh. 627,750,200 (4 Marks) (d) Multiple regression analysis Ŷ = 632,640 + 1.501X – 59.067 (index) X = 800 Index = 113 Y = 632,640 + 1.501 (800) – 59.067 (index) = 632,640,000 + 1.501 x 800,000 – 59.067 x 113 = 627,166,229 (4 Marks) (e) Multiple regression analysis is the most appropriate because it considers price changes, making price index to be an independent variable. Or simple regression has highest adjusted R 2 . (2 Marks) QUESTION TWO (a) Standard cost of materials per kilogramme of output = (0.65 kilogrammes x 40) + (0.3 kilogrammes x 60) + 0.2 kilogrammes x 25) = Sh.49 Standard overhead rate = 120,000/Budgeted standard quantity of ingredient F (4000 x 0.65) = 120,000 = Sh. 46 per kilogramme of F 2,600 Standard overhead rate per kilogramme of Y = 0.65 x 46 = Sh. 30 Sh. 177 Answers – Past Papers 178 Standard cost of actual output Material (4,200 x 49) Overhead (4,200 x 30) Actual Cost of output Material Overheads (78,000 + 48,000) 205,800 126,000 331,800 203,800 126,000 329,800 Variance calculations Materials price variance = (standard price – actual price) Actual Quantity = SP X AQ – AC = (40 X 2840) + (60 X 1210) + (25 X 860) – 203800 = 3900 F Material yield variance = Actual yield – Standard yield x Standard material cost per unit of output = (4200 – 4910) x 49 = Sh. 3409A 1.15 Material mix variance = Actual quantity in actual mix at standard price – actual quantity in standard mix at standard prices F (4910 x 0.65/1.15 – 2840)40 = Sh. 2591A D (4910 x 0.30/1.15 – 1210)60 = Sh. 4252F N (4910 x 0.20/1.15 – 860)25 = Sh. 152A 1509F Overhead efficiency variance = (standard quantity of F – Actual quantity) Standard overhead rate per kg of F Overhead efficiency variance = (4200 x 0.65 – 2840) 46 = 5060A Overhead capacity variance = (Budgeted input of F – Actual input) x Standard overhead rate per kg of F = (4000 x 0.65 – 2840)46 = 11040F Overhead expenditure variance = budgeted cost – actual costs = 120,000 – 126,000 = 6000A Reconciliation of standard costs and actual cost of output Standard cost of actual production Material variances Material price variance Material yield variance Material mix variance Overhead variances Overhead efficiency Overhead capacity Overhead expenditure Actual costs 3900F 3409A 1509F 5060A 11040F 6000A Sh. 331,800 2000F 20A Past Paper Questions and Answers 333,780 (12 Marks) (b) Standard number of deliveries (4000 x 1.15)/460 = 10 Standard cost per supplier delivery (40,000/10) = Sh.4,000 Standard number of dispatches to customers (4,000/100) = 40 Standard cost per customer dispatch (80,000/40) = Sh. 2,000 Actual output exceeds budgeted output by 200 = 5% 4,000 Activity-based costing reconciliation statement 179 Answers – Past Papers 180 Standard cost for actual output Deliveries (1.05 x 10 x 4,000) Despatches (1.05 x 40 x 2,000) Activity usage variance Deliveries (10.5 – 12)4,000 Despatches (42 – 38) 2,000 Activity expenditure variance Deliveries (12 x 4000 – 48,000) Despatches (38 x 2000 – 78,000) Actual overheads Sh. 42,000 84,000 6000A 8000F 0 2000A Sh. 126,000 2,000F 2,000A 126,000 (8 Marks) (Total: 20 Marks) Alternative (a) material and overhead variancies Material price variance (AQ X AP) – (AQ X SP) 203,800 – (2840 x 40 x 1210 x 60 +860 x 25) 203,800 – 207,700 = 3900 F Material Yield Variance Std. cost per unit (Actual Yield – std yield) Std cost of output = (0.65 x 40 + 0.30 x 60 +0.2 x 25 = Sh.49 Std yield: 2840 + 1210 + 860 4910 Input 1.15kg 4910 Output 1 kg ? ∴ Output = 4910 1.15 = 4269.5 = 4270. ∴ Material yield 49(4200 -4270) = 3430A Material Mix Variance SP (Actual Mix – Std. mix) F 40(2840 – 0.65 x 4910) = 2,600A 1.15 D 60(1210 – 0.3 x 4910) = 4,260F 1.15 Past Paper Questions and Answers N 25(860 – 0.2 x 4910 = 150A 1.15 Total Material Mix variance = 1510F Overhead variances Overhead expenditure variance. Actual expenditure – Budgeted expenditure (78000 + 48000) – 120000 126000 – 120000 = 6000A Overhead capacity variance FOAR (Actual input – budgeted input) FOAR = 120,000 = 46.154 4000/0.65 = 46.154 (2840 – 4000 x 0.65) 46.154 (2840 – 2600) 11077 A Overhead efficiency variance FOAR (Actual quantity – Std. quantity) 46.154(2840 – 4200 x 0.65) 46.154(2840 – 2730) 46.154 (110) = 5077A b) Variance analysis based on Activity Based costing (ABC) Std no. of deliveries (4000 x 1.15) ÷ 460 = 10 Std cost per supplies delivery 40000 = Sh.4000 10 Std no. of dispatches 4000 = 40 400 Std cost per customer dispatch 80,000= Sh. 2000 40 Actual output exceeds budgeted output by 4,200 = 1.05 i.e. 5% 4000 Activity usage variances Deliveries (1.05 x 10 – 12) x 4000 = 6000A Dispatches (1.05 x 40 – 38) x 2000 = 8000F 2000F 181 Answers – Past Papers 182 Activity expenditure variances Deliveries (12 x 4000 – 48,000) = Nil Dispatches (38 x 2000 – 78000) = 2000A 2000A Reconciliation Actual overheads 48,000 + 78,000 = 126,000 Deliveries 1.05 x 10 x 4000 = 42,000 Dispatches 1.05 x 40 x 2000 = 84,000 126,000 QUESTION THREE (a) Narok as a special Order Sh. ‘000’ Convert to standard model Sh. ‘000’ Sell the way it is Sh. ‘000’ Sales price Less cash discount 2% Additional manufacturing costs Direct materials Direct labour Variable overheads 50% of direct labour Commission 3% of selling price Total costs Net contribution 68,400.0 0 - 68,400.0 0 6,200.00 4,200.00 2,100. 00 12,500.0 0 2,052.00 14,552.0 0 53,848.0 0 62,500 1, 250 61,250 2,850.00 330.00 1,650.00 7,800.00 1,225.50 9,025.00 52,225.00 52,000.00 - 52,000.00 - - - - 1,560.00 1,560.00 50,440.00 (12 Marks) (b) Narok option’s contribution Next best alternative Difference Sh. ‘000’ 53,848 (52,225) 1, 623 Past Paper Questions and Answers ∴ The counter offer price that Farmers Limited is willing to accept from Narok Corporation will be:- 68,400 – 1,623 = Sh. 66,777,00 (3 Marks) (c) (i) Farmers Limited should accept special orders whenever the firm is operating substantially below capacity, including below the break even point, whenever marginal revenue from the orders exceeds marginal cost. Normally, this would mean that the order should be acceptable as long as the sales price of the order exceeds the variable production costs. The special order will result in a positive contribution towards covering the company’s fixed costs. The fixed factory overhead is not considered in the pricing because it will be incurred whether the order is accepted or not. (3 Marks) (ii) If Farmers Limited is operating above its break even volume and if special order will allow the company to utilize unused capacity efficiently, the special order should be accepted as long as marginal revenue exceeds marginal cost or, in most cases, the sales price exceeds variable production costs. If the sales price exceeds the variable production costs the order will yields a positive contribution towards company’s fixed costs. In this case fixed costs are irrelevant. (2 Marks) (Total: 20 Marks) QUESTION FOUR (a) (i) Degeneracy This is a term in transportation and assignment which refers to a situation where the number of occupied cells is less than n + m – 1 where n is the number of rows and m is the number of columns. (2 Marks) (ii) Pure Strategy In a game matrix represent the row and column whose intersection is the saddle point. In a pure strategy player X will play one row all of the time and player Y will also play one of his column all the time. (2 Marks) (iii) Mixed Strategy Consist of a probability mixture of more than one strategy. The objective in a mixed strategy involves preparing the opponent from knowing which strategy is used on a given play. This is accomplished by selecting the strategy to be used for each play at random, according to probabilities that can be computed from 183 Answers – Past Papers 184 the game matrix. (2 Marks) (iv) Dominance rule This rule states that there are strategies that a given player would never play, irrespective of what the other player does. The strategies which are always avoided are said to be dominated by the other strategies and can be left out from the analysis. (2 Marks) (b) The problem is transportation model and the problem is a minimisation. Cost Computations:- Past Paper Questions and Answers Destinations E F G W 1 W 2 W 1 W 2 W 1 W 2 Pla nt A 170 160 210 B 170 160 210 C 190 210 240 (6 Marks) Computation of the above table E.g. A to W 1 under E = 30 + 20 + 60 + 30 = 140 A to W 2 under E = 30 + 30 + 60 + 50 = 170 A to W 1 under F = 30 + 20 + 60 + 50 = 160 A to W 2 under F = 30 +30 + 60 + 30 = 150 A to W 1 under G = 30 + 20 + 60 + 80 = 190 A to W 2 under G = 30 + 30 + 60 + 90 = 210 From the above pick the lowest cost through each combination. The problem is not balance, it has a difference of 1400. Initial table using LCCM. K 1 = 140 K 2 = 120 K 3 = 190 K 4 = 0 E F G Dumm y Capaci ty R 1 = 0 A 900 100 1000 R 2 = 0 B 700 1300 2000 185 8m 14 0 13 0 15 0 15 0 11 0 19 0 19 0 17 0 140 0 140 +3 0 150 +3 0 150 0 190 190 0 0 Answers – Past Papers 186 R 3 – 10 C 200 800 1000 Supply 900 800 900 1400 4000 Degeneracy check No. of filled cell = 6 R + C – 1 = 6 Hence the problem is not degenerate Optimality check The solution is not optimal since there are negative improvement index. Table 2 K 1 = 140 K 2 = 130 K 3 = 190 K 4 = 0 E F G Dum my Capacit y R 1 = 0 A 1000 700 300 R 2 – 0 B 900 1100 2000 R 3 – 20 C 800 200 1000 Suppl y 900 800 900 1400 4000 Degeneracy check: No. of filled cells = 6 R + C – 1 = 6 Hence the problem is not degenerate. 130 110 - 10 170 0 0 140 140 +1 0 130 110 +2 0 150 150 0 190 190 170 +2 0 0 0 0 Past Paper Questions and Answers Optimality check: The problem is optimal since there is no negative improvement index, however the problem is not unique since it has zero improvement index, that means it has more than one solution. Allocation optimal solution 1 187 Answers – Past Papers 188 Source Destination Units x cost Total A A B B C C G Dummy E Dummy F G 700 x 190 300 x 0 = 900 x 140 = 1100 x 0 = 800 x 110 = 200 x 170 = 13300 0 0 12600 0 0 88000 340 00 Minimum total cost 38100 0 (6 Marks) Optimal solution 2 Source Destination Unit x cost Total A A B C C E G E F G 300 X 140 700 X 190 600 X 140 800 X 110 200 X 170 42000 13300 0 84000 88000 340 00 Total minimum cost 38100 0 (6 Marks) QUESTION FIVE (a) The balanced scorecard is an integrated set of performance measures derived from the company’s strategies that gives the top management a fast but comprehensive view of the organizational unit (i.e. a division on a Strategic Business Unit (SBU)). The balanced scorecard philosophy assumes that an organization’s vision and strategy is best achieved when the organization is viewed from the following four perspectives. i) Customer Perspective (How do customers see us?) This gives rise to targets that matter to customers perspective. ii) Internal business process (what must we excel in?) This aims to improve internal processes and decision making e.g. quality control. Past Paper Questions and Answers iii) Learning and growth perspective (can we continue to improve and create value?) This considers an organization’s capacity to maintain its competitive position through acquisition of new skills. iv) Financial perspective. (How do we look to shareholders?) This covers traditional measures such as profitability, return on investment e.t.c. By implementing the balanced scorecard, the major objectives for each of the four perspectives should be articulated. These objectives should be translated into specific performance measures and targets for achievement. This method integrates traditional financial measures with operational, customer and staff issues vital in long-run competitiveness. (10 Marks) (b) Benchmarking involves comparing key activities of a company with world class best practices. It attempts to identify an activity, such as customer order processing, that needs to be improved and finding a non-rival organization that is considered to represent world class best practice for the activity, and study how it performs the activity. The objective is to find out how the activity can be improved and ensure that the improvements are implemented. Benchmarking is cost effective since an organization can save time and money avoiding mistakes that other companies have made. They can also avoid duplicating the efforts of other companies. The overall aim should be to find and implement best practice. - Benchmarking in production, stockholding - Benchmarking prices, quality, wastage. - Benchmarking productivity & efficiency. - Benchmarking services. - Benchmarking New Production Development. (10 Marks) (Total: 20 marks) 189 Answers – Past Papers 190 CPA PART III MANAGEMENT ACCOUNTING SUGGESTED SOLUTIONS JUNE 2005 QUESTION ONE (a) Evaluation of the linear regression equations Criterion Regression 1 Regression 2 Regression 3 (i) Economic Plausibility Positive coefficient thus economically plausible. Negative coefficient not economically plausible in long run, but may be in short run for discretionary costs. Positive coefficient economically plausible (ii) Goodness of fit r 2 = 0.61 Fair goodness of fit r 2 = 0.68 Fair goodness of fit r 2 = 0.29 Poor goodness of fit (iii) Significance of independent variables Note T C = 2.228 t b = 3.86 Slope coefficient significant at α = 0.05 T b = 4.43 Slope coefficient significant at α = 0.05 T b = 2.09 Slope coefficient not significant at α = 0.05 (iv) Specification Analysis (a) Linearity (Note: A plot required) (b) Independence of residuals Appears reasonable from the plot Appears reasonable from the plot. Appears somewhat questionable from plot. D = S1 Assumption of independence not rejected. D = 1.73 Assumption of independence not rejected. D = 2.34 Assumption of independenc e not rejected (12 marks) (b) Variables that could be important cost drivers of the company’s operating costs include: 1) Fuel consumed in litres 2) Number of employees 3) Product mix characteristics 4) Route mix characteristics e.g. number of short Vs. long trips. 5) Age and maintenance record of vehicles. (3 marks) Past Paper Questions and Answers (c) An alternative data base for use in quantitative analysis would be annual maintenance costs and annual kilometers traveled. This data base would be less prone to within the year deferral of maintenance costs to months with low kilometers traveled. However, management may also defer maintenance expenditure across years due to pressure from short run profit performance for example. (2 marks) (d) Limitations of regression analysis method (i) A sufficient number of observations is required to derive an acceptable cost function. This may not be the case in the analysis. (ii) The assumption that the function is linear may be misleading. (iii) The cost function is valid only within the relevant range. (iv) The function may not hold where historical performance is different from expected future performance. (v) The observed data may be affected by inflation or accounting policy and thus affecting the final function. (vi) The cost and the activity level sometimes do not relate to the same period especially where wages paid to one period may be calculated by reference to the output of a previous period. (3 marks) (Total: 20 marks) QUESTION TWO (a) EOQ = h O C DC 2 = ) 5000 %( 10 500 , 4 500 , 2 000 , 10 2 + X X = 100 units (2 marks) (b) To ascertain whether it is worth increasing the purchase quantity to 200 units, we must compare the total costs at each of these quantities. Total costs with a reorder quality of 100 units Shs. Annual holding costs = ½ QC h = ½ (100) x 5000 = 250,000 Annual ordering costs = 2500 100 10000 x C Q D O · = 250,000 500,000 Purchase manager bonus = 10% x (1,000,000 – 500,000) 50,000 Annual purchase costs = 10,000 x 5,000 50,000,000 Total annual costs 50,550,000 Total costs with a reorder quality of 200 units Shs. Annual holding costs = 999 , 4 2 200 x 499,900 191 Answers – Past Papers 192 Annual ordering costs = 500 , 2 200 000 , 10 x 125,000 624,900 Purchase manager bonus = 10% x (1,000,000 – 624,900) 37,500 Annual purchase costs = 10,000 x 4,990 49,900,000 Total annual costs 50,562,400 The optimal order quantity is still 100 units (4 marks) (c) The probability distribution of demand during the lead time is Past Paper Questions and Answers Demand Frequency Probability Expecte d Value 106 4 0.04 4.24 104 10 0.10 10.40 102 16 0.18 16.32 100 40 0.40 40.00 98 14 0.14 13.72 96 14 0.14 13.44 94 2 0.02 1.88 100 100.00 NB: It is expected that re-order level will be set at 100 units (expected value). The expected costs of various levels of safety stock are as follows: Safety Stock (units) Reorder Point (unit) Stock out per order (units) Stock out per year (units) Probabil ity of stock- out Expecte d Stock- out Costs Holding costs Shs. Total Cost 6 106 0 0 0 0 27000 27000 4 104 2 200 0.04 8000 18000 26000 2 102 2 200 1.10 20000 9000 45000 4 400 0.04 16000 0 96000 0 100 2 200 0.16 32000 4 400 1.10 40000 6 600 0.04 24000 Note: During the year 100 orders will be made (10000/100) Stock-out per year in units is calculated by multiplying the stock-out per order by 100 orders. Expected stock-out costs = annual stock-out in units x Prob. of stock-out x 1000 Lost contribution. Holding costs = Safety stock x (Holding Cost of Shs. 5000 – Saving of 10% on purchasing managers bonus) Conclusion Costs are minimized if a safety stock of 4 units is maintained. (6 marks) (d) The following items should be included in the report: (i) The disadvantage of ordering from only one supplier (e.g. Vulnerability of disruptions of supplies due to strike/production difficulties or bankruptcy). (ii) Failure to seek out cheap or alternative sources of supply. 193 Answers – Past Papers 194 (iii) It is assumed that no major price increases are anticipated that will justify holding additional stocks or that the stocks are not subject to deterioration or obsolescence. (iv) It is assumed that the lead time will remain unchanged. However, investigations should be made as to whether this, or other suppliers, can guarantee a shorter lead time. (v) The need to ascertain the impact on customers goodwill if a stock- out occurs. The answer to (c) assumes that the company will merely lose the contribution on the sales and long term sales will not be affected if a stock-out occurs. (8 marks) (Total: 20 marks) QUESTION THREE (a) Assumptions (i) All costs can be resolved into fixed and variable elements. (ii) Over the activity range being considered costs and revenues behave in a linear fashion. (iii) The only factor affecting costs and revenues is volume. (iv) The technology, production methods and efficiency remain unchanged. (v) There is assumed to be no uncertainty. (vi) There are no stock level changes or that stocks are valued at marginal cost only. (5 marks) (b) The expected value calculation are: Variable Costs Shs. Fixed Costs Shs. (1000 + 10% x 1000) x 10/20 550 8200000 x 0.3 2460000 (1000 + 0) x 6/20 = 300 8500000 x 0.5 4250000 (1000 – 5% x 1000) x 4/20 190 900000 x 0.2 180000 1,04 0 8510000 Shs. 1,700 selling price Unit s Fixed costs Shs. 21000 x 0.2 4,20 0 19000 x 0.2 = 38,000 19000 x 0.5 9,50 0 17500 x 0.5 = 8,750 16500 x 0.3 4,95 0 15500 x 0.3 = 4,650 18,6 50 17,200 Expected contribution Past Paper Questions and Answers At price of Shs. 1700 = (1700 – 1040) 18650 = Shs. 12,309,000 At price of Shs. 1800 = (1800 – 1040) 17200 = Shs. 13,072,000 The existing selling price is Shs. 1600 and if demand continues at 20,000 units per annum, then total contribution will be (1600 – 1040) 20,000 = Shs. 11,200,000. Using the expected value approach, a selling price of Shs. 1800 should be set. (6 marks) (ii) Expected profit = 13,072,000 – 8,510,000 = 4,562,000 Breakeven point = 197 , 11 1040 1800 8510000 · − units Margin of safety = Expected – BEP = 17200 11197 17200 − = 6003 units = les Expectedsa Sales Sales − = 34.9% (4 marks) (iii) An expected value approach has been used. The answer should draw attention to the limitations of this approach such as - Risk is ignored. - Range of possible outcomes is not considered. The answer should have been based on a comparison of probability distribution. (2 marks) (iv) Computer assistance would enable a more complex analysis to be undertaken. In particular, different scenarios could be considered, based on different combinations of assumptions regarding variable costs, fixed costs, selling prices and demand using computers would also enable Morte Carlo simulation to be used for more complex decisions. (3 marks) (Total: 20 marks) QUESTION FOUR (a) (i) Decision making under conditions of certainty. In this environment only one state of nature exists i.e. there is complete certainty about the future. (ii) Decision making under conditions of uncertainty. More than one state of nature exists but the decision maker lacks sufficient knowledge to allow him assign probabilities to various states of nature. (iii) Decision making under conditions of risk 195 Answers – Past Papers 196 More than one state of nature exists but the decision maker has sufficient information to allow him assign probabilities to various states. (6 marks) (b) Best strategies: (i) U 1 U 2 U 3 U 4 Row Minimum C 1 2.5 2.7 3.5 -0.2 -0.2 C 2 2.0 1.1 0.8 0.8 0.8 C 3 1.4 1.2 1.5 1.3 1.2 C 4 3.0 1.0 1.9 0 0 Column maximum 3.0 2.7 3.5 1.3 There is no saddle point (6 marks) Using dominance rule column U 1 and U 3 are dominated. Hence the game can be reduced to U 2 U 4 C 1 2.7 - 0.2 C 2 1.1 0.8 C 3 1.2 1.3 C 4 1.0 0 (2 marks) Row four and two are dominated. The final matrix will U 2 U 4 C 1 2.7 -0.2 C 3 1.2 1.3 Solving this we get 2.7C 1 + 1.2C 3 = - 0.2C 1 + 1.3C 3 But C 3 = 1 – C 1 2.7C 1 + 1.2 (1-C 1 ) = - 0.2C 1 + 1.3 (1-C 1 ) ⇒ C 1 = 1/80 so C 3 = 29/30 The union strategies are done likewise U1 U3 1/30 2.7 0.2 29/30 1.2 1.3 ½ ½ Hence the company should play strategies Past Paper Questions and Answers C 1 : C 2 : C 3 : C 4 in the ratio 1/30:0:29/30:0 While the union should play strategies U 1 : U 2 : U 3 : U 4 in ratios 0: ½: 0: ½ (c) Limitations (i) Managerial decision making environment is rarely ever a zero-sum. (ii) Rarely do both parties in real-life game situation have equal information. (iii) It is extremely difficult to convert monetary pay-off for the matrix game. (iv) The environment in which managerial decisions are made is rarely a two person game. (6 marks) (Total: 20 marks) QUESTION FIVE (a) A transfer pricing system can be used to meet the following purposes: (i) To provide information that motivates divisional managers to make good economic decisions. This will happen when actions that divisional managers take to improve the reported profit of their divisions also improves the profits of the company as a whole. (ii) To provide information that is useful for evaluating the managerial and economic performance of the divisions. (iii) To intentionally move profits between divisions or locations. (iv) To ensure that divisional autonomy is not undermined. (4 marks) (b) Transfer pricing of products at cost or sales value • With cost – based transfer price systems, transfers are made either at actual cost or standard cost. When actual costs are used, there is no incentive for the supplying centre to control costs because any inefficiencies arising in the supplying centre will be passed on to the receiving centre. Consequently, the receiving centre will be held accountable for the inefficiencies of the supplying division. Transfers at actual costs are therefore inappropriate for responsibility accounting. • When cost based transfer pricing systems are used, transfer should be at standard cost and not actual cost. This will result in the supplying centre being held accountable for variances arising from the difference between standard and actual cost of transfers. The managers of the supplying centre are therefore motivated to minimize costs. • When transfers are made at standard cost any inefficiencies of the supplying centre are not passed on to the receiving centre. The receiving centre should be held accountable for usage of resources at the standard price, thus ensuring that the manager of the 197 Answers – Past Papers 198 receiving centre is held accountable only for excessive usage of resources. • Where cost-based transfer prices are used, there is still a danger that inappropriate transfer prices are set that will not provide an appropriate basis for allocating profits between divisions. Where there is a competitive market for intermediate products the current market price is the most suitable basis for setting the transfer price. When transfers are recorded at market prices, profit centre performance is likely to represent the real economic contribution of the profit centre to total company profits. • If the supplying centre did not exist, then intermediate products would have to be purchased from the outside market at the current market prices. Alternatively, if the receiving centre did not exist, the intermediate product would have to be sold on the outside market at the current market price. Responsibility centre profits are therefore likely to be similar to the profits that would be calculated if the centres were separate independent businesses. Therefore, transfer based on selling prices will represent a more appropriate basis for meeting the requirements of a responsibility accounting system. (8 marks) (c) Transfer prices • When the supplying division does not have sufficient capacity to meet all the demands placed upon it, linear programming can be used to determine the optimum production level. The transfer price that will induce the supplying division to produce the optimum output level can be derived from the linear programming model. The transfer price is determined by adding the shadow prices of the scarce resources (as indicated by output from the linear programming model) to the variable costs of the resources consumed by the intermediate product. This transfer price will result in the supplying division being credited with all of the contribution arising from the transfers and the receiving division earning a zero contribution. The allocation of zero contribution to the receiving division will have a negative motivational influence, and result in a loss of divisional autonomy and a reported performance that does not reflect the economic performance of the division. (8 marks) (Total: 20 marks) Past Paper Questions and Answers KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD CPA PART III MANAGEMENT ACCOUNTING December 2005 3 hours QUESTION ONE (a) (i) Let P = Selling price per bottle C 1 = Cost of ingredient 1 C 2 = Cost of ingredient 2 Amount Produced daily = 250x360 = 300 units ∴Profit = 300P – (250X 1 + 360X 2 ) Expected selling price 4000 x 0.15 + 4,500 x 0.35 + 5,000 x 0.20 + 5,500 x 0.3 = Shs. 4,825 Expected cost of ingredient 1 1000 x 0.1 + 1,500 x 0.05 + 2,000 x 0.35 +2,500 x 0.5 = Shs. 2,125 Expected cost of ingredient 2 1500 x 0.20 + 2,000 x 0.25 + 2,500 x 0.15 + 3,000 x 0.4 = Shs. 2,375 ∴Expected daily profit = (300 x 4825) – [(2,125 x 250) + (360 x 2,375)] = 1,447,500 – 1,386,250 = Shs. 61,250 (ii) Selling Price Shs. Probs. Cum Probs. RN- Ranges 4,000 0.15 0.15 01 – 15 4,500 0.35 0.50 16 – 50 5,000 0.20 0.70 51 – 70 5,500 0.30 1.00 71 - 00 Cost, ingredient 1 Sh. Probs. Cum Probs. RN- Ranges 199 Answers – Past Papers 200 1,000 0.10 0.10 01 – 10 1,500 0.05 0.15 11 – 15 2,000 0.35 0.50 16 – 50 2,500 0.50 1.00 51 - 00 Past Paper Questions and Answers Cost, ingredient 2 Shs. Probs. Cum Probs. RN-Ranges 1,500 0.20 0.20 01 – 20 2,000 0.25 0.45 21 – 45 2,500 0.15 0.60 46 – 60 3,000 0.40 1.00 61 - 00 201 Answers – Past Papers 202 Da y RN Selli ng Price Uni ts Total Revenu e RN Cost X1 Unit s Total Cost X1 RN Cost X2 Unit s Total Cost X1 + X2 Total Cost X1 + X2 Daily Profit Shs. Shs. ‘000’ Shs. ‘000’ Shs. Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ 1 58 5,000 300 1,500 71 2,50 0 250 625 96 3,000 360 1,080 1,705 (205) 2 30 4,500 300 1,350 24 2,00 0 250 500 18 1,500 360 540 1,040 310 3 46 4,500 300 1,350 23 2,00 0 250 500 34 2,000 360 720 1,220 130 4 27 4,500 300 1,350 85 2,50 0 250 625 13 1,500 360 540 1,165 185 5 99 5,500 300 1,650 24 2,00 0 250 500 44 2,000 360 720 1,220 430 6 49 4,500 300 1,350 18 2,00 0 250 500 09 1,500 360 540 1,040 310 7 79 5,500 300 1,650 49 2,00 0 250 500 74 3,000 360 1,080 1,580 70 8 16 4,500 300 1,350 32 2,00 0 250 500 23 2,000 360 720 1,220 130 9 02 4,000 300 1,200 56 2,50 0 250 625 88 3,000 360 1,080 1,705 (505) 10 87 5,500 300 1,650 59 2,50 0 250 625 41 2,000 360 720 1,345 305 1,160 Average Daily Profit = 10 1,160,000 = Shs. 116,000 Past Paper Questions and Answers (b) EBQ = D P P C 2D − x h Co. 12000 48000 48000 x 7.5 ,000 2x12,000x2 − = 2921.19 or 2921 units Where P is production rate D is usage rate Ch = 2.50 + (20% x 25) = Shs. 7.5 203 Answers – Past Papers (ii) Optimal EBQ = , ` . | −12000 48000 48000 7.5 00 2x12000x10 = 2065.59 = 2066 units TRC incurred= ( )( ) x7.5 48000 12000 48000 2921 2 1 2921 ) 12000(1000 − + = Sh. 12323.49 TRC Optimal = ( ) ( )( ) x7.5 48000 12000 48000 2066 2 1 2066 1000 12000 − + = 11618.95 Cost of production error = 12323.49 – 11618.95 = Shs. 704.54 QUESTION TWO (a) The variable cost per unit of output for sales outside the company are Shs. 110 for the intermediate product and Shs. 490 (i.e. 100 A + 390 B) for the final product. It is assumed that the company has sufficient capacity to meet demand at the various selling prices. Optimal output of intermediate product for sale on external market. Selling price (Sh) 200 300 400 Unit contribution (Sh) 90 190 290 Demand in units 15,000 10,000 5,000 Total contribution (Sh) 1,350,00 0 1,900,00 0 1,450,00 0 Optimal output is 10,000 units at a selling price of Sh. 300. Optimal output for final product Selling price (Sh) 800 900 400 Unit contribution (Sh) 310 410 510 Demand in units 7,200 5,000 2,800 Total contribution (Sh) 2,232,00 0 2,050,00 0 1,428,00 0 Optimal output is 7,200 units at a selling price of Shs. 800. Optimal output of Division B based on a transfer price of Sh. 290. Division B will regard the transfer price as a variable cost. Therefore total variable cost per unit will be Sh. 680 (Sh. 290 + 390) and Division B will calculate the following contributions: Selling price (Shs.) 800 900 1,000 204 Past Papers Questions and Answers Unit contribution (Shs.) 120 220 320 Demand in units 7,200 5,000 2,800 Total contribution (Shs.) 864,000 1,100,00 0 896,000 The manager of Division B will choose an output level of 5,000 units at a selling price of Sh. 900. This is sub-optimal for the company as a whole. Profits for the company as a whole for the sale of the final product are reduced from Shs. 2,232,000 (7,200 units) to Shs. 2,050,000 (5,000 units). The Shs. 2,050,000 profit will be allocated as follows; Division A = Shs. 950,000 (5,000(290-100) Division B = Shs. 1,100,000. (b) At a transfer price of Shs. 120, the variable cost per unit produced in Division B will be Sh. 510 (Shs. 120 + 390). Division B will calculate the following contributions. Selling price (Sh) 800 900 1,000 Unit contribution (Sh) 290 390 490 Demand (units) 7,200 5,000 2,800 Total contribution (Sh) 2,088,000 1,950,000 1,372,00 The manager of Division B will choose an optimal level of 7,200 units and a selling price of Sh. 800. This is the optimal output level for the company as a whole. Division A would obtain a contribution of Sh. 144,000 (7,200 x (120 – 100)) from internal transfers of the intermediate product, whereas division B will obtain a contribution of 2,088,000 from converting the intermediate product and selling a final product. The total contribution for the company as a whole would be Sh. 2,232,000. Note that Division A would also earn a contribution of Shs. 1,900,000 from the sale of intermediate product to external market. QUESTION THREE (a) Pricing decisions The learning curve theory is used in cost prediction to enable quotations to be prepared for potential orders. Work scheduling Learning curve enables firms predict the required inputs more effectively and this enables production of more accurate delivery schedules. Standard setting 205 Answers – Past Papers In order to set proper standards that will not be easily achieved in future the learning curve is taken into consideration. (b) (i) Skilled labour: 952 hours: Y = 052X 0.678 (Total) Semi skilled 650 hours: Y = 650X 0.848 (Total) Labour hours for 6 th and 7 th boat: Skilled: 952 (7) 0.678 – 952(5) 0.678 = 726.4 hours Semi skilled 650(7) 0.848 – 650 (5) 0.848 = 840.3 hours Standard labour cost of boats assembled in June i.e. (six and seventh) Skilled: 726.4 x 1250 = 908,000 Semi skilled: 840.3 x 950 = 798,285 1,706,285 (b) (ii) Reconciliation Standard Labour Cost 1,706,285 Labour rate variance Skilled: 800,400 – 680 x 1,250 49,600F Semi skilled: 1,281,200 – 1,256 x 950 88,000A 384,000A Labour efficiency Skilled: 1,250 (680 – 726.4) 58,000F Semi skilled: 950(1,256 – 840.3) 394,915A 336,915A Actual labour cost (800,400 - 1,281,200) 2,082,600 (iii) Labour Mix variance = SR (Actual Mix – Std mix) Skilled: 1250 ] ] ] + + − 1256) x(680 840.3 726.4 726.4 680 = 272,032 F Semi Skilled: 950 ] ] ] + + − 1256) x(680 840.3 726.4 840.3 1256 = 206,745 A ________ Total labour mix variance = 65,287 F Labour output variance = Std. labour cost (Actual output – std. output) Std. cost per labour cost = 2 1,706,285 = 853142.5 Std. output = (1936 ÷ 2.4714 2 840.3) 726.4 (6 · + · ∴Labour output variance = 853,142.5 (2-2.4714) = 402,171 A Labour efficiency variance = Labour Mix + Labour output = 65,287 F + 402,171 A 206 Past Papers Questions and Answers = 336,884 A QUESTION FOUR (a) T = Let X = long run share of ICU Patients Y = long run share of HDU Patients I – X – Y = long run share of ICU GP patients ICU HDU GW ICU 0.5 0.5 - HDU 0.1 0.5 0.4 GW 0.05 0.1 0.85 207 Answers – Past Papers ∴[X Y I – X – = [X, Y, 1-X- Y] 0.5x + 0.1y + 0.05 (1-x-y) = x 0.5x + 0.1y + 0.05 – 0.05x – 0.05y = x - 0.55x + 0.05y = - 0.05………….. (1) 0.5x + 0.5y + 0.1 (1-x-y) = y 0.5x + 0.5y + 0.1 – 0.1x – 0.1y = y 0.4x – 0.6y = -0.1…………………(2) - 0.55x + 0.05y = - 0.05…………. x 12 0.4x – 0.6y = 0.1 - 6.6x + 0.6y = -0.6 0.4x – 0.6y = - 0.1 - 6.2x = - 0.7 x = 6.2 0.7 = 0.1129 - 0.55 (0.1129) + 0.05y = - 0.05 Y = 0.2419 ∴1xy = 1 0.1120 0.240 = 0.6452 ∴Long run percentages are: ICU 11.29% HDU 24.19% GW 64.55% ∴Long run weekly costs Shs. ‘000’ ICU: 11.29% x 4000 x 200,000 9,032 HDU: 24.19% x 4000 x 100,000 96,760 GW: 64.52% x 4000 x 50,000 129,040 234,832 0.5 0.5 - 0.1 0.5 0.4 0.05 0.1 0.85 208 Past Papers Questions and Answers (b) T = [x, y, 1-x-y] = [x, y, 1-x- y] 0.4x + 0.2y + 0.05 (1-x-y) = x 0.4x + 0.2y + 0.05 – 0.05x – 0.05y = x - 0.65x + 0.15y = - 0.05……….. (1) 0.6x + 0.5y + 0.1 (1-x-y) = y 0.6x + 0.5y + 0.1 – 0.1x – 0.1y = y 0.5x + 0.6y = -0.1 0.65x + 0.15y = - 0.05………….. x 4 0.5 x – 0.6y = - 0.1 - 2.6x + 0.6y = - 0.2 0.5x + 0.6y = - 0.1 -2.1x = - 0.3 x = 1 . 2 3 . 0 = 0.1429 - 0.5 (0.1429) – 0.6y = - 0.1 0.07145 – 0.6y = - 0.1 y = 0.28575 ∴1 – 0.1429 – 0.2858 = 0.5713 = 0.6452 ∴Steady State percentages: ICU 14.29% HDU 28.58% GW 57.13% ∴Steady state weekly costs HDU ICU 0.6 HDU 0.5 GW0.05 0.10.85 0.4 - 0.2 0.3 0.05 0.85 209 Answers – Past Papers ICU: 14.29% x 4000 x 200000 114,320 HDU: 28.58% x 4000 x 100000 114,320 GW: 57.13% x 4000 x 50000 114,260 342,900 (c) Decision: The hospital should not adopt the proposal of the board of governors because the proposal will increase long run costs by: Shs. 342,900 – 316,120 = Shs. 108,068 (000) = Shs. 108,068,000 (d) Assumptions of Markov Analysis (i) There is a finite number of possible states. (ii) Transition matrix remains constant. (iii) The size and make up of the Markov system does not change. (iv) A future state of nature can be predicted given the current state and the transition matrix. (v) The various states of nature are assumed to be mutually exclusive and collectively exhaustive. QUESTION FIVE (a) Assumptions of C-V-P • It assumes a single product or a constant sales mix. • It assumes that the total cost and total revenue functions are linear. • The C-V-P analysis applies to the relevant range only. • It assumes that all other variables remain constant other than the one on consideration. • It assumes that costs can be accurately divided into fixed and variable elements. • The C-V-P analysis applies only in the short-run. • The C-V-P analysis assumes all costs to be variable in calculation of profits for the period. • It assumes a fixed complexity related costs. (b) Revenue per person: 5000 + 800 + 100 = Shs. 5900 Fixed costs = 210,000 + 840,000 + 50,000 + 790,000 = Shs. 1,890,000 Average no. of people Mid points Probability 3000 0.2 4000 0.3 5000 0.4 6000 0.1 210 Past Papers Questions and Answers Profit from dinner and dance: No. of peopl e Reve nue Food Costs Fixed costs Total costs Profi t Probabili ty Expect ed profit Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ 3,000 17,70 0 9,600 1,890 11,49 0 6,210 0.2 1,242 4,000 23,60 0 9,600 1,890 11,49 0 12,11 0 0.3 3,633 5,000 29,50 0 12,00 0 1,890 13,89 0 15,61 0 0.4 6,244 6,000 35,40 0 14,40 0 1,890 16,29 0 19,11 0 0.1 1,911 Total expected profit from dinner and dance 13,030 Profit from the programme Pages Probabilities 240 0.2 320 0.4 400 0.3 480 0.1_ 1.00 Pages Revenu e Costs Profit Probability Expected profit Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ 240 16,800 5,200 11,60 0 0.2 2,320 320 22,400 5,600 16,80 0 0.4 6,720 400 28,000 6,000 22,00 0 0.3 6,600 480 33,600 6,400 27,20 0 0.1 2,720 Total Profit from the programme 18,360 Expected profit = 13,030,000 + 18,360,000 = Shs. 31,390,000. 211 Questions - Mocks Part III: Comprehensive Mock Examinations QUESTIONS - MOCKS COMPREHENSIVE TEST 1 Time Allowed: 3 hours Answer any FIVE questions. All questions carry equal marks QUESTION ONE 1. Samaki Ltd., a company based in Mombasa, exports vital fishing hooks to Madagascar. The demand for the hooks is constant and Samaki Ltd., is able to predict the annual demand with considerable accuracy. The predicted demand for the next couple of year is 200,000 hooks per year. Samaki Ltd. purchases its hooks from a manufacturer in Mombasa at a price of Sh.400 per hook. In order to transport the purchases from Mombasa to Madagascar, Samaki Ltd. must charter a ship. The charter services usually charge Sh.20,000 per trip plus Sh.40 per hook (this includes the cost of loading the ship). The ships have a capacity of 10,000 hooks. The placing of each order including arranging for the ship requires 5 h ours of employee time. It takes about a week for an order to arrive at the Samaki Ltd. warehouse in Madagascar. The warehouse has a capacity of 15,000 hooks. When a ship arrives at the Samaki warehouse, the hooks can be unloaded at a rate of 25 hooks per hour per employee. The unloading equipment used by each employee is rented from a local supplier at a rate equivalent to Sh.100 per hour. Supervisory time for each shipload is about 4 hours. The employees working in the warehouse have several tasks: i Placing the hooks into storage, after they are unloaded which can be done at the rate of about 40 per hour. ii Checking, cleaning etc. of the hooks in inventory requires about one-half hour per hook per year. iii Removing a hook from inventory and preparing it for shipments to a customer requires about one-eighth of an hour. iv Security guards general maintenance, etc. require about 10,000 hours per year. The average cost per hour of labour is equivalent to Sh.200 (including fringe benefits). Samaki Ltd. has developed the following 212 Comprehensive Mock Examinations prediction equation for its general overhead (excluding shipping materials, fringe benefits, and equipment rental): Predicted overhead for the year = Sh.20,000,000 + (Sh.160 x Total labour hours) The materials used to ship one hook to a customer costs Sh.20 and the delivery costs average out to about Sh.40 per hook. The company requires a before-tax rate of return of 20 per cent on its investment. The ordering policy from the manufacturers by Samaki Ltd., is based on an EOQ. Model, which is determined by the demand for hooks in Madagascar. Required a) Determine the quantity that should be ordered each time and the re-order level (15 marks) b) If the true overhead prediction equation is: Sh.16,000,000 + (Sh.240 x Total labour hours), what is the cost of the prediction error? (10 marks) (Total: 25 marks) QUESTION TWO The Finance Director of Africa Problems Ltd. is considering developing a flexible-budget formula for the manufacturing overhead costs. The accounting staffs have suggested that simple linear regression be used to determine the cost behaviour pattern of the overhead cost. They consider that this method would provide a good and quick estimate of the costs that can be expected to be incurred each month. The actual direct-labour hours and corresponding manufacturing overhead costs for each month between 1996 and 1999 were used in the linear-regression analysis. The following occurrences during the period are considered unusual: 1. Production was reduced in one month during 1997 due to wildcat strikes related to political changes in one of the countries. 2. In 1998, production was reduced in one month because of material shortages and materially increased (overtime scheduled) during two-months to meet the units required for one-time sales order. 3. Employee benefits were raised significantly in December 1998 as a result of a labour agreement. 4. Production during 1999 was not affected by any special circumstances. The accounting staff raised the following issues: • Some members question whether historical data should be used at all to form the basis for a flexible-budget formula. 213 Questions - Mocks • Some members believe that he use of data from all 48 months would provide a more accurate portrayal of the cost behaviour. While they recognized that any of the monthly data could include efficiencies, they believed these would tend to balance out over a long period of time. • Still other members felt that only the most recent 12 months should be used because they were the most current. • Other members of the accounting staff suggested that only those months that were considered normal should be used so that the regression would not be distorted. The accounting department ran two regression analyses of the data, one using the data from all 48 months and the other using only the data from the last 12 months. The results were as follows: 214 Comprehensive Mock Examinations African Problems Ltd Least-square Regression Analyses Data from all Data from most recent Coefficients of the regression equation: Constant Sh.185.71 5 Sh.163.530 Independent variable Sh. 2.40045 6.9655 Coefficient of correlation 0.47 0.69 Standard error of the estimate 19.504 11.210 Standard error of the regression Coefficient for t he independent variable 0.97 1.40 Calculated t statistics for the registration coefficient 1.64 3.01 Statistics required for a 95% confidence interval: 10 degrees of freedom 2.23 34 degrees of freedom 1.96 Required: a) i Formulate the flexible-budget equation that can be employed to estimate monthly manufacturing-overhead costs. (2 marks) ii Calculate the estimate of overhead costs for a month when 37.500 direct labour hours are worked. (2 marks) b) Using only the results of the two regression analysis above, explain which of the two results is more appropriate as a basis for the flexible-budget formula. (7 marks) c) Evaluate and explain how each of the four issues raised by the accounting department staff influence our willingness to use the results of the statistical analyses as the basis for the flexible-budget formula. (9 marks) (Total: 20 marks) QUESTION THREE A company makes a lotion that is manufactured through two processes, A and B. on the 1 November 1995, work in process consisted of the following: Sh. Process A: 2000 units Direct materials 1,000,000 Direct labour 400,000 Overheads 600,000 Process B: 6000 units Direct materials 3,400,000 Direct labour 760,000 Overheads 1,200,000 215 Questions - Mocks In both processes the goods were 100% complete as to direct materials and 75% complete as to direct labour and overheads. In the month of November, the following additional costs were incurred. Process A Process B Sh Sh. Direct materials 1,940,000 560,000 Direct labour 728,000 2,240,000 Overheads 1,080,000 4,200,000 On 30 th November 1995, 4000 units were completed and passed form Process A to Process B while 1600 units remained in progress, 100% complete as to direct materials and 50% complete as to direct labour an overheads. On the same date, 10,000 units were passed from Process B into finished goods while 4000 units remained in progress, 100% complete as to direct materials and 50% complete as to direct labour and overheads. All inventories are valued on the weighted average cost basis and transfers from process A to Process B are treated as part of direct material cost. Required: The cost accounts for both processes for the month of November 1995. Show all supporting computations including the inventory flow through each process. (Total: 20 marks) QUESTION FOUR Siku Kuu Ltd. Manufactures and distributes a line of Christmas gifts. The company had neglected to keep its gifts line current. As a result, sales have decreased to approximately 25,000 units per year fro a previous high of 125,000 units. The gifts have been redesigned recently and is considered by company officials to be comparable to its competitors’ models. The company plans to redesign the gifts each year in order to compete effectively. Kama Kawaida, the Sales Manager, is not sure how many units can be sold next year, but she is willing to place probabilities on her estimates. Kama Kawaida’s estimates of the number of units that can be sold during the next year and the related probabilities are as follows: Estimated Sales in units probabilities 50,000 0.10 75,000 0.40 100,000 0.30 125,000 0.20 The units would be sold for sh.500 each. The inability to estimate the sales more precisely is a problem for Siku Kuu Ltd. the number of units of this product is small enough to schedule the entire year’s sales in one production run. 216 Comprehensive Mock Examinations If the demand is greater than the number of units manufactured, then sales will be lost. If the demand is below supply, the extra units cannot be carried over to the next season and would be given away to various charitable organizations. The production and distributions cost estimates are as follows: UNITS MANUFACTURED 50,000 75,000 100,000 125,000 Variable costs (S h) 9,900,000 14,850,00 0 19,800,00 0 24,750,00 0 Fixed costs (S h) 7,700,000 7,700,000 8,800,000 8,800,800 0 Total costs (S h) 17,600,00 0 22,550,00 0 28,600,00 0 33,550,00 0 The company intends to analyze the data to facilitate making a decision as to the proper size of the production run. Required: a) Prepare a payoff table for the different sizes of production runs required to meet the four sales estimates prepared by Kama Kawaida for Siku Kuu Ltd. If Siku Kuu Ltd. relied solely on the expected monetary value approach to make decisions, what size of production run would be selected? (6 marks) b) Identify the seven basic steps that are taken in any decision process. Explain each step by reference to the situation presented by Siku Kuu Ltd. and your answer to requirement (a) (14 marks) (Total: 20 marks) QUESTION FIVE The Uganda Bank (E.A.) Ltd has only two-branches. The head office branch is in the center of Kampala and the Kagera branch outside Kampala. The head office staff consists of the managing director and finance manager. With minor exceptions, the branch managers are permitted to conduct their affairs like the heads of two independent banks. The planning and control system centers on branch income statements prepared by the Finance Manager. The Kagera branch, on the other hand, is located outside Kampala in a large and growing retirement community and as primary retail branch. Mr. Obok, the manager, is in his first year with the Uganda Bank. In his attempts to sell the bank’s services to the Kagera residents, he has found that his only success is the area of foreign deposits. Loan business, on the other hand, is both competitive and scarce. The interest rate he can charge is constrained by the fact that the manager of the local competing branch of the other bank while not 217 Questions - Mocks actively soliciting loan business is apparently charging rates below the prevailing Kampala prime rate. Additionally, there seems to be fundamental resistance in the part of the Kagera residents to the idea of borrowing even at the 12% rate Obok has been offering. The Kampala branch located in the growing central business district, serves primarily commercial customers. The manger, Mr. Kamau, has found in recent years that while he faces a number of vigorous competitors the principal constraint on his ability to generate new loan business is lack of supporting deposits. The only alternative source of lending funds is the purchase of Euro currency, which are foreign deposits held in a bank outside Africa. This opinion is considered less than acceptable by Kamau, as the 22% interest he would have to pay for such funds is higher than the rate he is able to charge loan customers currently at 20%. In spite of his frequent lectures on the merits of leverage, the best Obok has been able to do is to generate a few goll-carat installment and social security cheque receivable loans. As a result, he finds himself with substantial excess savings deposits, which he has to keep in the vault to satisfy the government’s 20% cash reserve requirement, the vault additionally contains excess lendable funds equal to almost 70% of total savings deposits. The finance manager has suggested that he lends these funds to Kamau at the Kampala branch. This was acceptable to both managers, although some disagreement arose as to the interest rate appropriate for such a loan. The argument was finally settled by the finance manger, who indicated that the theoretically correct rate was the rate Obok was paying on savings deposits, 10%. It has been further agreed that if Obok could find additional loans, any or all of the funds lent to Kamau would be returned. Required: a) Evaluate the 10% interbranch loan rate and suggest appropriate changes in relation to the following criteria: i Motivating managers to act in a manner consistent with the best interests of the bank as a whole. (4 marks) ii Evaluating the performance of individual branches. (3 marks) b) Would your answer change if the Kagera branch loan rate were to rise to 14%, while all other rates as well as the level of loan demand at Kampala branch, remained the same? (4 marks) c) Would your answer change if all rates were the same as in (a) above except that he cost of Euro currency dropped to 18%. (3 marks) d) Based on your answers to the above, what general statements can you make about the interbranch loan rate appropriate for evaluation of individual managers? (6 marks) 218 Comprehensive Mock Examinations (Total: 20 marks) 219 Questions - Mocks COMPREHENSIVE TEST 2 Time Allowed: 3 hours Answer any FIVE questions. All questions carry equal marks QUESTION ONE Miujiza Co. Ltd. manufactures two industrial products: x-100, which sells for Sh.4,500 a unit, and Y-120 which sells for Sh.4,250 a unit. Each product is processed through both of the company’s manufacturing departments. The limited availability of labour, materials and equipment capacity has restricted the ability of the firm to meet the demand for its products. The production department believes that linear programming can be used to support and systematize the production schedule for the two products. The following data are available to the production department: Resources required per unit X-100 Y-120 Direct material – weekly supply limited to 1800 Kg at Sh.600 per kilogramme 4 Kg 2 Kg Direct labour: Department 1 – weekly supply limited to 10 people at 40 hours each at an hourly cost of Sh.3000 40 min. 1 hour Department 2 - Weekly supply limited to 15 people at 40 hours each at an hourly rate of Sh.400 1hr.15 min 1 hour Machine time: Department I - Weekly capacity limited to 250 hours 30 min. 30 min. Department 2 – Weekly capacity limited to 300 hours 0 hours 1 hour The overhead costs for Miujiza Co. Ltd. are accumulated on a plant wide basis. The overhead is assigned to products on the bass of the number of direct-labour hours required to manufacture the product. This base is appropriate for overhead assignment because most of the variable-overhead costs vary as a function of labour time. The estimated overhead cost per direct labour hour is: Sh Variable – overhead cost 300 220 Comprehensive Mock Examinations Fixed overhead cost 300 Total overhead cost per direct ___ Labour hour 600 The production department formulated the following equations for the linear-programming (L.P) statement of the problem. A = number of units of X-100 to be produced B = number of units of Y-120 to be produced Objective function to minimize costs: Minimize Z = 4250A + 3100 B Constraints: Material: - 4A + 2B <=1,800 Kgs. Dept.1 labour: - 2/3A + B <= 400 hours Dept. 2 labour: - 1 ¼ + B < = 600 hours Non-negativity: - A => = 0, B = >0 (Note. >= is greater than or equal to and <= is less than or equal to) Required: a) Evaluate the accuracy and application of the L.P. equations prepared by the production department. (6 marks) b) Formulate and label equations for the L.P. statement of the production problem in line with your findings in (a) above. (8 marks) c) Explain how L.P. could help Miiujiza Co. determine how large a change in the price of direct materials would have to be to change the optimum production Mix of X-100 and Y-120 (6 marks) (Total: 20 marks) QUESTION TWO Kata Leo manages a factory that is currently processing a large order to make hundreds of newly designed computers. Several serious production problems have been encountered. Kata Leo is concerned whether the units will be of acceptable quality. If they are acceptable, the factory will have a net profit of Sh.1,000,000. If the units are of an unacceptable quality, the legal problems, warranty claims and unfavourable publicity will result in a net loss of Sh.625,000. However, Kata Leo could add an intricate inspection procedure so that all defective computers could be discovered and repaired before they leave the factory. The cost of his procedure would be Sh.1,307,500 Required: a) Formulate Kat Leo’s problem as a “decision table” or “pay off table showing actions, events and outcomes. (4 marks) 221 Questions - Mocks b) Supposes that both events are equally likely and that Kata Leo bases his decision strictly on expected monetary return, which action will the management prefer? (6 marks) c) Suppose that Kata Leo could obtain a consultant’s special accounting analysis that would affect his assessments probabilities of acceptable or unacceptable quality. The consultant is expected to produce one of three possible reports: neutral, optimistic or pessimistic. The neutral report would not change the original decision in (b) above. The optimistic report would change Kata Leo’s assessments of probabilities to 0.7 acceptable and 0.3 unacceptable. The pessimistic report would have the reverse effect, changing the probabilities to 0.3 acceptable and 0.7 unacceptable. Kata Leo assesses probabilities of receiving the various reports as follows: Neutral report - 0.3 Optimistic report - 0.3 Pessimistic report - 0.4 What is the highest price that Kata Leo should pay for the report? (10 marks) (Total: 20 marks) 222 Comprehensive Mock Examinations QUESTION THREE Joy Musa is trying to decide between three capital projects of varying returns and risks as shown below: Internal Rate of Return Standard Rate Deviation Project A 32% 9 Project B 27% 6 Project C 42% 21 The manager’s performance is measured by the following linear equations: Z = a + b (x – 27) Z = 13 + 0.9 (x – 27) Where Z is compensation based on the excess (shortage) of actual rate of return over the minimum desired rate of return; a is minimum compensation; b is the weighing of the difference between the actual rate and the minimum desired rate, x is the actual rate of return and 27 percent is the minimum desired rate of return. After holding extensive discussions with Joy, you are convinced that her attitude towards risk and compensation would be expressed as: F = u z – 2σ z Where f is the utility value of each expected level of compensation; u z is the expected value of z; and σ z is the standard deviation of z and is measured by the expression b 2 σ z Required: a) What difficulties in the design of control systems are demonstrated by the above situation? (7 marks) b) Compute Joy Musa’s expected utility from each capital project. (8 marks) c) Which capital project would she choose and why? (5 marks) (Total: 20 marks) QUESTION FOUR Computer Ltd., is in the process of deciding how to service a one-year warranty on the 1,000 computers sold to a large international company. You have been presented with three alternatives: Alternative A A reputable computer service firm has offered to service the computers, including all parts and labour for a flat charge of Sh.27,000. Alternative B 223 Questions - Mocks For Sh.22,500 another reputable service firm would provide all necessary parts and up to 1,000 service calls at no charge. Service calls in excess of that number would be Sh.6 each. The number of calls is likely to be: Event Probability of Occurrence Total Cost Sh. 1,000 calls or less 0.5 22,500 1,500 calls 0.2 25,500 2,000 calls 0.2 28,500 2,500 calls 0.1 31,500 1.0 Alternative C You can hire your own labour and buy your own parts. Your past experience with similar work has helped you to formulate the following probabilities and costs: Event Chances of Occurrence Total Cost Sh. Little trouble 10% 12,000 Medium trouble 70% 15,000 Much trouble 20% 45,000 2,500 calls 100% 31,500 Required: a) For each alternative, compute the standard deviation and the coefficient of variation. (12 marks) b) Which alternative is most risky? Explain. (3 marks) c) What alternative would be taken? Explain. (5 marks) (Total: 20 marks) QUESTION FIVE FMD Ltd, wishes to study the relationship between the total costs of operating one of its divisions and to the physical output of that division. It decides to begin with a simple linear probabilistic model relating monthly total operating cost to monthly output, as follows: Y = K 0 + K 1 x + Z Where y is monthly total operating cost, x is monthly unit production, and Z is a random variable assumed to follow a normal probability distribution with mean U of zero and standard deviation of o. Required: 224 Comprehensive Mock Examinations a) Give a precise interpretation of the parameters K 0 and K 1 of the model above, so that an accountant would understand what they stand for. (2 marks) b) Give a brief outline of the role of Z in the model. In a particular, indicate why it is there. (6 marks) c) FMD Ltd. obtains the following data on monthly production and costs: Months ago Units produced ‘000’ Total operating costs K£ ‘000’ s 1 1 2 2 4 5 3 10 9 4 7 7 5 3 3 Using these data, compute the coefficient K 0 and K 1 of the model. (4 marks) d) Outline how you would go about deciding whether or not the model above fits the data reasonably well and captures the underlying process generating the monthly operating costs. (6 marks) e) Use the model to predict next month’s operating costs at a production level of 2,000 units. (2 marks) (Total: 20 marks) 225 Questions - Mocks COMPREHENSIVE TEST 3 Time Allowed: 3 hours Answer any FIVE questions. All questions carry equal marks QUESTION ONE Uganda Ltd. has the following standards for producing an alcoholic beverage: Concentrate 590N - 50 litres @ Ug.Sh.100 = Ug.Sh. 5,000 Concentrate KAG - 50 litres @ Ug.Sh.300 = Ug.Sh.15,000 100 litres Ug.Sh.20,000 Every 100 litres of input should yield 80 litres of Chovi, the finished product. The production manager is supposed to make the largest possible amount of finished product for the least cost. He has some leeway to alter the combination of materials within certain wide limits, as long as the finished product meets specified quality standards. Actual results showed that 400,000 litres of Chovi were produced during last week. The raw materials used in this production were 280,000 litres of 590N and 240,000 litres of KAG. No price variances were experienced during the period. Required: a) A presentation of yield and mix variances. (13 marks) b) Comment on the performance of the manager. (7 marks) (Total: 20 marks) QUESTION TWO Katiba Ltd. is changing its current short-term planning approach in an attempt to incorporate some newer planning techniques that will permit selection of an optimum production mix. The company’s director of operations has developed the following price and cost information per unit of each product. PRODUCT 1 2 3 Sh. Sh. Sh. Selling price 4,500 5,400 7,200 Direct labour 1,350 1,800 2,250 226 Comprehensive Mock Examinations Direct materials 1,620 1,080 1,890 Variable overhead 1,080 1,080 1,080 Fixed overhead 180 180 180 Assume the total production level of 60,000 units made up of equal amounts of each product. Required: (Parts (a) and (b) below are independent of each other) a) All three products use the same direct material which cost Shs. 270 per kilogramme and direct-labour rate is Shs. 900 per hour. Monthly capacities are 2,000 direct-labour hours and 20,000 kilogrammes of direct materials. Fixed overhead is assumed to be the same for each product. Formulate and clearly label the linear-programming (LP) functions necessary to maximize Kariba’s net income. Show supporting computation but do not solve t he linear programming functions.(11 marks) b) Katiba’s management has decided to produce product 3 only. The sales and marketing director has presented the following results of a price analysis for product 3. at a selling price of Sh.7200 per unit, the probability distribution of total sales is uniform between Sh.27,000,000 and Sh.54,000,000. At a selling price lowered to Shs. 6,300 per unit. The probability distribution of total sales is uniform between Shs. 54,000,000 and Sh.81,000,000. i What is the probability of at least breaking even at a selling price of Sh.7,200 per unit (5 marks) ii Which pricing strategy yields a higher expected profit? (4 marks) (Total: 20 marks) QUESTION THREE James Ugenya is the Final Director of Ugenya Ltd. He wishes to install an inventory control system an, in particular, calculate and utilize an optimal order quantity using the EOQ model. He has collected the following data about inventory item NPD: - Purchase price Sh.31.25 per unit - Inventory insurance and other variable costs of storage paid at year-end Sh.0.625 per unit - Annual demand 1,250 units Ugenya’s opportunity rate of return is 10 per cent. He anticipates no need for a safety stock. He is unsure about the cost behaviour associated with ordering inventory. He collected some data about the most recent 20 orders made for inventory item NPD. He also ran a regression using the number of units in each order to predict the total cost of the order. The results are as follows: 227 Questions - Mocks Total cost in shillings = 55.0 + 3.4125x Standard errors of the coefficients 11.0 0.54 r 2 = 0.83 x = number of units ordered Where EOQ ={ 2AP}½ { S } Where: A - Annual inventory requirement P - Ordering cost per order S - Carrying cost per item per annum Required: a) Using only the data given above, what optimal order quantity would you recommend? (4 marks) b) What is the 95% confidence interval of the variable ordering cost per unit ordered? (3 marks) c) List two regression assumptions that must be maintained in order to answer (b) above. (3 marks) d) The actual costs of ordering turned out to be Sh.50 per order plus Sh.4.375 per unit ordered. e) Assuming that the recommendations in (a) above were implemented, what was Ugenya’s cost of prediction error! (10 marks) (Total: 20 marks) QUESTION FOUR Chakula Engineering Company Limited (CECL) recently sent their chief designer to the USA and UK to review developments in the American and British Markets. He has now returned with details of a new type of food mixer that is being developed over there. CECL are considering the design and manufacture of a liquidizer gadget attachment to be used as an extra gadget for the new mixer when it is sold in Kenya. The chief designer’s notes show that 10% of the experts he questioned in both the UK and USA believed the new mixer would reach the Kenyan market in a year’s time, whereas 30% thought it would be launched in four year’s time, and the remainder suggested a five-year delay before it reached Kenyan. The presents value (PV) of net cash flows form making and selling the liquidizer are estimated by the company to be sh.8 million, if the market develops one year from now and sh.3.2 million if it develops five years from now. CECL have not developed a liquidizer before, and whilst it immediate development would cost Sh.2 million, they feel they have only a 50% chance of a successful development at present. A number of alternative courses of action present themselves. The company could abandon the whole project, or wait for one year to see if the mixer has 228 Comprehensive Mock Examinations penetrated the Kenyan market. They would then abandon or develop the liquidizer at a PV cost of Sh.1.8 million, with a 70% chance of success, but they would be late into the market and the PV of their receipts they estimate at Sh.4.8 million, including the expenditure of Sh.400,000 on acquiring extra product data during the second year of delay, and the chance of a successful development would be 90%. At this point, however, the mixer could only come on the market at the four or five year point from now. Required: Using a decision tree approach, advise the company on the course of action to adopt. (20 marks) QUESTION FIVE The Hatari Weapons Ltd. desires to submit a tender for 32 “string-to- surface” rockets required by Vita Ltd. it is estimated that each rocket will cost approximately Sh.40,000,000 for material and variable overhead costs. Total fixed costs will amount to approximately Sh.1,600,000 over the two years it will take to build the rockets all of which would have to be recovered against this contract. The company, as a result of past experience, anticipates it could expect a 75 per cent learning curve and that the steady state would not be achieved during this production run. Building the first rocket would require approximately 400,000 hours of direct labour at a direct labour cost of Sh.150 per hour. Variable overhead costs which vary with direct labour amount to Sh.50 per direct labour hour. Eight rockets will be built during the first year of the contract and the remaining 24 will be completed during the second year. The Hatari Weapons Ltd. always adds 25 per cent profit margin to the estimated costs of the contract for which they tender. Required: a) Calculate the total labour hours that will be required to build the 32 rockets. (5 marks) b) Draw up a quotation showing the total price to be quoted, with details of the constituent parts of the cost structure and the profit added. (5 marks) c) Assuming the contract is awarded to the company, and no costs are deferred over the two-year period, draft estimated income statements for the first and second years of the contract life. Revenue is to be recognized on the basis of completed rockets. Fixed costs are incurred equally each year. (5 marks) (Total: 15 marks) 229 Questions - Mocks COMPREHENSIVE TEST 4 Time Allowed: 3 hours Answer any FIVE questions. All questions carry equal marks QUESTION ONE Mwendandamu Company Ltd. can produce a product using either labour-intensive or machine-intensive operations. Cost of each method are as follows: Labour – intensive Machine – Intensive Sh. Sh Variable costs per unit 15 5 Fixed cost 900,000 2,400,000 Demand for the product and unit selling price are uncertain. The following possible outcomes and associated probabilities have been estimated by management. Demand Unit selling price Number of Units Probability Price (Sh) Probability 150,000 0.3 20 0.40 200,000 0.4 23 0.40 250,000 0.20 25 0.20 300,000 0.10 Required: a) Develop probability tree to show the possible profits from labour-intensive and machine-intensive production. (8 marks) b) Determine the following for each production method: i Expected profits; (2 marks) ii Probability of at least breaking even; (2 marks) iii Probability of profits of at least Sh.1,000,000. (2 marks) c) Which production method do you prefer and why? (2 marks) d) Discuss other factors that Mwendamu Company Ltd.’s management should consider before deciding on the production method. (4 marks) (Total: 20 marks) 230 Comprehensive Mock Examinations QUESTION TWO Uchunguzi Ltd. plans to conduct a questionnaire survey. The table below shows the tasks involved, the immediately proceeding tasks and for each task duration the most likely estimate (L), optimistic estimate (O) and the pessimistic estimate (P). 231 Questions - Mocks Number of days Task Precedin g Task Most likely (L) Optimis tic (O) Pessimi stic (P) A - B - C Pilot Survey A 10 8 24 D Interviewer recruitment B 8 4 12 E Interviewer training D 6 6 6 F Interviewer allocation B 8 6 10 G Interviews undertaken C, E, F 20 16 36 H Data entry on computer G 6 4 8 I Interviewer debriefing G 4 4 4 J Data analysis HH 10 8 12 K Writes a report I, J 8 4 24 Using the project evaluation and review technique (PERT) the meantime, M and standard deviation O. for the duration of each task are estimated from the most likely (L), Optimistic (O) pessimistic (P) estimates by using the formulae: M = 0.08333 (4L + O + P) O = 0.08333 (P – O) Required: a) Compute the mean duration and standard deviation for each task. (11 marks) b) The project is budgeted to cost Sh.500,000. Actual costs per day are Sh.10,000. Can the project be implemented within the budget? (Hint: Determine critical path first). (9 marks) (Total: 20 marks) QUESTION THREE Mitumba Ltd. has set the following standards: Sh. 75 litres of material X @ Sh.21 1,575 45 litres of material Y @ Sh.30 1,350 30 litres of material Z @ Sh.24 720 150 3,645 This standard mix should produce 135 litres of Maliza juice. 232 Comprehensive Mock Examinations The company does not maintain any stocks of raw materials. Purchases are made as needed, so that all price variances related to materials used. Actual results showed that 75,000 litres were used during March 2000; Sh. 39,000 litres of X at actual cost of Sh.18 702,000 24,000 litres of Y at actual cost of Sh.31.50 756,000 12,000 litres of Z at actual cost of Sh.28.50 __342,000 75,000 1,800,000 The good quality output was as follows: 60,000 litres at standard cost of Sh.27 1,620,000 Total material variance to be explained. 180,000 Required: Comprehensive computation showing the yield, mix and price variances. (Total: 20 marks) QUESTION FOUR Through the end of 1993, Viatu Ltd., a shoe manufacturer had always sold its products through distributors. In 1993, the turnover was Sh.87,500,000 and net profit was 10 per cent of turnover. Total fixed expenses (manufacturing and selling) were Sh.17,500,000. During 1993, a number of Viatu’s competitors had begun selling their products through distributors. Viatu’s marketing research group was asked to predict the effects of eliminating distributors from the channels of distributors and selling direct to retailers. The group was instructed to predict both changes in sales volume and changes in selling expenses, under the provision that the selling price per unit would remain unchanged. The marketing analysis yielded the following predictions: Turnover in1994 would drop 20 percent from the 1993 figures, but net profit for 1994 would rise to Sh.9,100,000 owing to savings in selling expenses. This net savings in selling expenses from eliminating the “middleman” was impressive, since total fixed expenses manufacturing and selling) would increase to Sh.18,900,000 because of the additional warehouse and delivery facilities required: If the 1993 distribution system were continued, however, 1994, results would replicate 1993. Required: a) What was the breakeven point (turnover) under the original situation prevailing in 1993? (5 marks) 233 Questions - Mocks b) What would be the breakeven point (turnover) under the proposed situation for 1994? (5 marks) c) On the basis of this analysis, Viatu Ltd, adopted the new direct- distribution plan for 1994, and reduced 1994 production on the 70,000,000 turnover level. Unfortunately, it became clear by early December 1994 that sales would reach only 66,500,000 and Viatu cut back productions so that no ending inventory remained. Variable costs per unit and total fixed costs were as predicted. Compute the cost of Viatu’s prediction error. Assume that sales would have been Sh.87,500,000 if the 1993 distribution system had been continued. (10 marks) (Total: 20 marks) QUESTION FIVE a) Briefly give five examples of business applications of linear programming. (7 marks) b) LP Ltd. produces two products, K-A and K-B by a joint process. One unit of input X processed in Department 1 total will yield three units of product K – A and two units of K – B. The variable operating costs in Sh.2.50 per unit of input X processed. Each unit of product K-A can either be sold at the split-off point for Sh.10 per unit or processed further in Department 2 to for product K-C. One unit of product K-A is needed to produce one unit of K-C. Variable processing costs incurred in Department 2 amount to Sh.7.50 per unit of K-A processed and each unit of K-C can be sold at a price of Sh.22.50 product K-B can be sold at Sh.8.75 per unit at the split-off point. Highly skilled labour is required in each of the two departments and the total available labour force is limited to 80,000 hours per week. To process one unit of X requires 1.5 direct-labour hours. If K-A is processed further, three hours per unit of K-A processed are needed. Furthermore raw material X can be acquired up to a maximum quantity of 40,000 units per week. The company ‘s market survey shows that the maximum weekly demand for product K-A is 40,000 units and for product K-C is 5,000 units. The survey further concludes that virtually any amount of product K-B can be sold immediately without difficulty. Weekly production does not have to be equal to weekly sales for any of the company’s products. However, since all three products are perishable, any unsold quantity at the end of the week will be discarded. Required: (i) Formulate a linear programe to determine the optimal weekly production mix for LP Ltd. that maximizes profits subject to the various production, market and technology constraints. Do not solve for optimal values but clearly define your variables. (8 marks) 234 Comprehensive Mock Examinations (ii) Independent of (a) above, assume that at the optimum, the marginal values associated with the maximum market demand for K-A constraint, the maximum market demand for K-C constraint and the maximum supply of X constraint are Sh.10, Sh.15 and Sh.15 respectively. Assume further that all other constraints have zero marginal values. What is the maximum achievable contribution? Show calculations. (5 marks) (Total: 20 marks) 235 Questions - Mocks COMPREHENSIVE TEST 5 Time Allowed: 3 hours Answer any FIVE questions. All questions carry equal marks QUESTION ONE Peter Oloo is a fishmonger in Kisumu. As a result of adverse business changes in the region, the supply and demand for fish are subject to random variations making it difficult to project the next day’s business. Management accounts in relation to the previous 300 days reveal the following mode of behaviour: Number of fish purchased from fishermen Number of days Number of fish Sold to customers Number of days 100 30 100 45 200 60 200 60 300 90 300 90 400 90 400 75 500 30 500 30 300 300 Peter Oloo buys each fish at Sh.40 and sells it for Sh.60 if sold on the same day; if the fish is sold the following day it will fetch only Sh.20. If not sold during the second day its value drops to zero and Peter Oloo donates it to children’s home. Peter Oloo’s Policy is to satisfy the days demand from the fresh fish first; and any further demand will be satisfied from the stock of fish from previous day. Failure to satisfy demand costs Peter Oloo Sh.20 for every fish supplied to the customer. There are no backorders in the business. Required: a) Simulate Peter Oloo’s operations for 8 days clearly indicating profits made each day. (16 marks) b) What are the average daily profits for Peter Oloo? Use the following random numbers 573423709751483681320931644925928345 (4 marks) (Total: 20 marks) QUESTION TWO Africa 1 and Kenya 1 are competing importers of lightweight industrial pick-up truck, the “Miracle”. Market research suggests that there is 236 Comprehensive Mock Examinations demand for such vehicles of about 1,200 units per year evenly spread over the year and that bearing in mind the facilities available on the truck, its price should be around Sh.550,000 but discounts may be available. The price to the dealer is about Sh.400,000 depending upon exchange rates. The management Accountant at Africa 1 has the task of determining the price to charge for the vehicle that will give the greatest monthly profit from the sale of Miracles. Past experience suggest that Africa1’s market share and profit will give the greatest monthly profit from the sale of Miracles. Past experience suggest that Africa1’s market share and profit depends not only on the price it charges, but also the price that Kenya 1 charges. The following pattern seems to have emerged; If both companies share the same price, then Africa 1 secures about 45% of the market and Kenya 1 , 55%. When Kenya 1 has a lower price, then Africa 1 loses about 3% market share for every Sh.10,000 price difference. On the other hand, when Kenya1 has a higher price, then Africa 1 gains 2% market share over and above the 45% per sh.10,000 price difference. From africa1’s point of view, kenya1 normally changes its prices monthly. Africa1’s Management Accountant has ruled out trial and error pricing an has decided to develop a simulation model to investigate price behaviour patterns based on monthly periods. Required: a) Develop a simulation model from Africa1’s point of view, using algebra, showing: i An expression for monthly profits; (2 marks) ii An expression for market share when Kenya1’s price is the same as Africa 1’s; (2 marks) iii An expression for market share when Kenya1’s price is higher than Africa1’s; (2 marks) iv An expression for market share when Kenya1’s price is lower than Africa1’s. (2 marks) b) Draw a flow diagram to show how the model would be used to simulate pricing and demand behaviour using a computer. (8 marks) c) Prepare a statement for the Management Accountant showing the strengths and weaknesses of simulation as a management technique. (4 marks) (Total: 20 marks) QUESTION THREE Paul Akili, an aggressive entrepreneur, is working on some make – or – buy decisions and a related inventory system. For one such product, 237 Questions - Mocks he decides to use the classic economic – lot – size model with no stockouts to determine an optimal order quantity. He initially predicts that annual demand will be 2000 units, that each unit will cost sh.2,565, that the incremental cost of processing each order (and receiving the ordered goods) will be Sh.3,819 in this case, and the incremental cost of storage will be sh.342 per physical unit per year. Assume that the inventory cycle precisely repeats every year. Required: a) What is the optimal order quantity? (1 mark) b) What are the total relevant costs of inventory from following your policy in (a) above? (3 marks) c) Suppose that Paul Akili is incorrect in his sh.3,819 incremental – costs – per order prediction but is precisely correct in all other predictions. State and solve the equation to predict the maximum amount Paul Akili should pay to discover the true incremental cost per order if: (i) This true costs is sh.1,881 per order and (ii) In the absence of any knowledge to the contrary, Paul Akili implement the solutions in (a) above and will not alter it for one full year. (6 marks) a) What happens t your answer in (c) above if we admit that Paul Akili has also made errors in predicting demand price and the cost of storage? (2 marks) b) Suppose Paul Akili implements the solution in (a) above for two years. c) Further supposes that all of his initial predictions were, and are, correct except that the actual incremental cost of storage is sh.1,140 per average unit. If it costs Akili a total of sh.228 to alter his inventory policy, state the equation to determine the cost of prediction error of not changing his inventory policy at the beginning of the second year. (8 marks) (Total: 20 marks) QUESTION FOUR a) Racquet Sports produces a variety of racquets for the sports industry. It makes racquets for tennis, squash and badminton. The table below presents the relevant data for the products produced. Racquet Sports Data Average Selling Average Variable Average Contribut ion Percenta ge of Product Price per unit Cost per unit (Sh) Margin (Sh) Total Sales Tennis racquet 4,000 3,000 1,000 50 238 Comprehensive Mock Examinations Squash racquet 2,500 1,500 1,000 40 Badminton racquet 2,500 1,500 1,000 10 100 Annual fixed costs – Sh.200,000 Production capacity – Sh.1,000,000 of total sales. Required: (i) Determine the contribution percentage on each shillings of sales for each of the products produced and sold. (6 marks) (ii) What is the overall contribution that each sales shillings provides toward covering the firm’s fixed costs, that is overall break-even point in shillings sales? (7 marks) (iii) Determine the profits if the plants operates at 70 per cent of the plant capacity. (2 marks) b) Explain the limitations of the techniques you have used to solve part (a) above. (5 marks) (Total: 20 marks) QUESTION FIVE Majimbo Ltd. Is a multi-divisional company operating in several countries. Division X wants to buy component for its final product. Suppliers outside Majimbo Ltd. Have given two bids for sh.30,000 and 31,800. The supplier who bid sh.31,800 will in turn buy some raw materials for sh.4,500 from Division Z of Majimbo Ltd. Which has spare capacity that will increase A’s contribution to overall company profits by sh.3,000. The supplier who bids sh.30,000 will not buy any materials from Majimbo Ltd. Required: a) Prepare a diagram of the cash flow for both alternatives. Does the use of the international market prices lead to optimal decision for Majimbo Ltd.? Explain (5 marks) b) Suppose Division Y is working at full capacity and can provide the needed part to Division X or to an outside customer at an assumed market price of sh.31,800. if market pricing were the rule, division Y would have to meet the sh.31,000 bid. Further, assume that the outlay costs to Y of filling the order were sh.22,500. Finally assume that Y, unlike the outside suppler does not buy from Z because Majimbo Ltd is so large and communications are so bad that the division Y management is unaware of this alternative. c) Will the use of sh.31,800 as a transfer price lead to optimal decisions for Majimbo Ltd? Show the net effects on cash flows. (10 marks) d) What is the minimum transfer price (inclusive of the opportunity cost?)? (5 marks) 239 Questions - Mocks (Total: 20 marks) 240 Comprehensive Mock Examinations ANSWERS - MOCKS COMPREHENSIVE MOCK EXAMINATIONS COMPREHENSIVE TEST 1 QUESTION ONE (a) Annual Demand = 200,000 hooks Cost per Order Hours Shs. Cost per Ship Chartered 20,000 Hours required to place an order 5 Hours required to supervise on loading 4 Total hours 9 Labour cost 9 x 200 1,800 Overhead cost 9 x 160 1,440 Total 23,240 Cost per unit of average Inventory Hours required per hook per day ½ Labour costs (½ x 200) 100 Overhead cost (½ x 160) 80 180.00 Cost of capital filed up in inventory variable Costs expected at the time of purchase Purchase price 400.00 Shipping cost 40.00 Equipment rental 2 5 1 x Sh.100 4.00 Hours required: on loading 2 5 1 On storage 4 0 1 Total 2 0 0 1 3 Labour cost 2 0 0 1 3 x 200 13.00 Overhead cost 2 0 0 1 3 x 160 10.40 467.40 Cost of capital 20% x 467.40 93.48 Total cost per unit 273.48 EOQ = hooks 830 , 5 48 . 273 240 , 23 x 000 , 200 2 · x 241 Answers - Mocks Reorder Level = DL = 200,000 x 5 2 1 = 3,846 hooks 360 - Original decision order size is 5,830 - Results of optimal decision, given alternative parameter (a) new rate = 16,000,000 + (Shs.240 x Total Labour hours) The Shs.1,600,000 is irrelevant Annual demand = 200,000 hooks Actual cost per order = 23,240 + 9(240 – 160) = 23,960 Actual cost per unit of inventory = 273.48 + ½(240 – 160) + 0.2(240 – 160) ( 2 0 0 1 3 ) = 314.52 EOQ = hooks 520 , 5 52 . 314 960 , 23 x 000 , 200 x 2 2 · · Ch Dco Optimal 2 Q D TRC Ch O Co + · = 200,000 x 23,960 + 5,520 x 314.52 = 1,736191.142 = 1,736,191.142 5,520 2 Actual results, given original decision TRC = 200,000 x 23,960 + 2,830 x 314.52 = 1,738,781.203 Actual 5,830 2 ∴ Cost prediction error = 1,738,781.203 – 1,736,191.142 = Shs.2,590.061 QUESTION TWO (a)(i) Estimated manufacturing Overhead (EMO) Data from all EMO = 185.715 + Sh.2.40045 (Direct labour hours) Data from most Recent EMO = Sh.163.53 + Sh.6.2965 (Direct labour hours) (ii) Data from all EMO = Shs.185.725 + Shs.2.40045 (37,500) = Sh.90,202.59 Data from most Recent EMO =163.53 + Shs. 6.29655(37,000) 242 Comprehensive Mock Examinations = 236,284.155 (b) The results develop from the most recent 12 months are preferred because the t statistic for the 12 months data is 3.01 which is greater than the t-statistic of 2.23 for a 95% confidence interval. The 48-month data have a t-statistic which is an important selection creation because, if the calculated t-statistic exceeds the table t-statistic for a specified confidence interval level, the indications that the true value of the regression coefficient may be different from zero. This means that the equation developed from the regression is statistically acceptable. (c) Issue 1 Other things equal, the more observation the better. However, it does not necessarily follow that there will be a balancing of variations in efficiencies, obtaining more observations by using additional months may introduce spurious elements which are no-longer relevant to estimating future manufacturing overhead. This happens to be the case in this problem. That, is the 12 month data provide a better estimating equation than 36 months data. Issue 2 There are differing philosophies on this matter. Some would say that since aberrations has occurred in the past, they may occur in the future, and therefore should be included. However, if the abnormality is unlikely to occur, it should be eliminated from the observations that are used to develop the regression equation. Issue 3 This issue is valued only if there is reason to believe that the underlying casual relationship has changed (for example: New Technology) or that shilling cost levels have changes. Otherwise, there is no reason to exclude observations due to the point in time at which they occurred. Issue 4 The use of historical data is a reasonable starting point and furnishes a sound foundation for developing a flexible budget formula provided that these have been drastic changes in casual and/or cost relationships. Of course, the equation derived from the regression analysis should be modified for any information that management expects will affect the cost estimate in the future. This could include adjustments for any unit cost increase. QUESTION THREE PROCESS A – Weighted Average Method (WAM) (i) Units flow INPUT TOTAL MATERIAL CONVERSION Beginning WIP 2,000 Added materials 3,600 243 Answers - Mocks Units to account for 5,600 OUTPUT Transferred out 4,000 4,000(100 %) 4,000 (100%) Ending WIP 1,600 1,600 (100%) 800 (50%) Equivalent units 5,600 5,600 4,800 (ii) Cost flow (Sh) Beginning WIP 2,000,000 1,000,000 1,000,000 Current cost 3,748,000 1,940,000 1,808,000 Cost to account for 5,748,000 2,940,000 2,808,000 (iii) Cost per unit (Shs) Equivalent units 5,600 4,800 Cost per unit (Shs) 1,100 = 525 + 585 (iv) Cost Application Shs (Workings) Transfer to Process B 4,440,000 (4,000 x 1,100) End up WIP 1,308,000 (1,600 x 525) + (800 x 585) Equivalent cost 5,748,000 244 Comprehensive Mock Examinations INPUT PROCESS A ACCOUNT OUTPUT Units Amount (Shs) Units Amount(S hs) Beginning WIP 2,000 2,000,000 Transfer to process B 4,000 4,440,000 Materials 3,600 1,940,000 Ending WIP 1,600 1,308,000 Labour 728,000 Overheads ____ 1,080,000 ____ ________ 5,600 5,748,000 5,600 5,748,000 PROCESS B (i)Units Flow INPUT TOTAL TRANSFERRED IN MATERIAL CONVERSION Beginning WIP 6,000 Added materials 4,000 Added from Process A 4,000 Units to account for 14,00 0 OUTPUT Transferred out 10,00 0 10,000 10,000 10,000 Ending WIP 4,000 4,000 4,000 2,000 Equivalent units 14,00 0 14,000 14,000 12,000 (ii) Cost flow (Shs.) Beginning WIP 5,360,00 0 - 3,400,000 1,960,000 Current cost 11,440,0 00 4,440,000 560,000 6,440,000 Cost to account for 16,800,0 00 4,400,000 3,960,000 8,400,000 (iii) Equivalent cost per unit (sh) ÷ ÷ ÷ ÷ Equivalent units 14,000 14,000 12,000 Cost per unit (sh) 1,300 317.14 282.86 700 (iv) Cost Application (SHS) (WORKINGS) Transferred to Finished Goods 13,000,0 00 (10,000 x 1,300) Ending WIP 3,800,00 0 2,000 (700) + 4,000 (282.86) + 4,000 (317.14) Equivalent costs 16,800,0 00 245 Answers - Mocks 246 Comprehensive Mock Examinations PROCESS B ACCOUNT INPUT OUTPUT Units Amount (Shs) Units Amount (Shs) Beginning WIP 6,000 5,360,000 Transferre d out 10,00 0 13,000,000 Material Added 4,000 560,000 Ending WIP 4,000 3,800,000 Transferred in 4,000 4,440,000 Labour 2,240,000 Overheads _____ 4,200,000 _____ _________ 14,000 16,800,000 14,00 0 16,800,000 QUESTION FOUR (a) Demand Probabili ty Production Runs ‘000’ 50 75 100 125 50 0.1 7,400 2,450 (3,600) (8,550) 75 0.4 7,400 14,950 8,900 3,950 100 0.3 7,400 14,950 21,400 16,450 125 0.2 7,400 14,950 21,400 28,950 EMV 7,400 13,700 14,900 11,450 Profit (profit payoff) = (selling price x Quantity) – Total Costs Working ‘000’ EMV at 50,000 Productions = 7,400 x 1 = 7,400 EMV @ 75,000 production = (-3,600 x 0.1) + (8,900 x 0.4) + (21,400 x 0.5) = 13,900 EMV @ 100,000 production = (-3,600 x 0.1) + (8,900 x 0.4) + (21,400 x 0.5) = 13,900 EMV @ 125,000 Production = (-8,550 x 0.1) + (3,950 x 0.4) + (16,450 x 0.3) + (28,950 x 0.2) = 11,450 Decision Produce at a production Run of 100,000 units because it yields the highest expected monetary value of Shs.13.9 million. (b)Steps 1. Identify objectives 2. Search for alternative courses of Action 247 Answers - Mocks 3. Gather data about alternatives 4. Select Alternative course of Action 5. Implement the decision 6. Compare actual and planned outcomes 7. Respond to divergencies from plan. QUESTION FIVE UGANDA BANK (E.A) Ltd (a) Solution to (i) and (iii) - Where this transfer rate will provide the proper motivation, it’s not clear that it is appropriate for evaluating branch performance. With this rate the Uganda Bank (E.A) Ltd. receives all the credit for the 7.5% incremental system-wise contribution associated with lending Kampala Branch deposits at Uganda Bank Ltd. (i.e. 20% -12.5%), while the Kampala Branch will always show a loss of slightly less than it’s fixed and other expenses. - Moreover, given that Uganda Bank Ltd’s only source of funds is the 22% Eurodollars, this incremental contribution is to a large extent attributable to the Kampala Branch. - Perhaps a transfer rate equal to the 20% Uganda Bank (EA) Ltd loan rate is appropriate for evaluating the performance of the Kampala Branch. - This would however fail to compensate Uganda Banks for the costs associated with soliciting and serving the loans. Thus the best policy may be to use dual rates, with the Uganda Bank rate being tied to the Kampala Branch cost of funds and the Kampala Branch rate being tied to the Uganda (EA) Ltd. rate (This structure would also provide the appropriate motivation, as transfers would take place except when the Uganda Bank (Ltd) loan rate dropped below the Kampala Branch cost of funds or Kampala branch loan rate which ever is higher or when the Kampala Branch cost of funds rose above the Uganda Bank (EA) Ltd Loan rate). - At this point, it is worthy noting that the need for dual rates highlights the fact that the branches are sufficiently interdependent so as to make evaluation as individual financial performance centers a questionable practice. Since neither branch can obtain the 7.5% incremental contribution acting separately, it is difficult or impossible to evaluate them meaningfully as separate entities. - Some students may raise the question about whether dual rates may lead to “Loose” cost of control by both branches. After all, each branch will be enjoying extremely favourable transfers prices. b) Given an increase in the Kampala branch loan rate to 14% as well as no significant increase in Loan demand at this branch the “Outlay cost plus opportunity cost” rule will seem to profit to retention of the 12.5% transfer rate advocated in (a) as Mr. Obok 248 Comprehensive Mock Examinations still has “excess capacity” (i.e. excess lendable funds) and therefore no opportunity cost on these funds. - However, in sight of the loan rate differential between the two branches, total bank profits will be maximized only if all funds above the reserve requirement are transferred to Uganda Bank (EA) Ltd. Thus the appropriate transfer rate would be slightly above 14% because this is the lowest rate at which it is disadvantageous for Mr. Obok to solicit loans with rates below the Uganda Bank (EA) Ltd rate. - In other words, the “general rule” in the chapter is interpreted as 12.5% + (14.0 – 12.5%) = 14% on any funds having a valid opportunity cost. (The word solicit was used because it is necessary to make a limited number of “Loss-Leader” loans in order to compete for the deposit business. - If a credit worthy pastor of the retired community requests a loan, it is usually a competitive necessity that the loan be made. - In a service, the outlay cost plus opportunity cost rule is still applicable because our objective is to put Obok in a position where he would not have “excess capacity” (i.e., where he is servicing something less than the potential Kampala Branch Loan Demand). Only if the Uganda Bank Loan rate drops below 14% would we prefer to have Mr. Obok lend his funds at Kampala Branch. - The use of the 14% rate for evaluation of branch performance raises the same problems outsourced above, because the total bank profit-maximizing function of the Kampala Branch is to act as a saw material supplier for Uganda Bank, if separate evaluation is to be made, the dual rate structure outsourced above is still appropriate. c) Assuming a decrease in the Eurodollar rate to 18%, as well as a 12% Loan rate at Kampala Branch, the 12.5% transfer rate advocated above remains proper from a motivational point of view. - Under these circumstances, however it is possible to clearly indicate that incremental contribution attributable to each branch with a transfer price. Specifically, if the Kampala Branch had not been built, Uganda Bank would be making an incremental contribution of 2% (i.e. 20% - 18%). Thus the incremental contribution of the Kampala Branch is 5.5% (i.e. 18% - 12.5%), and the appropriate transfer price for evaluation of branches is the 18% Eurodollar rate. (In general, as long as the Eurodollar rate is below the Uganda Bank rate, a transfer price tied to the Eurodollar rate will also provide the proper motivation.) - Mr. Obok will be motivated to solicit and transfer deposits to Uganda Bank so long as the Eurodollar rate is greater than his loan rate and/or cost of funds). - It was pointed out in the above discussion on the transfer rate appropriate for evaluating branches that the branches are sufficiently interdependent so as to make individual evaluation 249 Answers - Mocks by an income statement based on transfer prices of limited value. - The same conclusion applies to management evaluation. A related problem is the fact that the income figure may fluctuate for seasons unrelated to the performance of the individual manager. - For example, assume that we had decided to use the dual rate (i.e. 20% for Mr. Obok and 12.5% for Mr. Kamau) advocated above and that after the decline in the Eurodollar rate in (c) it was decided to use 18% for evaluation. The resulting 2% decline in Mr.Obok’s contribution is no way related to his performance or to any decision variables under his control. - This type of fluctuation could probably be avoided by using the dual rate structure for management evaluation. However, even the approach is less than acceptable to the extent that Mr. Kamau’s performance is dependant on the rate Mr. Obok has to pay on savings deposits while Mr. Obok’s performance is dependent on the prevailing Uganda Bank (EA) Ltd. Loan rate, variables over which neither of them really has control. - If income statements are to be used for evaluating managers, they should probably be based on dual rates combined with measures of variable more closely connected with managerial performance such as deposit and loan market share and cost control performance. 250 Comprehensive Mock Examinations COMPREHENSIVE TEST 2 QUESTION ONE Three products Nitrat e Phosph ate Potas h Filler Fertilizer selling price/tonnes X1 0.1 0.1 0.2 0.6 83 X2 0.2 0.2 0.1 0.6 81 X3 0.3 0.1 0.1 0.6 81 Price per tonne Shs.15 0 Shs.60 Shs.12 0 Shs.1 0 Max. Available Tones 1200 Tones 2000 Tones 2200 No limit Selling Price Per tonne Manufacturing cost Fixed Sh.11 per tonne (Excluding raw material) Z = 21X 1 + 25X 2 + 16X 3 0.1X 1 + 0.1X2 + 0.2X3 ≤ 1200 (1) 0.1X 1 + 0.2X2 + 0.2X3 ≤ 2000 (2) 0.2X 1 + 0.1X2 + 0.2X3 ≤ 2200 (3) Cost price product X1 (0.1x 150) + (0.1 x 0.60)+ (0.2 x 120) + (0.6 x 10) = 15 + 6 + 24 + 6 = Sh.45 + Sh.6 Total Price = Sh.51 + 11 = Sh.62 Product X 2 (0.1x 150) + (0.2 x 60) + (0.1 x 120) +(0.6 x 10) + 11 = 15 + 12 + 12 + 6 + 11 = Sh.56 Product X 3 (0.1x 150) + (0.1 x 60) + (0.1 x 120) +(0.6 x 10) + 11 = 30 + 6 + 12 + 6 + 11 = Sh.65 Contribution X 1 = 83 – 62 = Sh.21 X 2 = 81 – 56 = Sh.25 X 3 = 81 – 65 = Sh.16 251 Answers - Mocks Z = 21 X 1 +21 X 2 + 16 X 3 0.1X 1 + 0.1X 2 + 0.2X 3 + X 4 = 1200 (Nitrate in tones) 0.1X 1 + 0.2X 2 + 0.1X 3 + X 5 = 2000 (Phosphate in tones) 0.1X 1 + 0.1X 2 + 0.1X 3 + X 6 = 2200 (Potash in tonnes) Z = 21X 1 + 25X 2 + 16X 3 (Maximize) b) X 4 when there is no production of X 1 , X 2 X 3 , X 4 given total nitrate available in tonnes. When all X 4 is consumed, the final table gives shadow price of Nitrate. Similarly X 5 and X 6. c) Initial Simplex Table Basic Variab le X 1 X 2 X 5 X 5 X 5 X 5 Solution Quantit y Ratio X 4 0.1 0.1 0.2 1 0 0 1,200 12,000 X 5 0.1 0.2 0.1 0 1 0 2,000 10,000 X 6 0.2 0.1 0.1 0 0 1 2,200 22,000 Z -21 -25 -16 0 0 0 0 d) Final Matrix as given in question Interpretation Production Procedure 4,000 unit of product X 1 Procedure 8,000 unit of product X 2 Do not produce product X 5 The total contribution from the production is Sh.284,000 Calculated as follow Z = 21 X 1 + 25X 2 + 16X 5 = 21 x 4,000 + 25 x 8,000 = 84,000 + 200,000 = Sh.284,000 Dual price or shadow prices. i) Chemical Nitrate has been fully, used and is a scarce quantity. Everyone tonne of this chemical available (above 1200 tonnes) will increase the production by Sh.170 (subject to maximum which can be calculated. ii) Similarly chemical phosphates has been fully used, every extra tonnes, will increase the profit by Sh.40 (subject to a maximum which can be calculated) 252 Comprehensive Mock Examinations iii) Potash not been fully used, there is still a surplus of 600 tonnes i.e. 2200 – 600 = 1600 tonnes has been used. Hence it has no scarcity value. iv) Production of X 5 will reduce the overall profit by Sh.22 per unit. Hence on economic grounds it should not be produced. 253 Answers - Mocks QUESTION TWO KATA LEO (a) Events Acceptable Unacceptabl e Actions Shs. Shs. Don’t inspect 1,000,000 -625,000 Inspect -37,500 -37,500 (b) If you don’t inspect: EMV = 1,000,000(0.5) – 625,000 (0.5) = Shs.187,500 If you Inspect: EMV = -37,500(0.5) + -37,500(0.5) = -37,500 Kata Leo would prefer to avoid inspecting because the expected gain is better than by inspecting (c) Effect of changes inprobabilities Events Success Failure Optimistic report: Probability of Event 0.7 0.3 Actions: Gain Gain Expected value Don’t inspect 1,000,000 -625,000 = 512,500 (i) Inspect -37,500 -37,500 = 37,500 Pessimistic Repo rt Probability of event 0.3 0.7 Don’t inspect 1,000,000 -625,000 = 137,500 (ii) Inspect -37,500 -37,500 = 37,500 (i) = 1,000,000 (0.7) – 625,000 (0.3) = 512,500 (ii) = 1,000,000 (0.3) – 625,000 (0.7) = 137,500 The expected values with imperfect information (The reports) would be: If neutral; don’t inspect Sh.187,500 If optimistic, don’t inspectSh.512,500 If pessimistic Inspect Sh.-37,500 Expected values Neutral Optimisti c Pessimisti c Expected value 254 Comprehensive Mock Examinations Probability 0.3 0.3 0.4 Don’t Inspect 187,500 512,500 - 210,000 (i) Inspect - - -37,500 -15,000 (ii) 195,000 (i) = 187,500 (0.3) + 512,500 (0.3) = 210,000 (ii) = 37,500 (0.4) = 15,000 The maximum price that should be paid for the report is the difference in the expected value with the report and the expected value with the existing information: 195,000 – 187,500 = Sh.7,500 QUESTION THREE (a) Not only does this problem gives an opportunity to consider utilities, but it underscores a major difficulty in the design of control system; how to measure performance and tie compensation to performance in such a way that goal congruence is more likely. That is the top manager desires the subordinates to take the actions that help reach top management goal. The problem may be used also to highlight the fact that superiors do not have the same information possessed by subordinates’ every action is infeasible. Thus, the design of control systems that promote congruence is hampered by lack of knowledge of subordinates alternatives and risk attitudes. (b) Projects A B C U Z 17.5 13 26.5 Z δ 7.29 4.86 17.01 f 2.92 3.28 -7.52 Workings Project A Project B Project C U Z = 13 + 0.9 (x – 27) = 13 + 0.9 (32 – 27) U Z = 12 + 0.9 (27 – 27) U Z = 13 + 0.9 (42 – 27) = 17.5 = 13 = 26.5 Z δ = 0.9 2 ( ) δ = 0.9 2 (9) Z δ = 0.9 2 (6) Z δ = 0.9 2 (21) = 7.29 = 4.86 = 17.01 f = U Z - 2Q Z = 17.5 – 2(7.29) f = 13 – 2(4.86) f = 26.5 – 2(17.01) = 2.92 = 3.28 = - 7.52 255 Answers - Mocks QUESTION FOUR Computer Ltd. (a) ALTERNATIVE A Standard deviation ( ) δ δ = 0 000 , 27 0 C.V C.V valuation of t Coefficien 0 1 ) 000 , 27 000 , 27 ( 2 · · · · − R ε δ ALTERNATIVE B Event Probability Total cost Expected cost 1000 calls or less 0.5 22,500 11,250 1500 calls 0.2 25,500 5,100 2000 calls 0.2 28,500 5,700 2500 calls 0.1 31,500 3,100 Expected cost Sh.25,150 Standard deviation ( ) δ 49 . 132 , 3 . 500 , 812 , 9 1 . 0 ) 150 , 25 500 , 31 ( 2 . 0 ) 150 , 25 500 , 28 ( 2 . 0 ) 150 , 25 500 , 25 ( 5 . 0 ) 150 , 25 500 , 22 ( 2 2 2 2 Shs · · − + − + − + − · δ Coefficient of variation C.V. 125 . 0 25150 49 . 3132 · · ALTERNATIVE C Event Change of occurrence Total cost Expected cost Little trouble 0.1 12,000 1,200 Medium trouble 0.7 15,000 10,500 Much trouble 0.1 45,000 4,500 Expected cost Shs.16,200 Standard Deviation (δ) 256 Comprehensive Mock Examinations 57 . 0 16,200 9258.29 C.V C.V variation of t Coefficien 29 . 258 29 . 258 , 9 . 000 , 716 , 85 1 . 0 ) 200 , 16 000 , 45 ( 7 . 0 ) 200 , 16 000 , 15 ( 1 . 0 ) 200 , 16 000 , 12 2 2 2 · · · · · − + − + − · Shs shs δ (c) The most risky alternative is Alternative C with the highest Standard deviation of Shs.9,258.29 as well as the highest coefficient of variation of 0.57 which is a more relative treasure of risk. (c) Alternative C is the best option as it yield the lowest cost of Shs.16,200 compared to the other alternatives. However reliance on simple number may buy information that the executive may need for a wise decision. QUESTION FIVE (a) Parameter (K 0 ) is interpreted as the weekly “Fixed costs” of operating the department and (K 1 ) as the variable costs per unit of output. (b) The random variable Z, is there because the Linear relationship between y and x is not exact. In say week there are a great number of random factors that throw total costs y “off the line” – that cause it to differ from what it would be if an exact linear relationship existed. Z represents the effect of these random factors. (c) 2 . 1 (25) - 5(175) (170) 25 - 26(175) ) ( ) ( ( ) ( 8 . 0 (25) - 5(175 (26) (25) - 5(170) ) ( x n y x - xy n B 26 y 170 175 x 25 5 2 2 2 2 0 2 2 2 1 2 · · Σ − Σ Σ Σ − Σ Σ · · · Σ − Σ Σ Σ Σ · · Σ · Σ · Σ · Σ · x x n xy x x y B x xy x n (d) Y = 1.2 + 0.8 (2) = 2.8 Next weeks operating costs would be Sh.2800 257 Answers - Mocks (e) Evaluation of the regression model The tests undertaken can be grouped into i) Logical relationship (economic plansibility) The analyst should study the data to see whether any relationship which exist is logical e.g. a high correlation between church attendance and beer consumption may not be logical. ii) Goodness of fit These tests can be divided into two a) Testing the whole model (that is all independent variables taken together) by use of • Coefficient of determination (r 2 ) • Std error of estimate (S e ) (MAD) • F – statistics. b) Testing the size of the slope by use of • Coefficient of correlation, (r) • Standard error of the slope (Sb) • T or Z – statistic depending on samples size Note: For a simple linear regression only one of the tests should be done. iii) Testing the assumptions (Specification tests) The necessary assumptions in linear regression are: 1. The underlying relationship is linear – scatter diagram. 2. The independent variable x is assumed to be known and is used to predict the dependent variable y. 3. The errors on residuals e, are normally distributed with mean zero and a constant variance negative a histogram & scatter diagram 4. The errors are independent (auto correlation) _ Use Durbin Watson 258 Comprehensive Mock Examinations COMPREHENSIVE TEST 3 QUESTION ONE a) Yield and Mix Variances Standard costs of finished products is Shs.20,000 = Shs.250 per liter 80 280,000 liters of 590N @ Shs.100 =Shs.28,000,000 240,000 litters of KAAG @ Shs.300 Shs.72,000,000 520,000 = 100,000,000 Good output was 400,000 liters @ a standard Cost of 250 per litter = 100,000,000 Material efficiency variance = Shs. 0 liter The difference in quantities were. (1) (2) Budget ed Actual Material Calculatio n Liters Liter Differences 590N 0.5(500,000 ) 250,00 0 280,000 -30,000 KAG 0.5 (500,000) 250,00 0 240,00 +10,000 TOTAL 500,00 0 520,000 -20,000 Yield variances Shs. 590 N -30,000 x Sh.200 =- 6,000,000 (U) KAG +10,000 x Sh.200 = +2,000,000 (f) - 4,000,000 (U) Mix Variances 590N -30,000 x (100 – 200) shs.= +3,000,000 (F) KAG +10,000 x (300 – 200) sh.= +1,000,000 (F) 4,000,000 (F) b) The manager apparently altered the mix by introducing a higher proportion of the less expensive ingredients. However, this resulted in an equal trade off. As you might suspect the yield of good product is likely to suffer from a higher than normal proportion of the cheaper ingredient. If this phenomenon would not occur, there would be a higher proportion of the cheaper ingredient at all times. QUESTION TWO a) Let 1 be A 259 Answers - Mocks 2 be B 3 be C Objective function (Z) MaxZ = 450A + 1440B + 1980C Constraints: 1.5 A + 2 B + 2.5 C + ≤ (hours) 2000 G A + 4 B + 7 C + ≤ (kilograms) 20,000 A, B, C, 5 A + 2 B ≥ 0 (N0n-Negativitiy) Workings (Shs.) 1 2 3 Selling price 4,500 5,400 7,200 variable costs Direct labour 1,350 1,800 2,250 Direct materials 1,620 1,080 1,890 Variable overheads 1,810 1,810 1,080 Total variable costs 4,050 3,960 5,220 Contribution margin 450 1,440 1,980 Labour hours Direct labour costs 1,350 1,800 2,250 hourly rate 900 900 900 1.5 2 2.5 Direct materials Direct material costs 1,620 1,080 1,890 Rate per Kg 270 270 270 6 4 7 QUESTION THREE a) 4.023 2.75) (31.25 X 1 0.625 S units 185 184.9 4.023 55 2(1,250) S 2AP EOQ · + + · ≈ · · · b) The value of t form tables exhibit 18 degrees of freedom is 2.101. 2.75 t 0.625 (2.101)0 implies a confidence interval form 1.417 to 4.043. c) Some possible consumers • No autocorrelation • No heteroscedasticity • Normality of disturbance terms d) Actual S = 0.625 + 0.1 (31.25 + 4.275) = 4.1875 i Original decision, given original parameters = 184.9 units 260 Comprehensive Mock Examinations ii Alternative parameter values Shs.50 and 4.375, optimal decision would provide total cost of iii Given the original decision instep (i) and the alternative parameters in step (ii), compute the financial result. C = 1,250 (50) + 184.9(4.375) = 742.49 184.9 2 ____ iv Cost of prediction error (ii) – (iii) –2.98 261 Developed now 2.11 m Successful 0.5 4.22 m 0.3 0.6 Successful 0.5 (2m) Wait for one year Develope 3.36 Successful 0.7 (1.8m) Abandon Delay further By one year Develop 3.12m Successful 10 3 4 m 4 yrs time 3 1 * 5 yrs time 0.9 Unsuccessful O Abandon (1.4m) Abandon 1.72 m 1.72 m 0.1 Abandon Unsuccessful 0.3 0 Answers - Mocks QUESTION FOUR Payoff 10% years time 8 million 30% 4 years time 5 million 60% 5 years time 3.2 million Decision Wait for one year and then delay for one more year then develop for expected pay off of Shs.1.72 m 262 1.72 m 140 5 m 3.2 m 4.8 m 0 0 4m 3.2m 0 0 0 Comprehensive Mock Examinations Workings P(market in 4 years time) = 0.3 P(market in 5 years time) = 0.6 Total = 0.9 * 0.3 ÷ (0.3 + 0.6) = 3 1 QUESTION FIVE a) Y Y 4150375 . 0 2 Log 0.75 Log 2 Log rate) important curve (learning of Log b hours 400,000 a e wher 32 1 · − · · · · · + x ax Yx b Y 32 = 400,000 (32) -0.4150375 + 1 = 400,000 (32) 0.5849625 = Shs.3,037,500 b) Quotation Shs. “000” Material (40,000, x 32) 1,280,000 Direct labour hours ( 3,037,500 x 150) 455,625 Variable overhead (3,037,500 x 50) 151,875 Fixed costs 1,600,000 Total costs 3,487,500 Profit mark up ¼ - 1 = 3 1 1,162,500 4,650,000 c) Average hours f or 8 rockets Y 8 = 400,000 x 8) -0.4150375 + 1 = 1,350,000 hours Y 24 = 400,000 24) -0.4150375 + 1 OR 3,037,500 – 1,350,00 = 1,687,500 hours Fixed costs = 1,600,000,000 = Shs.800,000,000 2 Price of the Rockets = 4,650,000,000 =Shs.145,312,500/Rockets 263 Answers - Mocks 32 264 Comprehensive Mock Examinations Draft of Estimated Income 1 st year 2 nd year Shs. “000” Shs. “000” Sales {145,312.5 x 2} 1,162,500 {145,312.5 x 24} 3,487,500 Less: Material (40,000,000 x 8) 320,000 (40,000,000 x 24) 960,000 Direct labour (1,350,000 x 150 202,500 (1,687,500 x 150) 253,125 Variable Overhead (1,340,000 x 50) 67,500 (1,687,500 x 50) 84,375 Fixed overhead 800,000 800,000 Fixed overhead (1,390,000) (2,097,500) Profit (Loss) 227,500 1,390,000 265 Answers - Mocks COMPREHENSIVE TEST 4 QUESTION ONE a) Demand Selling price Joint Labour intensive Machine probability intensive Shs. ‘000’ Shs. ‘000’ P(20) 0.4 0.12 (18) (18) 0.3 P(23) 0.4 150,000 0.12 36 36 P(25) 0.2 0.06 36 36 P(20) 0.4 0.16 16 96 0.4 P(23) 0.4 200,000 0.16 112 192 P(25) 0.2 0.08 88 128 P (20) 0.4 0.08 28 108 0.2 P(23) 0.4 250,000 0.08 88 168 P(25) 0.2 0.04 64 104 P(20) 0.4 0.04 24 84 300,000 0.1 P (23) 0.4 0.04 60 120 P(25) 0.2 0.02 42 72 576 1,126 266 Comprehensive Mock Examinations Profit = (Selling price – Variable) Demand – Fixed cost b) (i) Expected profit Labour intensive = Shs. 576,000 Machine intensive= Shs.1,126,000 (ii) P(Break even) = 0.12 + 0.06 + 0.16 + 0.16 + 0.08 + 0.08 + 0.08 + 0.04 + 0.04 + 0.04 + 0.02 = 0.88 machine intensive = ( 1 – 0.12) = 0.88 (iii) P(Profits at least Shs.1,000,000) Labour intensive = 0.16 Machine intensive = 0.16 + 0.08 + 0.08 + 0.08 + 0.04 + 0.04 + 0.04 = 0.52 c) The best production method is machine intensive with the highest expected profit of Shs.1,126,000 d) (i) Constant demand (ii) Constant variable, fixed cost (iii) Constant selling price (iv) Government legislation QUESTION TWO a) M = 0.08333 (4L + O + P) σ = 0.8333 (P – O) M σ A 3 0.33332 B 13 1.6666 C 6 1.33328 D 4 0.06664 E 3 0 F 4 0.33332 G 11 1.6666 H 3 0.33332 I 2 0 J 5 0.33332 K 5 1.666 b) Critical path B –D – E – G – H – J – K. Project duration = 44 days Budgeted cost = Shs.500,000 Actual cost = 44 x 10,000 = 440,000 267 Answers - Mocks The project can be implemented within the budget since the budgeted cost is greater than the actual cost. 268 0 4 Comprehensive Mock Examinations K 5 J 5 I 2 H 3 G 11 E 3 F 4 C 6 H 3 B 13 269 39 39 8 34 34 7 31 31 6 20 20 5 17 17 4 13 13 3 2 14 2 0 0 I 44 9 Answers - Mocks QUESTION THREE The difference in quantities were: (1) (2) Material Detailed computati on Budgeted or standard Quantity of inputs Actual quantity of Inputs Difference X 0.5 x 66,666 33,333 39,000 -5,667 Y 0.3 x 66,666 19,999 24,000 -4001 Z 0.2 x 66,666 13,333 12,000 1000 66,666 75,000 -8,668 Yield variance X – 5,667 x Shs.24.3 = - 137,708 (U) Y – 4,001 x Shs.24.3 = - 97,224 (U) Z + 1,000 x Shs.24.3 = +24,300 (F) 210,632(U) (Rounded) Mix variance X – 5,667 x Shs. (21 – 24.3) = +18,701 (F) Y – 4,001 x Shs. (30 – 24.3) = -22,806 (U) Z + 1,000 x Shs. (24 – 24.3) = -300 (U) -4,405 (U) (Rounded) Price Variance X (21 – 18) Shs. X 39,000 = + 117,00 (F) Y (30 – 31.5) Shs. X 24,000 = - 36,000 (U) Z (24 – 28.5) Shs. X 12,000 = - 54,000 (U) 27,000 (F) QUESTION FOUR a) Sales = 87.5 M Net profit 10% of turnover Fixed expenses = Sh.17.5 M Sh Sales 87.5 Profit 8.75M (10% of sales) Expenses 78.75M Fixed Expenses 17.50 M Variable expenses 61.25 M BEP (sh) = F.C x Sales C.M = 17.5 x 87.5_= Shs.58,333,333 270 Comprehensive Mock Examinations [87.5 – 61.25] 271 Answers - Mocks b) Sales 80% of 87.5 70 M Profit 9.1 M Total Expenses 60.9 M Fixed Cost 18.9 M Variable Cost 42 M B E P (Sh) = F.C x Sales C.M = 18.9M x 70 = 70 – 42 = Shs.42,250,000 c) Prediction Assuming no change was made Sales projection 87.5M Profit would be 8.75M With Change Sales 66.5M Variable Cost 39.9M C.M 26.6M F.C 18.9M 7.7M Cost of Error 8.75 - 7.7 = Sh.1.050M Predict Actual Sales 70M 66.5 V.C 42 39.9 C.M 28 26.6 F.C 18.9 18.9 N.P 9.1 7.7 QUESTION FIVE a) (i) Determination of optimum product mix (ii) Determination of optimum machine and labour combinations (iii) Determination of optimum material mix (iv) Determination of optimum use of storage and shopping facilities. (v) Any other situation of combining labour, materials and facilities to best advantage. b) (i) Let A = quantity of product K – A sold at split off point B = quantity of product K – B produced and sold C = quantity of product K – C produced and sold D = quantity of input X used Objective – max = 10A = 8.75B + 15C – 2.5X 272 Comprehensive Mock Examinations NB: Coefficient of C price minus separable processing cost subject to A ≤ 40,000 (market) C ≤ 5,000 (market) x ≤ 40,000 (supply) B -2x ≤ 0 (joint process) A +C - 3x ≤ 0 (joint process) 3C + 1.5x ≤ 80,000 (Labour) A, B, C, D, X ≥ 0 (Non-Negativity) (ii) Z = 10 (40,000) + 15(5,000) + 15(40,000) = Sh.1, 075,000 The maximum achievable contribution is therefore Shs.1, 075,000 273 Answers - Mocks COMPREHENSIVE TEST 5 QUESTION ONE a) No. of fish purchased Purchases No. of days Probability Cumulativ e RN 100 30 0.1 0.1 0 200 60 0.2 0.3 1 – 2 300 90 0.3 0.6 3 – 5 400 90 0.3 0.9 6 – 8 500 30 0.1 1.0 9 Number of fish sold to consumers Demand No. of days Probability Cumulativ e RN 100 45 0.15 0.15 00 –14 200 60 0.2 0.35 15 – 34 300 90 0.3 0.65 35 – 64 400 75 0.25 0.9 65 – 89 500 30 0.1 1. 90 – 99 Day RN SS RN DD Sale Balanc e c/f Shortf all Profit 1 5 300 73 400 300 - 100 4,000 2 4 300 23 200 200 100 - 2,000 3 7 400 09 100 100 300 - (6,00 0) 4 7 400 51 300 300 100 - (2,00 0) 5 4 300 83 400 400 - - 6,000 6 6 400 81 400 400 - - 8,000 7 3 300 20 200 200 100 - 2,000 8 9 500 31 200 200 300 - (4,00 0) Total profits for 8 days 10,00 0 Workings Days 1 2 3 4 5 6 7 8 Sales 18,00 0 12,00 0 6,000 18,00 0 20,00 0 24,0 00 12,00 0 12,00 0 Less cost of sales (12,0 00) (10,0 00) (12,0 00) (20,0 00) (14,0 00) (16,0 0) (10,0 00) (16,0 00) Less deficit cost (2,00 0) ____- ____- __- ____- ____- ____- ____- Net profit 4,000 2,000 (6,00 0) (2,00 0) 6,000 8,00 0 2,000 (4,00 0) 274 Comprehensive Mock Examinations b) Average profits = 10,000 = Shs.1,250 8 275 Answers - Mocks QUESTION TWO a) Let P A = African 1 price for Miracle P K = Kenya 1 price for miracle. M A = Africa 1 market share S = Africa 1 monthly sales A Π = Africa 1 monthly profits If the annual sales are about 1200 per annum, then monthly sales = 1200 = 100 units 12 Africa 1’s monthly sales may be defined as 100 M A (i) Africa 1’s monthly profit A Π = 100 A M = (P A – 400,000). (ii) If P A = P K =, then M A = 0.45 (iii)If P K > P A , then for every Shs.10,000 difference, Africa 1’s price grows by 2% These are P K - P A ‘Price steps’ 10,000 (iv) If P K < P A M A = 0.45 – 0.03 P A – P K 10,000 b) The flow diagram includes a nested loop. The first loop will be used to set Africa1’s price for miracle and for every price set by Africa 1, a range of prices set by Kenya 1 will be generate. 276 Comprehensive Mock Examinations P A = P K P A < P K Yes Yes No 277 START Set price For miracle Generate Kenya 1 Price for Miracle Compar e P A& P K M A = 0.45 – 0.03 P A – P K 10,000 M A = 0.45 – 0.02 P K – P A 10,000 M A = 0.45 Print Market share and profit Set a new Kenya 1 price Set a new miracle price END ( ) 400,000 A P A 100M − · ∏ Answers - Mocks QUESTION THREE a) EOQ = units 211.3449 342 3,819 x 2,000 x 2 · Current EOQ = 211.3449 units EOQ with Sh. 1140 storage cash. = 1140 9 2x2000x381 = 115.7584 units Total relevant cost with accurate EOQ at 115.7584 units. = 115.7584 2000x3819 + ½ x 115.7584 x 1140 = Sh. 131,964.50 Total relevant cost using units used. 211.3449 2000x3819 + ½ x 211.3449 x 1140. = Sh. 156,606.60 ∴Cost of prediction error = Total relevant Total relevant Cost with actual - cost with + Sh. 228 EOQ EOQ = 156,606.60 – 131,964.50 + 228 = Sh. 24,870.10 b) TRC = D Co + ½ QCL Q = 2,000 (3,819) + 1 (211.3449 (342) = Sh.72,280 211.3449 2 c) TRC Actual = 2,000 (1,881) + 1 (24.3489) (342) 211.3449 2 = 53,940 Optimal Cost 148.32397 342 1,881 x 2,000 x 2 EOQ · · TRC Optimal = _ 2,000 (1,881) + 1 (148.32397) 342 148.32397 2 =Sh.50,727 278 Comprehensive Mock Examinations Cost of perdition error = 53,940 – 50,727 = Sh.3,213 d) The cost of prediction error will also change to reflect the errors in other areas e) Cost of prediction errors Cost Incurred = 2,000 (3,819) + 1 (211.3449) 1,180 211.3499 2 = Shs.156,607 1,180 ) (115.75837 2 1 (3,819) 115.75837 2,000 Costs Optimal 115.75837 1,140 3,819 x 2,000 x 2 Optimal EOQ + · · · = Sh.131,965 The cost of not charging at beginning = (156,607 – 131,965) – 228 = Shs.24,414 of second year. QUSTION FOUR a) Lacquet Sports Contribution Percentage. (i) Tennis = 1,000 x 50% x 100 = 12.5% 4,000 Squash = 1,000 x 40% x 100 = 16% 2,500 Badminton = 1,000 x 10% x 100 = 4% 2,500 _____ Total Contribution Margin = 32.5% (ii) Overall break-even-points (shs) = Total Fixed Costs Overall contribution margin = 200,000 0.325 = Shs.615,385 ∴For Tennis = 50% x 615,385 = Shs.307,692.50 For Squash = 40% x 615,385 = Shs.264,154.00 279 Answers - Mocks For Badminton = 10% x 615,385 = Shs. 61,538.50 Shs.615,385.00 (iii) Profit = Sales (IMR) – Fixed Cost = (700,000 x 0.325) – 200,000 = Shs.27,500 b) CVP Analysis Limitations. i. Fixed costs are likely to change at different activity levels (A stepped fixed cost scope is probably the most accurate representation). ii. Variable costs and sales are unlikely to be linear. Extra discounts, overtime payments, the effect of learning curve, special price contracts and other similar matters make it likely that the variable costs and revenue units are some form of curve rather than a straight line. iii. The charts depict relationships which are essentially short-term. It makes them inappropriate where the time scale spars several years. iv. CVP analysis makes the assumption that changes in the level of output are the sole determinants of cost and revenue changes. This is likely to be a gross over simplication in practice although volume changes of course do have a significant effect on and revenues. v. It is assumed that either there is a single product or a constant mix of products or a constant or mark-up on marginal costs. vi. Risk an uncertainty are ignored and perfect knowledge of cost and revenue function is assumed. vii. It is assumed that the firm is a price taker and a perfect market is deemed to exist. viii. It is assumed that revenues and all forms of variable costs (Materials, Labour and all the components of variable overheads) Vary in accordance with the same activity indicator. This is an over-sight on most realistic situations etc. QUESTION FIVE a) Transfer Pricing The cash flows are diagrammed below for both alternatives 1) Buy at Shs.30,000 2) Buy at Shs.31,800 This case illustrates how external market prices may not be automatically lead to optimal decisions for the company as a while, even in a non-transfer pricing content. In this question, there is a net advantage of Sh.1,200 if the Shs.31,800 price is accepted. (1) Buy at Shs.30,000 (2) Buy at Shs.31,800 Cash flow for Firm as a whole Shs.30,000 Shs.31,800 – (4,500 – 1,500) = Shs.28,800 Masimbo Ltd 280 Outside supplier Comprehensive Mock Examinations (1) Shs.30,000 (2) Shs.31,800 (2) Sh.1,500 (2) Shs.4,500 NB The conflicts among the two criteria for decentralization. The firm as a whole will benefit if X pays Shs.1,800 more of it’s goods. Z will also benefit. Goal congruence says that X be instructed or induced to pay Shs.31,800. However, if the system is not designed to give X some credit for its self sacrifice, the problems of managerial effort and autonomy well probably become more troublesome. b) The decision to transfer at Shs.31,800 would have been wrong. The cash flow are diagrammed for both alternatives. NET EFFECT ON CASHFLOWS Buy inside Buy outside @ 31,800 @ 31,800 Outflow of Y (22,500) Outflow of X (31,800) Contribution ½ (31,800 – 22,500) 9,300 ½ (4,500 – 1,500) 3,000 12,300 _____ ____ Cash outflow has 22,500 Cash outflow has 19,500 firm as a whole Firm as a whole Majimbo Ltd (2) Sh31,800 Outside (2) Shs31,800 Buyer (1) Shs.31,800 (1) Sh22,500 (2) sh22,500 281 X Another Outside supplier Z X Y Outside supplier Answers - Mocks (2) sh4,500 (1) Buy inside (2) Buy outside NET EFFECT ON CASH FLOWS (1) Buy inside (2) Buy outside @ 31,800/= @ 31,800/= Outflow of Y - 22,500 outflow of X - 31,800/= contribution: Y (31,800 – 22,500) Sh + 9,300 Z (4,500 – 1,500) Sh + 3,000 + 12,300 Cash outflow for cash outflow for Firm as a whole - 22,500 firm as a whole -19,500 c) The general rule will work correctly. The minimum transfer price should be Outlay cost to point of transfer + opportunity cost for the firm as a whole. 22,500 + [ (31,800 – 22,500) + (4,500 – 1,500) ] = Shs.34,80 282 Z Revision Questions and Answers Part IV: Revision Questions and Answers MANAGEMENT ACCOUNTING Questions QUESTION ONE SPL Agencies specializes in the distribution of pharmaceutical products. They buy from pharmaceutical companies and resells to each of three different markets. • General supermarket chains (GSC) • Drugstore chains (DC) • M and P Single-store pharmacies (MPS) The management Accountant of SPL Agencies reported the following data for August 2003. GSC DC MPS Average Revenue per delivery (shs) 30,90 0 10,50 0 1,980 Average cost of goods sold per delivery (shs) 30,00 0 10,00 0 1,800 Number of deliveries 120 300 1,000 SPL Agencies has been using gross margin percentage {(Revenue ÷ Cost of Goods sold)÷ Revenue}to evaluate the relative profitability of its customers groups (distribution outlets). The management Accountant recently attended a seminar on activity based costing and decides to consider using it at SPL Agencies. The management Accountant meets with all the senior manages and other middle level managers. Generally, these individuals agree that there are five key activity areas at SPL Agencies. Activity Area Cost Driver 1. Customer purchasing order processing 1. Purchase orders by customers 2. Line item ordering 2. Line items per purchase order 3. Store delivery 3. Store deliveries 4. Cartons shipped to stores 4. Cartons shipped to a store per delivery 5. Shelf-stocking at customer store 5. Hours of shelf-stocking Each customer purchase order consists of one or more line items. A line item represents a single product (such as Actifed Panadol Tablets). 283 Questions Each store delivery entails the delivery of one or more cartons of products to a customer. Each product is delivered in one or more separate cartons. SPL Agencies staff stack cartons directly onto display shelves in a store. Currently, there is no charge for this service and not all customers use SPL Agencies for this activity. The August 2003 operating costs (other than cost of goods sold) of SPL Agencies are Shs 301,080. These operating costs are assigned to the five activity areas. The costs in each area and the quantity of the costs allocation base used in that area for August 2003 are as follows: Activity Area Total costs August 2003 (shs) Total units of cost allocation base used in August 2003 1. Customer purchase order processing 80,000 2,000 orders 2. Line – item ordering 63,840 21,280 line items 3. Store deliveries 71,000 1,420 store deliveries 4. Cartons shipped to stores 76,000 76,000 cartons 5. Shelf stocking at customer stores 10,240 640 hours 301,080 Other data for August 2003 include the following: GSC DC MPS Total number of orders 140 360 1,500 Average number of line items per order 14 12 10 Total number of cartons shipped per store delivery 300 80 16 Total number of store deliveries 120 300 1,000 Average number of hours of shelf – stocking per store delivery 3 0.6 0.1 Required: (a) Compute the August 2003 gross – margin percentage for each of its three distribution markets and SPL Agencies operating income. (b) Compute the August 2003 rate per unit of the cost allocation base for each of the five activity areas. (c) Compute the operating income of each distribution market in August 2003 using the activity based costing information. Comment on the results. (11 marks) (Total: 20 marks) QUESTION TWO SIMTON Limited has been operating a standard cost system and has accumulated the following information in relation to variances in its monthly management accounts: 284 Revision Questions and Answers i. Variances fall into two categories % of total No. of variances Category A: Not worth investigating 64 B: Worth investigating 36 100 ii. Out of category B, connective action has eliminated 70% of variances, but the remainder has continued. iii. The cost of investigating averages is Shs 3,500 and that of connecting variances averages Shs 5,500. iv. The average size of any variance not connected is Shs 5,250 per month and the company’s policy is to assess the present value of such costs at 24% per annum for a period of five months. 285 Questions Required (a) Prepare two decision trees, to present the position if an investigation is; (i) Carried Out (4 marks) (ii) Not carried (4 marks) (b) Recommend, with supporting calculations, whether or not the company should follow a policy of investigating variances as a matter of routine. (2 marks) (c) Explain briefly two types of circumstances that will give rise to variances in category A and two to those of category B. (6 marks) (d) Mention any one variation in the information used that you feel would be beneficial to the company of you wised to improve the quality of the decision making rule recommended in (b) above. Explain briefly why you have suggested it. (4 marks) (Total: 20 marks) QUESTION THREE Chemex limited manufactures three garden furniture products A B and C. The budgeted unit cost and resource requirements of each of these items are detailed below. Timber cost 50 150 100 Direct labour cost 40 100 80 Variable overhead cost 30 75 60 Fixed overhead cost 45 112.50 90 Total cost 165 437.50 330 Budgeted volumes p.a 40,000 20,000 15,000 These volumes are believed to equal the market demand for these products. The fixed overhead costs are attributed to the three products on the basis of direct labour hours. The labour rate is Shs 40 per hour. The cost of the timber is Shs 20 per square metre. The products are made from a specialist timber. A memo from the procurement manager advises you that because of a problem with the supplier it is to be assumed that this specialist timber is limited in supply to 20,000 square metres per annum. The sales director has already accepted an order for 5,000 A, 1,000B and 1,500C, which if not supplied would incur a financial penalty of Shs 20,000. These quantities are included in the market demand estimates above. 286 Revision Questions and Answers The selling prices of the three products are: A = Shs 200 B = Shs 500 C = Shs 400 Required a) Determine the optimum production plan and state the net profit that this should yield per annum. (10 marks) b) Calculate and explain the maximum prices, which should be paid per square metre in order to obtain extra supplies of the timber. (10 marks) (Total: 20 marks) 287 Questions QUESTION FOUR Tumbo Limited makes and sells executive towels to which the following standard information relates: i. Raw material is purchased at Shs 5.00 per square metre on a just-in- time basis. The purchasing manager has the responsibility for the servicing of raw material. ii. The executive towel is made in a conversion process in which the variable conversion cost per product unit of output is estimated at Shs 12.50 (a half hour at Shs 25.00 per hour). The conversion process manager is deemed responsible for material usage and conversion process efficiency and expenditure variances. The actual events for the period ending 31 December 2002, which may be considered as a representative of future periods, are as follows: i. 27,000 square metres of raw material purchased at Shs 4.50 per square metre is used to produce 8,000 units of the executive towels. The purchasing manager has made the decision to0 buy from a cheaper source. ii. 4800 hours of conversion process time at a variable cost of Kshs 20.00 per hour is used to a achieve the output of Shs 8, 000 units of the executive towels. A charge in the processing method was implemented at the start of the period. Production capacity is available in order to produce in excess of 5,000 units of the executive towels if the demand dictates. Required: i. Calculate standard cost variances for material usage and price and for conversion process efficiency and expenditure for the period ended 31 December 2002. (5 marks) ii. Suggest, giving your reasons, whether decisions should be based on: 1. The variances over which each manager has control or 2. The effect of each material cost variance and conversion cost variance (5 marks) It has been established that the reasons for the variances for the period ended 31 December 2002 are as follows; i. 80% of the extra material used is due to purchasing from the cheaper source. The balance off extra material usage is due to the amended processing method, which was introduced. 288 Revision Questions and Answers ii. 60% of the extra hours used is due to the ammended processing method, the balance of extra hours id due to the change to a cheaper material source. Required i. Prepare a schedule of costs for the four alternative strategies, which incorporate different combinations of existing and amended material sources and conversion process methods and hence determine the profit maximizing strategy. (6 marks) ii. Prepare a report which discusses ways in which the alternative decision making focus in each off sections (a) and (b) of the question has contributed to a change in decision making strategy by the company. (4 marks) (Total: 20 marks) 289 Questions QUESTION FIVE Kenya Charity Organization has been holding annual dinner and dance for the last 100 years with the primary intention of raising funds. This year, there is a concern that an economic recession may adversely affect both the number of persons attending the function and advertising space that will be sold in the programme published for thee occasion. Based on past experience and current prices and quotations, it is expected that the following costs and revenues will apply for the function: Shs. Costs Dinner and Dance Hire of premises 700 2,800 Band and entertainments Raffle prices 800 Photographer 200 Food at shs 12 per person (With a guarantee of 400 Persons minimum) Programme: A fixed cost of shs 2000 Plus shs5 per page. Revenues Dinner and Dance Price if tickets shs20 per person Average revenue from; Raffle shs5 per person Photographs shs1 per person Programme Average revenue from advertising is shs70 per page A sub-committee formed to examine more closely the likely outcome of the function discovered the following from previous records and accounts: No of tickets sold No of past occasions 250 – 349 4 350 – 449 6 450 – 549 8 550 – 649 2 Total 20 No of programme No of past 290 Revision Questions and Answers pages sold occasions 24 4 32 8 40 6 48 2 20 Several members of the sub-committee are in favour of using a market research consultant to carry out a quick enquiry into the likely number of tickets and the likely number of pages of advertising space that would be sold for this year’s dinner and dance. 291 Questions Required: (a) Calculate the expected value of the profit to be earned from the dinner and dance this year. (b) Recommend, with relevant supporting financial and cost date, whether or not the Kenya Charity should spend Shs 500 on the market research enquiry and indicate the possible benefits the enquiry could provide. (10 marks) (Total: 20 marks) QUESTION SIX a) Decision-making situations under short-term conditions require consideration of; i. The cost classifications which the management accountant should use or ignore, and ii. Factors which may affect the behavior of costs and hence the accuracy of the cost analysis and the relevance of the decision making. Required In the context of the above statement, discuss whether a company should make quantities of a component used in a manufacture of a product or buy in the component from an outside supplier or out source. (10 marks) b) Coordination between operational and strategic planning is very essential in any organization, but lack of it may results in unrealistic plans, inconsistent goals. Poor communication and inadequate performance measurement. Required i. State key features or characteristics, which should be incorporated in each of strategic planning and operational planning. (4 marks) ii. List and comment briefly on examples of the cost implications of each of the factors underlined in the above statement which may occur from lack of relevant and appropriate operational planning. Your answers should be in the context of strategic planning goal of sustaining competitive advantage at minimum cost through speedy delivery of quality products to clients. (6 marks) (Total: 20 marks) QUESTION SEVEN A summary of additional information relating to the above points is as follows Units Probabil ity Advanc e order (kshs) Consvers ion Discount Conversi on premium 292 Revision Questions and Answers (kshs) (kshs) High 15,0 00 0.3 10.00 - - Medium 12,0 00 0.5 12.00 - - Low 8,00 0 0.2 14.00 - - Special ingredient B order discount or premium cost on conversion from: Low to medium 1.50 Medium to high 1.00 Low to high 2.00 Medium to low 4.00 High to medium 3.00 High to low 9.00 Required: (a) Prepare a summary which shows the total budgeted contribution earned by Botton Limited from the new product for the coming year for each of the nine possible outcomes which may result from the above data. (11 marks) i. Using figures from your answer to (a) as relevant, indicate the advance level order size which should be chosen for special ingredient B and comment on the management attitude to risk where decision is based on each of the following criteria: i. Maximizing expected value ii. Maximax iii. Maximum (9 marks) (Total: 20 marks) Bottom Limited identified a market for a new product at a selling price of shs 300 per unit. It has yet to quantify its estimate of the volume of the market in production units. The estimated cost structure of the product per unit is as follows: • Raw materials; 8.5kg @ Kshs. 5 per kg. • Special ingredient B 1.5kg • Other variable costs; 60% of selling price Bottom Limited must place an advance order for the coming year with the supplier of special ingredient B. It intends to enter into advance contract for special ingredient B for the coming year at one of 3 levels; high, medium or low – which correspond to the requirements of a high, medium or low of demand for the product. The level of demand for the product will not be know when the advance order for special ingredient B is entered into. A set of 293 Questions probabilities have been estimated by management as to the likelihood of demand for the product being high, medium or low. The amount of special ingredient B actually supplied will always be equal to the actual demand level. However, because of the effects of unidentified volume on supplier costs, the following points should be noted: • Where the advance order entered into for special ingredient B is lower than that required for the level of demand which is actually achieved, a discount from the original price of supply is allowed to Bottom Limited for the total quantity of special ingredient B which is purchased. • Where the advance order entered into for special ingredient B is in excess of that required for the actual level of demand achieved, a penalty payment; premium in excess of the original price of supply is payable for the total quantity of special ingredient B which is purchased. Required:  Prepare a summary, which shows the total budgeted contributions earned by Bottom limited from the new product for the coming year for each of the nine possible outcomes, which may result from the above data.  Using figures from your answer to (a) as relevant indicate the advance level order size, which should be chosen for special ingredient B and comment on the management attitude to risk where decision is based on each of the following criteria. 294 Revision Questions and Answers QUESTION EIGHT (a) Badi Division is part of the Dendi Group. Badi Division produces a single product for which it has an external market, which utilizes 80% of its production capacity. Lewi Division, which is part of the Dendi Group, requires units of the product available from Badi Division as input to a product, which will be sold outside of the group. Lewi Divisions requirements are equal to 40% of Badi Divisions production capacity. Lewi Division has a potential source of supply from outside the Dendi Group. This outside supplier can supply 75% of Lewi Divisions requirements. The outside source may wish to quote a higher price of Lewi Division only intends to take up part of its product availability. Required: Discuss aspects of transfer pricing principles and information availability, which will affect the likely achievement of group profit maximization from the sourcing decisions made by Lewi Division in the above situation. (14 marks) (b) The management accountant may make use of opportunity cost in the following situations: (i) Operation of a standard cost system; (ii) Setting transfer prices from one division to another; (iii) Deciding whether or not to accept a contract. Required: Discuss the relevance of the use of opportunity cost in each of the above applications. (6 marks) (Total: 20 marks) QUESTION NINE Kwaree Group limited has recently recruited you as the Accounts manager. You have been contacted to help in preparing a report entitled “How to design an effective management accounting information system.” The report should incorporate references to specific environments/organization type(s) and examples of the management accounting tools that would be of use. Required: Prepare a draft report in a format that is presentable to the senior management team of Kwaree Group limited. (Total: 20 marks) QUESTION TEN Tobil Limited produces two products namely Winfil and Bootfil. Both are components that have a wide range of industrial applications. Tobil Limited share of the market for winfil is insignificant but is one of 295 Questions a limited number of suppliers of bootfil. Winfil is a long-established product and Bootfil is a new product. The market price off winfil is shs320 and that of Bootfil is Shs. 237.50. Tobil Limited is unable to influence these prices. The resource requirements for producing one unit of each of the two products are: Products Process hours Kgs of material Labour hours Winfil 10 20 54.5 Bootfil 7.5 35.625 18.75 Materials cost Shs. 7.5 per Kg and labour costs Shs. 8 per hour. Other costs are constant. During the coming year the company will have the following recoveries available to it; 3,000 process hours, 10,000 Kgs of material and 15,000 labour hours. Required: Advise the company of output combination of winfil and bootfil that will maximize its profit in the coming year. (Support your advise with full financial analysis). (14 marks) Draft a memorandum suitable for the circulation to Tobil limited board of directors explaining the commercial limitations of the model you have used in your answer in part (a) above. (6 marks) (Total: 20 marks) QUESTION ELEVEN Solomon’s Limited sells an electric calculators but finds that it runs our of stock on occasions and thus loses the contribution on missed sales. The estimated demand is 12,000 units per year which can be purchased at shs100 each and sold at Shs 155 each. The lead-time is 5 days guaranteed and the cost of holding a calculator is sh20 per year. The company’s economic order quantity is 1,200 calculators. Solomon’s Limited works a five-day week for 48 weeks a year. The demand figures have been analyzed for the last 27 weeks; Calculators sold No of days Level of sales occurred 30 10 40 20 50 50 60 30 70 15 80 5 90 5 135 296 Revision Questions and Answers At present Solomon’s Limited uses a re-order level of 2,500 calculators and does not carry any safety stock because of the guaranteed delivery time. Ideally it wishes to satisfy customers on average at least 95% of the time whilst minimizing the associated costs. Required: 1. The annual stock-out costs of using the present re-order level. (15 marks) 2. The re-order level at which the company would meet it’s 95% requirement. (5 marks) (Total: 20 marks) QUESTION TWELVE Two companies are considering their bid strategy for installation of a computer center in a new university. Company A is considering four alternative courses of action; A1- bid on both the hardware and the software A2- bid only on the hardware A3- bid only on the software A4- no bid. Company B is considering three alternative courses of action: B1- bid on both B2- bid only on the hardware B3- no bid. If Company A bids a1 and Company B bids b1, then the expected payoff to Company A is again of 2 (units of utility). Company B is going to have a loss of 2. If company A bids a3 and Company B bids b2, then thee expected payoff to company A is a loss of 3 (A gain of 3 to Company B). We estimate thee payoffs in all other possible alternatives and summarize the information in the table below. Player B B1 b2 b3 A1 2 -1 3 A2 -2 1 3 Player A A3 -2 -3 2 A4 -1 1 0 Required: 297 Questions a. Find whether a pure-strategy solution exists. (3 marks) b. Solve the problem. (4 marks) The labour contract between Uchumi Company and its workers is about to expire and a new one has to be negotiated. From previous wage bargaining the union have certain strategies from the most hard- line (u1) to the most compromising (U4). The Company has similar strategies (c1 to c2) the payoff matrix is as follows: Company C1 C2 c3 c4 U1 (5, -6) (0, -2) (-1,18) (-2, -21) U2 (7, -9) (1, -1) (3,4) (-2,3) U3 (13 -25) (4,12) (-4,3) (-8,9) U4 (-4,18) (-7,10) (-7,2) (-12,15) Required: Determine the solution of the game if: a. Co-operation is not allowed. (5 marks) b. The Company and the union can negotiate. (4 marks) c. What are the limitations of a game theory in business applications. (4 marks) (Total: 20 marks) QUESTION THIRTEEN Minwa Tods Limited purchases a large number of wooden pullets for use in the storage and transportation of its products to replace those cost or damaged in transit. The average yearly requirement for the past 3 years has been 6,000 pullets. A quantity, which can be applied realistically to this year as well. The need for replacement pullets is relatively constant and the cost associated with the placing and receipt of an order is Shs30. The inventory cost policy that Minwa Tods ltd has traditionally employed is to charge 22% of the purchase cost as the annual inventory holding cost for any item in the inventory. The standard price charged by the major manufacturing company is Shs16 per pallet. Required: a) Determine the optimum order quantity and the consequent time between orders (3marks) b) Describe the assumptions you have made in part (a) and assess their likely validity within the context of this question. (6 marks) c) The manufacturer offers a discount of 4% if Minwa Tods order 4,000 or more pullets at a time. Show that the discount is not financially 298 Revision Questions and Answers beneficial to Minwa Tods. What percentage discount would be required for Minwa Tods to order 4,000 or more pullets at a time? (6 marks) d) State the effect on the company’s inventory policy described in (a) if the supply of pullets has a variable lead-time. (5 marks) (Total: 20 marks) QUESTION FOURTEEN (a) In transportation problems the following difficulties do occur; degeneracy, inequality of supply and demand and non - unique optimal solution. Required: (i) Explain the underlined words. (3 marks) (ii) Explain how the transportation algorithm is adapted to overcome the above difficulties. (3 marks) (a) Yoloks molders limited had orders to be completed next week for three of its products A, B, C as given the table below: Product order units A 8000 B 4800 C 2000 There are 3 machines available for the manufacturing operations, and all thee 3 can produce each of the products at the same production rate. However, the unit cost of these products varies depending upon the machine used. The unit costs (in Shs.) of each machine are given in the following table: Products A B C X 24 26 22 Machines Y 28 26 30 Z 22 20 26 Furthermore, it’s known that capacity for next week for machines Y and Z is 6,000 units and for machine X is 4,000 units. Required: i. Use the transportation model to find the minimum cost production schedule for the products and machines. Determine minimum cost. (6 marks) ii. If this optimal solution is not unique, describe all other production schedule with the minimum cost. If the production manager would like the minimum cost schedule to have the smallest number of changeovers of production on machines, recommend the optimal 299 Questions solution. (8 marks) (Total: 20 marks) QUESTION FIFTEEN Chopa manufacturers limited operate 30-day terms for all its customers. Experience has shown that 80% of all accounts are settled within one month and 70% of the remainder is settled during the second month after the customer has been sent a standard overdue account letter of those accounts still unpaid after two months. 50% are settled during the third month after a ‘final demand’ has been sent. Any accounts still not paid after three months are dealt with in one of two ways. If the amount owing exceeds shs 1 million, the Company institutes legal proceedings to recover the money. Taking into account the legal costs involved, the proportion of the original sum owing, which is ultimately recovered varies as follows; Proportion recovered % Probability Upto 40 0.1 40.60 0.3 40.61 0.4 40.62 0.2 This process takes a further three months before payment is finally received. If the amount owing is less than Shs 1 million, the debt is sold to a debt collecting company in return for 50% of the sum involved which is obtained after a further month i.e. at the end of month four, In recent months, the size of the accounts issued by Chopa is shown by the following distribution; Size of account (Shs) Probability Upto 200,000 0.1 200,000-500,000 0.2 500,000-1,000,000 0.3 1,000,000-2,000,000 0.3 2,000,000-5,000,000 0.1 You may assume t6hat these is no relationship between the size of the account when its settled and the proportion recovered and that all accounts are settled on the last day of the month. The Company’s cost of capital is the equivalent of 1.5% per month. Required: What is the probability that, for any particular account, payment is received at the end of: 300 Revision Questions and Answers (i) The second month (ii) The third month (iii) The fourth month (iv) The sixth month (5 marks) What is the expected present value of a new account which has Shs 2 million outstanding. Monthly Discount factors are; Month 1 2 3 4 5 6 Factor 0.9852 0.9707 0.9563 0.9422 0.9283 0.9145 (5 marks) (c) Show how the system as a whole may be simulated by using the following random digits to determine the present value of two simulated accounts. (d) Account 1 8 8 7 5 7 (e) Account 2 9 9 8 2 9 (10 marks) (Total: 20 marks) 301 Answers Answers QUESTION ONE a) Gross profit margin % = Revenue – cost of sales x 100% Revenue GPM(GSC) = 30,900 – 30,000 X 100% = 2.9% 30,900 GPM (DC) = 10,500 – 10,000 X 100% = 4.8% 10,500 GPM (MPS\0 = 1980 – 1,800 X 100% = 9.1% 1,980 Operating Income For Period Ending August 2003 Gross profit (GSC) = (30,900 – 30,000) x 120 108,00 0 Gross profit (DC) = (10,500 – 10,000) x 300 150,00 0 Gross profit (MPS) = (1,980 – 1,800) x 1,000 180,00 0 Total Gross profit 438,00 0 Less operating cost 301,08 0 Operating profit 136,92 0 b) (i) Customer purchase order processing = 80,000 = Sh 40 per order 2,000 (ii) Line item ordering = 63,840 = Sh 3 per line item. 21,280 (iii) Store deliveries = 71,000 = Shs 50 per store delivery 1,420 (iv) Cartons stopped to stores = 76,000 = Shs 1 per carton 76,000 (v) Shelf-stocking at customer stores = 10,240 = Shs 16 per hour 640 c) Operating income based on ABC For the period ending August 2003 Gross profit as in (a) 108,000 150,000 180,000 302 Not with investigating With Investigating and Correspondence taken (shs.5,500) Fault eliminated Fault eliminated 0.3 0.64 No investigation Worth investigating but not done 0.64 Revision Questions and Answers Less operating costs (i) Customer purchase order processing (5,600) (14,400) (60,000) (ii) Line- item ordering 5,880) (12,960) (45,000) (iii) Store deliveries (6,000) (15,000) (50,000) (iv) Cartons shipped to stores (36,000) (24,000) (16,000) (v) Shelf-stocking at customer store (5,760) (2,880) (1,600) Operating profit (loss) 48,760 80,760 (7,000) Comment Drug-store is performing better than the other distribution chains with an operating profit of Shs 80,760. QUESTION TWO SIMTON LTD (a) (i) Investigation undertaken Costs = Shs 3,500 0.36 0.7 It is assumed that the Shs. 5,500 correction cost applies to all variances that the initial investigation indicates are worthy of further investigation. The expected cost of the investigation is carried out as: Shs3,500 + (0.36 x Shs. 5,500) conctrine action + 0.36 x 0.3 x 24,746 (wl) (continuing variance) = Shs Workings: (i) Present value of Shs 5,250 for 5 months @ 24% p.a (Shs 5,250 x 4,7135) = Shs 24,746 = Shs 8,153. Decision tree if an investigation is not carried out. 303 So variance continue 0.36 Answers The expected cost if no investigation is undertaken = 0.36 x Shs 5,250 x 4,7135 = Shs 8,909. c) Applying the expected value decision rule, the company should follow policy of investigating variances as a matter of routine. The expected cost of investigation is Shs 8,153. Compared with an expected cost if no investigation is undertaken of Shs 8,909. On average, the befits from investigation are Shs 750 per variance. d) Examples of category A variances include: e) The above analysis assumes that the average variance is Shs 5,250 and additional costs of Shs 5,250 in excess of standard continue for five months. Presumably, working practices are changed every five months. Costs of investigation and corrective action are Shs. 3,500 and Shs. 5,500 irrespective of the amount of the variance. It would therefore be appropriate to determine the value of variances which justify investigation. Let x be savings per month. The expected cost of investigation is equal to the expected cost of no investigation where: Shs. 3,500 + (0.36 x Shs 5,500) + (0.36 x 0.3 x 4.7135x) = 0.36 x 4.7135x ∴ Only variances in excess of Shs 4,610 should be investigated. QUESTION THREE (a) Chemex Limited A B C Total Timber required per unit (m 2 ) 2.5(shs. 50÷Shs. 20) 7.5(shs. 150÷20) 5.0(shs. (100÷20) Budgeted sales volume (units) 40,000 20,000 15,000 Total timber required (m 2 ) 100,000 150,000 75,000 325,0 00 Production requirements exceed the available supply of materials by 125,000m 2 (325,000-200,000) A B C Unit contribution (shs) 80.00 175.000 160.00 Timber requirements (m 2 ) 2.50 7.50 5.00 Contribution per m2 (shs) 32.000 23.33 32.00 Ranking 1 3 1 The scarce materials should be allocated as follows: Materials used Balance unused 304 Revision Questions and Answers A (40,000 units x 2.5) 100,000 100,000 C (15,000 units x 5) 75,000 25,000 B (25,000/75 = 3,333 units) 25,000 - The above production plan is sufficient to meet the order that has been accepted. The profit arising from the above production plan is calculated as follows: Shs A (40,000 units x 80) 3,200,000 C (15,000 units x 160) 2,400,000 B (3,333 units x 175) 583,275 Total contribution 6,183,275 Fixed overheads(40,000 x Shs 45)+(20,000x112.50)+(15,000x shs90) 5,400,000 Profit 783,275 (a) The above production plan indicates that maximum sales demand for furniture products A and C has been met but there is unutilized demand for the furniture product B. Therefore any additional materials purchased will be used to make B yielding a contribution per unit of Shs 175,000 and a contribution per metre for material used of Shs 23.33 (see part (a) for calculation). The company should not pay above Shs 23.33 in excess of the acquisition cost of materials. The maximum purchase price is Shs 43.33 (Shs 20 + 23.33). QUESTION FOUR (i) 8000 units should have used (x 3 m 2 ) 24,000 m 2 But it used 27,000 m 2 Usage variance mm 2 3,000 m 2 (A) X standard cost per metre x shs5 Material usage variance 15,000 (A) 27,000 m2 should have cost (shs5) shs 135,000 But it costed (x shs 4.50) shs 121,000 Material price variance Shs 13,500 (F) 8,000 units should have taken (0.5 hours) 4,000 hours But took 4,800 hours Efficiency variance in hours 800 hours X standard cost per hour x shs25 hours Conversion process expenditure variance 20,000 (A) 4,800 hours should have cost (shs 25) 120,000 But cost (x shs20) 96,000 Conversion process expenditure variance 24,000 (F) (ii) If the decisions are based on variances over which each manager has control; The purchasing manager has control over the material price variance and he is likely to continue to purchase raw material from the cheaper supplier as such action will result in a favourable measure against which he will be assessed. 305 Answers The conversion process manager would want to reduce the adverse material usage variance and so could desire additional expenditure on high-quality raw material, employee training or improved quality control procedures. Given that the conversion process efficiency variance over which he has control is also adverse, he could well request additional expenditure to improve the efficiency and effectiveness of the process. New machines or staff training could well reduce this variance. 2. If decisions are based on the effect of each of the variances. The total material variance is an adverse variance of shs1500. Principally, because of the Kshs. 15,000 adverse usage variance. This could result in the purchase of a higher-quality (but not too expensive) raw material with the aim of reducing wastage. The total conversion process variance is a favourable variance of Kshs. 4,000. Additional expenditure on improvements to the processing method would therefore not be desirable 306 Revision Questions and Answers (b) Existin g materi al. Existin g process Existing material Amended process Amend ed materi al Existin g proces s Amende d material Amende d process Material 3 x 8,000 x Shs. 5 3.075 (wl)x8000x Shs. 5 3.3 (wl) x 8000 x Shs. 4.50 3.375 (wl) x 8000 x Shs. 4.50 120,000 - - - - 123,000 - - - 118,800 - - - - - 121,500 Conversion process - - 0.5 x 8000 x Shs. 25 0.56 x 8000 x Shs. 20 0.524 x 8000 x Shs. 25 0.6 x 8000 x Shs. 20 100,000 - - - - 89,600 - - - - 104,800 - - - - 96,000 220,000 212,600 223,600 217,500 The profit maximizing strategy is to use the existing material source and the amended conversion process, giving a total material and conversion cost of Kshs 212,60. Workings: 1 actual material usage per unit of product (executive towels) with amended process and amended source) =27,000/8,000 = 3.375m 2 Additional usage per unit due to amended material source = (3.375 – 3) x 80% = 0.3m 2 Additional usage per unit due to amended conversion process =(3.375- 3) x 20% = 0.075m 2 ∴ If source changed standard usage per unit = 3.3m 2 If process charged, standard usage per unit = 3. 075m 2 2 Actual hours per unit of the executive towel (with amended process and amended source) = 4800 = 0.6 hours 8000 Additional hours per unit due to amended conversion process =(0./6- 0.5) x 60% = 0.06 hours. 307 Answers Additional hours per unit due to amended material source (0.6 – 0.5) x 40% = 0.024 hours. ∴ If process charged, standard hours per unit = (0.5 + 0.06) =\ 0.56 hours If source charged, standard hours per unit = (0.5 + 0.24) = 0.524 hours. 308 Revision Questions and Answers QUESTION FIVE KENYA CHARITY ORGANIZATION (a) Expected value of profit Dinner & Dance No of ticket s sold Freque ncy Probabili ty (a) Reven ues excludi ng progra ms Food costs (shs) Fixed costs (shs) Profit(los s) (b) Expect ed value (ax5) shs 300 4 0.2 7,800 4,80 0 4,50 0 (1,500) (300) 400 6 0.3 10,400 4,80 0 4,50 0 1,100 330 500 8 0.4 13,000 6,00 0 4,50 0 2,500 1,000 600 2 0.1 15,600 7,20 0 4,50 0 3,900 390 20 1.0 1,420 Expected profit p.a. for dinner = ∴ Kshs. 1,420 Programmes Pag es sold Freque ncy Probabili ty (a) Incom e (shs) Costs Shs Profit(lo ss) shs (b) Expecte d value 24 4 0.2 1,680 2,120 (440) (88) 32 8 0.4 2,240 2,160 80 32 40 6 0.3 2,800 2,200 600 180 48 2 0.1 3,360 2,240 1,120 112 236 Expected profit from programmes = Kshs. 236 ∴Total expected profit = 1656 (1420=236) (b) There is no indication given on the reliability or the results expected from the market research enquiry so that this part of the question cannot be answered without making assumption. Therefore the following assumptions are made in answering this question: i. That the dinner need not be held each year i.e. if the enquiry shows that not enough tickets will be sold to produce a profit the dinner can be cancelled. ii. If the dinner is cancelled no programmes are sold or produced. iii. The shs2000 fixed cost is an avoidable charge if no programmes are produced. 309 Answers iv. The programmes sales (an associated probabilities) are independent of the number of tickets sold i.e. the schedule of the programme demand could occur for any level of ticket sales. 310 Revision Questions and Answers Based on these assumptions, the expectable loss can be calculated: (Loss when 300 tickets sold (P= 02) Kshs Profit (loss) on programme sales with Kshs Total loss as Kshs Joint probabil ity (pr T xpr P) (b) Expected loss (axb) Kshs Pr T Pr P (1500) 0.2 600 0.3 (900) 0.06 (54.0) (1500) 0.2 (440) 0.2 (1940) 0.004 (77.6) (1500) 0.2 80 0.4 (1420) 0.08 (113.6) (1500) 0.2 1120 0.1 (380) 0.02 (7.6) 252.8 ∴The total avoidable expected loss is Kshs. 252.8 and the survey costs Kshs. 500 and thus it’s not worthwhile. QUESTION SIX COST CLASSIFICATIONS FOR DECISION MAKING The cost (and benefits), which should be used for decision making, are relevant costs: in general, future, incremental cash flow, which arise as a consequence of choosing a particular course of action (a) Future Costs Any cost that was incurred in the past and cannot now be recovered in a cost and is therefore not relevant to decision making. Only costs that will be incurred in the future if a particular course of action is taken are relevant. (b) Incremental Costs Incremental costs are the additional cost incurred as a result of decision and is therefore relevant. Any costs will be incurred in the future regardless of whether or not the decision is taken (committed costs) are not relevant. (c) ©Cash Flow It is assumed that a decision is taken to maximize ‘satisfaction’ of the person or organization in question. Although the time value of money affect the worth of cash flow from a project over a longer period, all short-run decision are assumed to improve, ‘satisfaction ‘ if they increase net cash in flow. Depreciation is not, therefore a relevant cost and it is only information pertaining to a cash flow, which is relevant to decision making. In general, variable costs are relevant costs because they are only incurred if a decision to do something is taken, whereas fixed costs are irrelevant to decision because they will be incurred regardless of the course of action taken. There is, however, a school of thought that argues that fixed costs are not always irrelevant. They have put forward the idea of the attributed cost whi8ch is made up of the following; (a) Short run visible costs 311 Answers (b) Divisible fixed costs. A fixed cost is divisible if significant shifts in the level of activity will require increases in the total amount of that costs. (c) Indivisible traceable costs. This is an indivisible fixed costs that can be traced directly to a product or function Finally, opportunity costs (the benefit forgone by choosing one option instead of the next best alternative) are relevant. Historic costs are not. One area in which the concept of relevant costs is needed is the make or buy situation. A make or buy problem involves a decision by an organization about whether it should make a product with its own internal resources, or whether it should buy the product from an outside supplier. If an organization has the choice of whether to manufacture a component internally or buy in from outside and it has no source resources that put a restriction on what it can do itself, the principal relevant costs are the differential costs between the two options. Costs behaviour and decision-making Although it is easy to generalize and to state that, for example, variable are relevant to a decision and fixed cost are not a proper understanding of the behaviours of c0osts is vital to ensure that the cost analysis is accurate. Consider the simple example in part (a) of the answer. The variable cost per unit could be made up of direct materials, direct labour and direct machinery costs. The direct material cost may include discounting for material that are used for a variety of items. The company overall costs may increase if the level of such materials purchased falls. The direct labour cost may not be wholly variable in the short term. Some employees ay be made redundant if internal manufacturing ceases and may not be fully utilized on other work, thereby making labour a semi-variable cost, the fixed cost, the fixed part of which would have to be estimated. Strategic planning is the process of setting or changing the long- term objectives or strategic target of a organization. These would include such maters as the selection of products and markets, the required level of company profitability, the purchases and disposal of subsidiary companies or major fixed asset. And so on. A notable characteristic of strategic planning is as follows; a. It will generally be formulated in writing, and only after much discussion by committee (the board). b. It will be (or should be) circulated to all interested parties within the organization and perhaps even to the press. c. It will trigger the production not of direct action but of a series of lesser plan for sales. Production, marketing, and so on. Operational planning work out what specific tasks needs to be carried out in order to achieve the strategic plan. For example a strategy may be to increase sales by 5% per annum for at least five years, and an operational plans to achieve this would be sales reps’ weekly sales target. (Note: we use the word ‘strategic’ and 312 Revision Questions and Answers ‘operational’ in the sense implied in the well-known work of Robert Anthony). Notable characteristic of operational planning are the speed of response to changing conditions and the use and understanding of non-financial information such as data about customer orders or raw material input. ii) 1. Unrealistic operational plan will force staff to try hard with too few resources. Mistakes and failure are almost inevitable. This means poor quality products; costs include lost sales arranging for returns, and time wasted dealing with complaints and rectification work. Over ambitions plan may also mean that more stocks are produced than an organization could realistically expected to sell (meaning the costs of written-offs, opportunity costs of wasted production resources and unnecessary stock holding cost are incurred. 2. Inconsistent strategic planning and operational planning goals may mean that additional cost are incurred. For example, an operational plan may require additional inspection point in a production process so as to ensure that quality products are delivered to customers. The resulting extra costs will be at odds with the strategic planning goal of minimum costs. 3. Poor communication between the senior management who set strategic goals and lower level operational management could mean that operational manager are unaware of the strategic planning goal of sustaining competitive advantage at minimum cost through speedy delivery of quality products to customers. Some operational managers may therefore choose to focus on quality of products while others attempts to produce as many product as possible as quickly as they can; still others will simply keep their heads down and do as little as possible. This will lead to lack of co-ordination; there will be bottlenecks in some operational areas, needing expensive extra resource in the short term, and wasteful idle time in other areas. 4. Inadequate performance measurement will mean that the organization has little idea of which area is performing well and which need attention. If quality of products and speed of delivery are the main source of competitive advantage a business needs to know how good it is these thing. For example, if an organization measures only conventional accounting results it will know how much stock it has and how much it has spent on ‘carried out’. It will not know the opportunity cost of cancelled sales though not having stock available when need or not being able to deliver it on time. Equally, the quantity of products need to be measured in terms not only of sales achieved, but also in terms of customers complaints and deed back; again the costs is the opportunity cost of cost sales. Otherwise, repairs and maintenance cost of machinery would vary withy the level of activity but machines would still need a certain level of maintenance even if they were not being used,(the 313 Answers company might, one the other hand, be considering selling the machinery, accounts of which may not have been taken). The estimate of direct attribute fixed costs may be subjective judgments, such as deciding which supervisor salaried would be avoidable if the service were contracted out. The variable costs may be based on past data that does not take account of potential reduction or increases in productivity due to factors such as untrained staff or new machines. Finally, the costs of buying in may also be high subjective. Accounts may not have been taken of costs such as increases or decreases in tie spent delivering the components (from abroad perhaps) or complaints or costs resulting from badly made component. It is therefore obvious that the behavior of costs associated withy a decision must be fully understood and their relevance to that decision ascertained before the decision is finally made. 314 Revision Questions and Answers QUESTION SEVEN BOTTOM LIMITED The variables in this instance are advance order size (high, medium, low) and actual level demand (high, medium, low). Advance ord er size Actual dem and Contributio n excl udin g ingr edie nt B(wk s) Cost of ingr edie nt B(w ks) Net co ntr ib uti on Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ High High 1162.5 225.0 937.5 Medium 930.0 234.0 696.0 Low 620.0 228.0 392.0 High 1165.5 247.5 915.0 Medium 930.0 216.0 714.0 Low 620.0 192.0 428.0 High 1165.5 270.0 892.5 Medium 930.0 225.0 705.0 Low 620.0 168.0 452.0 Workings: Cost of excluding costs of special ingredient B Shs. Selling price 300.00 Raw materials (8.5kg x 5) 42.50 Variable cost (60% x 300) 180.00 77.50 High Medium Low Production demand (units) 15,000 12,000 8,000 X contribution per unit 77.50 77.50 77.50 1,162,50 0 930,000 620,000 High advance order, high actual demand Cost of B = 15,000 X 1.5 KG X Shs 10 = Shs 225,000 315 Answers High advance order, medium actual demand (Shs. 3.00 premium) Cost of B = 12,000 x 1,5kg x Shs (10 +3) = Shs 234,000 High advance order, low actual demand (Shs. 9.00 premium) Cost of B = 8,000 x 1,5kg x Shs. (10 + 9) = Shs 228,000 Medium advance order, high actual demand (Shs. 1 discount) Cost of B = 15,000 x 1,5kg x Shs (12 – 1) = Shs. 247,500 Medium advance order, medium actual demand Cost of B = 12,000 x 1.5kg x Shs. 12 = Shs. 216,000 Medium advance order, low actual demand (Shs. 4.00 premium) Cost of B = 8,000 X 1.5kg x Shs. (12 +4) = Shs. 192,000 Low advance order, high actual demand (Shs 2 discount) Cost of B = 15,000 x 1.5kg x Shs. (14 – 2) = (Shs 1.50 discount) Low advance order, medium actual demand (Shs 1.50 discount) Cost of B = 12,000 x 1.5kg x Shs (14 – 1.50) = Shs 225,000 Low advance order, low actual demand Cost of B = 8,000 x 1.5kg x Shs 14 = Shs 168,000 (b) (i) maximizing expected value EMV High = 0.3(937.5) + 0.5(696) + 0.2(392) = Shs 707,650 EMV medium = 0.3(915) + 0.5(714) + 0.2(428) = Shs 717,100 EMV low = 0.3(892.5) + 0.5(705) + 0.2(452) = Shs 710,650 If management wishes to maximize expected value, a medium sized advance order should be placed. This approach takes a neutral attitude towards risk since all possible outcomes and probabilities are taken into consideration. (ii) Maximax The maximax decision rule involves choosing the strategy with the possible result, in this instance choosing the strategy which 316 Revision Questions and Answers maximizes contribution. The decision maker would therefore choose to make a high advance order, so that there is a chance of contribution of Shs 937,500. Such an approach takes a risk-seeking attitude since, although it offers the chance of the highest contribution, there is a 20% chance that the lowest possible contribution of Shs 392,000 could occur. (iii) Maximum The maximum decision rule involves choosing the strategy that offers the least unattractive worst outcome, in this instance choosing the outcome strategy which maximizes the minimum contribution. The decision maker would therefore choose to place a low-sized advance order, which has a lowest possible contribution outcome of Shs. 452,000. This is better than the course possible outcome from high and medium advance order sizes, which would provide contributions of Shs. 392,000 and Shs. 428,000 respectively. Such an approach therefore takes a risk-averse attitude. QUESTION EIGHT Generally, transfer prices should be set at marginal cost + opportunity cost of the transfer to Dendi Group. In order that transfer prices can be set at marginal plus opportunity cost to the group of the internal transfer of the product, information must flow freely between Lewi and Badi Division. The degree of autonomy granted to the individual division will affect how freely information flows. However, if management of Badi Division is allowed a significant degree of autonomy whereby they make decisions independently and are not tied down by instructions from head office, the transfer price they offer is likely to be as high as the market will bear. As per the transfer pricing policy; (i) Badi Division has an external market for 80% of it’s production capacity, the transfer price of those products representing this proportion of Badi Division’s production capacity should be set at the product’s market price (because the opportunity cost of not making the transfer would be the contribution forgone on an external sale). If Lewi Division is able to acquire the product from an external supplier at less than the market price, group profits will therefore be increased because Badi Division can sell at market price and Lewi Division can purchase at less than the market price. (ii) It’s possible that these may be some costs incurred on external sales of the product, which are not incurred when the product is transferred internally (such packaging and delivery costs). If this is the case, the transfer price should be an adjusted market price (i.e. market price less costs not incurred on transfers). Such a transfer price allows Badi Division to earn the same profit on internal transfers and external sales and means that Lewi Division will not consider buying from external suppliers quoting a price higher than 317 Answers the adjusted market price fo9r this proportion of it’s requirements. (iii) The output from the 20% of Badi Division’s production capacity not utilized on supplying the external market should be offered to Lewi Division at transfer price based on the marginal cost of the product (because there id no opportunity cost associated withy transferring this output to Lewi Division). Lewi Division will therefore not buy from any external supplier quoting a price in excess of the marginal cost of the product for this proportion of its requirements. (iv) The external supplier can supply 75% of Lewi Division’s requirements, which is equivalent to 30% (75% x40%) of Badi Division production capacity. Given that 20% of Badi Division’s production capacity is spare, the division should aim to supply 20% of this 30% at marginal cost. The remaining 10% represents sales that Badi Division makes outside the Group. The 10% should therefore be offered to Lewi Division at and adjusted market price. Badi Division should therefore offer the following transfer prices • 20% of production capacity at marginal cost • 80% of production capacity at adjusted market price. Lewi Division can therefore compare these prices against those being offered by the outside supplier and, taking into account that a higher price may have to be paid if the full 75% is not purchased from the outside supplier, decide on the source of the product that it requires. (b) i. The opportunity cost can be used in standard costing systems which report the contribution gained or lost as a result of deviations from the budget. Opportunity costs are particularly if the standard costs are updated so that planning and operational variances cam be identified. For example, the sales volume variance can then be analyzed to show the potential contribution gained or lost as the result of various deviations from the budget ii. Opportunity cost is relevant in the setting of transfer prices if the transferring division is working at full capacity and is able to sell it’s output externally at a profit. In this case, the transfer price would be equal to variable cost plus opportunity cost, where the opportunity cost is the contribution forgone from the external sale. The resulting transfer price should result in the most profitable use of the transferring divisions resources, but it may lead to behavioral problems. iii. If a contract involves the use of resources which can be used profitably in other ways, opportunity cost can be a useful concept., It provides a common basis for the valuation of resources which have a number of competing demands on them. The use of opportunity costs also help to avoid overstating the costs of a contract because it excludes irrelevant sunk or past costs. 318 Revision Questions and Answers N/B Out of all the above three case, the main problem is the identification of opportunity cost in practice and the fact that changing conditions may mean opportunity costs change frequently. QUESTION NINE Management accounting information has three principal objectives: a. Aid to short term planning and strategic planning b. To facilitate control and decision making c. To provide the base for the effective use of management accounting techniques. This planning, controlling and decision-making activities are essential of the organization is to achieve its objectives. These objectives may encompass a wide range of issues from high-level strategic plan to the control of detailed operating activities, such as the labour hours worked during the month. There is therefore a need to identify the information needed for abroad range of business activities. Given a spectrum from long term strategic to short term operation information need, the data source will probably exhibit the following characteristics. Strategic information need will tend toward long term, external and global data, which is obtainable from customers, suppliers, trade associations and government, whereas detailed operational information need are likely to come from within the business. The recording and processing methods adopted need to consider; • Collecting and recording monetary and non-monetary information • The influence and need of management accounting techniques • The influence of IT system • The type of business entity In deciding on the format of the report generated, consideration should be given to; • Analysis and dissemination to relevant individuals and group • Management culture, structure and style • The appropriate accuracy, detail and speed and any trade-off between them • Security, access and controllability and other organizations • Needs, skills and system knowledge of the potential users. • Other general issues that need to be considered are; • Expected planned life of the system • Developments in MIS • Available resource and time constraints in terms of commissioning dates The above discussion should include reference to a specific organization of which the candidate has experience/knowledge. The design of the system should consider the management accounting tools that there are likely to be utilized e.g. budgeting, costing, TQM, bench making can these system deliver the information need of these techniques. 319 Answers QUESTION TEN a) Let: Winful be W (output) Bootful be B (output) W (Shs) B (Shs) Material Shs 7.5/kilo 60.00 106.875 Labour Shs 8/hour 174.40 60.00 234.40 166.875 Selling price 320.00 237.50 contribution 85.6 70.625 Maximize z = 85.6W + 70.625B Subject to: 10W + 7.5B 000 , 3 ≤ (process hours) 20W + 35.625B 000 , 10 ≤ (materials) 54.5W + 18.75B 000 , 15 ≤ (labour hours) W, B, ≥ 0 (non negativity) The constraints are graphed and the contribution line drawn at a slope of 1.21200: 1B (i.e 85.6: 70.675) 8 Labour 7 6 5 Process hours 4 3 Optimum point 2 Material 1 Contribution line 1 55w 2 3 4 5 6 Product W ‘000’ Maximum contribution = 153(85.6) + 193(70.625 = Shs 26,898.625 (b) Limitations of LP model. (i) Can only be used when relationships can be assumed to be linear, it thus cannot be applied appropriately in situations where the relationship isn’t linear. (ii) Linear programming can only be used if an optimal solution actually exists. (iii) It also assumes that units produced are resources allocated are infinitely divisible which is not always the case in reality. 320 A P P R O X 1 9 3 B P R O D U C T B ‘0 0 0’ Revision Questions and Answers (iv) The model assumes that the contribution per unit for each product and the utilization of resources per unit are the same whatever quantity of output is produced and sold within the output range being considered. QUESTION ELEVEN Solomons Limited a) Cost of Stock outs Re- order level safety Holdin g stock Possible Costs (shs) Probabilit y Shortage No of orders Shortag e costs (shs) 250 0 0 50 100 150 200 0.22 0.11 0.04 0.04 10 10 10 10 6050 6050 3300 4400 Total cost = Shs 19,800 300 30 600 50 100 150 0.11 0.04 0.04 10 10 10 3025 2200 3300 Total cost = Sh 9,125 350 70 1,400 50 100 0.04 0.04 10 10 1100 2200 Total cost = Shs 4,900 400 130 2,600 50 0.04 10 1100 Total cost =Shs 3,700 450 180 3,600 0 0.0 10 0 Total cost = Shs 3,600 ∴ Annual stock out cost of using present re-order level of 250 = Shs 19,800 (from the table) (b) From the table; at 450 – re-order level has the minimum cost and enables the company meet its 95% requirement. Workings: Units sold No of days Probability Units x probability 30 10 0.07 2.1 40 20 0.15 6.0 50 50 0.37 18.5 60 30 0.22 13.2 70 15 0.11 7.7 80 5 0.04 3.2 90 5 1.00 3.6 135 1.00 54.3 Average demand = 54.3 units per day = 54 units per day. Average usage in lead time 543 x 5 = 270 units 321 Answers Orders per annum = 12,000 = 10 1,200 Stock out cost per unit = Shs 155 – shs 100 = Shs. 55 322 Revision Questions and Answers QUESTION TWELVE GAME THEORY b 1 b 2 b 3 min a 1 2 -1 3 -1 a 2 -2 1 3 -2 a 3 -2 -3 2 -3 a 4 -1 1 0 -1 Max 2 1 3 No saddle point (i) Reduction process from above. a 1 is better than a 3 thus eliminate a 3 b 1 is better than b 3 thus eliminate b 3 a 4 is better than a 2 thus eliminate a 2 2/5 3/5 bi bj 2/5 a: 2(4/25) - 1(6/25) 3/5 a: -1 1(9/25) Let aij bij Proportion of each player playing their respective strategies. Σai = bj = l 3b i – 2b 2 = 0 2a i – 1a 4 = -ai+a 4 2b i +2b 2 = 2 3a i – 2a 4 = 0 5b i = 2 2a i – 2a 4 = 2 b i = 2/5 b 2 = 3/5 5a i = 2 a i = 2/5 a 4 = 3/5 EXPECTED VALUE OF THE GAME = 8/25 – 6/25 – 6/25 +9/25 = 8/25 +9/25 = 17/25 In the long run, a wins 17/25 and that b losses 2 C 1 C 2 C 3 U 1 (0,-2) (-1,18) (-2,-21) U 2 (1, -1) (3,4) (-2, 3) U 3 (4, 12) (-4,3) (-8, 9) OX 1 +X 2 + 4X 3 = -1X 1 + 3X 2 – 4X 3 OX 1 + X 2 + 4X 3 = -2X 1 – 2X 2 – 8X 3 X 1 + X 2 + X 3 = 1 323 Answers (ii) C 2 C 3 C 4 U 2 (1, -1) (3, 4) (-2, 3) U 3 (4, 12) (-4, 12) (-8, 9) X 1 +4X 2 = 3X 1 – 4X 2 = -2X 1 – 8X 2 (c) LIMITATIONS OF GAME THEORY IN BUSINESS APPLICATIONS (i) Game theory has weary theoretical foundations for example it does not adequately cater for negotiations, collusions, coalitions and informational asymmetry. (ii) Presence of government: the government is usually a participant sometimes an active player and in other situations, the government acts as an arbitrator. (iii) Presence of trade unions: trade union members belong to competing firms. There is no provision on how to incorporate this in game theory. (iv) As the number of players increase, the analysis becomes exceedingly complex. (v) Data availability: Data may not be early or readily available e.g. opponent’s strategies, and pay-off specification. QUESTION THIRTEEN ()a Determine the optimum order quantity and consequent time between the orders: Annual demand D = 6,000 pallets per year. Cost of order Co = Kshs. 30 per order Cost of purchase C = Kshs. 16 per pallet Cost of holding Ch = 22% of 16 per pallet per year EOQ = · Ch 2CoD 320 0.22x16 2x30x6,000 · pallets per order. The optimum order quantity is 320 pallets. No of orders per year = 19 320 6,000 EOQ D · · ∴The orders should be placed every 19/12 years, that is 1 ½ every month approximately. ()b Assumptions implicit in the EOQ model. (i) Demand for pallets is spread evenly through the year. This assumes that the pallets are lost or damaged on a regular basis and that production is uniform throughout the year. Both of these are unlikely to be strictly the case in practice. (ii) Cost of ordering and storage are known and fixed, and independent of the order size. This is probably true fro the storage 324 Revision Questions and Answers costs, since they are based on the costs of capital. The assumption is probably not reliable for the ordering costs since the order size is likely to affect the cost of delivery, unloading etc. (iii) Lead time is known and fixed so that new order arrives just as the stock level falls to zero. This assumption may be reliable – it depends on the supplies. ()c Total annual cost of stockholding and purchase, TC, in shillings per year is: CD 2 EOQ Ch EOQ D Co TC + + · Kshs. per year At EOQ = of 320 Sh97,125.7 96,000 563.2 562.5 16x6,000 2 320 0.22x16x 320 6,000 30x TC · + + · + + · With the discount, the purchase price = 96% of Kshs 16 = Kshs. 15.36 Therefore, when EOQ = 4,000 TC = 0 15.36x6,00 2 4,000 x 0.22x15.36 4,000 6,000 30x + + = 45 + 6,758.4 + 92,160 = Kshs. 98,963.4 per year. This is a higher cost. The discount is not worth having, since the saving in the purchase price and ordering costs does not compensate for the increased storage costs. Consider the purchase price at the point at which the total annual cost is the same with and without the discount. Suppose at this breakeven point the purchase price is x% of Kshs. 16, then: ( ) ( ) x6,000 100 xx16 2 400 x 100 xx16 0.22x 4,000 6,000 30x TC + + · 45 + 70.4x + 960x = 45 +1,030.4x When TC 4000 = TC 320 45 + 1,030.4X = 97,125.7 ∴ 1,030.4x = 97,080.7 x = 94.2,165 The discount which must be offered is (100 – 94.22)% = 5.78% ()d If the lead time is variable the company may go out of stock of pallets if the re-order level is fixed. This problem can be reduced by the holding of a buffer stock. The size of this buffer 325 Answers stock would be chosen so that the probability of a stock out is reduced on an acceptable level. QUESTION FOURTEEN (a) .i It is a transportation algorithm whereby the allocation of a number of routes used is less than (number of rows + number of columns – 1) Inequality of supply and demand It is a requirement of the transportation algorithm whereby it requires that the total amount demanded at all the destinations to be equal to the total amount available at all the origins. Non-unique optimal solution The optimal solution is non-unique if there is more than one allocation of routes which produce the minimum cost. .ii Degeneracy The difficulty may be overcome by the use of dummy routes. For example, if the actual number of routes used is one too few, then an empty cell is selected and treated as if it were an allocated cell. If we wish, we can allocate a very small amount to this cell. The amount allocated should be so small that the associated transport costs can be ignored. If the transport allocation is degenerated by two routes, then we use two empty cells in this way, etc. Inequality of supply and demand If the above statement (a(i)) is not true, then algorithm cannot be used until a dummy origin or destination has been added to satisfy this condition. If the total supply exceeds the total demand, then a dummy destination is added which has a demand equal to the excess supply. If the total supply is less than the total demand, then a dummy origing is added which has a supply equal to the shortfall. The transportation costs for all routes involving the dummy are zero. Non – unique optimal solution The existence of other optimal allocations can be identified by examining the shadow cost. If any of the costs are zero, then alternative optima exist. A zero shadow cost means that items may be moved into that cell without increasing the total cost of the allocation. Non-unique optimal solutions are not a difficulty in the transportation problem, but it does mean that the decision maker must use some criterion other than cost, to chose the allocation of routes to be used. (b) (i) Find the minimum cost production schedule using the transportation method: Total capacity of the machine is 16,000 units Total requirements is 14,800 units. Therefore there is excess capacity of 1200 units. A dummy product must be included in the transportation tableau, for which the demand is1200 units next week. 326 Revision Questions and Answers Set up a transportation tableau and use of Vogel’s methods to make the initial allocation. Key: unit production cost Allocation The subscripts indicate the order in which the allocation are made, for example, the penalty 26, is the first penalty selected. The allocation 600, is the first allocation made etc. Y X 327 Answers Products A B C Dummy Capacity Penalty X 2000 4 - 20003 0 - 0 22 2 2 Y 4,800 - - 1,200 0 26 2 2 Z 1,200 4 4,800 2 - - 0 20 2 4 Demand : 0 0 0 0 Penalty 2 2 2 6 6 2 4 4 4 3 0 For a basic allocation, we require: No. of allocated cells = no of rows + no. of columns – 1 In this case, no of rows + no of columns – 1 = 3 + 4 – 1 = 6 which is the same as the number of allocated cells. The allocation is basic. Test of Optimality For each allocated cell, we split the unit cost Cij into a raw component Ui and a column component, Vj. For each empty cell, we calculate the shadow cost, Sij where Sij = Cij – (Ui + Vj) Allocated Cells C11 = 24 = U1 + V1 Let U1 = 0, then V1 = 24 C13 = 22 = U1 + V3 V3 = 22 C21 = 28 = U2 + V1 U2 = 4 C24 = 0 U2 +V4 V4 = 4 C31 = 22 = U3 + V1 U3 = 2 C32 = 20 = U3 + V2 V2 = 22 For the empty cells: S12 = 26 – (0 + 22) = 4 S14 = 0 – (0 – 4) = 4 S22 = 26 – (6 + 20) = 0 S23 = 30 – (4 + 22) = 6 S33 = 26 – (-2 + 22) = 6 S34 = 0 – (-2 – 4) = 6 328 24 2 2 2 2 2 2 3 2 Revision Questions and Answers All of the shadow cost are positive or zero, therefore the allocation is optimal – since there is a zero shadow cost, we know that this is a non- unique optimum. The minimum cost of production is: Machine X makes 2,000 A and 2,000 Z and is fully utilized. Machine Y makes 4,800 A and is under – used by 1,200 units. Machine Z makes 1,200 A and 4,800 B and is fully used. The minimum cost is 24 x 2,000 + 22 x 2m000 + 28 x 4,800 + 22 x 1,200 + 20 x 4,800 = Shs 348,800 (ii) Select the optimum allocation which has the least number of machine change over; The current optimum schedule requires machine changeovers (1 of each machines X and Z). Using the stepping stone method we can allocate N items to cell (Y, B) and adjust the row and column allocations. We find that N = 4,800 and that the solution has become degenerated. However, the solution is still optimum. The total cost is Shs 348,800. The alternative optimum is: Products A B C Dummy X 2000 - 2000 - Y - - 4,800 - 1,200 Z 6,000 - - - This solution requires only one changeover (Machine X) and therefore is preferred choice. The preferred minimum cost production schedule is: Machine X makes 2,000 A and 2,000 C and is fully used. Machine Y makes 4,800 B and is under-used by 1,200 units. Machine Z makes 6,000 A and is fully used. QUESTION FIFTEEN a) S n denotes that the account is settled at the end of the month n. S n * denotes that the account is not settled at the end of month n. The problem may be illustrated by a tree diagram: 24 2 2 2 2 2 2 3 2 0 0 0 M a c h i n e 329 Answers b) S1 0.8 S2 0.7 S*1 0.2 S3 0.5 S*2 0.3 S*3 0.5 i. P (a/c settled at end of month 2) = P(S1*) x P(S2) = 0.2 x 0.7 = 0.14 (i) P (a/c settled at end of month 3) = P(S1*) x P(S2*) x P(s3) = 0.2 x 0.3 x 0.5 = 0.03 ii. Payment is received at the end of month 4 only if the amount is less than Shs 1 million agency used. Proportion of accounts ≤ Shs 1,000,000 is (0.3 + 0.2 + 0.1) = 0.6 P(a/c settled at end of month 4) =P(S1 x P(S*2) x P(S3*) x P(s4) x P(a/c ≤Shs 1,000,000) = 0.2 x 0.3 x 0.5 x 1 x 0.6 = 0.018 iii. P(a/c settled at end of month 6) =P(S1*) x P(s2*) x P(s3*) x P(S6) x P(a/c >Shs 1m) = 0.2 x 0.3 x 0.5 x 1 x 0.4 = 0.012 c) Expected value of a new account of Shs 2 million. A = Σ(Px X Ak) where Pk is the probability that payment Ak is received at the end of month K. Expected present value of amount outstanding = k X r Ak x P , ` . | + ∑ 100 1 The value of the debt is Shs 2 million, therefore if its not paid by the end of month 3, legal proceedings are taken. Estimate of the expected proportion recovered if legal action is taken. Expected proportion recovered = Σ(mid-point proportion x probability) = 0.2 x 0.1 + 0.5 x 0.3 + 0.7 x 0.4 + 0.9 x 0.2 = 0.63 330 Revision Questions and Answers The expected amount recovered = 0.63 x Shs 2,000,000 = Shs 1,260,000 = A6 P(a/c of Shs 2 million settled at end month 6) = P(S1*) x P(s2*) x P(S3*) x P(S6) = 0.2 x 0.3 x 0.5 x 1 = 0.03 = P6 Accoun t settled at end month Probabili ty Pk Account received A/C Kshs. million PV of amount received Shs. million Expected PV (millions) 1 0.8 2 2 x 0.9852 = 1970.4 x 0.8 2 0.14 2 2 x 0.970 = 1941.4 x 0.14 3 0.03 2 2 x 0.9563 = 1912.6 x 0.03 6 0.03 1.26 1.26 x 0.9145 = 1152.3 x 0.03 Total 1940.06 The expected PV of the amount Kshs. 1,940,060 d) The variables in the problem are: 1. Size of the account 2. Time taken to settle the account 3. If legal proceedings are required, the proportion of the debt recovered. (i) Size of the account Size of account Shs. Mid point Shs. Probabil ity Cumulati ve probabili ty Random number Upto 200,000 100,000 0.1 0.1 0 200,000 – 500,000 350,000 0.2 0.3 1 – 2 1,000,000 – 2,000,000 750,000 0.3 0.6 3 – 5 2,000,000 – 5,000,000 1,500,000 0.3 0.9 6 – 8 3,500,000 0.1 1.0 9 (ii) Account settled End of month Probability Cumulati ve probabili ty Random number 1 0.8 0.8 00 – 79 2 0.14 0.94 80 – 93 3 0.03 0.97 94 – 96 4 or 6 0.03 1.00 97 - 99 331 Answers iii) If legal proceedings are taken: Proportion received Mid point Probabilit y Cumulative probability Random number Upto 0.4 0.2 0.1 0.1 0 0.4 – 0.6 0.5 0.3 0.4 1 – 3 0.6 – 0.8 0.7 0.4 0.8 4 – 7 Above 0.8 0.9 0.2 1.0 8 - 9 Simulations Account 1: Using the random digits in the order given, the RN 8, produces an account value of Kshs 1,500,000. The next two digit RN, 87, produces a settlement time of end of month 2. Therefore the PV of the amount received is: Shs 1,500,000 x 0.5 x 0.9707 = Shs 1,456,050 Account 2: The first RN9 produces an account size of Shs 3,500,000. The next 2 random digits, 98, select a settlement time of 4 or 6 months. Since the account is > Shs 1 million, legal proceedings are taken and a proportion is recovered at the end of month 6. The next RN is 2, which selects the proportion recovered as 0.5. Therefore the present value of the amount received is: Shs 3,500,000 x 0.5 x 0.9145 = Shs 1,600,380. 332 Management Accounting Tables Table I Areas under the Standard Normal Curve from 0 to Z 0 Z Z 0 1 2 3 4 5 6 7 8 9 0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359 0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0754 0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141 0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517 0.4 0.1554 0.1591 0.1623 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879 0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224 0.6 0.2258 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2518 0.2549 0.7 0.2580 0.2612 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852 0.8 0.2881 0.2910 0.2939 0.2967 0.2996 0.3023 0.3051 0.3073 0.3106 0.3133 0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389 1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621 1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830 1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015 333 Management Accounting Tables 1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177 1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319 1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441 1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545 1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633 1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706 1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767 2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817 2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857 2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890 2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916 2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936 2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952 2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4761 0.4962 0.4963 0.4964 2.7 0.4965 0.4966 0.4967 0.4968 0.4669 0.4970 0.4971 0.4972 0.4973 0.4974 2.8 0.4974 0.4975 0.4976 0.4977 0.4877 0.4978 0.4979 0.4979 0.4780 0.4781 2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986 3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990 3.1 0.4990 0.4991 0.4991 0.4991 0.4992 0.4992 0.4992 0.4992 0.4993 0.4993 3.2 0.4993 0.4993 0.4994 0.4994 0.4994 0.4994 0.4994 0.4995 0.4995 0.4995 3.3 0.4995 0.4995 0.4995 0.4996 0.4996 0.4996 0.4996 0.4996 0.4996 0.4997 3.4 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4998 334 Management Accounting Tables 3.5 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 3.6 0.4998 0.4998 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 3.7 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 3.8 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 3.9 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 * From Statistics by SPEIGEL, Copyright 1972 McGraw-Hill Publishing Co. Ltd. Used with permission of McGraw-Hill Book Company. Table II Normal distribution Shaded area = p 0 Z Z 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 P 0.500 0.460 0.421 0.382 0.345 0.308 0.274 0.242 0.212 0.184 Z 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 P 0.159 0.136 0.115 0.097 0.081 0.067 0.055 0.045 0.036 0.029 Z 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 P 0.023 0.018 0.014 0.011 0.008 0.006 0.005 0.003 0.003 0.002 Z 3.0 3.1 3.2 3.3 3.4 P 0.0013 0.0010 1.0007 0.0005 0.0003 335 Management Accounting Tables Table III Percentage points of the t distribution. The table shows the total of the shaded area The table gives the values for the area in both tails. 0 t Area in both tables combined Area in both tables combined Degree of freedom .10 .05 .02 .01 Degrees of freedom .10 .05 .02 .01 v = 1 6.314 12.706 31.821 63.657 v = 21 1.721 2.080 2.518 2.831 2 2.920 4.303 6.965 9.925 22 1.717 2.074 2.508 2.819 3 2.353 3.182 4.541 5.841 23 1.714 2.069 2.500 2.807 4 2.132 2.776 3.747 4.604 24 1.711 2.064 2.492 2.797 5 2.015 2.571 3.365 4.032 25 1.708 2.060 2.485 2.787 6 1.493 2.447 3.143 3.707 26 1.706 2.056 2.479 2.779 7 1.895 2.365 2.998 3.499 27 1.703 2.052 2.473 2.771 8 1.860 2.306 2.896 3.355 28 1.701 2.048 2.467 2.763 9 1.833 2.262 2.821 3.250 29 1.699 2.045 2.462 2.756 10 1.812 2.228 2.764 3.169 30 1.697 2.042 2.457 2.750 11 1.796 2.201 2.718 3.106 40 1.684 2.021 2.423 2.704 12 1.782 2.179 2.681 3.055 60 1.671 2.000 2.390 2.660 13 1.771 2.160 2.650 3.012 12 1.658 1.980 2.358 2.6170 14 1.761 2.145 2.624 2.977 ∞ 1.645 1.960 2.326 2.576 15 1.753 2.131 2.602 2.947 16 1.746 2.120 2.583 2.921 17 1.740 2.110 2.567 2.898 18 1.734 2.101 2.552 2.878 19 1.729 2.093 2.539 2.861 336 Management Accounting Tables 20 1.725 2.086 2.528 2.845 337 Management Accounting Tables Table IV The X² distribution 0 X² Cut-off value Degrees of freedom Level of significance 5% 1% v = 1 3.841 6.635 2 5.991 9.210 3 7.815 11.34 5 4 9.488 13.27 7 5 11.070 15.08 6 6 12.592 16.81 2 7 14.067 18.47 5 338 Management Accounting Tables 8 15.507 20.09 0 9 16.919 21.66 6 10 18.307 23.20 9 339 Management Accounting Tables Table V Percentage points of the f distribution V1 = Degrees of freedom for numerator 1 2 3 4 5 6 7 8 9 10 11 12 1 161 200 216 225 230 234 237 239 241 242 243 244 (4,052) (4,999) (5,403) (5,625) (5,764) (5,859) (5,928) (5,981) (6,022) (6,056) (6,082) (6,106) 2 18.51 19.00 19.16 19.25 19.30 19.33 19.36 19.37 19.38 19.39 19.40 19.41 (98.49) (99.01) (99.17) (99.25) (99.30) (99.33) (99.34) (99.36) (99.38) (99.40) (99.41) (99.42) 3 10.13 9.55 9.28 9.12 9.01 8.94 8.88 8.84 8.81 8.78 8.76 8.74 (34.12) (30.81) (29.46) (28.71) (28.24) (27.91) (27.67) (27.49) (27.34) (27.23) (27.13) (27.05) 4 7.71 6.94 6.59 6.39 6.26 6.16 6.09 6.04 6.00 5.96 5.93 5.91 (21.20) (18.00) (16.69) (15.98) (15.52) (15.21) (14.98) (14.80) (15.68) (14.64) (14.45) (14.37) 5 6.61 5.79 5.41 5.19 5.05 4.95 4.88 4.82 4.78 4.74 4.7 4.68 (16.26) (13.27) (12.06) (11.39) (10.97) (10.67) (10.45) (10.27) (10.15) (10.05) (9.98) (9.89) 6 5.99 5.14 4.76 4.53 4.39 4.28 4.21 4.15 4.10 4.06 4.03 4.00 (13.75) (10.92) (9.78) (9.15) (8.75) (8.47) (8.26) (8.10) (7.98) (7.87) (7.79) (7.72) 7 5.59 4.74 4.35 4.12 3.97 3.87 3.79 3.73 3.68 3.63 3.60 3.57 (12.25) (9.55) (8.45) (7.35) (7.46) (7.19) (7.00) (6.84) (6.71) (6.62) (6.54) (6.47) 8 5.32 4.46 4.07 3.34 3.69 3.58 3.50 3.44 3.39 3.34 3.31 3.28 (11.26) (8.65) (7.59) (7.01) (6.93) (6.37) (6.19) (6.08) (5.91) (5.82) (5.74) (5.67) 9 5.12 4.26 3.83 3.63 3.48 3.37 3.29 3.23 3.18 3.13 3.10 3.07 (10.56) (8.02) (6.99) (6.42) (6.06) (5.80) (5.62) (5.47) (5.35) (5.38) (5.18) (5.11) 10 4.96 4.1 3.71 3.48 3.33 3.22 3.14 3.07 3.02 2.97 2.94 2.91 (10.04) (7.58) (6.55) (5.99) (5.64) (5.39) (5.21) (5.06) (4.93) (4.85) (4.76) (4.71) 11 4.84 3.98 3.59 3.36 3.20 3.09 3.01 2.95 2.90 2.86 2.82 2.79 (9.65) (7.20) (6.22) (5.67) (5.32) (5.07) (4.88) (4.74) (4.63) (4.54) (4.46) (4.40) 12 4.75 3.88 3.49 3.26 3.11 3.00 2.92 2.85 2.80 2.70 2.73 2.69 (9.33) (6.93) (5.95) (5.41) (5.06) (4.82) (4.65) (4.50) (4.39) (4.30) (4.23) (4.18) Values of f: Right tail of the distribution for P = .05 Right tail of the distribution for P = .01 (in brackets). 340 V 2 = D e g r e e s o f f r e e d o m f o r n u m e r a t o r Management Accounting Tables 341 Management Accounting Tables Table VI (a) Table of individual Poisson probabilities Number of occurrences (x) Mean (m) 0 1 2 3 4 5 6 0.1 0.9048 0.0905 0.0045 0.0002 0.000 0.000 0.000 0.2 0.8187 0.1637 0.0164 0.0011 0.0001 0.000 0.000 0.3 0.7408 0.2222 0.0333 0.0033 0.0003 0.000 0.000 0.4 0.6703 0.2681 0.0536 0.0072 0.0007 0.0001 0.000 0.5 0.6065 0.3033 0.0758 0.0126 0.0016 0.0002 0.000 0.6 0.5488 0.3293 0.0988 0.0198 0.0030 0.0004 0.000 0.7 0.4966 0.3476 0.1217 0.0284 0.0050 0.0007 0.0001 0.8 0.4493 0.3595 0.1438 0.0383 0.0077 0.0012 0.0002 0.9 0.4066 0.3659 0.1647 0.0494 0.0111 0.0020 0.0003 1.0 0.3679 0.3679 0.1839 0.0613 0.0153 0.0031 0.0005 Table shows probability of a given number of occurrences for a given mean (m). (b) Table of cumulative Poisson probabilities Number of occurrences (x) Mean (m) 0 1 2 3 4 5 6 0.1 0.9048 0.9953 0.9998 1.00 1.00 1.00 1.00 0.2 0.8187 0.9824 0.9988 0.9999 1.00 1.00 1.00 0.3 0.7408 0.9630 0.9963 0.9996 0.9999 1.00 1.00 0.4 0.6703 0.9384 0.9920 0.9992 0.9999 1.00 1.00 0.5 0.6065 0.9098 0.9856 0.9982 0.9998 1.00 1.00 0.6 0.5488 0.8781 0.9769 0.9967 0.9997 1.00 1.00 0.7 0.4966 0.8442 0.9659 0.9943 0.993 1.00 1.00 0.8 0.4493 0.8088 0.9526 0.9909 0.9986 0.9998 1.00 0.9 0.4066 0.7725 0.9372 0.9866 0.9977 0.9997 1.00 1.0 0.3679 0.7358 0.9197 0.9810 0.9963 0.9994 0.9999 Table shows probability of finding x or fewer occurrences for a given mean (m). 342 Management Accounting Tables Table VII Compound interest Table shows value of £1 at compound interest (1 + r) n Interest rates (r) % Years (n) 1 2 3 4 5 6 7 8 9 10 11 1 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100 1.110 2 1.020 1.040 1.061 1.082 1.102 1.124 1.145 1.166 1.188 1.210 1.232 3 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1.295 1.331 1.368 4 1.041 1.082 1.126 1.167 1.216 1.262 1.311 1.360 1.412 1.464 1.518 5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.469 1.539 1.610 1.685 6 1.061 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.772 1.870 7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.949 2.076 8 1.083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 1.993 2.144 2.304 9 1.094 1.195 1.305 1.423 1.551 1.689 1.838 1.999 2.172 2.358 2.558 10 1.105 1.219 1.344 1.480 1.629 1.791 1.967 2.159 2.367 2.594 2.839 11 1.116 1.243 1.384 1.539 1.710 1.898 2.105 2.332 2.580 2.853 3.152 12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.519 2.813 3.138 3.498 13 1.138 1.294 1.468 1.665 1.886 2.133 2.410 2.720 3.066 3.452 3.883 14 1.149 1.319 1.513 1.732 1.980 2.261 2.578 2.937 3.342 3.797 4.310 15 1.161 1.346 1.558 1.801 2.079 2.397 2.759 3.172 3.642 4.177 4.785 20 1.220 1.486 1.806 2.191 2.653 3.207 3.870 4.661 5.604 6.727 8.062 25 1.282 1.641 2.094 2.666 3.386 4.292 5.427 6.848 8.623 10.835 13.585 Interest rates (r) % Years (n) 12 13 14 15 16 17 18 19 20 25 30 1 1.120 1.130 1.140 1.150 1.160 1.170 1.180 1.190 1.200 1.250 1.300 2 1.254 1.277 1.297 1.322 1.346 1.367 1.392 1.416 1.440 1.562 1.690 3 1.405 1.443 1.481 1.521 1.561 1.602 1.643 1.685 1.728 1.953 2.197 4 1.573 1.630 1.689 1.749 1.811 1.874 1.939 2.005 2.074 2.441 2.856 5 1.762 1.842 1.925 2.011 2.100 2.192 2.288 2.386 2.488 3.052 3.713 6 1.974 2.082 2.195 2.313 2.436 2.565 2.700 2.840 2.986 3.815 4.827 7 2.211 2.353 2.502 2.660 2.826 3.001 3.186 3.379 3.583 4.768 6.275 8 2.476 2.658 2.853 3.059 3.278 3.511 3.759 4.021 4.300 5.960 8.157 9 2.773 3.004 3.252 3.518 3.803 4.108 4.435 4.785 5.159 7.451 10.604 10 3.106 3.395 3.707 4.046 4.411 4.807 5.234 5.695 6.192 9.313 13.786 11 3.478 3.836 4.226 4.662 5.117 5.624 6.176 6.777 7.430 11.641 17.922 343 Management Accounting Tables 12 3.896 4.334 4.818 5.350 5.936 6.580 7.288 8.064 8.916 14.552 23.298 13 4.363 4.898 5.492 6.153 6.886 7.699 8.599 9.596 10.699 18.190 30.287 14 4.887 5.535 6.261 7.076 7.988 9.007 10.147 11.420 12.839 22.737 39.374 15 5.474 6.254 7.138 8.137 9.265 10.539 11.974 13.589 15.407 28.422 51.186 20 9.646 11.523 13.743 15.366 19.461 23.106 27.393 32.429 38.338 86.736 190.050 25 17.000 21.230 26.462 32.920 40.874 50.658 62.669 77.388 95.396 264.698 705.641 Table VIII Present value factors. Present value of £1 (1 + r) -n Periods Interest rates (r) % (n) 1% 2% 4% 6% 8% 10% 12% 14% 15% 1 0.990 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.870 2 0.980 0.961 0.925 0.890 0.857 0.826 0.797 0.769 0.756 3 0.971 0.942 0.889 0.840 0.794 0.751 0.712 0.675 0.658 4 0.961 0.924 0.855 0.792 0.735 0.683 0.636 0.592 0.572 5 0.951 0.906 0.822 0.747 0.681 0.621 0.567 0.519 0.497 6 0.942 0.888 0.790 0.705 0.630 0.564 0.507 0.456 0.432 7 0.933 0.871 0.760 0.665 0.583 0.513 0.452 0.400 0.376 8 0.923 0.853 0.731 0.627 0.540 0.467 0.404 0.351 0.327 9 0.914 0.837 0.703 0.592 0.500 0.424 0.361 0.308 0.284 10 0.905 0.820 0.676 0.558 0.463 0.386 0.322 0.270 0.247 11 0.0896 0.804 0.650 0.527 0.429 0.350 0.287 0.237 0.215 12 0.887 0.788 0.625 0.497 0.397 0.319 0.257 0.208 0.187 13 0.879 0.773 0.601 0.469 0.368 0.290 0.229 0.182 0.163 14 0.870 0.758 0.577 0.442 0.340 0.263 0.205 0.160 0.141 15 0.861 0.743 0.555 0.417 0.315 0.239 0.183 0.140 0.123 16 0.853 0.728 0.534 0.394 0.292 0.218 0.163 0.123 0.107 17 0.855 0.714 0.513 0.371 0.270 0.198 0.146 0.108 0.093 18 0.836 0.700 0.494 0.350 0.250 0.180 0.130 0.095 0.081 19 0.828 0.686 0.475 0.331 0.232 0.164 0.116 0.083 0.070 20 0.820 0.675 0.456 0.312 0.215 0.149 0.104 0.073 0.061 21 0.811 0.660 0.439 0.294 0.199 0.135 0.093 0.064 0.053 22 0.803 0.647 0.422 0.278 0.184 0.123 0.083 0.056 0.046 344 Management Accounting Tables 23 0.795 0.634 0.406 0.262 0.170 0.112 0.074 0.049 0.040 24 0.788 0.622 0.390 0.247 0.158 0.102 0.066 0.043 0.035 25 0.780 0.610 0.375 0.233 0.146 0.092 0.059 0.038 0.030 345 Management Accounting Tables Periods Interest rates (r) % (n) 16% 18% 20% 22% 24% 25% 26% 28% 30% 1 0.862 0.847 0.833 0.820 0.806 0.800 0.794 0.781 0.769 2 0.743 0.718 0.694 0.672 0.650 0.640 0.630 0.610 0.592 3 0.641 0.609 0.579 0.551 0.524 0.512 0.500 0.477 0.455 4 0.552 0.516 0.482 0.451 0.423 0.410 0.397 0.373 0.350 5 0.476 0.437 0.402 0.370 0.341 0.328 0.315 0.291 0.269 6 0.410 0.370 0.335 0.303 0.275 0.262 0.250 0.227 0.207 7 0.354 0.314 0.279 0.249 0.222 0.210 0.198 0.178 0.159 8 0.305 0.266 0.233 0.204 0.179 0.168 0.157 0.139 0.123 9 0.263 0.225 0.194 0.167 0.144 0.134 0.125 0.108 0.094 10 0.227 0.191 0.162 0.137 0.116 0.107 0.099 0.085 0.075 11 0.195 0.162 0.135 0.112 0.094 0.086 0.079 0.066 0.056 12 0.168 0.137 0.112 0.192 0.076 0.069 0.062 0.052 0.043 13 0.145 0.116 0.093 0.075 0.061 0.055 0.050 0.040 0.033 14 0.125 0.099 0.178 0.062 0.049 0.044 0.039 0.032 0.025 15 0.108 0.084 0.065 0.051 0.040 0.035 0.031 0.025 0.020 16 0.093 0.071 0.054 0.042 0.032 0.028 0.025 0.019 0.015 17 0.080 0.060 0.045 0.034 0.026 0.023 0.020 0.015 0.012 18 0.069 0.051 0.038 0.028 0.021 0.018 0.016 0.012 0.009 19 0.060 0.043 0.031 0.023 0.017 0.014 0.012 0.009 0.007 20 0.051 0.037 0.026 0.019 0.014 0.012 0.010 0.007 0.005 21 0.044 0.031 0.022 0.015 0.011 0.009 0.008 0.006 0.004 22 0.038 0.026 0.018 0.013 0.009 0.007 0.006 0.004 0.003 23 0.033 0.022 0.015 0.010 0.007 0.006 0.005 0.003 0.002 24 0.028 0.019 0.011 0.008 0.006 0.005 0.004 0.003 0.002 25 0.024 0.016 0.010 0.007 0.005 0.004 0.003 0.002 0.001 346 i Acknowledgment ACKNOWLEDGMENT We gratefully acknowledge permission to quote from the past examination papers of the following bodies: Kenya Accountants and Secretaries National Examination Board (KASNEB); Chartered Institute of Management Accountants (CIMA); Association of Chartered Certified Accountants (ACCA). We would also like to extend our sincere gratitude and deep appreciation to Mr. Cyrus Iraya for giving his time, expertise and valuable contribution, which were an integral part in the initial development of this Revision Kit. He holds the following academic honours, MBA, B.COM (Accounting), CPA, currently pursuing his Phd in Finance at the University of Nairobi. He is a senior lecturer at Strathmore University, School of Accountancy. MANAGEMENT ACCOUNTING ii Acknowledgment Contents 346 Acknowledgment...................................................................i ACKNOWLEDGMENT...............................................................i 346......................................................................................ii Acknowledgment..................................................................ii ............................................................................................ii 346 Introduction..........................................................................v 346.......................................................................................v ............................................................................................v PART I: INTRODUCTION..........................................................v APPROACH TO EXAMINATIONS...............................................................v Introduction ........................................................................vi 346......................................................................................vi ...........................................................................................vi 346.....................................................................................vii Approach to Examinations...................................................vii Syllabus.............................................................................viii 346....................................................................................viii .........................................................................................viii SYLLABUS................................................................................................................................viii Syllabus...............................................................................ix 346......................................................................................ix ...........................................................................................ix Syllabus................................................................................x 346.......................................................................................x ............................................................................................x Topical Guide to Past Paper Questions............................................................................xi 346......................................................................................xi ...........................................................................................xi TOPICAL GUIDE TO PAST PAPER QUESTIONS...................................................................xi Topical Guide to Past Paper Questions..................................xii Contents iii 346.....................................................................................xii ..........................................................................................xii 346....................................................................................xiii Introduction.......................................................................xiii .........................................................................................xiii 346 Past Paper Questions and Answers...............................................................................1 PART II: PAST PAPER QUESTIONS AND ANSWERS....................1 Questions...............................................................................................1 ............................................................................................2 Questions – Past Papers 346......................................................................................2 Past Paper Questions and Answers. 3 ............................................................................................3 346......................................................................................3 Answers...............................................................................................76 346...................................................................................199 Answers – Past Papers 346.................................................76 Past Paper Questions and Answers..................................199 ........................................................................................199 ..........................................................................................76 Answers – Past Papers 346..........................................202 ........................................................................................202 Past Paper Questions and Answers..................................203 346...................................................................................203 ........................................................................................203 Answers – Past Papers.......................................................204 346...................................................................................204 ........................................................................................204 346...................................................................................209 ........................................................................................209 Past Papers Questions and Answers............................................................................209 Part III: Comprehensive Mock Examinations.......................212 Questions - Mocks..............................................................................212 ........................................................................................213 MANAGEMENT ACCOUNTING iv Acknowledgment 346...................................................................................213 ........................................................................................212 Questions - Mocks..........................................212 346...................................................................................212 Comprehensive Mock Examinations....................................213 ........................................................................................241 Answers - Mocks................................................................................241 346...................................................................................241 Comprehensive Mock Examinations....................................241 Answers - Mocks............................................242 346...................................................................................242 ........................................................................................242 Part IV: Revision Questions and Answers............................283 Questions...........................................................................................283 346...................................................................................283 Revision Questions and Answers........................................283 ........................................................................................284 ........................................................................................283 Questions.......................................................284 346...................................................................................284 Answers.............................................................................................302 Answers..........................................................302 346...................................................................................303 Revision Questions and Answers........................................303 346...................................................................................302 ........................................................................................303 ........................................................................................302 346...................................................................................333 346...................................................................................334 ........................................................................................334 ........................................................................................333 Management Accounting Tables.........................................333 Management Accounting Tables..................................334 v Introduction v PART I: INTRODUCTION APPROACH TO EXAMINATIONS No amount of examination room technique will enable you to pass unless you have prepared yourself thoroughly before hand. The period of preparation may be months or even years and must include a good grasp of the course content and a proper familiarity with the type of examination questions that have been set in the past. It is no use expecting to pass with a feverish last minute reliance on this revision kit. By the end of your study of this revision kit, you should be able to answer every question in a typical examination set-up. The Mock questions provided at the end are to be worked out on a simulated exam scenario. Before the examination: a) Make sure you know the exact time, date and location of examination. b) Carefully check your travel arrangements. Leave yourself adequate time. c) Check over your examination equipment: Calculator? Spare battery? Pens? Pencils? Watch? d) Check your examination number. In the examination room: You need to be calm and confident in the examination room. Before you start writing • • • • Carefully read the whole examination paper including the rubric Decide the sequence you will tackle the questions. Generally, answer the easiest questions first. Decide the time allocation for each question. In general the time allocation should be in direct proportion to the marks for each question. Read the questions you are answering again. Do you know exactly what the examiner is asking? Underline the key words in the question and keep these in mind when answering. Dealing with questions: 1. a) Make sure you plan each question first. Make a note of the main points or principles involved. If you are unable to finish the question you will gain some marks from these points. b) Attempt all questions required under each part of each question. MANAGEMENT ACCOUNTING vi Introduction c) Do not let your answer rumble on. Be as brief as possible consistent with covering all the points you know. d) Follow a logical sequence in your answers. e) Write neatly, underline headings and if the question asks for a particular sequence of answer then follow that sequence. f) If diagrams, tables or graphs are required give them plenty of space, label them neatly and comprehensively, and give a key to symbols. A simple clear diagram showing the main points can often gain a good proportion of the marks for a question. • • Concentrate on answering the questions set not some related topic. MANAGEMENT ACCOUNTING . Use every minute for checking and rechecking or adding points to questions answered. Do not leave the examination room early.Approach to Examinations vii When you have finished writing: a) Check that you have followed the examination regulations regarding examination title. b) Make sure you include all the sheets you require to be marked. In general. which you happen to know something about. Always attempt every question set and every part of each question. c) If you have time carefully read each and every part of each answer and check each calculation. vii i Syllabus SYLLABUS PAPER NO. the statistical properties of regression. special orders • Make or buy decisions.0 SPECIFIC OBJECTIVES A candidate who passes this subject should be able to: Determine costs for an organization’s operations Analyze managerial functions which require decision making • Evaluate organizational processes with a view to determining the most efficient and effective means of resource utilization.1 Managerial Decisions and Information • Value of information imperfect information. sensitivity analysis. simple and multiple regression. simulation and statistical methods. stochastic time series.3 Short Term Planning Decisions • Cost-Volume-profit analysis under uncertainty. Design management accounting systems. forecasting with time series models Application of the methods in solving management accounting problems • 14. in decision-making: perfect and 14. pricing decisions and other similar short-run decisions • Learning curves and estimating learning effect 14.4 Advanced Budgeting and Variance Analysis • Motivational aspects • Advanced variances .Volume -profit analysis with multiple products • Risk assessments • Application of marginal costing • Product mix decisions. probability tree simulation • Cost . 14. linear time series models.2 Cost Estimation and Forecasting • An overview of the methods of cost estimation and prediction: Engineering. Time series models. CONTENT 14. statistical analysis. smoothing and extrapolation. 14 MANAGEMENT ACCOUNTING OBJECTIVE To ensure that the candidate can apply modern tools of analysis in the solution of management problems in different functional areas. ix Syllabus 14.5 Inventory Control Decisions • • Cost of holding stock Stock replenishment models MANAGEMENT ACCOUNTING . tendering.x Syllabus • • • • • • • 14. diversification and retrenchment The use of Markov analysis in the formulation of strategic moves 14.7 Strategic Decisions • • Application of game theory to management: Collective bargaining.6 • Quantity discounts Timing of replenishment Shortage cost models Stochastic inventory models Pareto analysis Simulation of reorder models ABC analysis Resource Allocation and Optimization Decisions Decision making through utilization of the following quantitative techniques: Decision tree and sequential processes. mathematical programming (linear. transportation model 14. negotiations. non-linear.8 Performance Evaluation Decisions • • • • • • • • Responsibility accounting and responsibility systems Methods of evaluating responsibility center performance such as return on investment and residual income Evaluation of foreign based centers such as foreign exchange gains and losses Transfer pricing and risk-sharing in decentralized firms International transfer pricing in foreign centers Managerial incentives schemes Strategic cost management Activity based costing . integer programming. 2 Cost estimation and forecasting 14.3 Short term planning decisions 14.5 Inventory control decisions MANAGEMENT ACCOUNTING . The questions and answers are provided in PART II of the Kit.1 Managerial decisions and information 14. TOPIC YEAR June 2003 Question 3 June 2002 Question 3 May2002 Question 1 June 2001 Question 5 July 2000 Question 5 June 2003 Question 4 May 2002 Question 2 June 2001 Question 3 June 2003 Question 1 December 2002 Question 5 December 2000 Question 5 July 2000 Question 1.4 Advanced budgeting and variance analysis 14.xi Topical Guide to Past Paper Questions TOPICAL GUIDE TO PAST PAPER QUESTIONS Below is an outline of the major topics of the syllabus and an assortment of questions that have featured in the past CPA examinations (July 2000 .Dec 2005). 2 June 2003 Question 2 December 2002 Question 2 May 2002 Question 4 December 2002 Question 2 December 2001 Question 1 December 2000 Question 2 July 2000 Question 14. 8 Performance evaluation decisions May 2002 Question 5 .xii Topical Guide to Past Paper Questions 4 December 2002 Question 1 December 2001 Question 2 December 2000 Question 3 June 2003 Question 5 December 2001 Question 3 14.7 Strategic decisions 14.6 Resource allocation and optimization decisions 14. Introduction December 2001 Question 4. 2 July 2000 Question 3 May 2002 Question 3 December 2002 Question 4 xiii 14. 4 3 2 2 4 2 2 2 2 2 1 2 2 2 1 1 Course content covered. Value of information in decision making Inventory control decisions Cost estimation: Regression analysis Relevant Costs for non-routine decisions Advanced Budgeting and Control Theory Cost-Volume-Profit analysis Advanced Variances Activity Based Costing Simulation Analysis Transportation Modeling Linear Programming Performance Evaluation Transfer Pricing Game Theory Strategic Cost Management Network Analysis MANAGEMENT ACCOUNTING .9 Emerging trends in Managing accounting MANAGEMENT ACCOUNTING EXAM ANALYSIS: JUNE 2000 TO DEC 2005 Frequency . 5 June 2001 Question 1. 4 The Kagocho Company has offered to supply 2000 kg of product Q at a delivered price of 90% of Timao’s Co..00 5. Ltd. Per kg) Direct labour @ Sh. Required: a) State with supporting calculations.20 8. is extremely busy. Data for its four products in 2nd quarter were: Product P Output (Kg) Selling price (Sh.00 49. will then be able to produce extra of product P instead of product Q to the plant’s total capacity. 80 17. 20 9. Although demand is still rising.40 26. Selling price.00 7.00 34.80 76. Ltd.00 95. it cannot increase its output more than an additional 5% from its existing labour force.60 65.2 TIME ALLOWED: 3 HOURS 19. It has increased its output and sales from 12. which is now at its maximum. whether Timao Co.40 39.20 7.00 112. Per kg) Costs (Sh. Timao Co.60 19.20 132.300 kg in the 2nd quarter..900 kg in 1st quarter of the year to 17.00 54.90 41. Ltd.40 Product R 3480 99. Timao Co.60 per hour) Direct materials Direct packaging Fixed overhead (Absorbed on basis of direct labour cost) 0 4560 162 Product Q 6960 116. 40 13.1 Questions and Answers Past Paper PART II: PAST PAPER QUESTIONS AND ANSWERS QUESTIONS JULY 2000 QUESTION ONE A processing company.30 0 Product S 2300 136. (15 marks) b) Which would be the most profitable combination of subcontracting 2000kg of one product at a price of 90% of its . Ltd should accept the Kagocho Company’s offer. (5 marks) (Total: 20 marks) .Questions – Past Papers 2 selling price and producing extra quantities of another product up to the plant total capacity? Assume that the market can absorb the extra output. . A and B. The current sales prices and sales demand are:A B Required: Price (Sh.400.1 in price would result in an increase in demand of 500 units.000.000.3 Questions and Answers QUESTION TWO Past Paper “Control theory offers valuable insights into the design and operation of management accounting information systems.000 units at Sh. The unit variable cost is sh. (4 marks) b) A manufacturer produces and sells two products. (6 marks) Explain why the transfer price calculated in (i) above may lead to sub-optimal decision making from the point of view of XYZ Ltd taken as a whole. and can also be transferred to other divisions within the organization.000. Required: i ii Calculate the transfer price per component which Z division should quote to X division so that its residual income target is achieved. The following budgeted information relating to Z division has been prepared for the coming financial year.25. (Total: 20 marks) QUESTION THREE a) The Z division of XYZ Ltd.20.000. Capital employed: Sh. A review of selling prices is in progress and it has been estimated that.1.500 units per every Sh. Sales to external customers: 500.000 .000 21.) 30 58 Demand (Units) 15.000 with cost of capital of 13% The X division of XYZ Ltd has asked Z division to quote a transfer price for units of the component.000 units. Maximum production/sales capacity 800. 5. produces a component which it sells externally. but only under circumstances where an organization’s environment is stable and predictable and outcomes are clearly measurable.” Required: Comment on the relevance and validity of this statement within the analysis or established control theory systems within a business organization.8 for A and B respectively. Fixed costs directly attributable to the division Sh. The division has set a performance target for the coming financial year of residual income of Shs.1 increase in price and similarly a decrease of Sh. Variable cost per component Sh. for each product and increase in the selling price would result in a fall in demand of Sh.12 and sh.37. As part of a review of the system. (WLL) is trying to decide whether or not to drill for oil on a particular site in North Eastern Kenya.0. The Chief Engineer has assessed the probabilities that there will be oil as follow. part no.3 The company works for 360 days per year and it costs Sh. Required: a) Calculate the level of buffer stock implicit in a re-order level of 150.4 0.2 5000 0.1. (3 marks) e) Discuss the possible alternatives to a re-order level EOQ inventory system and their advantages and disadvantages.000 units.6 0.2. lead times.8 . X 206 Probabilit Demand Probability y (units) 0. The various control levels were set originally based on estimates which did not allow for any uncertainty and this has caused difficulties because.025 for storage plus 10% opportunity cost of capital. has been studied in detail as follows: Lead times (Days) 15 20 25 Data for Part No. X 206. typical stock item. The holding cost is estimated at Sh. The re-order level for this part is currently 150.2 0. demands and other factors to vary. based on past experience.5 7000 0. Oil No oil 0.000 to place an order. (2 marks) c) Calculate the expected annual stock-outs in units. (10 marks) QUESTION FOUR Muthothi Ltd. Operates a conventional stock control system based on re-order levels and Economic Order Quantities (EOQ). Each unit is purchased at Sh. in practice.000 units. (4 marks) d) Compute the stock-out costs per unit at which it would be worthwhile raising the re-order level to 175. (5 marks) b) Calculate the probability of stock-outs.000 units and it can be assumed that the demands would apply for the whole of the appropriate lead-time.Questions – Past Papers 4 Calculate the profit-maximizing price for reach product. (6 marks) (Total: 20 marks) QUESTION FIVE Watt Lovell Ltd. 3 million. WLL has used the firm many times before and has made the following estimates: 1. The following additional information is also provided: • The cost of drilling is Sh. If there really is oil. then there is a 95% chance that the report will be favourable. Required: a) Advise the company on whether to acquire additional information from the consultants (16 marks) b) Compute the value of imperfect information. (4 marks) (Total: 20 marks) .70 million • The cost of obtaining information is Sh.10 million. If there is no oil then there is only a 10% chance that the report will indicate that there is oil. 2. • The value of the benefits if oil is found is Sh.5 Questions and Answers Past Paper It is possible for WLL to hire a firm of international consultants to carry out a complete survey of the site. using simulation analysis and the following random numbers: .200 per week. We know they are not coming out with exactly what they feel. over the range 470 to 530. Discuss. (4 marks) b) In his study of: “the impact of budgets on people” C Argyris reported the following comment by a financial controller on the practice of participation in setting budgets in his company: “We bring in the supervisors of budget areas.25 005 The unit cost of holding stock is Sh. Again. we tell them that we want their frank opinion.Questions – Past Papers 6 DECEMBER 2000 QUESTION ONE TIME ALLOWED: 3 HOURS a) Differentiate between a feedback control system and a feed forward control system.5. (6 marks) (Total: 20 mark s) QUESTION TWO Sola Ltd. but most of them just sit there and nod their heads. weeks Probability Lead time distribution 1 2 3 4 0.00 and the unit cost of being out of stock is Sh. The components are bought from outside suppliers. Required: Estimate the average cost per week of the above policy. The unit is an initial stock of 2000 components and the company has decided to order in batches of 2500 whenever the stock level falls below 1500 components. The cost associated with placing an order is Sh. Explain why managers may be reluctant to participate fully in setting budgets. past experience indicates that the time between the order being placed and delivery varies as follows: Lead time.02 0. the company has determined that the demand for the component can be approximated by a normal distribution with a mean of 500 and a standard deviation of 10. (10 marks) c) A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity.5 per week applied to the total stock held at the end of each week. The company does all its accounting at the end of the week and all ordering and delivery occur at the beginning of a week. is a manufacturing company that requires component XLA20 in one of its production lines. I guess budget scares them”.50 0. which may arise from the imposition of budgets by senior management. Form past experience. indicating the negative side effects. The demand at S1.S2.2. 220 180 260 S4 Sh.2. Distribution costs (in Sh.300 at S1. P2 and P3are 625. P1 220 P2 240 P3 260 S2 Sh. (17 marks) (Total: 20 marks) .500 at plants P1 and P3 and Sh. S3 and S4 are 850. the price per unit charged is Sh.2. S3. Currently.1.P2. The variable unit production costs are Sh. Sh.250 at S3. (Estimate these probabilities in ranges of 5) QUESTION THREE 1. These outlets already have requirements in excess of the combined capacity of its three production plants P1. determine the contribution to profit for the optimal allocation. 360 280 240 From Since the four outlets are in different parts of the country and as there are differing transportation costs between the production plants and the outlets along with slightly different production costs at different production plants there is a pricing structure which enables different prices to be charged at the four outlets. (EFL) produces a unique type of computer desks. 380 and 230 desks respectively while the plant capacity at plant P1. The company needs to know how to allocate its production capacity to maximize profits. S2. The Executive Furnitures Ltd. and P3. and Sh.2. 240 200 200 S3 Sh. 640. Four of EFL’s main outlets are S1.350 at S2. (3 marks) 2. 825 and 450 desks respectively. and S4.400 at S4. Required: Using the transportation algorithm.7 Questions and Answers For Demand: 034 162 For Leadtime: marks) 95 74 3 33 2 73 73 8 61 6 10 63 6 80 4 76 96 4 56 0 51 736 111 74 Past Paper 61 4 41 0 69 8 95 9 63 7 77 4 24 6 76 2 (Total: 20 • Hint: • Use 15 trial runs Round off the demand probabilities to 3 decimal places.1.550 at plant P2. Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs.) per unit from each production plant to each outlet are given in the following table: To S1 Sh. Sh. The businesses may justify their pricing policy by stating that they need to earn foreign exchange from foreign markets and recover their research and development costs. Their effect will be to increase both the variable and fixed costs by 20% each over the budgeted figures. Required: a. At this level of activity. (2 marks) 2. Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets than for export sales. Show whether and by how much Alvis Kiptoo should adjust his selling price in respect to increases in: • Fuel costs.000 units. Information about two price increases has just been received from suppliers: one is for materials (which are included in Alvis Kiptoo’s variable costs) and one is for fuel (which included in his fixed costs). Alvis Kiptoo has budgeted that output and sales of his single product will be 100.Questions – Past Papers 8 QUESTION FOUR 1. (2 marks) • Material costs.200 demand would be nil. Required: i Critically explain briefly the rationale for such a differential pricing policy. (5 marks) ii Should earning of foreign exchange be a factor in a firm’s pricing policy. His sales manager estimates that the demand for the product would increases by 1000 units for every decreased of Sh. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100.25. (8 marks) . Alvis Kiptoo aims at maximizing profits from his business. his unit variable costs are budgeted at Sh. (4 marks) (Total: 20 marks) QUESTION FIVE a) Explain the advantages of using Value Added Statements (VAS) for interdivision for comparisons in decentralized firm.1 in unit selling price (and vice versa) and that at a unit selling price of Sh. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases.50 and his unit fixed costs at Sh. (4 marks) c. (3 marks) b.000 units in the coming year. plus production overheads against home demand. 200 64. 70 24 12 R 8. 60 20 8 Cost drivers Machine hours Machine hours Number of production runs Number of production runs Number of components receipts Number of customer orders Information on the cost drier is given as follows: P Direct labour hours per unit Machine hours per unit Number of components per unit Number of component receipts Number of customer orders Number of production runs Required: Using activity based costing (ABC) show the cost and gross profit per unit for each product during the period.000 54.000 Sh. 102. and R.000 Sh. Q.000 84. Is a manufacturing company that makes only three products P. 50 16 8 Total Sh.800 36.000 Q 16.9 Questions and Answers b) Past Paper ABC Lt. (12 marks) (Total: 20 marks) Q 1 ½ 3 18 6 6 1½ 1 5 80 20 16 R 1 1½ 8 64 10 8 .000 Sh.000 49. Data for the period ended last month are as follows: Units produced and sold Sales price per unit Direct material cost per unit Direct labour cost per unit Production overheads costs Machining costs Production scheduling Set-up costs Quality control Receiving materials Packing materials P 12.000 390. 100 90 80 70 60 50 Quantity sold Units 1000 2000 3000 4000 5000 6000 TIME ALLOWED: 3 HOURS The variable and fixed costs of each division are as follows: Mugaa Gwashati Sh. To enable the company offer a better quality product at a lower cost than its competitors.000 90.000 The transfer price is Sh. (12 marks) b) Which selling prices maximize the profits of Gwashati division and the company as a whole? Comment on why the selling price (which is selected by the company) is not selected by Gwashati division. Outline the objections which can be raised against this basis.Questions – Past Papers 10 JUNE 2001 QUESTION ONE Kanorer Enterprises Ltd has two divisions Mugaa and Gwashati. (3 marks) c) It has been argued that full cost is an inappropriate basis for selling transfer prices. This team met weekly to monitor the status of the project. which it sells. One unit of the intermediate product is used in the production of the final product. (5 marks) (Total: 20 marks) QUESTION TWO K. and is determined on a full cost-plus basis. the company has decided to expand its present facility to accommodate a new line. Gwashati division incorporates the intermediate product into a final product. The expected units of the final product which Gwashati division estimates it can sell at various selling prices are as follows: Net selling Price Sh. Required: a) Profit statements for each division and the company as a whole for the various selling prices. A project team has been formed within the company to direct and coordinate the plant expansion. Sh. the management developed the following list of required activities: . Mugaa division manufactures an intermediate product for which there is no external market. Variable cost pr unit 11 7 Fixed cost per annum 60. Prior to the start of the plant expansion.K Limited manufactures security systems for homes.35 for the intermediate product. 000 in lost profit.000 5.000 4.000 12.000 20. 1. The financial controller of the company has considered many possible independent variables and equations to predict sales and has .500 4. (3 marks) Kelele Company Ltd.D C F G E. The company is considering the use of simple and multiple linear regression analysis to forecast annual sales for they are 2001 because previous forecasts have been inaccurate.000 7.000 26.H.11 Questions and Answers Past Paper Activity Predecess or A B C D E F G H I J K L M Prepare architectural plan Construct building Develop equipment Specifications Design and construct Equipment Install/Test equipment Develop staffing plan Hire staff Train staff Pilot production run Market research Complete product development Complete package design Complete marketing plan A A C B.000 30.000 24.000 50. The sales forecast will be used to initiate the budgeting process and to identify more accurately the underlying process that generates sales. K Ltd knows that other companies are working on a competing product.000 25.000 4.000 6.000 10. L J.000 8. The company estimates that the delay of every week beyond the 40th week in bringing out the new line will cost the firm sh.000 6.000 30.000 33 3 25 4 2 2 1 1 4 10 2 6 52.000 4.000 20. What will be the cost to the firm if the project is completed in 50 weeks? (3 marks) d) Is it advisable to crash the profits from 51 to 45 weeks? Why? (2 marks) (Total: 20 marks) QUESTION THREE Explain why a high correlation between the independent and dependent variables may or may not necessarily prove that a change in the independent variables may or may not necessarily prove that a change the independent variable causes a change in the dependent variable. (8 marks) b) Determine the minimum time and minimum cost network.000 Required: a) Determine the critical path and list the critical activities. manufacturers crockery.000 Crash Time Cost in (Sh) weeks ‘000’ 7 12.000 2.000 24. (7 marks) c) K.000.000 15.K J Normal Time in weeks 10 35 4 25 5 2 4 2 1 8 12 4 8 Costs (Sh) ‘000’ 10..000 4. (1 KL = 1.Questions – Past Papers 12 narrowed his choices to four equations.000 0.7.000 0.5 11.00 2. operates daily round-trip flights on the Nairobi-Mogadishu route using a fleet of three light aircraft.00.81 Equation IV Yt N t t Zt Zt t 3.1 = actual Kenya gross national product in time period t – 1 Nt – 1 = company’s net income in time period t – 1 Required: a) Using the relationship T = a + bx.000.00005 50.000.90 Equation III Yt Zt 1 4.1 50 Zt 0. Equatio nI Yt Yt 1 2.00 0 5.00001 5 T-statistic 20.00 2.00 0 0.00006 25. (6 marks) (Total: 20 marks) QUESTION FOUR Skyline Ltd. “Skyline 2 and Skyline 3.000 0. The following is a statistical summary of the four equations and definitions of the variables used in the exercise. He used annual observations from twenty prior years to estimate each of the four equations.96 Dependent variable Independent variable Intercept Coefficient of independent variable T-statistic Standard error of estimate Coefficient of determination (sh ) (sh ) The other statistics for Equation IV were estimated as follows: Zt .000 * * 2.450.500.94 Equation II Yt Zt 5.00 7.50 15 Where: Yt = forecast sales (in shillings) for the company in time period t Yt – 1 = actual sales (in shillings) for period t – 1 Zt = forecast Kenya gross national product in time period t Zt .600.500.500.1 0.(2 marks) e) Explain the advantages and disadvantages of using Equation IV to forecast annual sales. These three aircraft are Skyline 1.000 0. (4 marks) d) Explain why the Financial Controller might prefer Equation III to Equation II.00 2. write Equations II and IV (3 marks) b) If the actual sales for the year 2000 were sh.000 0. The standard quantity of fuel used on each round-trip over this twelve-month period has a mean of 100 KL and a standard deviation of 10 KL.00001 .550. what would be the forecast sales for the year 2001? (2 marks) c) Explain the meaning and significance of the coefficient of determination.000 litres) Variable Coefficient Nt .500. 13 Questions and Answers Past Paper James Thuo. Budgeted estimates for the year ending 300 June 2002 are as follows: 1. indicate the variance investigation decisions which should be made. James Thuo monitors trends in the SQS charts to determine if additional investigations decisions should be made. The budgeted occupancy level will vary with the client fee level per day and is estimated at different percentages of maximum capacity as follows: . The maximum capacity of the center is 50 clients per day for 350 days in the year. In addition. He investigates all those flights with fuel usage greater than two standard deviations from the mean. The service is provided on a residential basis and clients reside for whatever number of days that suit their needs. (5 marks) b) Present the SQC charts for round-trip fuel usage by each of the three aircraft I May 2001. 2. the operations manager of Skyline Ltd. uses a statistical quality control (SQC) approach in deciding whether to investigate the variances from the standards fuel usage per round-trip flight.. James Thuo received the following reports for round-trip fuel usage for the month of May 2001 from the pilots of the three planes operating on the Nairobi-Mogadishu route: Flight 1 2 3 4 5 6 7 8 9 10 Skyline 1 KL 104 94 97 101 105 107 111 112 115 119 Skyline 2 KL 103 94 96 107 92 113 99 106 101 93 Skyline 3 KL 97 104 111 104 122 118 126 114 117 123 Required: Using the ± 2σ rule. Clients will be invoiced at a fee per day. (6 marks) c) What inferences can be made from the three SQC charts developed in (b) above? (5 marks) (Total: 16 marks) a) QUESTION FIVE a) Mount Sinai Health Centre specializes in the provision of sports/exercise and medical/dietary advice to clients. 1. most likely and low levels provided in the question are estimated at 0. Sh. (5 marks) (Total: 24 marks) .400 High Most likely Low Occupancy level Occupancy as a percentage of maximum capacity 90% 75% 60% 3.900. 0. Required: i. (8 marks) b) The probabilities of variable costs levels occurring at the high.000 4. A summary which shows the budgeted contribution to be earned by Mount Sinai Health Centre for the year ended 30 June 2002 for each of the nine possible outcomes. The range of cost levels reflects only the possible effect of the purchase prices of goods and services.1. State the client fee strategy for the year to end 30 June 20002 which will result from the use of each of the following decision rules. (11 marks) ii. 4.3 respectively Required: Compute the maximum amount you would be willing to pay to acquire perfect information.1. Maximin. Minimax regret.1. Variable costs are also estimated at one of the three levels per client day.400 respectively. (a) (b) (c) Maximax.600 4.700 ad Sh. The high most likely and low levels per client per day are Sh.Questions – Past Papers 14 Client fee per day (sh) 3.6 and o. (4 marks) (Total: 20 marks) QUESTION TWO Boots Ltd.1 1. the demand during the lead-time has generated the following frequency distribution: Lead time demand Number of stock cycles 0 1 1 2 2 6 3 8 4 10 5 8 6 8 7 5 8 2 TIME ALLOWED: 3 HOURS Each time the warehouses runs out of stock.0 0 0.50 plus 10% opportunity cost of capital.250 each. C.50 40 B 6.5 0. is a large cash and carry warehouses which sells electronics. The lead-time is three days.000 Kgs 6.4 1. Kiko Ltd.50. Kiko Ltd.50 42 C 6.15 Questions and Answers Past Paper MANAGEMENT ACCOUNTING DECEMBER 2001 QUESTION ONE Kiko Ltd. Incurs a cost of Sh. Purchases the most popular model of calculators (FX 100) directly form the manufacturer at a cost of Sh.00 per hour . During the last 50 stock cycles.3.10 per Kg Forming Sh. manufactures a range of five similar products. D and E. A. together with the weekly inputs available and selling prices of each product.00 3. Whenever an order with the manufacturers is placed.00 52 Weekly inputs available 35.00 0.12.7 5 48 E 6.0 1.1 1. Average sales per a 300 day year are 475 calculators.50 0. an emergency order is placed with an extra cost of Sh.75 4. B. Required: a) The economic order quantity (EOQ) and the reorder level. Inputs Raw materials (Kg) Forming (hours) Firing (hours) Packing (hours) Selling price (Sh.50 1.00 4. the table below shows the quantity of each of the required inputs necessary to produce one unit of each product.50 44 D 6.00 0.000 hours 4. The stock holding costs are estimated at Sh. (16 marks) b) The total annual relevant costs for the order quantity in (a) above.2.0 0 6.20 per calculator.) A 6.000 hours 30.25 6.000 hours The costs of each input is as follows: Material Sh. Questions – Past Papers 16 Firing Packing Required: a) Formulate this problem as a Linear Programming problem.1. (7 marks) b) The problem has been solved using a computer package and the following final table of a simplex solution has been produced: Sh.30 per hour Sh.00 per hour .8. 357 321 9. (8 marks) Kamau and Njoroge are two cousins specializing in hawking business along River road.9 7 -0. (4 marks) ii Describe the implications of using this plan in terms of unused resources and overall contribution to profit.09 1.482 2. T an U are the respective number of hours short of maximum weekly input of forming.02 S 0 1 0 0 0 Past Paper T 0 0 1 0 0 U 2.1 4 8.18 -0. Each of the cousins is considering expanding to include in their lines of business.8 1 Value 3.2 6 C 1. items on which their rivals now have a monopoly. (3 marks) iii In the context of this problem explain the meaning of “The dual or shadow price of a resource” (3 marks) iv There is a proposition that the company manufactures an additional product which would sell at Sh. one hour of forming time. i . Kamau figures out that if he does not expand his business and his cousin does.3 7 0. sales have been decreasing partly due to the harsh economic condition in Kenya and partly due to restrictions by the City Council.34 1.36 -0.46 0. firing and packing time.28 0.321 105. S.17 Questions and Answers Bas is A B T E Zj A 1 0 0 0 0 B 1.0 4 0.1 8 0. B.18 2. Kamau specializes in second hand shirts while Njoroge specializes in cheap electronic goods.52 0.02 1.50 per unit. However.79 1 Where A. Each unit will need 6 kg of raw material. Use this table to find the optimum weekly production plan.0 6 D 0.27 -0.2 3 2. five hours of firing time and one hour of packing time. it will hurt his trade by Sh. X is the amount of raw material that falls short of the maximum available. C. If neither of them expands inventory to include the extra product.500 of profit per day.29 0. Each knows that the other is considering this expansion and this influences each of their decisions. Is it a worthwhile proposition? (3 marks) (Total: 20 marks) QUESTION THREE (a) (b) Briefly explain four ways in which competitive situations (or games) can be classified.79 2.02 2.1 4 2.51 E 0 0 0 0 0 X 0. D and E are the weekly production levels for the five products. 000 per day. Mega Techniques Ltd.000 Direct wages: Department X: 3 men for 4 weeks at Sh. he believes the combination of location and expanded inventory will increase his profits by Sh.000 1.1. Required: i Prepare a game matrix and show that a pure strategy does not exist.600 per man/week Variable overhead: .000 8.000 which included an estimated normal profit mark-up of 10 per cent on total costs. the sales manager of Mega Techniques Ltd.27. However. Had recently gone into liquidation and will not therefore take the equipment.280. production Fixed. (4 marks) ii Solve the above game to determine the average winnings (or losses) each of the cousins would expect. The costs incurred to manufacture the machine were Direct materials Direct wages Overheads: Variable Fixed. During the past year.000 2. makes special purpose equipment according to customer specifications. (8 marks) (Total: 20 marks) QUESTION FOUR 1.000 540.000 After a sustained search.21.420.9. Mega Techniques Ltd’s production department has made a preliminary assessment which reveals that conversion would entail extra work costed as follows: Direct materials Sh. Finished construction the equipment only to be notified that Pawa Ltd. ordered a specialized equipment to be fabricated for it. this will result in no net increase in business. selling and administration Sh. had been agreed at Sh. The original price to Pawa Ltd.800. Pawa Ltd. If he expands and his cousin does also. Mega Techniques Ltd. 3.160.Questions – Past Papers 18 Kamau thinks it will boost his net profit by Sh.. which has indicated that it could buy the machine if certain conversion work could be carried out.576. one of its loyal customers.108. Zimwi Systems Ltd.000 360.000 per man/week Department Y: 1 man for 4 weeks at Sh.500 per day due to his superior location. if he alone expands and his cousin does not. Has managed to locate one potential buyer. If not needed for the conversion they could be used in the production of another machine in place of materials that would currently cost Sh. In the original machine. 7. Department Y has idle staff. The manufacture of M101.000 3.000.540. 6. ii Type Q could be sold to a scrap merchant for Shs.000. Required: a) The minimum price that Mega Techniques Ltd. Department Y: 25 per cent of direct wages.50 for every Sh. iii Type R would need to be scrapped at a cost to Mega Techniques Ltd.2. all of whom are paid at the standard rate of Sh. for organizational reasons its labour force cannot be reduced below its present level of four employees. 270 per hour to put it into a suitable condition for sale.108. A non-returnable deposits of 12% of the selling price.162.000 if the machine is scrapped. The designs and specifications of the original machine could be sold in a neighbouring country for a sum of Sh. The materials for the conversion are at present in stock. (16 marks) b) State clearly any assumptions that you have made in arriving at your conclusions in (a) above.684. One of the company’s finished products involves .000. It is the company’s normal practice to charge supervision to fixed overhead.19 Questions and Answers Past Paper 20 per cent of direct wages Fixed production overhead: Department X: 75 per cent of direct wages. An additional temporary supervisor would have to be engaged for the conversion work at a cost of Sh. The conversion would be carried out in two departments: Department X is currently extremely busy and it is estimated that its contribution overheads and profits is Sh. of Shs.600 per week. The following additional information is provided: 2. for the converted machine.1 of labour. Pawa Ltd. Explain clearly how you arrive at your figure. 5. (4 marks) (Total: 20 marks) QUESTION FIVE Madoadoa Limited is a multi-division manufacturing company. Had paid Mega Techniques Ltd.21. 360. should accept from Zimwi Systems Ltd. there were three types of basic materials: i Type P could now be sold to a scrap merchant for Sh.270.000 but it would take 120 hours of labour paid at Shs. 4. Makini is of the opinion that his division should be allowed to take all its requirement (30.150.610.. Mwanzo division manufactures the chassis for M101 and transfers it to Mwisho division where it is reworked. a competitor of Mwanzo division offering to supply a minimum of 30.000. Makini. The unit price would be Sh.22.000. has been considering the possibility of sourcing the chassis from outside suppliers.000 Mwisho division Quantity of units produced and sold 30.000 Profit made for the year Sh.000 and a maximum of 40.30000 Current level of operations of full capacity Loss for the year Sh.Questions – Past Papers 20 two divisions. He suggests that if Mwanzo division cannot reduce the price it would be better for it to cease operations and the space it now occupies be taken up by Mwisho division.90.000 units per year) of chassis from Samawati Ltd..000 Transfer price from Mwanzo to Mwisho Sh. which is currently seeking extra warehouse space.000.000 Price charged outsiders Sh. the general manager of Mwisho division.000 Mr. Data on the operations of the two divisions for the year just ended is as follows: Mwanzo division Quantity of units (chassis) transferred per year 30. unless Mwanzo division agrees to cut the unit transfer price to Sh. fitted and assembled into the finished product. The summarized profit and loss accounts of the divisions for the past year ended 31 October 2001 is as follows: 75% .22. Mr. He has received a quotation from Samawati Ltd. The two divisions are housed in the same building whose lease is due to expire in two years’ time.000 units of chassis per year for two years with adequate guarantees as to quality and continuity of suppliers. Mwanzo and Mwisho.000. . To a twoyear period would be agreeable to Madoadoa Ltd. it would probably fetch 25% of its cost. The manager of Mwanzo division complains that his division has to bear exceptionally heavy depreciation charges and fixed overheads (including central office charges) which are beyond his control.100.000.000 285. If this raw material is sold off (following the decision to close Mwanzo division).000 150.000. The plant used by Mwanzo division has a book value of Sh. ‘000’ 4.000. in two years it is estimated that it will have negligible value.000 200.000.000 (90. Mwanzo division has in stock sufficient raw material for nine months’ production if production is continued at the same level as he has achieved last year.depreciation Mwisho division 30. it should be possible to operate at full capacity. and still make a reasonable profit.000 2.50.000 90. You have gathered the following additional information: The limitation of the proposed contract with Samawati Ltd.000 75.000 240. ‘000’ 900. If Mwanzo division is closed.000) 900. As the lease for the factory is unlikely to be renewed in two years’ time and there is no wish to enter into firm commitments beyond that date.000 900. The additional output would increase the direct materials cost and variable overhead proportionately but he estimates that the total direct labour cost would only increase by 10%.000 990. which operate in the vicinity at no additional cost to those divisions. The storage space required by Mwisho division will probably cost Sh.22. he believes that Mwanzo division could match price quoted by Samawati Ltd.000 610.150.000 You have been asked to investigate and advise on Makini’s proposal.000 450. Its current resale is probably Sh. most of the work force could be productively absorbed by other divisions of Madoadoa Ltd.500.000 Past Paper Production and sales (Physical units) Sales revenue Direct materials Chassis Direct labour Variable overhead Fixed overhead (excluding depreciation) Fixed overhead .21 Questions and Answers Mwanzo division 30.000 3. He also believes that with a price of Sh.000.000 Sh..000 Sh. Without these expenses.000 4.000.10.000 per annum if rented.000 300. Required: .000 90. selling 25% of the output in the open market.500.890. Questions – Past Papers 22 a) Mwanzo division’s combined profit and loss account for the ensuring two-year period on the assumption that the division continues to operate after reducing its transfer price to Sh.22. If a decision to adopt the proposal made by Mr. (10 marks) (Total: 20 marks) . Makini rather than the plan put forward by the manager of Mwanzo division is taken. (10 marks) b) A statement of costs and benefits to Madoadoa Ltd.000 and operating at full capacity as expected. The company’s management accountant estimates that the initial distribution for likely sales is normal with a mean of 20.000. Has the option of hiring a special machine for Sh.000 books.5 million.000 books.25 24 – 30 0.5 that the likely sales will lie between 16.000 per copy but the publishing company pays the author 10% of revenue in royalties while the fixed costs of printing and marketing the book are calculated at Sh.20 16 – 20 0.40 0. marks) ii The special machine is hired. Using current printing facilities.4 million which will reduce the variable production costs to Sh. The following data have been .05 By assuming that the actual can only take the mid-points of theses classes. In addition. QUESTION ONE Past Paper TIME ALLOWED: 3 HOURS New Books Publishers (NBP) Ltd. determine the probability that the company will at least break even if: i Existing printing facilities are used. however the NBP Ltd. Sales Sh ‘000’ Probability 0– 10 0. (3 (3 marks) c) By comparing expected profits.400 per book. (7 marks) ( Total: 20 marks) QUESTION TWO a) Describe the advantages and disadvantages of using simulation to investigate queuing situations compared with the use of queuing formulae.23 Questions and Answers MAY 2002 Answer ALL questions. are planning to introduce a new management accounting text book. it can be shown that he following probability distribution may be applied to the book sales. Required: a) Show the standard deviation ( δ ) of likely sales is approximately 6.2. The textbooks will sell for Sh.1. (4 marks) b) Using δ = 6000. (3 marks) d) By using the normal distribution.05 10 16 0.25 20 – 24 0.1. (4 marks) b) Kisumu Municipal council operates a mini-bus service to take shoppers and tourist from the bus and the railway stations to various locations in the Municipality. the variable production costs are Sh. decide whether or not the publishing company should hire the special machine.20 30 . it has been determined that there is a probability of 0.250 per book.000 and 24. determine the expected value of perfect information and interpret it. 1 8 2 0. (CGL) makes and sells three types of computer games for which the following budget/standard and actual information is available for a week period: Model Sales Budget/standard Selling price Variable Actual Sales b) c) .38 12 0. Use the following random numbers: 18262318624207384092976446757444417165809 (12 marks) ii. (8 marks) (Total: 20 marks) QUESTION FOUR Computer Games Ltd.1 6 2 0.28 14 0.2 8 4 0.3 4 4 0.15 16 0.2 4 3 0. Discuss.2 7 3 0. Simulate the arrival of to passengers at the bus stop assuming that the simulation clock begins at time zero.1 0 6 0.0 4 1 0.09 The number of empty seats on the bus is found to follow the distribution below: Number of empty seats Probability 0 0. (6 marks) “If a manager searches for a system that will provide the ‘true costs’ of each service produced by his firm he is attempting the impossible”.0 2 The mini-buses are scheduled to run every 10 minutes but variation in traffic conditions results in the following distribution. (6 marks) Explain the major characteristics of modern businesses that necessitate the introduction of a strategic cost management system.0 1 Required: i.1 1 5 0.0 3 6 0. Estimate the average time a passenger must wait for a bus and the average length of queue (4 marks) (Total: 20 marks) QUESTION THREE a) Discuss the three main elements of strategic costs management.Questions – Past Papers 24 collected for the arrival of passengers at the bus stop outside the railway station: Time between successive arrivals (minutes) Probability 0 0.1 6 5 0.10 10 0. Time between successive buses (minutes) Probability 8 0.0 6 1 0. Per unit 3. but using the budgeted weighted averaged contribution per unit as the variance valuation base. (3 marks) ( Total: 25 marks) QUESTION FIVE Zimco Media Group has three major divisions: Newspapers. Summary financial data (in millions of shillings) for years 2000 and 2001 is given as follows: Operating income 2000 2001 Sh. (4 marks) ii. Television.500 6. (4 marks) iii. The arguments which may be put in favour of the individual product quantity and mix variances as calculated in (b) above. Per unit 3.500 2001 Sh.900 3.730 Past Paper cost Sh. quantity and mix variances to management.25 Questions and Answers (Units) A B C Required: 15.600 i.600 2001 Sh. The company defines ROI as . mix and volume for each model and in total.900 3. (8 marks) c) Prepare a report to the management which specifically comments on each of the following points: with those calculated in (b) above.600 6.400 1.650 Total assets 2000 Sh.000 1.100 130 220 160 200 Revenue 2000 Sh. 4. The relevance of the individual product.000 21.400 2.000 a) Prepare a summary of sales variances for quantity.716 (Units) 18. Similarities between the variances calculated in (a) as compared Year Newspape rs Television Film studios The manager of each division has an annual bonus plan based on his division’s return on investment (ROI). 4.120 2.000 2.000 10.000 25.700 2. Sh. where individual product standard contribution per unit is used as the variance valuation base.000 9.000 Sh. 900 1.120 1. 4. Film studios. (6 marks) b) Prepare an alternative summary giving the same range of variances as in (a) above.950 1. 4. Required: a. has received a proposal to base senor executive compensation in each division on Residual Income (RI) defined as operating income less imputed interest charge. J. (3 marks) T. and they are limited to 50% of the bonus paid to the division managers reporting an increase in ROI. b. Use the Dupont Method to explain differences among the three divisions in their 2001 ROI. The media group has a 12% required rate of return for investments in all three divisions.Questions – Past Papers 26 operating income divided by total assets. Kanyama’s decision on the acceptance of the fast-speed printing press investment proposal? (3 marks) (Total: 15 marks) d. Senior executives from divisions reporting increases in the division’s ROI from the prior year are automatically eligible for a bonus. Compute the residual income (RI) of each division in the year 2001 (3 marks) Would adoption of the residual income (RI) basis change J. . Kanyama. c. 200 million in a fast speed printing process with colour options. 30 million. Zimco the Chairman of the media group. (6 marks) Explain whether J Kanyama should undertake the fast-speed printing press investments proposal. In order to be eligible for any bonus. The estimated increment to year 2002 operating income would be Sh. J. Senior executives of division reporting a decline in ROI have to provide persuasive explanations for the decline. manager of the newspapers division is considering a proposal to invest Sh. (Use 2001 total assets as the denominator). and the distance (in kilometer) from each mine to the three preparation plants are: Preparati on Plant A B C 1 22 18 44 Mine 2 44 16 32 3 26 24 16 4 52 42 16 5 24 48 22 Required: a) Determine how the output of each mine should be allocated to the three preparation plants.3.4 2.2 0.3. ‘000’/tonne) 2. The capacities and operating costs of these plants are as follows: Plant Capacity Tones/day 300 200 200 Operating Cost Sh.3 A B C All coal is transported by rail at a cost of Sh.3 0. it must be cleaned and graded at one of the three coal preparation plants. How will this affect the allocation of coal to the preparation plants? (3 marks) . What effect.27 Questions and Answers DECEMBER 2002 QUESTION ONE Past Paper TIME ALLOWED: 3 HOURS.5 2.8 1 2 3 4 5 Before the coal can be sold.6 2.9 3.000 per tonne. the production cost is expected to fall to Sh.5 to 180 tonnes per day. which have the following outputs and production costs: Mine Output Tonnes/da y 120 150 80 160 140 Production Cost (Sh. which can be achieved without any increase in production cost per tonne.50 per tonne kilometer. In all the Republic of Ramuka there are five coal mines. will have on the allocation of coal to the preparation plant? (3 marks) c) It is planned to increase the output of coal mine No. ‘000’/tonne 0. if any. (14 marks) b) Following the installation of a new equipment at coal mine No. . (6 marks) b) A company has determined that the EOQ for its only raw material is 2000 units every 30 days.Questions – Past Papers 28 (Total: 20 marks) QUESTION TWO a) Explain the advantages and disadvantages of the Just-In-Tie (JIT) inventory system. The following is the probability distribution of estimated usage of the raw material for the month of December 2002. The company knows with certainty that a four-day lead time is required for ordering. (Total: 20 marks) QUESTION THREE Tritech Ltd. Actual data for the period August to November 2002 have been summarized below: August Septem ber Octob er Novemb er . 3. (Note: hours) Gross machine hours = productive hours + non-productive The standard data for the machine process are as follows: 1.29 Questions and Answers Usage (units) 1800 1900 2000 2100 2200 2300 2400 2500 Probability 0.07 0. The process is controlled by machine attendants who are paid a fixed rate per hour of process time. 2. Standard non-productive (idle time) hours as a percentage of gross machine hour is 10%. Non-productive hours include time spent on the rework of products.10 per unit Required i Determine (12 marks) ii Compute (2 marks) the the probability optimal of being safety out of stock stock. Machine costs are charged to production output at a rate per standard hour sufficient to absorb the cost of the standard level of non-productive time.10 0.270.16 0. A system of standard costing and budgetary control is in operation.14 0. Standard output productivity is 100% that is one standard hour of work is expected in each productive machine hour. The process has recently been reorganized as part of an ongoing total quality management programme in the company.100 per unit and the average monthly holding cost will be Sh. 4. Standard variable machine cost per gross hour is Sh. has semi-automatic machine process in which a number of tasks are performed.13 0.06 0.04 Past Paper Stock-outs will cost the company Sh.30 0. The nature of the process is such that the machines incur variable costs even during non-productive (idle time) hours. ? ? ? 4. ? ? ? 3. ‘000’ Variance analysis Productivity Excess idle time Expenditure 3.061 4.000 (A) 111.Questions – Past Papers 30 Standard hours of Output achieved Machine hours (gross) Non-productive machine hours Variable machine costs Sh.437 4.100 Sh.100 450 1.200 440 1.980 4.000 (A) .070 Sh.437 3. 99.000 420 1. 42.800 430 1.900 (A) 6.000 (F) 12.000 (A) 3.247 Sh.247 Sh.000 (A) 20. (4 marks) (Total: 20 marks) QUESTION FOUR Large service organizations such as banks and hospitals used to be noted for their lack of standard costing systems and their relatively unsophisticated budgeting and control systems compared to the practice in large manufacturing organizations. Required: a) Explain which features of large service organizations encourage the application of activity-based approaches to the analysis of cost information.0 (A) % ? ? ? iii . (6 marks) b) In order to highlight the trend of variances in the months from August to November 2002. (7 marks) % 4.8 (A) 10.9 (A) % ? ? ? % 7. But this is changing any many large service organizations are now reversing their use of management accounting techniques.0 (A) 1. (3 marks) ii Excess idle time variance as a percentage of expected idle time. (3 marks) c) Comment on the trend of variances in the August to November period and possible inter-relationships. (4 marks) Expenditure variance as a percentage of hours paid for all standard machine cost. Particularly in the context of the total quality management programme which is being implemented.2 (A) 5.31 Questions and Answers Past Paper Variance analysis (in % terms) Productivity Excess idle time Expenditure Required: a) Calculate the machine variances for productivity. express each as a percentage term as follows: i Productivity variance as a percentage of standard cost of production achieved.4 (F) 4. excess idle time and expenditure for each of the two months of September and October. (7 marks) b) Explain which features of service organizations may create problems for the application of activity-based costing. there is a university administrative/management function and a central services function. In addition. Occupancy costs total Sh. Such costs are apportioned on the basis of area used which is: Faculti es Area (Square feet) 7.000 Administrati ve/ Managemen t 7. The following cost information is available for the year ended 30 June 2002 1.000.000.15.000 Central services 3. The university’s organization structure consists of three faculties each with a number of teaching departments. (6 marks) (Total: 20 marks) QUESTION FIVE A university offers a range of degree courses.000 .Questions – Past Papers 32 c) Explain the uses of activity-based cost information in service industries.500 Teaching Departme nts 20. 000 Indirect costs: an apportionment of occupancy costs.000.10. Indirect cost: an apportionment of occupancy costs and central services costs plus all faculty costs.000 Faculties Teaching departments Degree courses: .000 Business studies Mechanical engineering Catering studies All other degrees 320 480 320 4. Teaching departments: Direct costs: Shs. Direct and indirect costs are charged to teaching departments.400 8.000. Central services: Direct costs: Sh. This is to be done by apportioning the overall savings to user areas in proportion to their share of the estimated external costs. Faculty costs: Direct costs: Shs. For the year ended 30 June 2002. Administration/management costs: Past Paper Direct costs: Shs. Direct and indirect costs are charged to degree courses on a percentage basis. The estimated external cost of service provision are as follows: Sh. A study has now been completed which has estimated what user areas would have paid external suppliers for the same services on an individual basis. Direct and indirect costs of central services have in previous years been charged to users on a percentage basis. 7. 4.480 16.000.000 Indirect costs: an apportionment of occupancy costs.17. Direct and indirect costs are charged to degree courses on a percentage basis.000.250. 3.33 Questions and Answers 2. 7. ‘000’ 2. 55.750. Indirect costs: an apportionment of occupancy and central services costs. the apportionment of central services costs is to be recalculated in a manner which recognizes the cost/savings achieved by using the central services facilities instead of using external service companies. 6. 5. Questions – Past Papers 34 Additional data relating to the degree courses are as follows: Business Studies Number of graduates Apportioned costs (as a % of total) Teaching departments Administrative/manag ement 80 3% 2. for the university and for each of the degree courses in business studies. (No value needs to be shown). (3 marks) b) Calculate the average cost per graduate for the year ended 30 June 2002. (4 marks) (Total: 20 marks) .500. mechanical engineering and catering studies (round your values to the nearest Sh.5% Mechanic al Engineeri ng 50 2. The total number of graduates from the university in the year to 30 June 2002 was 2. Required: a) Prepare a flow diagram which shows the apportionment of costs to user areas.1. and discuss briefly the relevance of such information to the university’s management.5% 5% Caterin g studies 120 7% 4% Central services are apportioned as detailed in (5) above.000) (13 marks) c) Suggests reasons for any differences in the average cost per graduate from one degree course to another. this leads to more an more distortion and misrepresentation of the impact of particular products on total overhead costs” (from Financial Times) Required: a) Briefly discuss the above statement and state what approaches are being adopted by management accountants to overcome such criticism.000 units. (8 marks) iii Based on your computation’s in (i) and (ii) above advise the company on whether to add T2 to its production schedule. (7 marks) ii The coefficient of variation for the two proposals. (8 marks) b) Traditional budgeting systems are incremental in nature and tend to focus on cost centers. is a manufacturing company which produces and sells a single product known as T1 at a price of Sh. The demand for T2 is also normally distributed with a mean of 50.8 per unit and incur a variable cost of Sh.000 units. The company is considering producing a second product. This is because the traditional approach usually absorbs overhead costs across products solely on the basis of the direct labour involved in their manufacture. QUESTION ONE Briefly explain three methods that can be used to analyze uncertainty in cost-volume-profit (C-V-P) analysis. If T2 is added to the production schedule.6 per unit and fixed costs of Sh. (3 marks) Aberdares Company Ltd. (2 marks) (Total: 20 marks) QUESTION TWO “It is now fairly and widely accepted that conventional cost accounting. sales of T1 will shift downwards to a mean of 85. Marks allocated to each question are shown at the end of the question.10 per unit.9. T2 to sell at Sh.000. Show all your workings.400.50. The correlation coefficient between sales of T1 and T2 is –0. The company incurs a variable cost of Sh.000 units and a standard deviation of 10. As direct labour cost expressed as a proportion of total manufacturing cost continues to fall.5 per unit with additional fixed costs of Sh.000 units and standard deviation of 8.35 Questions and Answers JUNE 2003 Past Paper TIME ALLOWED: 3 HOURS Answer ALL questions. Required: i The company’s break-even point for the current and proposed production schedules. distorts management’s view of business through unrepresentative overhead allocation and inappropriate product costing. Activity based budgeting (ABB) links . Sales are normally distributed with a mean of 110.000.000 units and standard deviation of 5.000 units. Required: i Explain the weakness of traditional incremental budgeting systems. (4 marks) ii Describe the main feature of activity based budgeting system and comment on its advantages.Questions – Past Papers 36 strategic planning to the overall performance measurement aimed at continuous improvement. (8 marks) (Total: 20 marks) . 6 P(high cost of Sh. Joan Odero will receive 10% of gross revenue from the film in excess of Sh. high demand – high costs.1 P(medium demand of Sh.100 million) 0. Joan Odero will receive a fixed fee of Sh. an independent movie producer. Roadshow Productions Limited is offering Joan Odero a choice of one of the three contracts.6 She estimates the following probabilities for the cost of production: P(budgeted cost of Sh.100 million) 0. and low demand – high costs).37 Questions and Answers QUESTION THREE Past Paper Joan Odero.100 million 2. Joan Odero estimates the following probabilities for the gross revenues: P(high demand of Sh.1 billion). medium demand – high costs.100 million. titled “The rise and fall of a cock”. Sh. .10 million. (15 marks) b) Joan Odero will choose the contract that maximizes her expected monetary value from the film. 2.1 billion (no payment is made for gross revenue up to Sh. Roadshow Productions Limited will pay 80% of all the production and marketing costs up to Sh. Which contract should she choose? (Show calculations). Contract C 1. Joan Odero will receive 30% of all gross revenue from the film.100 million and 30% of production and marketing costs in excess of Sh. Contract A 1.4 Required: a) The expected monetary value for Joan Odero under each contract for each of the six possible events. (2 marks) 3. Roadshow Productions Limited will pay all the production and marketing costs. Roadshow Productions Limited will pay 50% of production and marketing costs up to Sh.500 million) 0.3 P(low demand of Sh.100 million. Joan Odero will receive 10% of all gross revenue for the film. medium demand – budgeted costs.200 million)0. low demand – budgeted costs. The budget for the film is. (Hint: The possible events are high demand – budgeted costs. Contract B 1.2 billion) 0. is negotiating with Roadshow Productions Limited on a contract for the production and marketing of her next film. 2. 350 350 150 550 January February March April Required: a) Determine the cost estimation function using: i High-low method. establish a 95% confidence interval for this point estimate. (1 mark) ii The maximum machine hours that would have been worked If the maintenance cost incurred had been limited to Sh. February.25). The maintenance cost incurred and the actual machine hours worked during the months of January.000 for the month of May 2003. Company A is considering a vigorous . (Assume tc = 2.200 400 1.600 Maintenance department’s Costs Sh. The company has determined that maintenance cost is primarily a function of machine hours worked in the various production departments. (3 marks) (Total: 20 marks) QUESTION FIVE a) Construct a flowchart to show the logic solution of a zero-sum game. (6 marks) b) Two manufacturers compete in a market for a specialized calculator. se = 63.Questions – Past Papers 38 c) What information might Joan Odero use in assessing the probability distribution for the production and marketing costs of “The rise an fall of cock” film? (3 marks) (Total: 20 marks) QUESTION FOUR High-tex Engineering Company Limited wishes to set flexible budgets for each of its operating departments. (5 marks) ii Regression analysis (5 marks) b) Using the regression function estimate: i The maintenance costs that would have been incurred if the machine hours were expected to be 900 in the month of May 2003. The company has determined that maintenance department performs all routine and major repair works on the company’s equipment and facilities. Company A controls 75% of the market while company B controls 25% of the market. March and April 2003 were as follows: Month Machine hours in Production departments 800 1. (6 marks) c) Assuming that in the month of May 2003 machine hours were 900.7764 and standard error of estimate. A separate maintenance department performs all routine and major repair works on the company’s equipment and facilities.400. 000.000.25.000.000 respectively). Required: i Using the share of the market percentages only.000 and Sh. It is estimated that if company A runs a vigorous annual marketing campaign.000 in research and development.000.000.000.000 and Sh. The total market for the specialize calculator is 100.50.80. Company B is debating how much money to invest in research and development every year. and hence solve the game.000.000 is invested. depending on company B’s investment in research and development (Sh.000.000 in research and development and increase by 3% if Sh. (6 marks) ii Obtain a pay off table consisting of contribution to profit in monetary terms. increase by 1% if it invests Sh.25.000 units per year.000.39 Questions and Answers Past Paper annual marketing campaign which will cost Sh. if company A does not run the marketing campaign.000.25. The profit contribution per unit is Sh.35.000. 50.80. company B’s share of the market will decrease by 1% of the total market if it invests Sh.000. On the other hand.000.000. Sh.3. (8 marks) (Total: 20 marks) . convert the above into a zero sum game. and hence solve for the optimal strategies for both companies.000.50. its share of the market after one yea will be either 79% or 73%. It is considering three alternatives: Sh.80. The Busia plant has been operating at 60% of its capacity producing 360. the local cane costs are Sh.000 per hour. The company is now planning to change the production mix of the joint process to 3:2 for product P1 and P2 respectively.750 per .000.000 tonnes of sugar per month. For each 800 tonnes of sugar.000 tonnes per month. The two products are taken to the mixing plant for blending and refining after the split off point.20.000 Sh. 1000 tonnes of care is required.000 The joint process costs are 70% fixed and 30% variable whereas the mixing plant costs are 30% fixed and 70% variable. Additional cane must be purchased through brokers at sh. There are only 5000 hours available in the mixing plant.000.000 Sh. 2000 hours for each product while the remaining 1000 hours are used for other work that generates a contribution of Sh. Show ALL your workings QUESTION ONE Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio of 3:1 at the split-off point.50. (14 marks) (b) Explain other qualitative factors that are important to consider before changing the production mix.1. This change will result in an increase in the joint cost by Sh. producing equivalent grades of sugar.000. At the Bungoma plant.2.3.000 Sh.250.000.000 Sh.000 Sh.000. The major raw material used in producing sugar is cane.875 per tonne but the supply is limited to 144.000 tonnes per month.000. Marks allocated to each question are shown at the end of the question.300. local cane costs sh.000 Product P2 100. Required: (a) Advise the company on whether to change the production mix. one in Bungoma and the other one in Busia.7.100.3000 per tonne and is limited to 400.000 Sh.500 Sh. The Bungoma plant has been operating at 75% of its producing 270.250.500 for each additional litre of P2 produced. (6 marks) (Total: 20 marks) QUESTION TWO A sugar manufacturing company has two plants. The following information is also provided: Product P1 Sales volume (litres) Selling price per litre Joint process costs* Blending and refining costs Other separable costs (all variable) *Joint costs are apportioned on the basis of volume 300.100.000 Sh. At Busia plant.Questions – Past Papers 40 December 2003 Allowed: 3 hours Time Answer ALL questions.000 tonnes of sugar per month. Usually 4000 hours are taken in processing of Product P1 and P2. 41 Questions and Answers tonne (delivered at either plant). month’s production are as follows: Past Paper The cost schedules for a typical . 000 3.060.600 tonnes of cane Fixed cost per month Variable cost Total cost Sh.000 594.000 Required: (a) (i) If the total combined production of both plants is to be maintained at a rate of 630.’000’ 468. SON-TVs.000 1. which plant’s production should be increased and by how much? (10 marks) (ii) What is the amount of the cost saving as a result of this switch? (5 marks) (b) If production requirements increased to 910. manufactures and sells a brand of television sets called LD-TVs. no other competitor has any effect on the current market.026.000 2. The year’s activity is summarized in the following table: Brand LD-TV SUM-TV SON-TV PAL-TV Number of customers January 2002 2200 3000 2300 2500 Gain 500 600 250 400 Loss 450 700 250 350 Number of customers December 2002 2250 2900 2300 2550 Further analysis resulted in the gain – loss summary as follows: Number of customers Gain from LD-TV SUMSONTV TV 0 400 0 200 0 250 100 50 0 150 250 0 PALTV 100 150 100 0 LD-TV SUM-TV SON-TV PAL-TV Number of customers Losses to LD-TV SUMSONTV TV 0 200 100 400 0 50 0 250 0 100 150 100 PALTV 150 250 0 0 .080. Because of the custom manufacturing process and their inherent high costs. The year 2002 was an exceptionally good year in terms of gain-loss trade offs.600 tonnes of cane Fixed cost per month Variable cost Total cost Busia plant Raw materials 249. how much would you recommend to be produced at each plant? (5 marks) (Total: 20 marks) QUESTION THREE Nzewani Electronic Ltd.000 1.404.088. would there be any apparent advantage in shifting part of the schedule production from one plant to the other? If so.000 576. The three closest competitor brands in the market are SUM-TVs.Questions – Past Papers 42 Bungoma Plant Raw materials 249.000 1.000 tonnes per month.000 tonnes. (5 marks) (Total: 20 marks) QUESTION FIVE . is a merchandising company selling a 40ml bottle of perfume in four zones within Kenya.30. The company has four salesmen available for an assignment in the four zones.43 Questions and Answers Past Paper The market shares for LD-TV. Required: (a) Advise the management of Nzewani Electronic Ltd. (15 marks) (b) Calculate the total contribution of the company after the assignment.000 130 Eastern 30.000 120 The four salesmen also differ in their marketing ability. SUM-TV. what would be the long run market share for each brand? (5 marks) (c) What are the assumptions of the technique you have used in (a) and (b) above? (5 marks) (Total: 20 marks) QUESTION FOUR Marashi Company Ltd. It is estimated that.000 100 Western 50. is to maximize contribution from each zone. working under the same conditions. the yearly sales would be proportionately shared as follows: Salesman: Proportion: Kariuki 6 Wafula 5 Oketch 5 Wambua 4 The objective of Marashi Company Ltd. The difference in the selling price is due to the transportation costs involved. on the expected market share for each brand at the end of December 2002. Kenya 60.70 but the selling price is different in each of the four zones.000 110 Nyanza 40. The variable cost per bottle is Sh.23 and 25 per cent respectively. Required: (a) Determine how the four salesmen can be assigned to the zones in order for the company to maximize the total contribution. (10 marks) (b) Assuming the same pattern of switching persists. It is estimated that a typical salesman operating in each zone would bring the following annual sales: Zone Annual sales in bottles Selling price per bottle Mt. SON-TV and PAL-TV in January 2002 were 22. The zones are not equally good in their sales potential. 000 which would reduce the operating cash outflows by sh. (6 marks) Explain the factors to be taken into consideration when establishing the length of a budget period.000 for the following five years.000. it is widely used in practice”.000.70.000. at the end of which the equipment will have a salvage value of zero.000. Discuss the possible justification for its use.70. (4 marks) (Total: 20 marks) (c) .000 which the managing directors wishes to spend on one of two schemes. Thereafter. Scheme A Pay Sh.70. (4 marks) (iii) The internal rate of return (IRR) for each alternative.000 immediately to reputable sales promotion agency which would provide extensive advertising and planned ‘reminder’ advertising over the next ten years. the effect would be zero.Questions – Past Papers 44 (a) In preparing the cash budget for the next year. (4 marks) (b) The paradox is that. Buy immediately labour saving machinery at a cost of Sh.000. Scheme B - Required (i) The average accounting rate of return (ARR) per annum for each scheme over 10 years.150.000.000 per annum for the first five years and Sh. Kericho Tea Farm Limited finds that it has limited surplus funds of Sh.100. This is expected to increase the net operational cash flows by sh.000 per annum for the next ten years. (2 marks) (ii) The net present value (NPV) for each scheme assuming the desired rate of return is 18%.200. “while cost plus pricing is devoid of any theoretical justification. 000. Both of these divisions have a wide range of independent activities.002QS2 Where Qs is the quantity of Xcel manufactured. South estimates its monthly total costs (TC) in shillings for producing Xcel using the following equation: TCS = 1. are South and North. (5 marks) . Marks allocated to each question are shown at the end of the question.500. The North division would then order the quantity it requires each month.000 + 1100QN + 0.45 Questions and Answers June 2004 hours Past Paper Time Allowed: 3 Answer ALL questions.001Q2S Where QN is the quantity produced by the North division which incorporates one unit of Xcel. One product. excluding transfer price are: TCN = 1. Required: (a) (i) The quantity of Xcel which would maximize profits for NEL. (5 marks) (ii) The transfer price in shillings corresponding to the maximum production in (i) above if South division’s marginal cost are adopted for transfer pricing.0008QN Where PN is the price per unit of the product incorporating Xcel. South division does not have any external customers for the product. is made by South division for North division. The North division estimates that the demand function for its product incorporating Xcel is: PN = 4. Among its divisions. Show ALL your workings QUESTION ONE Nairobi Enterprise Ltd. It has been suggested that South division should give a transfer price schedule for the supply of Xcel based on South division’s own production costs and that all goods transferred would be made at South division’s marginal costs. Xcel. Show the resulting profit for each division. North division total costs (TCN) in shillings using Xcel.000 + 550QS + 0.500 – 0. The central management of NEL delegates all pricing decisions to divisional managers and the pricing of Xcel has been a contentious issue. (NEL) is a divisionalised enterprise. Neither division holds any stocks of Xcel. Questions – Past Papers 46 (b) (i) The quantity of Xcel which North division would take (at South division’s marginal costs) if it wanted to maximize its own profits. (5 marks) (ii) The transfer price in shillings corresponding to the quantity of Xcel that would maximize the profits of North division. (5 marks) (Total: 20 marks) . and the resulting profit for each division. she has a fitting.250 per month and the company’s policy is to assess the present value of such costs at 2% per month for a period of five months.1. The manufacturers require orders in advance and once a batch has been made. if the company as a whole runs out of an item. 200 per item. 4. One particular outfit is bought at Sh. Further.5.000 to order and receive goods into stock. it is not possible for delivery to be staggered over the fashion season.500. it is not possible to place a repeat order. When a customer buys an outfit. 3. The cost of an investigation averages Sh.500 and that of correcting variances averages sh.8. and then she collects the outfit a day or so later. The average cost of any variance not corrected is Sh. For the first category corrective action has eliminated 70% of the variances. any alterations or adjustments are made. but the remainder have continued unchanged. If the company over buys for a season. Mean holding costs per season per outfit amounts to Sh.50 and it costs Sh. Its variances fall into two categories: Category Percentage of total number of variances Those which are not worth 64 investigating 36 Those which are worth 100 investigating 2. (4 marks) (b) Kenya Fashions Ltd. (2 marks) (iii) Explain briefly two types of circumstances that would give rise to variances in the first category and two types of circumstances that would give rise to variances in the second category.3. sells a wide range of high quality customized outfits. usually in a matter of hours. (6 marks) (ii) Recommend with supporting calculations. whether or not the company should follow a policy of investigating variances as a matter of routine.800 and sold at Sh. a company operating a standard cost accounting system has accumulated the following information in relation to variances in its monthly management accounts: 1.5. Required: (i) Two decision trees to represent the position if an investigation is carried out and the position when an investigation is not carried out. then the cost of the stock out is Shs. However.300. Generally if an outfit is out of stock at one branch. then it is .47 Questions and Answers QUESTION TWO (a) Past Paper From past experience. it can be readily obtained from another branch. 20 0.20 0.20 - Required: (a) Explain the basic steps that can be used to solve this type of problem simulation technique. (2 marks) (Total: 20 marks) QUESTION THREE Mwamba Development Group (MDG) plans to undertake a project consisting of eleven (11) tasks.10 0.Questions – Past Papers 48 expected that it will be able to dispose of the surplus outfits at Sh.30 8 0. MDG has approached a consultancy firm for advice on the expected project completion time.10 0.D.80 0. Required: (i) Determine the number of outfits to order to maximize expected profits.20 0. Use the activity’s expected time to determine the expected completion time of the project.20 0. for the purpose of simulation analysis: Activi ty A B C D E F G H I J K Immediate Predecessor 3 A B.40 0.H I J 0.40 - Duration in days and probabilities Duration in days 4 0.30 0.50 0.40 0. (4 marks) .50 0.20 10 0.C B E C G F.50 0.70 0.50 9 0.20 0. (6 marks) (b) Draw the network for the project and determine the critical path of the project.20 0.20 0.90 0.10 0.70 5 0.30 0. bearing in mind the penalties for over and under ordering. The consultancy firm intends to use simulation analysis to deal with the uncertainty of the project completion time. The expected completion time of each task is uncertain and this makes the project completion time uncertain.50 0. The following data were obtained by the consultancy firm. The problem facing the management accountant of the company is to decide how many outfits to order for the season ahead in order to maximize expected profit. (6 marks) (ii) Compare and contrast the model that you have developed with the classical economic quantity model.500 each.20 0.40 0.60 6 7 Probabilities 0. (d) 95.) W 1. 27. 53. 15. 60. (4 marks) (ii) Explain why ABC might.000 10 1 ½ 6 Y 1. 09. 45. 09. 96. 86. 56. 40. 69. Y and Z using the same plant and processes.000 10 1 ½ 6 X 10. (6 marks) State two advantages and two disadvantages of the simulation technique. 10. 66. determine the expected project completion time. X. The following information relates to the company: Product Volume (units) Material cost/unit (Sh. 84. 23. 81.200 32 4 2 24 Z 14. W. 75. 74. 50.49 Questions and Answers (c) Past Paper Carry out four simulation runs for each activity and using the results of the simulation. 59.000 34 3 3 18 The cost accountant analysed the recorded under the following headings: production overheads . 09. 93.) Direct labour/unit (hours) Machine time/unit (hours) Labour cost/unit (Sh. 36. 14. (3 marks) (iii) (b) The Marima Manufacturing Company produces four products. 54. 95. 98. 49. 24. whereas ABC may give a different impression of product costs. However. 90. 55. 79. Required: (i) Explain cost behaviour issues underlying the use of ABC. 98. 72. 85. be more suitable for modern manufacturing environment than traditional cost accounting techniques? (3 marks) Comment on the reported claim that ABC gives better information as a guide to decision making than the traditional product costing techniques. 28. (4 marks) Use the following random numbers. 30. 60. it is not necessarily a good idea and it may be advisable to continue improving traditional cost accounting techniques before moving to ABC. 05. 14. 83 (Total: 20 marks) QUESTION FOUR (a) The current thinking in Management Accounting contends that Activity-Based Costing (ABC) provides better information concerning products costs and decision making than traditional management accounting techniques. 61. 710 3.9. .160 17. (6 marks) (ii) Comment briefly on the differences disclosed between overheads traced by the present system and those traced by activity based costing.200 Overhead costs are absorbed by products on a machine hour rate of Sh.40 Investigations into the production overhead activities for the period reveal the following totals: Product Number Number Number Number of of of of set-ups material orders times material was handled spare parts used W 2 2 4 4 X 12 16 20 10 Y 4 2 6 2 Z 16 16 24 8 Required: (i) Unit costs per product using activity-based costing tracing costs to production units by means of cost drivers. Sh.60 per hour giving an overhead cost per unit for the products as follows: Product Shillings W 2.Questions – Past Papers 50 Overhead costs: Factory overhead (machine-oriented activity) Set-up costs Material costs: Cost of ordering materials Materials handling costs Administration costs for spare parts.840 15.60 Z 14.40 Y 9.’000’ 74.40 X 2. long-term planning base in contrast to the traditional short-term annual budgeting approach.848 8. (4 marks) (Total: 20 marks) QUESTION FIVE Various attempts have been made in the public sector to achieve a more stable. with its emphasis on flexibility. (8 marks) (Total: 20 marks) .51 Questions and Answers Past Paper Required: (a) Explain the deficiencies of the traditional approach to planning which led to the attempts to introduce planning programming budgeting system (PPBS). (6 marks) (b) Give an illustration of how PPBS plan could be drawn up in respect of one sector of public authority activity. (6 marks) (c) Discuss the problems which have made it difficult in practice to introduce PPBS. 210 181.800 93.220 Production Units ‘000’ 62.800 714.220 16. the overhead cost have been related to production levels.350 fixed) Data Processing (Sh.110 768.000 98.500 194.480 735. ‘000’ Time allowed: 3 Indirect materials (variable) Indirect labour (Sh.100 736.420 27.420 777. 2) For cost estimation purpose.200 236.960 726.470 fixed) Technical support (fixed) 37.400 Price index 89 90 93 95 98 100 101 103 103 106 108 113 . it is estimated that the coming period’s value index will be the same as that of the last period. Costs have been classified as either fixed or variable according to the judgement of the financial controller.000 24. 3) Following the management instructions.920 The following additional information is provided: 1) In the past. 6.000 59. ‘000’ 718.800 72.500 fixed) Personal Property taxes (Sh.880 753. 171.200 62.000 fixed) Rent (fixed) Electricity (variable) Equipment depreciation (fixed) Equipment maintenance (Sh.Questions – Past Papers 52 December 2004 hours QUESTION ONE Maisha Meta Products Ltd. production levels and an appropriate price index. The information gathered is given below: Overhead cost Sh. which is 113. 9. 8. price instability has made the management to suggest that an explicit consideration be given to include an appropriate price index in the cost equation.000 87.940 742.000 units. information was gathered on past costs.400 56.670 715. However.310 717.100 60.100 11. The schedule was prepared on the assumption that production would amount to 800.640 720.330 14.600 73.410 718.800 69.900 58. has prepared a schedule of estimated overhead costs for the coming year. The following overhead cost items and their classification as either fixed or variable form the basis for the overhead cost schedule: Item Total cost Sh. 626. the following results were obtained: Equation (figure in ‘000’) Overhead = Sh. 1.53 Questions and Answers Past Paper 4) There have been no significant changes in operations over the period covered by the above information nor are there any significant changes expected in the incoming period.547 + (Sh. 5) When the information above was entered into a regression program using only the production level as the independent variable.504 x production units) Statistical data for the above equation . Questions – Past Papers 54 Correlation coefficient R-square Adjusted R-square 0.988 0.976 0.974 6) When both predictors are entered in the regression program, the following results were obtained: Multiple regression results: Equation (figures in ‘000’ except the index) Overhead = Sh. 632,640 + (Sh.1.501 x production units) – (Sh.59.067 x index) Statistical data for the above equation: Correlation coefficient (multiple R) R-square Adjusted R-square Correlation matrix:: Production Index 0.988 0.976 0.972 Production 1.00 -0.087 Index -0.087 1.00 Required: a) Determine the cost estimation equation using the account analysis method (6 Marks) b) Use the high-low method to estimate the cost of 800,000 units of production expected in the coming period. (4 Marks) c) Using the simple linear regression, estimate the cost of 800,000 units of production. (4 Marks) d) Use the multiple regression results to prepare an estimated cost for the 800,000 units in the incoming period. (4 Marks) e) Comment on which of the methods is more appropriate under the above circumstances. (2 Marks) (Total: 20 marks) QUESTION TWO Industrial Chemical Ltd. (ICL) produces chemical Y. the standard ingredients of 1 kilogram of Y are: 0.65 kilograms of ingredient F @ Sh. 40 per Kg 0.30 kilograms of ingredient D @ Sh. 60 per Kg. 0.20 kilograms of ingredient N @ Sh. 25 per Kg. The following additional information is provided: 1. Production of 4,000 kilograms of chemical Y was budgeted for October 2004. 2. The production of chemical Y is entirely automated and production costs attributed to its production comprise only direct materials and overheads. 55 Questions and Answers Past Paper 3. ICL’s production process works on a just-in-time (JIT) inventory system and no ingredients or inventories of chemical Y are held. 4. Overheads budgeted for the production of Y in the month of October 2004 were as follows: Questions – Past Papers 56 Activity Receipt of deliveries from suppliers (Standard delivery quantity is 460 kilograms) Dispatch of goods to customers (Standard dispatch quantity is 100 kilograms) Total amount Sh. 40,000 80,000 120,000 5. In October 2004, 4,200 kilograms of Y were produced and the cost details were as follows: Materials used 2,840 kilograms of F, 1,210 kilograms of D and 860 kilograms of N at a total cost of Sh. 203,800. Actual overhead costs 12 supply deliveries at a cost of Sh.48,000 and 38 customer dispatches at a cost of Sh. 78,000 were made. 6. ICL’s budget committee met recently to discuss the preparation of the cost control report for October 2004 and the following discussion took place: Chief accountant: “the overheads do not vary directly worth output and are therefore by definition ‘fixed’. They should be analyzed and reported accordingly”. Management accountant: “the overheads do not vary with output, but they are certainly not fixed. They should be analyzed and reported on an activity based basis.” Required: Having regard to this discussion, a) Prepare a variance analysis of the production costs of Y in October 2004. (Separate the material cost variance into price, mixture and yield components and the overhead cost variance into expenditure, capacity and efficiency components using consumption of ingredient F as the overhead absorption base). (12 marks) b) Prepare a variance analysis of the overhead production costs on Y in October 2004 on an activity based basis. (8 marks) Note: In both parts (a) and (b) round you values to the nearest shilling. (Total: 20 marks) QUESTION THREE Farmers Limited had received an order for a piece of special machine from Naivasha Flowers Limited. Just as farmers completed the machine, Naivasha Flowers Limited was declared bankrupt, defaulted 57 Questions and Answers Past Paper on the order, and forfeited 10% deposit paid on the selling price of Sh. 72,000,000. Farmers Limited engineering department manager identified the costs already incurred in the production of the special machine for Naivasha Flowers limited as follows: Questions – Past Papers 58 Sh. ‘000’ Direct materials used Direct labour incurred Overhead applied: Variable Fixed Fixed administrative expenses Total cost 10,700 5,350 16,050 5,4 05 59,455 Sh. ‘000’ 16,600 21,400 The following additional information is provided: 1. Narok Corporation would be interested in buying the special machine if it is reworked to Narok’s corporation specifications. Farmers Limited has offered to sell the reworked special machine to Narok Corporation as special order for a net price of Shs. 68,400,000. Narok Corporation has agreed to pay the net price when it takes delivery in two months time. 2. The additional identifiable costs to rework the machine to the specifications of Narok Corporation are as follows: Sh. ‘000’ 6,200 4, 200 10,400 Direct materials Direct labour 3. Farmers limited can convert the special machine to a standard model. The standard model sells for Sh. 62,500,000. The additional identifiable cost to convert the special machine to the standard model are: Direct materials Direct labour Sh. ‘000’ 2,850 3,300 6,150 4. Farmers Limited can sell the machine as it is (i.e. without modifications) for a net price of Sh.52,000,000. However, the potential buyer of the unmodified machine wants it after 60 days. They buyer offers Sh. 7,000,000 down payment with the final payment upon delivery. 5. The sales commission rate on sales of standard models is 2% while the sales commission rate on special orders is 3%. All sales commissions are calculated on the net price (i.e. list price less cash discount, if any). 6. Normal credit terms of sales of standard models are 2/10 net 30. Customers take the discounts except in rare instances. Credit terms for special orders are negotiated with the customer. 7. The applicant rates of the manufacturing overhead and the fixed selling and administrative costs are as follows: 59 Questions and Answers Manufacturing: Variable Fixed Past Paper 50% of direct labour 25% of direct labour Selling and administrative: (fixed) 10% of the total of direct materials, direct labour and manufacturing overheads. 8. Normal time required for rework is one month. 9. A surcharge of 5% of the sales price is placed on all customer requests for minor modifications of standard models. Conversion of a special machine to a standard model is not a minor modification. 10.Farmers Limited normally sells a sufficient number of standard models for the company to operate at a volume in excess of a breakeven point. 11.Farmers Limited does not consider the time value of money in the analysis of special orders and projects whenever the time period is less than one year because the effect is not significant. Required: (a) Determine the total contribution in shillings for each of the three alternatives (12 marks) (b) If Narok Corporation makes a counter offer, what is the lowest price farmers limited should accept for the reworked machine from Narok Corporation? Explain your answer. (3 marks) (c) Discuss the influence that fixed factory overhead costs should have on the sales quoted by Farmers Limited for special orders when: (i) A firm is operation at or below the breakeven point (3 marks) (ii) A firm’s special orders constitute efficient utilization of unused capacity above the breakeven volume. (2 marks) (Total: 20 marks) QUESTION FOUR (a) Explain the following terms as applied in competitive situations: i) Degeneracy (2 marks) ii) Pure strategy (2 marks) iii) Mixed strategy (2 marks) iv) Dominance rule (2 marks) Best Sell Ltd. has decided to launch a new product in addition to its range of products. The following information is available: 1. The new product may be distributed through any combination of the two company warehouses W1 and W2. 2. The available monthly production capabilities for the new products are: 1000 units at plant A (b) Questions – Past Papers 60 2000 units at plant B 1000 units at plant C 3. Three major concentration points of customer demand are at locations E, F and G which are estimated to have a monthly demand of: 900 units at E 800 units at F 900 units at G 4. The unit production costs amount to Sh.30, Sh.40, Sh.10 at A, B and C respectively. 5. The unit handling costs at the warehouses amount to Sh.20 and Sh.30 at W1 and W2. 6. The unit transportation costs from plant to warehouse and unit delivery cost from warehouse to customers are as shown below: 61 Questions and Answers Past Paper Transportation cost schedule. Warehouses W1 W2 Plants A B C Sh. 60 50 130 Sh. 60 50 40 Delivery costs schedule Locations Warehouses A B E Sh. 30 50 F Sh. 50 30 G Sh. 80 90 Required: Determine the optimum production and distribution schedule to minimize total cost. (12 Marks) (Total: 20 Marks) QUESTION FIVE Equi-solutions Ltd. was formed ten years ago to provide business equipment solutions to local business. It has separate divisions for research, marketing, product design, technology and communication services, and now manufactures and supplies a wide range of business equipment. To date the company has evaluated its performance using monthly financial reports that analyze profitability by type of equipment. The managing director of Equi-solutions Ltd. has recently returned from a course in which it has been suggested that the “Balanced Scorecard” could be a useful way of measuring performance. Required: a) Explain the “Balanced Scorecard” and how it could be used by Equisolutions Ltd. to measure its performance. b) The managing director of Equi-solutions Ltd. also overheard someone mention how the performance of their company had improved after they introduced “Benchmarking.” Required: Explain “Benchmarking” and how it could be used to improve the performance of Equi-solutions Ltd. (10 marks) (Total: 20 marks) Questions – Past Papers 62 KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD CPA PART III MANAGEMENT ACCOUNTING 2 June 2005 hours. Time Allowed: 3 Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. QUESTION ONE Tony Kichumi, a financial analyst at Green City Bus Company Ltd. is examining the behaviour of the company’s monthly transportation costs for budgeting purposes. The transportation costs are a sum of a two types of costs: 1) Operating costs, such as fuel and labour. 2) Maintenance costs, such as overhaul of engines and spraying. Kichumi collects monthly data on items 1 and 2 above and the distance covered by the buses. Monthly observations for the year ended 31 December 2004 were as follows: Month Operating costs Shs. ‘000’ 471 504 609 690 742 774 784 986 895 651 481 386 Maintenance costs Shs. ‘000’ 437 388 343 347 294 211 176 210 280 394 381 514 Distance covered in kilometers (d) Shs. ‘000’ 3,420 5,310 5,410 8,440 9,320 8,910 8,870 10,980 4,980 5,220 4,480 2,980 January February March April May June July August September October November December Kichumi ran three linear regression equations based on the data above and came up with the following results: Regression equation I Operating costs = a + bd Variable Constant Distance covered in Coefficien t 309.19 0.054 Standard error 96.05 0.014 tvalue 3.22 3.86 63 Questions and Answers kilometers r2 = 0.61, Durbin – Watson statistic = Regression equation II Maintenance costs = a + bd 1.61 Past Paper Questions – Past Papers 64 Variable Constant Distance covered in kilometers r2 = 0.68, Durbin – Watson statistic = Coefficien t 531.55 - 0.031 1.72 Standard error 46.95 0.007 tvalue 11.32 - 4.43 Regression equation III Total transportation costs = a + bd Variables Constant Distance covered in kilometers r2 = 0.29, Durbin – Watson statistic = Coefficient 840.73 0.023 2.34 Standard error 80.25 0.011 tvalue 10.48 2.09 Required: (a) Evaluate the three linear regression equations using: (i) Economic plausibility. marks) (ii) Goodness of fit marks) (iii) Significance of independent variables. marks) (iv) Specifications analysis criteria marks) (Use a 95% confidence level where applicable). (b) (c) (d) (3 (3 (3 (3 List three variables, other than distance covered, that could be important drivers of the company’s operating costs. (3 marks) Suggest an alternative database that Kichumi could have used to examine the drivers of the company’s maintenance costs. (2 marks) Explain three limitations of the linear regression analysis used by the company. (3 marks) (Total: 20 marks) QUESTION TWO Nyali Ltd. is a distributor of an industrial chemical in the South Coast. The chemical is supplied in drums which have to be stored at a controlled temperature. The company’s objective is to maximize profits, however the management team disagrees on the stock control policy and holds the following different views: The Managing Director’s view: The company’s managing director (MD) wishes to improve the stock holding policy by applying the economic order quantity (EOQ) model. Each drum of the chemical costs Shs. 5,000 from a supplier and is sold for Shs. 6,000. The annual demand is estimated to be 10,000 drums 65 Questions and Answers Past Paper which the MD assumes to be evenly distributed over the 300 working days in a year. The cost of delivery is estimated at Shs. 2,500 per order and the annual variable holding cost per drum at Shs. 4,500 plus 10% of the purchase price. Using these data, the MD calculated the EOQ and proposes that it should be used as the basis for future purchasing decisions of the industrial chemical. The Purchasing Manager’s view: Provided in the employment contract of the company’s purchasing manager (PM), is a clause stating that he will receive a bonus (rounded at the nearest Shs. 100) calculate as follows: b = [1,000,000 – (OC + HC)] x 0.1 where: b is the annual bonus. OC is the annual ordering cost. HC is the annual holding cost. Using the same assumption as the MD, the PM points out that in making his calculation, the MD has not only ignored the bonus but also the fact that suppliers offer quantity discounts on purchase orders, where if the order size is 200 drums or above, the price per drum for an entire consignment is only Shs. 4,990 compared to Shs. 5,000 when the order is between 100 and 199 drums and Shs. 5,010 when an order is between 50 and 99 drums. The Finance Director’s view: The company’s finance director (FD) accepts the need to consider quantity discounts and pay a bonus, but he also holds the view that the MD’s approach is too simplistic. He points out that there is a three days lead time for an order and that demand has not been entirely even over the past year. Moreover, if the company has no drums of the chemical in stock, it will lose specific orders as potential customers will source the chemical from competitors. He gives the frequency of lead time demand over the last year as follows: Demand during lead time (No. of drums) 106 104 102 100 98 96 94 Frequen cy 4 10 16 40 14 14 2 Under the circumstances, the MD decided that he would seek further advice on the course of action to be taken by the company. Required: (a) The EOQ as originally determined by the company’s managing director. (2 marks) Questions – Past Papers 66 (b) Determine the optimum order quantity, taking into consideration the MD’s assumptions and after allowing for the purchasing manager’s bonus and supplier quantity discount. (4 marks) The safety stock the company should maintain after applying the finance director’s assumptions and assuming further that the supplier’s contract requires that the order quantity be constant for all the orders in a year. (6 marks) As a consultant, write a brief report to the managing director on the company’s stock ordering and stock holding policies, referring where necessary to your answers in (a) to (c) above. The report should refer to other factors that should be considered when making the final decisions on stock ordering and holding policies. (8 marks) (Total: 20 marks) (c) (d) QUESTION THREE (a) (b) List five assumptions underlying the cost-volume-profit (CVP) analysis. (5 marks) Makazi Ltd. manufactures a hedge-trimming tool which has been selling at Shs. 1,600 per unit for a number of years. The selling price is to be reviewed and the following information is available on costs and the likely demand: 1. The standard variable cost of manufacturing the tool is Shs. 1,000 per unit and an analysis of the cost variances in the past 20 months shows the following pattern which the production manager expects to continue in the future. • Adverse variances of 10% of the standard variables cost occurred in ten of the twenty months. • Nil variances occurred in six of the twenty months. • Favourable variances of 5% of the standard variable cost occurred in four of the twenty months. 2. Fixed costs have been Shs. 400 per unit at an average sales level of 20,000 units, but are expected to rise in the future. 3. The following estimates have been made of the total fixed cost: Shs. Optimistic estimate Most likely estimate Pessimistic estimate 8,200,000 8,500,000 9,000,000 Probabil ity 0.3 0.5 0.2 4. The demand estimates at the two proposed selling prices being considered are as follows: Proposed selling price Optimistic estimate Most likely estimate Shs. 1,700 No. of units demanded 21,000 19,000 Shs. 1,800 No. of units demanded 19,000 17,500 Probabil ity 0.2 0.5 (6 marks) (b) Topcom Kenya International Limited (TKIL) is a telecommunications company situated in Nakuru. The management with the help of a consultant.67 Questions and Answers Pessimistic estimate 16. advise the management of Makazi Ltd. Indicate the price you would recommend. on whether they should change the selling price.500 0. has prepared the pay-off matrix shown below: .3 Assume that all the estimates and probabilities are independent. Required: Based on the information given above. (6 marks) (ii) The expected profit at the price you have recommended in (i) above and the resulting margin of safety expressed as a percentage of expected sales. Recently. (4 marks) (iii) Comment on the method of analysis you have used to deal with the probabilities given in the question. the company was faced with a workers strike which necessitated a renegotiation of the workers’ salaries through their union. (2 marks) (iv) Explain briefly how the use of a computer program would improve your analysis. (3 marks) (Total: 20 marks) (i) QUESTION FOUR (a) Identify and explain three types of decision making environments.500 Past Paper 15. (8 marks) (c) Shadow prices may be used in the setting of transfer prices between divisions in a company. Sales value at the point of transfer. (6 marks) (Total: 20 marks) QUESTION FIVE (a) (b) State four objectives of a transfer pricing system. Required: (i) Advise the management on the best strategies. (6 marks) (ii) The value of the game marks) (2 (c) Briefly explain the limitations of the use of fame theory in decision making.0.3 0 Company strategies C1 C2 C3 C4 A positive sign represents a wage increase while a negative sign represents a wage decrease.8 + 0. Transfer pricing of products between manufacturing company can be done at: 1.8 + 1.2 + 2.1 + 0.7 + 3. processes in a Required: Discuss how each of the above methods could be used effectively in the operations of a responsibility accounting system.0 + 1.0 + 1.Questions – Past Papers 68 Pay-off matrix Workers union strategies U1 U2 U3 U4 + 2. Cost or 2.5 .4 + 3.5 + 1.2 + 1.5 + 2.0 + 1. where the intermediate products being transferred are in short supply.9 + 1. (8 marks) (Total: 20 marks . Required: Explain why the transfer prices thus calculated are more likely to be favoured by the management of the divisions supplying the intermediate products rather than the management of the divisions receiving the intermediate products. 25 0.35 0.000 4. The data below relate to the three random variables.500 Probabilitie s 0. Currently.69 Questions and Answers Past Paper KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD CPA PART III MANAGEMENT ACCOUNTING December 2005 Allowed: 3 hours QUESTION ONE (a) Manukato Ltd. X1 and X2 represented by the production function given below: Y = = = = X 1X 2 Time Where Y produced. The price of the designer perfume and the cost of ingredients X1 and X2 are random variables.500 5. 1.30 Probabilitie s 0. produces a designer perfume called “Hint of Elegance.35 0.10 0.500 2.” Production of the perfume involves the use of two ingredients. Units of ingredient 2.000 5.50 Probabilitie s 0.000 2. 4.15 0.500 Cost of ingredient X2 Shs.000 2.05 0. 1. the company is operating at a level where the daily usage of X1 and X2 is set at 250 units and 360 units respectively. X1 X2 Number of bottles of designer perfume Units of ingredient 1.500 2.000 1.15 .20 0. Selling price of Y (per bottle) Shs.20 0.500 Cost of ingredient X1 Shs. 000 units of product K are sold externally at a price of Shs. the remainder being put into stock. 290 arrive at by deducting the selling and packaging expense from the external price of Shs. 25 to produce. some of which is sold externally and the remainder used as an input in division B in the manufacture of product M. 41. 34. Calculate the cost of prediction error. 56. 2. 10. (4 marks) (Total: 20 marks) QUESTION TWO Kutwa Ltd. 59.000 units are transferred to division B at an internal transfer price of Shs. 2.000 units per month. 16. 09. The unit production costs of product K are given below: Direct material Direct labour Direct expense Variable manufacturing overheads Fixed manufacturing overheads Selling and packaging expenses (variable) Shs. (3 marks) (ii) Assume that the actual set-up cost of machine Y is Shs. 44. 49. 88. It costs Shs. is a manufacturing company with two divisions. . 18. 23. 30.50 per unit per annum plus a 20% opportunity cost of capital per annum. 23. A and B. Each component costs Shs. 06 (8 marks) (b) Nairobi Manufacturers Ltd. 85.000 to set up machine Y while the stock holding cost is estimated at Shs. produces component X on machine Y at a rate of 4. 02. (5 marks) (ii) Simulate the company’s profit for 10 days using the following random numbers: 58.000 units per month. 32. 71. 49. 300 per unit and 5. 87. Division A manufactures a single standard product K. 1.40 Required: (i) Calculate the daily expected profit of the company. 27. 18. 79. 13. 74. 46. 300 which is not incurred for products transferred internally. 99. 24.Questions – Past Papers 70 3. Required: (i) Compute the optimal batch size that should be produced using machine Y. Machine Z uses component X at the rate of 1. 40 20 20 20 40 10 150 Annually.000.000 instead of Shs. 2. 24. 96.000 0. This would lead to an increase in the output and overall profitability of the company. 290 230 30 120 120 10 800 The manager of division B has disagreed with the basis used in arriving at the transfer price.. He also claims that division A would not be in a position to externally sell the extra units that are transferred to division B at the price of Shs. (12 marks) (b) Calculate the effect of adopting the transfer price of Shs.) Demand (units) Selling price (Shs.000 2.” The following information has been availed to you: .71 Questions and Answers Past Paper The unit production cost for product M which uses product K as an input is given below: Cost of internally transferred products from division A to division B Direct material Direct labour Variable overheads Fixed overheads Selling and packaging expenses (variable) Shs.200 300 10. (4 marks) Pwani Marine Ltd.000 1.000 800 7. 120 would offer division A a reasonable contribution towards its fixed cost and earn division B a reasonable profit. 300. A survey on the relationship between the selling price and demand for each division was carried out by the company’s Sales Director.000 900 5. (Total: 20 marks) QUESTION THREE (a) (b) Explain the applications of the learning curve.800 The manager of division B suggests that based on the above results. He argues that the transfer price should be arrived at by charging the variable cost plus an agreed mark-up. Required: (a) Calculate the effect of the existing transfer pricing system on the company’s profits.) Demand (units) 200 15. a boat construction company.000 400 5. has developed a new type of speed boat called “Speed Surf. (8 marks) (NB: use the results of the Sales Director’s survey in your calculations). a transfer price of Shs. The results are shown in the table below: Division A Division B Selling price (Shs. 120 on the company’s profits. (8 marks) NB: The value of b in the formula for the learning curve is -0. (3 marks) (ii) Reconcile the standard cost with the actual cost for the month of October 2005 showing the labour rate and labour efficiency variances. • Semi-skilled labour – 1. Boat assembling is labour intensive involving the use of two classes of labour namely: • Skilled labour at a standard rate of Shs. 4. (5 marks) (iii) Express the labour efficiency variance in terms of labour mix and labour output variances. (Total: 20 marks) QUESTION FOUR Angels of hospital’s increasing should cut Mercy Mission Hospital operates on charity basis.281. 800. (Value the labour mix variances using standard rates). Experience on boat construction from other models indicates that the use of skilled labour is associated with an 80% learning curve effect whereas use of semi-skilled labour is associated with a 90% learning curve effect. . is concerned about the cost variances and would like to learn more on the composition of the variances. Boat construction is a continous assembling process carried out at the company’s yard. the following labour usage and costs were recorded: • Skilled labour – 680 hours at a total cost of Shs.400. The board of directors has recently complained about the size of the cost budget insisting that the management down on costs. 950 per hour.256 hours at a total cost of Shs. 2. the sixth and the seventh speed boats were assembled from start to finish.322 for an 80% learning rate and -0. 3. 1. During the month.200. 5. • Semi-skilled labour at a standard rate of Shs. In October 2005. Required: (i) Calculate the standard labour cost of the month of October 2005. • Semi-skilled labour – 650 hours.152 for a 90% learning rate. The management of Pwani Marine Ltd. Labour usage for the first speed boat assembled was as follows: • Skilled labour – 952 hours.250 per hour. 1.Questions – Past Papers 72 1. 50% will remain in HDU while only 30% will be transferred to GW. (7 marks) (b) The steady state weekly costs under the proposed policy. 5.000 patients weekly. (ii) 10% of the patients in HDU at the beginning of the week will be transferred to ICU.000 compared to Shs. (ii) No changes will be expected in the GW.73 Questions and Answers Past Paper The major concern of the board is the cost of maintaining patients at the intensive care unit (ICU). (7 marks) (c) Advise the board on the best policy. The board of directors believe that the criteria for maintaining patients in the ICU is too strict and should be relaxed so that only 40% of the patients in ICU at the beginning of the week remain there at the end of the week while 60% are transferred to HDU. Past information on patients indicates that: (i) 50% of the patients in ICU at the beginning of the week will remain in ICU at the end of the week and 50% will be transferred to HDU by the end of the week. there is concern that an economic recession may adversely affect the success of the event with a fall in the .000 per week of maintaining a patient at the general ward (GW). For the last 20 years. 50. the club has held an annual dinner and dance event with the primary aim of raising funds to help the less fortune members of the society. The average cost of maintaining a patient at the ICU per week is Shs. Past hospital records indicate that the hospital serves an average of 4. and 40% will be transferred to GW. 10% will be transferred to HDU and 5% to ICU. 200.000 per week incurred in maintaining a patient at the high dependency unit (HDU) and Shs. 4. (4 marks) (Total: 20 marks) QUESTION FIVE (a) (b) Highlight the assumptions of cost-volume-profit (C-V-P) analysis. (2 marks) (d) State the assumptions of the quantitative technique used in solving problems (a) and (b) above. The staff at the hospital insist that if the proposed criterion is adopted: (i) 20% of patients in HDU at the beginning of the week will be transferred to ICU. 2. (4 marks) Mwito Club is a charitable organization based in Nairobi. 3. 50% will remain in HDU. Required: (a) The steady state weekly costs under the current policy. (iii) 85% of the patients in the GW at the beginning of the week will remain in GW at the end of the week. This year. 100. The following information is available on the operations of the hospital: 1. 5. • Events programme Advertising space: Shs. Sale of raffle tickets: Shs.000 Food per person (subject to a minimum of 4. (Assume one raffle ticket and one photograph per attendant).500 5.000 and a variable cost of Shs.500 3.000.000 Hire of a photographer 50. 4.500 4.000 per page. (10 marks) . 100 per photograph. Costs • Dinner and dance Shs. Photographs: Shs. A committee appointed to assess the likely outcome of the event has come up with the following data from the club’s records: Number of tickets sold 2. A study of past experience.500 Number of events programme pages sold 240 320 400 480 Number of past events 4 6 8 2 20 Number of past events 4 8 6 2 20 Required: (i) The expected profit from the event. Hire of premises 210.000 guests) 2.000 per page. current prices and quotations shows that the following costs and revenues will apply for the event: Revenue • Dinner and dance Sale of dinner and dance tickets: Shs.Questions – Past Papers 74 number of guests attending and sale of advertising space in the published events programme.000 per ticket.000 Music band and entertainers 840.501 to 5.501 to 4. 800 per ticket.500 to 3.000 Raffle prizes 790. 70. 5.400 • Events programme A fixed cost of Shs.501 to 6. (6 marks) (Total: 20 marks) .75 Questions and Answers (ii) Past Paper Describe how cost-volume-profit (C-V-P) analysis can be applied in absorption costing. 9 = 34.670.022.6) Contribution of P 135.100 Total Existing Capacity 253.2 (183.883.8 Direct materials (1973 x 65.4 .Answers – Past Papers 76 Answers JULY 2000 QUESTION ONE (a) Existing capacity Kshs P 4560 x 19.639.720)_ Incremental Contribution 65. 65.408 12.4)} (70.4 38.4) 16.6) 38.6 Increased contribution therefore is: Shs Shs.376 Q 6960 x 13.022.670.40) – (13 + 49 + 7.4 Decision Timao Company Limited should subcontract 2000kg from Kagocho Company due to the incremental contribution of Kshs. 2000 x 13 Add 5% increase Available cost to be switched Labour cost of P = 26.452 S 2300 x 17.4 = 1973 Kg Therefore units to be switched = 19.480 R 3480 x 9.20) 128.670. Sales 197 x 162 319.4 Less: Lost contribution from Q = 2000{(0.742.6 = 89.4 Switching of 2000 kg of Q releases Direct Labour cost by-: which is switch to P.626 Less: Variable Cost Direct labour (1973 x 19.0 = 90.6 Direct packaging 91973 x 8.0 = __39.6 38.4 Total Direct Labour of Full capacity 266.573.000 12.678.408 Add 5% increase to full Capacity 5% x 253.9 x 116.670.670.4 19. 200 26.4 Workings (a) (b) (c) (d) (m) 19.20 69.00 17.800 ÷ 19.19.26.9 17 (k) 19.6 118.60 7.760.40 44.530 2000Kg of Q subcontract 64.39.12.6 (l) 19.800 (n) 34.60 ÷ 13 ÷ 9.80 Subcontracts price = (90% x 4) 145.20 49.40 78.80 104.6 26.4 ÷ 17.60 13.77 Answers (b) Past Paper Questions and P Q R S 99.40 5.20 Direct packing 8.12 Less: Variable cost of marking Direct labour 19.00 Total Variable cost 93.00 54.000 ÷ 9.6 (r) 12.200 39.28 123.50 32.200 from P (a) 0 3015 (e) Shs.9 12.800 ÷13 cost.000 from Q (b) 1326 (h) 0 Shs.40 7.4 ÷ 19.670.70 S 58.00 (q) (s) (t) (e) (f) (g) (h) 39.200 39.670.800 from R (c) 1010 (k) 1523 (l) Shs.283(i) 0 42.00 Direct materials 65. This can be done in a matrix form as follows. R 3959 2626 0 3434 1280 S 2305 (g) 1529 (j) 1164 (m) 0 745 (t) (f) (i) (p) (s) ÷17 ÷ 19.90 9.20 Timao’s selling prices (A) 162 116.000 ÷ ÷ ÷ ÷ 13 (i) 9.000 from S (d) 1734 (n) 2615 (o) Extra 5 % of capacity 646 (q) 974 (r) Shs.670.670.90 17. Additional Production (Kg) from switching direct labour Source of units P Q Shs.20 Lost Contribution 52.070 Extra contribution gained in Shs.4 ÷ 13 12.76 89.9 (j) 26.60 35.00 41.954 62.90 Switching of 2000kg to different products.00 9.000 2000 2000 2000 2000 x x x x 19.60 13.000 (o) 34.000 ÷ 17 19.90 56.34.4 ÷ 9.536 .500(ii) 96.9 12.00 R 47 82. P Q Contribution per Kg/Sh.80 2000Kg of P subcontract 0 73. 68.40 136.000 (p) 34. 843 111.7)} – {(2000 x 52.500. 118.448 Workings Incremental contribution .788 78.e.307 2000 Kg of S subcontract 73.lost contribution i. (i) { ( 3015 + 974 ) 47 } – { (2000 x 52.6) } = 82.280 (ii) {(3959 + 1280) 42.500 etc Decision The best profitable contribution is to subcontract 2000kg of P and replace it with 5239kg (3959 + 1280) kg of R leading to the highest contribution of Shs.Answers – Past Papers 78 2000Kg of R subcontract 48.373 0 46. .900 0 51.6)} = 118. • The concepts of control theory can provide valuable insights into the design and operation of a management accounting information system (MAIS) because:i. Actual achievements are compared with the objective. These objectives must be measurable. This information acts as a feedback loop. . that is a system can be divided into a number of sub-systems and sub-subsystems. based largely on a system of budgets. Control theory can be used to analyse or to establish control systems within a business organization. which kept every various elements within the system all working towards a common objective. iii. each with it’s own purpose and controls. A model can be constructed and used as follow: i. ii.79 Answers QUESTION TWO Past Paper Questions and Two important concepts in control theory are firstly. • A control model can also be made to recognize environmental influences. The system as a whole. The way in which a MAIS is structured and used can be determined by modeling techniques. ii. Actual achievements of the system and sub-system are monitored. iv. iii. When actual achievements are measured as what the system is not expected to achieve and future expectations are compared with objectives (Such as projected completion dates for a project) we have feed forward control. and would usually take the form of budgets. Management accounting provides an information system for control. and for each sub-system (and sub-sub-systems) one or more objectives are identified. and the ways in which environment can affect the system’s achievements and objectives. Where suitable. A control model for a MAIS would: - Identify the sub-systems within the organization Establish objectives for each sub-system. Reasons for any differences between the objectives and achievements are identified v. with the control system being a budgetary control system. • i. and for the system as a whole. that a system must have a purpose and must have controls if it’s to remain cohesive and secondly. the comparison of results with objectives is called a feedback control loop. Controls provide the binding force. corrective measures are taken to bring the system under control • When actual achievements are measured as actual outcomes and results. ii. Business organizations need to be controlled by their management. • • • • • QUESTION THREE a) Sh.000 Current Income from external sales Contribution = 500 (37 – 25) 6. frequent changes caused by unstable environment could remove the practical value of feedback systems for control. Measure actual achievements for each sub-system. Further more. the significance of differences between actual results and budget would be difficult to assess for control purposes. Business organizations are largely ‘human systems. ‘000’ (i) Desired Residual Income 5. This always the prospect that unless results can be measured objectively managers will manipulate and ‘judge’ the figures. iv. control measures must be taken by managers. It might also be necessary to alter the system’s objectives in response to environmental change. Outcome needs to be fairly clearly measurable for control system to operate successfully. The practical application of control principles to a MAIS.000 Fixed costs (1. Compare actual results with the objectives (budgets) Identify significant differences. When an organization’s environment is unstable ad unpredictable forecasts of achievements will be uncertain. perhaps using their judgment.400) Capital cost 13% x 20 m (2. there may be problems in applying quantative measures to qualitative outputs. • A MAIS cannot initiate control action itself. control theory can provide a useful framework for a MAIS but control of a business is not “automatic”.Answers – Past Papers 80 iii.’ ad there will inevitably be difficulties with applying the theoretical • structure of a control model in practice.000 . so that the problems of human behaviour damage the operation of the control system. In addition. In practice. and control information might be imperfect and incomplete. for the system as a whole. but can only indicate where control measures might see appropriate. using a budgetary control system does depend on the stability of the environment and accurate measurement of results. v. and the reasons for them. In conclusion. In this respect.600) Contribution to be generated by internal transfers 2. or frequent. and a comparison of actual results against plan might be meaningless. If environmental changes are continual. although some environmental change can be achieved for in a control mode. a MAIS falls short of the ideals’ of a cybernetic control model. indicating where control action should be taken.000 3. the problems of redefining systems objectives will be considerable and budgets would have to be revised at frequent intervals. The net effect is that the company as a whole losses. This may result in the other divisions being forced to buy components externally and thus incur buying costs while Z will incur selling cots.37 rather than to transfer them to other divisions at Sh. The demand changes by 500 units for each Sh.30.1 change in price.000 units at a price of Sh.10 = Sh.25 + Sh.12 At Maximum profit MR = MC 60 .35.60 b = 1_ 500 The demand function will be P = 60 - 1 500 Q Total revenue = PQ = 60Q – 1 Q2 500 Profit is maximized where MR = MC MR = dTR = 60 – 2Q = 60 – Q dQ 500 250 MC is the unit variable cost = Sh.10 per unit 300 = Sh.35 per unit (ii) The transfer price above may motivate the Z division manager to want to sell the components externally at Sh.000 = Sh. b) The demand function can be determine as follows: P = A – bV WhereP is the price per unit V is the volume of sales at that price A is the price at which V = O (Maximum price) b is the rate at which the price falls for volume increases a proportion of sales volume.60 500 The maximum price = Sh.Q = 12 250 . Product A Demand is currently 15. A = 30 + 15.81 Answers Contribution per unit Transfer price Past Paper Questions and = 3.000 x 1 = Sh. 4 5.08 = 6.000 0.000 0.36 and profit maximizing Quantity is 12.600 0.12 (15 x 7.100 500 P = 100 .2 0.000 .000 0.Q2 500 MR = dTR = 100 .000 units Substituting to find P P = 60 – 12.000 15 working days 0.8 At maximum profit MR = MC 100 .Q_ dQ 250 MC = Sh.12 = 12.000 = Sh.000 = Sh.000) 0.4 5.000 units.20 (20 x 5.000) 0.08 (15 x 5000) 0.36 500 The profit maximizing price is Sh.1 Q 500 TR = 100Q .20 = 20.54 500 The profit maximizing price is Ksh.23.Q_ = 8 250 Q = 23.6 7.54 while the profit maximizing quantity is Sh.000 units QUESTION FOUR (a) Expected Value of Usage Lead-Times Probability Demand (units) Joint Probability Expected Value (Usage) (Days) 0.000 x 1 = Sh.000 units Substituting P = 100 – 23.Answers – Past Papers 82 Q = 12. Product B This is solved in the same way as A A = 58 + 21. 1 x 2) = 140. which can be used for other profitable activities.000) 0.4) + 7.1 x 2) = 1.85 ∴ = (d) The expected annual stock outs in units per annum {(0. Reduction in obsolete stocks Considerable reduction in paper work arising from a reduction in purchasing.000 (25 x 7.18 = 31.000 units the expected value of stock outs per annum is 10.000 – 150.4 5.000) (0.000 (0.000 – 150.85 = 89.200 x 360) x 1.6 7. Advantages of JIT i.000 25 working days 0.0025 + (0.000) 0.000 (0.000) = 175.30 Past Paper Questions and (20 x 7.3 0.12 0.000 0.375 Therefore.000)} x 15.855 = 15.766) (e) JIT (Just in time) it involves a continuous commitment to re-pursuit of excellence in all phases off manufacturing systems design and operation.855 units (c) Daily Demand = 5.00 0.000 units: 15 (175. stock and accounting transactions .30 = 42.200 x 360 140.500 Bufter stock at 150.000 units) = (25 x 7. are-order level of 150.6 7.766 units.18 1. Elimination of waste Savings in factory and warehouse space.000) 0. v.18 EOQ = 2 x (6.900 units (b) The P (stock out cost i.200 No of average orders per annum = 6.e.025 x 1.83 Answers 20 working days 0.156 units The additional annual holding cost if the re-order level is increased to 175.000 127.000 0.375/10.100) = 22. iv.000 – 127. Leads to substantial savings in stockholding costs. Then the increase in stock is justified where stock out cost per unit is greater then Shs.12 = 15.0.000 units ∴P (stock out cost) = 0. iii. ii.000 (25 x 5. Demand in excess of 150.order level = (150.3 (1.000 units re.225) (175.6) = 6.100 0.5 0. changes in plant layout and goods inwards facilities. QUESTION FIVE (a) Modification of the probability by use of Bayes Theorem Β (B/A) = P (B) x P (A/B) P (A) Steps to follow in modification of probabilities Step 1 Interpretation of the formula into the question: B is either oil (O) or not oil (N) A is the result of the report either favourable (F) or unfavourable (U) under each of the above situations. Difficulty in predicting duty or weekly demand. Additional investment costs in new machinery.Answers – Past Papers 84 Disadvantages of JIT i. iii. P (O/F) = P (O) x P (F/O) P (F) P (O/U) = P (O) x P (U/O) P (U) P (N/F) == P (N) x P (F/N) PF P (N/U) = P (N) x P (U/N) P (U) . Increased risk due to the greater probability of stock out costs arising from strikes. then restrict production or supplies. or other unforeseen circumstances. which is a key feature of the JIT philosophy. ii. 05 0.05 0.8) = 0.9 Step three Derivation of probabilities from step two P P P P (O) = 0.2 x 0.8 Favourable.1 No Oil Unfavourable.1 (0.1 P (U/N) = 0.9 P (F) = 0.8 x 0.27 0.986 P (O/F) = P (O) x P(F/O) P (F) P (O/U) = P (O) x 9U/O) P (U) P (N/F) = P (N) x (F/N) P (F) P (N/U) = P (N) x (U/N) P (U) Step five Construct a Decision tree and evaluate .3 (F/O) = 0.95 0.296 0.27 P (U) = 1 – 0.73 = = = = 0.704 0.05 P (F/O) = 0.2) + 0.27 = 0.2 Unfavourable. 0.85 Answers Step two Construction of probability tree.2 x 0.73 Step four 1 Incorporation of the probabilities into the formulas in step = = = = 0.95 (0. Past Paper Questions and Favourable.1 0.95 Oil 0. 0. 0. 0.27 0.9 0.014 0.95 (U/O) = 0.2 (N) = 0.8 x 0.73 0. 0.704 0. 4m C 0. 7.28 Dril l Shs.10 m) 0.Answers – Past Papers 86 Shs.10.10 m) Don’t drill 0 0 Oil 0.296 70 (Shs. 3m. 0 Shs.6056 m Don’t get Information Shs.2 70 Drill (Shs.8 0 0 14 Oil . 10 m) Don’t Drill No oil 0.73 Don’t Drill 0.49.39.28 Oil A No oil 0.014 70 Favourable Sh.986 0 Get Information Shs.27 Shs.98 B No oil Unfavourable D Drill 0 (Shs.6056 0. 6056 – 3 = 7.296) = 49. At Decision Box choose the highest value At outcome point use probabilities on values to get the expected monetary value.28 ⇒ Don’t Drill =0 At D3 ⇒ Drill = 0.73) = 10. 2.02 ⇒ Don’t Drill =0 At D4 ⇒ Drill = 14 – 10 m =4 ⇒ Don’t Drill =0 At D1 ⇒ Hire 10.986) = 0.98 Emv @ C = 70 (0.6056 Don’t Hire =0 Note 1.28 Emv @ B = 70 (0.28 – 10 m = 39.6056 At D2 ⇒ Drill = 49.87 Answers Past Paper Questions and 14 Oil Evaluation using EMV Emv @ A = 70 (0.2) + 0 (0.27) + 0 (0.704) + 0 (0.014) + 0 (0.98 – 10 m = -9. .8) = 14 Emv @ D = 39.28 (0. 4.605. (b) The value of imperfect information is: Value of imperfect (sample) information = Expected monetary value with IPI – Expected monetary value without IPI Sh.000 Sh.Answers – Past Papers 88 Step six Make Decision or Advice – Walt Lovell Limited (WLL) should use a consultants given the report is favourable drill as this will release a net benefit of Kshs. 7.6056 million.3.600 – Sh.7.000.605.600 . and deliberately makes it difficult to understand. (iv) Budgets are used by managers to express their character and patterns of leadership on subordinate. the unfavourable reactions of subordinates against is seems to be at the core of the budget problem. It should provide clear guidelines for current operations. (iii) The development of budgets (done properly) helps to achieve co-ordination between the various departments and functions of the organization. fearful of having his budget derailed by factory management. The accountant. Feedback control system is information about actual achievements. (ii) The accounting department is usually responsible for recording actual achievement and comparing this against budget. (ii) It’s an important medium of communication for organizational plans and objectives and the progress towards meeting those objectives. . the acceptance of derived targets. based by management to force ‘ lazy’ employees to work harder.89 Answers DECEMBER 2000 QUESTION ONE Past Paper Questions and (a) Feed forward control describes a control system in which deviations in the system are anticipated in a forecast of future results. on the other hand. basics. (iii)The budget usually sets targets for each department. In business organization. Benefits (i) It’s the major formal way in which the organizational objectives are translated into specific plans. (b) In his statement Chris Argyris. subordinates. so that ‘corrective action’ can be taken in advance of any deviations actually happening while on the other hand. The intention of such pressure is to improve performance. obscures his budget and variance reporting. (iv) The involvement of all levels of management with setting budgets. he identified situations why mangers could be reluctant in setting budgets: as follows: (i) The budget is seen as a pressure device. blame the budget rather than the leader thus it looses meaning. (c) The decision calls for the analysis of benefits and problems of budgeting. Accountants therefore are ‘budget man’ is the failure of another manager and this failure causes loss of interest and declining performance. produced from within the organization (for example management accounting control reports) with the purpose of helping the control decisions. and objectives related to individual managers and supervisors. achieving the departmental target becomes of paramount importance regardless of the effect this may have on the other departments and the overall company performance. it is information about actual results. resentful of their leadership style. the two way flow of information and other facets of a properly organized budgeting system all help to promote a coalition of interest and to increase motivation. 066 0. which is part of budgetary planning and the subsequent monitoring of expenditure.197 Cummulativ e Probability 0.003 0.50 0. (vii) The investigation of operations and procedures.175 0.05 Cumulative probability 0.95 1.106 0.009 0.040 0. budget should not be abolished as a company or an organization might not adjust to its set objectives without a budget system.25 0. may cause antagonism and decrease motivation.028 0. poor forecasting or general uncertainties due to managerial performance.599 Random Number 000 003 012 040 106 227 402 – – – – – – – 002 011 039 105 226 401 598 .121 0.003 0.402 0. may lead to reduced costs and greater efficiency. Problems (i) There may be too much reliance on the technique as a substitute for good management.00 Random number 00 –19 20 – 69 70 – 94 95 – 99 Allocation of random numbers ranges to weekly demand Demand/ Week 470 475 480 485 490 495 500 Probability 0. (v) The very existence of well documented plans and budgets may cause rigidity and lack of flexibility in adapting to change.Answers – Past Papers 90 (v) Management’s time can be saved and alterations directed to areas of most concern by the ‘exception principle’ which is at the heart of budgetary control. QUESTION TWO The variables in the problem are the demand and the lead time. (iv) Budgets are developed round existing organizational structures and departments. In conclusion.70 0.20 0. (vi) Performance of all levels is systematically reported and monitored thus aiding the control of current activities. (iii) Variances are just as frequently due to changing circumstances. (ii) The budgetary system perhaps of undue pressure or poor human relations.227 0. Lead Time Week 2 3 4 Probability 0.20 0. Since the demand is approximated by the continuous normal distribution we will consider demand insteps of 5 x LA 20 Allocation of random numbers to lead time.012 0. which may be inappropriate for current conditions and may not reflect the underlying economic realities. 028 0.998 1.000 599 774 895 961 989 998 – – – – – – 773 894 960 986 997 999 .175 0.009 0.121 0.989 0.774 0.066 0.91 Answers 505 510 515 520 525 530 0.895 0.961 0.003 Past Paper Questions and 0. 485 Demand RN Amount 034 743 738 636 964 736 614 698 637 162 332 616 804 560 111 480 505 505 505 520 505 505 505 505 490 495 505 510 500 490 7.490 985 495 2. Test the empty cells as usual.015 510 5 0 0 1.520 1.520 1.485 985 2.490 985 495 0 1. but use any cell which has positive shadow price.18.000 1.475 Reorder ? YES/NO LeadTime RN Weeks 95 4 Shorta ge YES 515 505 YES 73 3 YES 10 1 1. calculate the unit profits.995 15.858.485 3. mean number of orders/week = 3/15 = 0.2 x 500) = Shs.2 The expected Average cost per week = (1.031. Use the transportation algorithm as usual to minimize these negative profits.031.200) + (0.020 15 = 68 x LA20/Week Number of orders placed during the 15 weeks period = 3 Therefore.35 QUESTION THREE (a) How can the transportation algorithm be modified to maximize rather than minimize? Instead of minimizing the positive unit costs of all the cells. make them negative and put these in each cell.020 Mean demand = 7525 = 501.Answers – Past Papers 92 Simulation of Stock Control Numbe r Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total Openin g Stock 2. Factories P1 P 2 (b) P3 supply outlets S1 S2 S3 & S4 .500 1995 1.6 x LA/Week 15 Mean shortage = 1.995 1.67 x Shs.995 1.475 = 1. Alternatively.995 1. that allocation gives the maximum profit. load the cells with the largest profits (instead of smaller costs) to give an initial allocation.015 510 5 0 2.500 1.7 x LA20 / Week 15 Mean closing stock = 15.525 Closing Stock 1. If all the shadow prices are negative or zero.5) +(68 x Shs. 100 . 7. 4.900 desks.580 to outlet S The matrix for contribution is given below: P1 P2 P3 S1 580 510 540 S2 610 600 650 S3 530 520 490 S4 600 570 660 The total demand from the four outlets is 850 + 640 + 380 + 230 = 2.93 Answers The contribution transport per desk = Past Paper Questions and selling price – variable cost – factory outlet at the factory costs at shop Example the contribution per desk Supplied from factory P = 2300 – 1500 – 220 = Sh. 4.51 -9 0 -1 1 0 230 6 00000 Total Demand 640 4.100 desks. There is therefore a need for a dummy factory to take up the 200 shortfall. The total supply from the three plants is: 625 + 825 + 450 = 1. The transportation table is as follows: TO FROM R1 = 0 P1 K1 = 58 S1 58 625 51 25 54 K2 = 67 S2 6 1 K3 = 59 S3 53 6 R2 = -7 R3 = -2 R4= -58 P2 0 420 6 P3 5 220 0 52 380 49 7 -4 6 K4 =68 S4 4 9 Total Capaci ty 625 5 825 38881 13 3 -6 -6 -8 -2 -8 6 230 - 450 0 200 111 Dummy 0 200 850 4. 51.1. 4.1. 60 380 1. 52 2. 52. 000 151.000.Answers – Past Papers 94 Note Note m+n–1=7 No of filled cells = 7 The problem is not degenerate. P1 S1 P2 S1 P2 S2 P2 S3 P5 S2 P3 S4 Dummy S1 Total contribution QUESTION FOUR a) (i) If the selling price is sh. 580 510 600 520 650 660 0 Total contribution Sh.200. 0. The total contribution at an output level of 100. Contribution = 100.001 (100. demand will be zero.000 units. therefore any change would reduce the contribution.600 143. P = 200 – 0. selling price must be reduced by Sh.001. 362.500 12.119. All the shadow prices are negative. The optimal allocation is: FROM TO Units Sh.500.650 The initial solution is determined by use of VAM.750 252.000) = Sh. .000 2. To increase demand by one unit.000 1 1000 (ii) Profit is maximized when MC = MR MC = Sh. The contributions are divided by 10 simplify the computations.000 2.000 197. Hence the demand function is P = 200 – 0.800 0 1.50 per unit variable cost.000 units Shs. This is thus the optimal solution.100 per unit. or Shs. 625 25 420 380 220 230 200 Contribution per unit Sh.500.000 (100 – 50) Less fixed cost Profit 5.001Q At the output level of 100. The mode is used to solve for optimality. with all companies adopting this approach.500.130 The price should be increased to Sh.001 (75.000) = Sh.3. 5.125. Consequently the pricing method encourages price stability.000) = Sh. Profits will decline by Sh.000. Change in Material Costs Revised marginal costs = Sh.001Q2 dTR = 200 – 0. The rationale for such an approach is as follows: Home Market Absorption cost-plus pricing is the norm in the home market. b) (i) The price in the home market is based on full absorption cost plus pricing.75 = Less fixed costs Maximum profit (iii) Past Paper Questions and Sh.60 The new optimum is where 60 = 200 – 0.130 to maximize profits. .002Q Q = 75.000 At this output level.000 3. P = 200 – 0.00 units The profit maximizing selling price = 200 – 0.000 2.125 The maximum profits Total contribution 75.95 Answers MR = dTR dQ TR = 200Q – 0. Therefore the selling price should not be changed.002 Q = 70.500.000 The optimal output level will not be affected by a change in fixed costs.625. whereas the price in the overseas market is based on partial absorption or variable cost-plus pricing.000. Therefore both price methods are on cost-plus basis.000 Change in fuel costs Revised fixed costs = Sh.002Q dQ The profit is maximized at 50 = 200 – 0.000 x Sh.001 (70. Export Market The export market is more competitive. the pricing objective might be to set a selling pricing in excess of incremental costs. Whether enough funds are being returned in the business (depreciation plus retained profits) to provide for asset replacement and internally –funded growth. value added statements focus attention on what managers can do something about. (ii) The main objection to the above pricing methods is that they are costbased and ignore price demand relationships. (ii) Value added statements also focus attention on how the benefits are shared out. and in particular: • Whether the employees are getting paid too much for what they are doing. an improving value added per shilling of labour cost would suggest that there is some scope for rewarding employees more highly. QUESTION FIVE (a) Advantages of Value added Statement (i) Managers might be in a better position to control their organization’s own inputs than the cost or usage efficiency of purchased material and services. allow alterations to be directed at activities within management’s control. the total profit will be influenced by changes in material prices (largely outside management control) and possibly also by occasional stock losses or profits when material prices alter value added statements. On the other hand. The firm might consider sales in the export market to be uncertain. Consequently. and short-term prices are set so as to cover short-run costs only. Consequently. If this is so. overheads have already been recovered in the home market and contribution pricing methods are adopted in the overseas market. and a price penetration policy might be adopted in order to obtain a significance share of the market. Firms might view export business as a means of utilizing any unused capacity. They would also reflect the quality of such management’s effort. . management will be made aware of the need to keep labour costs under control. • (iii) In organizations where the material cost content is a high proportion on total costs.Answers – Past Papers 96 The home market provides high volume sales and can therefore bear the full costs. If the value added per unit of labour is declining. Prices should be set by equating the marginal cost schedule with the sum of the marginal revenue schedules of the two countries. by taking out material costs as a separate item. 000 = shs. of components Receipts 162 Packing Materials = Packing Material’s cost = 36. v.000 Total overhead cost 68.3/machine hour {Budgeted machine hours = ½ (12.640/production run No.120 49.520 390.72 Shs. of production runs 30 = Shs.000 102.000/Customer order iv.000) + 1½(8.000 No.19 Workings for Recovery Rates (i) Machining cost = Budgeted machining cost = 102. and so far comprising the relative productivity of two or more divisions.400 84.000 48. .800 28.200 = 1. vi.5.200 32.000 Set up cost 10.800 = 400 Receipt No.15.240 13.000 16. Set up costs = Budgeted Set Up Cost = 54. of production runs 30 Receiving materials = Budgeted Receiving Materials cost = 64.000 16.000 8.000 Units produced 12.800 Packing materials 6.000 Budgeted machine hours 34.800 14. of production runs 30. Overhead costs (Activities) P(Shs) Q(Shs) R(Shs) TOTAL(SHS) Machinery cost 18.000} Production scheduling = budged production scheduling cost = 84.800/production run No.000) = 34.800 22.848 26.2.000 8.840 121.600 64.000 36.000 = shs.000 Quality control = Budgeted Quality Control Cost = 49.400 54.12.49 Shs.000 36.64 199.800 44.200 Receiving materials 7.0000 + (16.000 25.000 Overhead cost/unit Shs.000 Production scheduling 16.000 Quality control 9.800/production run iii.000 = 1.1.97 Answers (iv) Past Paper Questions and Value added in relations to labour effort and labour costs provides excellent measures of productivity. Answers – Past Papers 98 No.00 Direct labour 8.00 Overhead cost (as above) 5.00 24.51 16.00 8.49 15.72 12.19 Total production cost 29.28 21.00 12.00 70. of customers orders Total cost statement and profit (shillings per unit) P Q R Direct materials 16.19 Sales price 50.49 15.72 12.00 Gross profit per unit 20.81 36 .00 20.00 60. 000 14.000 44. Shs.000 300.000 6.000 210.000 140.000 66. This selling price produces a maximum divisional contribution of shs.000 Shs.000 42.000 72.000 21.000 3.000 175.000 4.000 Whole Company Output Total Units Revenue Shs.000 300.000 300. Total Mugaa Division Output Units 1.000 33. 7. 1.000 114.000 7.000 48.000 180.000 112.000 96.000 3.000 35. 1.114.000 4.000 70.000 192. 18.000 4.000 240.000 28.000 Based on the statements in (a) Gwashati division should select a selling price of Shs.000 90.000 208.000 96.000 24.000 2.000 58.000 5.000 210.000 70.60 per unit is selected.000 Total Contribution Shs. .000 Variables Total Cost Transfers Shs.000 36.000 5.000 2.000 22.000 280.000 72.000 48.000 105. 35.000 100.80 per unit.000 210.000 90. 35. 82.000 6.99 Answers JUNE 2001 QUESTION ONE (a) Past Paper Questions and Contributions for each division and the company as a whole for the various selling prices are as follows: Total Variables Total Revenue Costs Contribution Shs.000 6.000 300.000 180.000 108.000 (b) Costs Shs.000 186.000.000 Gwashati Division Output Total Units Revenue Contribution Shs.000 175.000 280.000 140. it is in the best interest of the company as a whole if the selling price of Shs.000 3.000 5.000 105.000 120.000 144.000 54.000 2.000 240.000 100.000 144.000 Company Variables Costs Shs.000 55. Shs. 000 2.000 18.000 18.000 but it’s marginal cost would increase by shs.11 per unit when the variable cost transfer pricing rule is applied.Answers – Past Papers 100 If Gwashati division selects a selling price of shs. 18. Consequently.000 Note: • Marginal cost = transfer price of shs. Gwashati Division will not wish to lower the price.e.000 6.000 60.000 18.000 3. it’s overall marginal revenue would increase by shs.80 per unit.000 4. When unit variable cost is constant and fixed cost remains unchanged.84. Consequently. • Gwashati will select the optimum output level for the group as a whole (i. Gwashati division will be faced with the following revenue schedules: Marginal cost (NOTE) Shs.000. a divisional profit incentive cannot be applied to the supplying division. 100.000 NIL Marginal Output units Revenue 1.000 40.7 per unit.000 18.000 80. (c) Where there is no market for the intermediate product and the supplying division has no capacity constraints.000 units) • And the optimal selling price of shs.000 18. QUESTION TWO (a) B 10 2 I 51 10 50 1 20 F G 8 20 2 4 3 H 10 51 A 10 C 14 9 35 4 45 45 E 5 50 .60 will be selected.000 Shs.000 5.60.11 per unit plus conversion variable cost of shs. and Mugaa will incur a loss equal to the forced costs. the correct transfer price is the marginal cost of the supply division for that output at which marginal revenue received from the intermediate product. Therefore the transfer price will be set at shs. this rule will result in a transfer price that is equal to the supplying division’s unit variable cost. A transfer price equal to the variable cost per unit of the supplying division will result in the profits of the group being allocated to Gwashati.000 20. 5.60 per unit instead of shs. 101 Answers 1 0 0 J 8 K 12 2 5 8 38 M 8 Past Paper Questions and 16 6 44 L 7 16 4 46 4 48 The critical path = A – B – E – I The project duration = 51 weeks The project normal costs = Sh 197 millions . 5 = 4. It does not mean that the independent variable will cause a change in the dependent variable.5m = 207.5m Cost of completing in 45 weeks = 197m + 4.000 + 0. 1m.000.5m (d) Cost of completing in 45 weeks Crash A. 206.5 million (c) Cost if project is completed in 50 weeks = Sh. QUESTION THREE (a) A high correlation between the independent and dependent variable simply means that the two variables move in the same direction and at almost the same rate. Such information can be determined by use of coefficient of determination. B & E Incremental costs = 2m + 2m + 0. 217.5 + 5m = Sh.Answers – Past Papers 102 (b) 2 A I 45 2 0 1 0 4 3 4 36 M 6 10 42 J 6 39 4 7 43 L 2 G H 16 1 9 7 45 7 7 C 3 B 33 4 15 D 25 10 F 40 5 40 E 4 8 12 44 1 44 K 10 The minimum time is 45 weeks The critical path is still A – B – E – I The minimum time cost = Sh.197 + Sh1 x 5m + 0.00005Zt (b) (i) .5m It is advisable to crash the project to 45 weeks since it will reduce the projects costs by Sh. equation II ˆ Y = 5. e. (b) Solution Exhibit 26-25 presents the SQC charts for each of the three aircrafts (c) Skyline 1 has no observation outside the µ + 2σ control limits. the explained variations.g.5 (7.statistics are not as high as other functions.000) = 43. It may also be harder to formulate the function. However.It considers more independent variables.750. QUESTION FOUR (a) The +σ rule will trigger a decision to investigate when the round –trip fuel usage is outside the control limit: Mean + 2σ = 100 + 2σ or 80 to 120 kl since the (iii) (iv) (v) Any fuel usage less than 80 kl or greater than 120kl will trigger a decision to investigate.500.000 The coefficient of determination (r2) explains the variations in the dependent variable explained by the independent variable i. in equation ! 94% of the variations in Y can be explained by the introduction of the dependent variable in the model while 6% of the variation is unexplained variation. .000015Zt – 1 Y (ii) Using equation I ˆ = 2.96 meaning that the explained variation is 96%.000 + 5.500.e. The problem of multi-collineerity may occur independent variables used are likely to be highly correlated to each other.000 + 5. The only plane to be outside the specified µ + 2σ control limit is Skyline 3 on flights # 5 (126 kl) and #10 (123 gallon units).500. The Financial Controller may refer equation III to equation II because equation II requires him to forecast even the independent variable while equation III uses actual gross domestic product as the independent variable. This may make it more reliable. there was an increase in fuel use in each of the last eight- .000.It has a lower standard error of estimate than the other functions Disadvantages The t.000 + 50 Nt – 1 + 0.00001Zt + 0. Equation IV is a multiple regression equation it has the following advantages:.103 Answers Past Paper Questions and equation IV ˆ = 3. Compared to the other equations it has a higher coefficient of determination of 0.5 Yt – 1 Y = 2. Skyline 2 appears in control regarding fuel usage. the mean on the last six flights is 120 compared to mean of 104for the first four flights. Moreover.Answers – Past Papers 104 roundtrip flights. The probability of eight consecutive increases from an in-control process is very low. . Skyline 3 has three observations outside the µ + 2σ control limits. 105 Answers SKYLINE 1 140 Past Paper Questions and FUEL USAGE PER ROUND TRIP FLIGHT 130 120 x x x x x x x 110 100 90 80 2 4 6 8 10 ROUND TRIP FLIGHT NUMBER SKYLINE 2 140 FUEL USAGE PER ROUND TRIP FLIGHT 130 120 x 110 x 100 x x 90 80 2 4 6 8 10 x x x x x ROUND TRIP FLIGHT NUMBER . 650 34. Minimax Regret Opportunity Loss Table (iii) (iv) .250 Decision Choose a client fee of shs.4.125 31.500 (ii) Maximum Rule Client fee shs.925 30.5 26.3.3.5 26. 400 Maximum payoff (000’) 26.562. 000 since it maximizes the minimum outcome or returns.4. 600 Shs.775 27. 000 Shs.4.4. 000 Shs. Maximum Client fee shs.562.250 Most likely 29. 600 Shs.3.650 34.3.4.000 Shs.Answers – Past Papers 106 SKYLINE 3 140 FUEL USAGE PER ROUND TRIP FLIGHT 130 x x x x x x x x x 120 110 100 90 80 2 4 6 8 10 ROUND TRIP FLIGHT NUMBER QUESTION FIVE (a) i) Client fee per day strategy contribution (shs.4.000 costs High 26.187.4.5 28.125 31. 000’) State of variable Shs.500 Decision Choose a client fee is Shs.600 Shs. 400 Maximum payoff (000’) 34.775 27. 600 since at maximizes the maximum outcome or return.350 Low 34. 107 Answers Past Paper Questions and . 000 since it minimizes the maximum regret.5 0 1. 28.5 525 3.925 30.4.263.775 27.5 26. 000’) State of variable Shs.00 Shs.75 Value of PI = 31.5 Low 0 525 3.500 50 31.75 – 31.6) + 34.312.25 (Highest EMV as above) EMV with PI = 27.125 31.650 (0.150 Maxmini Regret 787.60 Shs.000 costs High 7877.4.562.027 31.000 Shs.157.6 34.6 29.5 Most likely 262.25 = 157.837.5 (0.263. 29.106.00 y 0 0 0 0.350 5 0.1) + 30.08 .106.Answers – Past Papers 108 Client fee per day strategy contribution (shs.5 ∴ The maximum amount to pay is Shs.3.1 26.3.562. 000’) Probabilit Shs.4. (b) State of variable costs High Most likely Low EMV Client fee per day strategy contribution (shs.250 0.4.106.187.5 0 1.4.5 25 5 Value of Perfect information = ENV with IP – EMV without PI EMV without PI = 31.5 (0.600 Shs.187.3 34.150 Decision: Choose fee of shs. 500 .3) = 31. 2 114__ x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = 1 1114 Total cost Safety stock 0 1 37.16 83.16 208 6 x 0.20 208 5 x 0.12 48 3 x 0.50 + 10% (250) = Sh.12 31.2 3 x 0.16 249.04 0.1 6 7 0.50 Ch = Sh.16 166.50 Lead time demand Probability 0 1 2 0.1 6 4 Past Paper Questions and 5 0.20 E O Q= 2 X 4 7 5X 5 0 3 7 .2 2 x 0.12.6 7 x 0.4 5 x 0.16 208 6 x 0.37.0 4 0.02 0.04 83.10 182 8 x 0.4 2 x 0.8 4 x 0.16 124.5 0 = 3 5.1 6 6 0.10 156 x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = .10 8 0.20 156 4 x 0.1 2 3 0.109 Answers DECEMBER 2001 QUESTION ONE a) D = 475 Co = Sh.5 9u nits≈ 3 6 u nits Stockholdi ng Cost 0 Stock out cost 1 x 0.50 1 x 0.04 10. 3 .8 911.4 5 x 0.2 3 x 0.2 3 x 0.8 x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = 4 4 4 x 37.04 629.5 312.04 41.04 x 20 x 13 = 72.16 83.5 = 187.16 124.6 2 x 0.04 x 20 x 13 = 31.16 41.2 3 3 x 37.10 x 20 x 13 = 52 3 x 0.6 2 x 0.16 x 20 x 13 = 41.50 = 112.6 44.20 52 2 x 0.5 1 x 0.2 1 24.6 2 75 1 x 0.20 104 3 x 0.5 = 150 x 20 x 13 = x 20 x 13 = x 20 x 13 = x 20 x 13 = 2 394.6 2 x 0.Answers – Past Papers 110 7 x 0.4 528.04 52__ 16__ 1 x 0.16 124.1 873.8 4 x 0.16 166.10 78 4 x 0.4 5 5 x 37.16 41.2 1 x 0.5 704.10 130_ 6 x 0.16 83.8 4 x 0.10 104 5 x 0. 50 per unit.5)} = Shs.10 x 6) + (3.5 = 300 The optimal safety stock is 6 units.5) + (3.0 x 1. 1.111 Answers 6 6 x 37.8 1 x 0.9 300 7 8 7 x 37.75) + (1.75)} = Shs.25 per unit C: unit contribution is 44 – {(2.0 x 0.4 0 271.72 QUESTION TWO (a) Produce (a) of A (b) units of B.8 4 6.58 ≈ 46 units 36 Total annual relevant Cost (TRC) TRC = D Co + ½ Q+S Ch Q = 475 (50) + (½(36) + 6) 37.8 272. (c) units of C (d) units of product D and (e) units of products E each week Calculate the unit contribution of each product.3 x 6) + (8 x 0. A: unit contribution is 40 – {(2.559.18.3 x 3) + 8.10 x 6.5) + (8 x 0.15.04 x 20 x 13 = 10.10 x 6.3 x 4.1 x 20 x 13 = 26 2 x 0. The reorder level will be: ROL = Cycle Stock + safety stock = DL + S Q = 475 x 3 + 6 = 45.25) + (1.16.16.04 x 20 x 13 = 20.3 x 6) + (8 x 0.39 units b) .5 = 225 Past Paper Questions and 1 x 0.10) + (3.10 x 6.64 per unit D: unit contribution is 48 – {(2.0) + (1.0 x 1.5)} = Shs. B: unit contribution is 42 – {(2.50 = Kshs.5 = 262.0 x 1) + (1.5)} = Shs.5 8 x 37.0 x 0.1) + (3. subject to the conditions above. The additional product would also have to be made at the expense of one or both of the other products.3 x 5) + (8 x 1)} = Kshs. Raw materials and packing time are the limiting constraints in the problem. 19.482 hours per week on the firing process.0 x 1) + (1.000 kg/week Non-negativity: a. b.81 of contribution.0a + 0.000 hours/week Packing: 0.000 kg/week Forming: 1. The shadow price is the amount.5) + (8.90 .000 hours/week Firing: 3. There is spare capacity of 321 hours per week on the forming process and 9.5b + 6. Shs.5e ≤ 30.0d + 1.105. d.791.4) + (3.5c + 0.25b + 15.0a + 6. ≥ 0 (b) (i) of product (ii) The optimum weekly production plan is to produce 3.39d + 21. e.0e ≤ 4.81 per hour.0 x 1)} = Shs. All raw materials and all packing time are used up.10 x 6. The resulting maximum weekly contribution is Kshs.71 per unit Maximize total weekly contribution.21. which would be added to the value of the total weekly contribution if one extra unit of a limiting resource were made available that: • • No additional costs were incurred.2.1d + 6.2.3 x 4. One additional kilogram of raw material will generate an extra Kshs.0a + 4.5a + 0.75b + 1. similarly generate additional shs.8.0d + 4.0e ≤ 6.5b + 0. C or D.357 units A. P where.5a + 16.2.4e ≤ 35. Unit contribution of the new product = 50 – {(2.64c + 18. we can see the shadow price for raw materials is Ksh.25c + 1.8.71e Shs/Week Subject to: Materials: 6.75d + 1.6) + (3. From the table. since all raw materials and packing time are currently used. c.0c + 6. The resource remains limiting (iii) Alternatively the shadow price is the amount by which the total weekly contribution would fall if the provision of a limiting resource was reduced by one unit.20 of contributions.1 x 1.02 per kilogram and for packing time is Kshs.Answers – Past Papers 112 E: unit contribution is 52 – {(2.0 x 1) + (1.1c + 6. P = 16.5b + 6. One extra hour of packing time will.321 units of product E and none of B. g. then a saddle point does not exist. games with perfect information or Games with imperfect information.g. The total reduction is the weekly contribution which would be: Kshs.81. the provision of raw materials for the other two products would effectively be reduced by 6 kilogrammes.90 – Shs. zero sum and non zero sum games Number of strategies available to each player e.02 = Kshs.8.12. 500 K1 + 0 (1 – K1 ) = -500 K1 + 1.000 is . 20. Amount of information the competitors have e. there will be a net loss of Shs.20. 2 x 3 game etc. Similarly.8. (ii) Let K be proportion of time Kamau does not expand 1 – K the proportion of time Kamau expands. There is therefore no pure strategy.1.113 Answers Past Paper Questions and If one unit of this new product was made. QUESTION THREE a) Four ways in which competitive situation can be classified are: Number of competitors e.19.000 500 1.500 K1 + 1.93 The gain from one unit of the new product is shs. 2 x 2 game. this would reduce the current total contribution by 6 x Kshs.12.2.000 b) Kamau K1 K2 Max Where: K1 K2 N1 N2 Min 0 is Kamau does not expand is Kamau expands is Njoroge does not expand is Njoroge expand Note: Since there is no entry that simultaneously a maximum of the now minima and a minumum of the column maxima.12.30.g. (i) Game matrix Njoroge N1 N2 500 -500 0 1.93 = Shs.19. the available packing time would be reduced by 1 hour. two persons and N – persons game.000 ( 1 – K1 ) 500K1 + = . this reduces the total contributions by Kshs.90 therefore.81 = Kshs.g.1. if one unit of the new product is made. the proposition is not worthwhile. Nature of payoff e.12 + Kshs. 500 (1 . 540.12 = = = = Payoff 500 -500 0 1.5 0 125 250 Kamau would expect to increase his profits by Sh.000 K1 = 1.000 N1 = 1.5 K2 = 0.5 (0.25) 0.25 Strateg ies K1 N1 K1 N2 K2 N1 K2 N2 Joint probability 0.8. These are established as follows: 1) Cost of original machine.000 N1 . to consider the alternative use of the direct materials (opportunity cost).000 N2 = 0. QUESTION FOUR (a) The minimum price of Mega Techniques Ltd is the price which reflects the relevant costs(opportunity costs) of the work.5 Let N1 be proportion of time Njoroge does not expand 1 – N1 be proportion of time Njoroge expands.250 per day on average.375 0.000 N 2.500 N1 = 1. however.250 per day on average while Njoroge expects to lose Sh.75) 0.5 (0.000 (1 – N1 ) 1.500 = 1.375 0.Answers – Past Papers 114 2.000 of costs incurred should be excluded form the minimum price calculation.125 0. 500N . It is necessary.75 2.000 .5 (0. and the shs. Past costs are not relevant.N1 ) = O1N + 1.000 Weighte d Pay offs 187.75) 0.5 (0.000 K1 = 0. Type P Revenue from sales as scrap (note 1) Type Q Revenue from sales as scrap.25) 0.000 – 1. Shs. 280.5 -62. which would be forgone if the conversion work is carried out.500 = 0. 50 in contribution per direct labour hour. 684. 000 Variable overhead cost: Shs. These costs would be incurred unless the work goes ahead. 684.324. 000 4) Variable overheads in Department Y are relevant costs because they will only be increased if production work is carried out (It’s assumed that if the work done is idle.000 – {120 x 270}) note 1 Type R Cost of Disposal if the machine is not converted (a negative opportunity cost) note 2 Total opportunity costs of materials Types P. Department X – costs for direct labour hours spent in conversion. Scrap sales would be lost if the work for Zimwi systems Limited goes ahead.600 108.2. however.2. 000 x 20% Shs.5 per shs.800 Contribution forgone by diverting Labour from other work Shs. 64. 3) Direct labour in Department X and Y is a fixed cost and the labour force will be paid regardless of the work they do or not do. 2. acceptance of the conversion work would be oblige the company to divert production from other profitable jobs.000 Shs. 3 men x 4 weeks x 27. Notes 1. 2) The cost of additional materials for conversion is Shs.1 of labour cost = 324.000 x 150% Shs.115 Answers Past Paper Questions and Minus the additional cash costs necessary to Prepare it for sale (360. If the work in stock would be unavailable goes ahead.000 885. 000 but this is an historical cost.600) = 86. In Department X. The relevant cost of close materials is the Shs. Q. Department Y = 20% of (1 man x 4 weeks x shs. 600 that would be spent on new purchases if the conversion is carried out.486.21. 600 from alternative use of these materials. R 327.324. 000 would be needed.400 . the materials in stock would be unavailable for production of the other machine mentioned item (2) of the question and so the extra purchases of Shs. 576.885. no variable overheads would be manned). The cost of labour for conversion in Department Y is not a relevant cost because the work could be done without any extra cost the company. The minimum contribution from using Department X labour must be sufficient to cover the cost of the labour and variable overheads and then make an additional Shs.600 By agreeing to the conversion of the machine Mega Techniques Ltd would therefore lose net revenue of Shs. Opportunity cost of using the direct Material types P.000 Sh.0 0) 0 0 2002 40. Shs.962.400 Fixed production overheads 162. 7) The money received from Pawa Limited should be ignored and should not be deducted in the calculation of the minimum price.800 (b) (i) (ii) cost behavior patterns are known. the company cannot sell the designs and specifications to the overseas companyhs.800 Opportunity cost: sale of design & specifications 270.000 Sh.000 Sh. Q.000 will not be spent unless the conversion work is done.Answers – Past Papers 116 5) If the machine is converted. ‘M’ TOTAL 80. Just as costs incurred in the past are irrelevant to a current decision about what to do in the future.800 Contributions forgone 486.270.600 Opportunity cost of additional materials for 684.000 Incremental costs: Variable production overheads in Department Y 86. revenue collected in the past are also irrelevant.000 Variable overhead 64.000 is relevant (opportunity) cost of accepting the conversion order. Shs. The objective of decision-making in the short-run is to minimize “satisfaction” which is often regarded QUESTION FIVE (a) MWANZO DIVISION PROFIT & LOSS ACCOUNT TO 31/10//03 Unit sales ( 1 0 0 7 5 x3 . be included as a relevant cost of order because the shs. ‘M’ . R 885.162. ‘M’ 2003 40. unit variable costs. The additional cost of supervision should.000 Conversion Opportunity cost of work in Department X: Labour 324.000 Minimum price 2. however. being manly undercharged regardless of what the company decided to do should be ignored because they are not relevant (incremental) costs. sales price and sales demand are known with certainty.000 874. The amount of fixed costs. 6) Fixed overhead. 000 99.000) (285.000 585.000 150. ‘000’ 4.650.584.935.000) Total direct cost Contribution Fixed overheads (No depreciation) Fixed overheads (depreciation) Loss (b) OPTION 1: MAKINI PROPOSAL 9 1 2 Sales (25% x x 450.829.0 00 2.375 Direct materials Chassis Direct labour Variable overhead Fixed overhead (excluding dep) Depreciation Total cost Plant disposal PROFIT OPTION 2: MWANZO’S PROPOSAL MWANZO Sh. ‘000’ Sales Direct materials Chassis Direct labour Variable overhead Fixed overhead (No Dep) Depreciation Total cost 880.100.760 1.000 699.375 2.000 200.000 200.000 285.500.000 2.000 TOTAL Sh. ‘000’ 84.000 (1.000) MWISH O Sh.000 (4.00 0) ______850.000 660.0 00 660.0 00 2.000 x 22.000 240.000 200.0 00) .000 270.000 (150.000 240.000 (3.000 339.000 150.625) MWISHO Sh.000) Past Paper Questions and 880 600 99 120 (819) 61 (285) _(75) (299) 880 600 99 120 (819) 61 (285) _(75) (299) 1.638) 122 (570) _(150) (598) Direct labour (110% x 90.650.000 660.0 00 660.000) __50.500.000 275.380.375 (285.000) Direct material ( 1 0 0 7 5 x150.000 240.000 (3. ‘000’ 5.000 ) _50. ‘000’ 4.000 150.0 00) TOTAL Sh.700.179.200 198 240 (1.000 300. ‘000’ 4.000 75.000) MWANZO Shs.000 600.000 585.000 120.100.100.000 (3.117 Answers Sales revenue (40.000 300. the disposal of direct material by Mwanzo division will result in revenue of Sh. 84. in raw materials cost and also a reduction in depreciation cost. 3. Makini’s proposal will result in a reduction.0 00 __551. If Makini’s proposal is taken.Answers – Past Papers 118 Profit (299.375M though there will be a loss in cost.000) __850. 2. The cost of Makini’s plan will result in group profit loss.0 00 NOTES: 1. . 675 To two significant figures 8 = 6.000 b – (400 + 2.25 16.000) = 0. therefore P (Z > Z) = 0.000 24.000 = 4.5 0.25 Using the standard normal tables.000 8 P (sales > 24.25 0.000 + 0.000 Assuming a normal distribution 5.000 is Z.000 sales (b) (i) The company will at least break even if (revenue – cost ) > 0 If the company sells b books.000 b = 5.000 8 8 = 4.119 Answers MAY 2002 QUESTION ONE (a) Distribution of sales f (s) Past Paper Questions and 0.000 = 5926 0.000 – 20. they will at least break even if 1.000 Sales 20.2.1 x 1.000 .000b) > 0 500 b > 2.000 Sales of 24.500.5 6. Z = 0.25.000 = .675 = 4. standard deviation above the mean where: Z = 24.000 is Z standard deviations below the mean where: ≥ = 5.675 approximately ∴ 0.500.000 – 20. 000 Expected payoff 0 4. (c) Expected profit = (Unit contribution x Expected sales) – Fixed costs = Expected sales = 20.650.500 11.500.5) = 0.0918 Therefore is there 90.900.000 b – (2.500.000 27.000 b) > 0 Assuming a normal distribution.0475 Therefore P (Z> .20 0.600.000 18.05 0.000 = 10. (650 x sales – 3.0475 = 0.000 – 20.000) (ii) Hire special machine. payoff = Shs.25 0.600 6. they will at least break even if: 1.500 -1.00) = 0.Answers – Past Papers 120 From the tables P (Z > 2.000 35.000 7.000 7.1 x 1.33 6.500 8.000 15. (ii) If the company sells b books. (500 x sales – 2.400.500.2.9525 There is 95.000 6. (d) Set up a payoff table for the following three possible decisions.00 On this basis.600 5. ‘000’ Possible decision Possible Existing Special outcomes facilities machine Sales 5. 6.000) (iii) Do not publish payoff = 0 Payoff Shs.25% probability that the company will at least break – even if the existing facilities are used.000 If the special machine is hired the unit contribution is shs.20 0.400 2.500. the special machine should be hired.000 + 0. the unit contribution is shs.000 22. If the existing facilities are used.000 is b > 6.5) = 1 – 0.500.000 = 7.000 x 650) – 2.00 + 250 b + 1.100 6.25 0.2.05 .100 Do not publish 0 0 0 0 0 0 0 Probabilit y 0.000 From the tables P (Z > 2. therefore the expected profit = (20. payoff = Shs.000 Z standard deviations below the mean where: Z = 6.400.100 9.82% probability that the company will at least break-even if the special machine is hired.000 13. therefore the expected profit = (20.000 x 500) – 2.000 = . (i) Use existing facilities.000 books. 16 0.g.20 04 – 19 0. (ii) The technique can also be used when the variables in the problem e.10 00 – 09 .100.6. negative exponential distribution. b) stop.16 0. (b) i.04 00 – 03 0.88 72 – 87 0. The first step is to allocate random numbers to the variable values. (iii) A computer is essential to cope with the amount of calculation required in (ii) above.28 0.04 0. QUESTION TWO (a)Advantages (i) Simulation can be used to investigate the behavior of problems.121 Answers Past Paper Questions and Calculate the expected pay off by multiplying each payoff by the probability of it’s occurring and summing them up. therefore. On the basis of choosing the decision which leads to the maximum expected payoff the company should have the existing facility. arrival time. which are too complex to be modeled mathematically.00 98 – 99 Cumulative Random Probability Numbers 0. It simply allows us to select the best of the alternative systems examined.10 0. do not follow the standard distribution.44 20 – 43 0. Passengers i at mins 0 1 2 3 4 5 6 Buses i at mins 8 Probability 0. (ii) Reliable results are possible only if the simulation is continued for a long period. more attractive to people who are not expert in quantitative techniques.000.10 Cumulative Random Probability Numbers 0.98 88 – 97 1. service time. The expected pay off is Shs. Disadvantages (i) Simulation is not an optimizing technique. (iii) The basic principles of the simulation technique one fairly simple and it’s.02 Probability 0.24 0. c) The time between successive people arriving at the bus The time between successive buses arriving at the bus The number of empty seats on the bus. The variables in this problem are: a) stop.72 44 – 71 0. 96 85 – 95 0.18 0.06 00 – 05 0.Answers – Past Papers 122 10 12 14 16 Number of Empty seats 0 1 2 3 4 5 6 0.03 0.9 (This means the queue is increasing in length) 10 QUESTION THREE (b) The three main elements of strategic cost management include: i.99 96 – 98 1. Strategic positioning iii. Passengers Board s Bus A B B C C D D D E E Queue Size Wait time (Mins) 9 20 19 24 21 34 33 32 4 40 273 1 2 3 4 5 6 7 8 9 10 18 18 07 92 46 44 17 16 58 09 1 1 1 5 3 3 1 1 3 1 A B C D E F G H 1 5 26 62 38 97 75 84 16 07 44 99 10 12 10 16 12 14 10 8 10 16 23 42 42 64 74 82 97 77 77 81 1 2 2 3 3 3 5 3 3 3 1 2 3 4 4 5 6 7 8 9 49 (i) The expected waiting time for passengers = 27.76 0.51 24 – 50 0. Value chain analysis ii. iat RN Minute Time Arriva l Time (mins ) 1 2 3 8 11 14 15 16 19 20 Bus iat RN Minute Time Arrival Time (Mins) 10 22 22 48 60 74 84 92 102 118 Seats RN No.28 0.91 1.15 0. Passengers No. Cost driver analysis .27 0.11 0.38 0.85 51 – 84 0.09 Probability 0.3 units = 273 10 (ii) The waiting time is progressively increasing at mean queue length = 49 = 4.48 0.00 99 a) We can now set up the simulations for arrival of 10 passengers at the bus stop.01 0.06 0.34 0.24 06 – 23 0.00 10 48 76 91 – – – – 47 75 90 99 Cumulative Random ProbabilityNumbers 0. Managing the linkages between customers and suppliers better. The value chain disaggregates the firm into strategically separable activities in order to understand the behaviour of costs so as to create competitive advantage. Value chain analysis is a systematic way of examining all activities that a firm performs and how they interact. Managing the linkages between activities better e. .g. improving efficiency through automation. A firm creates competitive advantages by: i.123 Answers Past Paper Questions and Value chain analysis Every firm is a collection of activities that are performed to design. iii. deliver and support its products/services. market. ii. produce. Finding new ways to conduct activities e.g. spending on better product design may reduce after sales service costs. Cost driver analysis Cost drivers are factors.e. Cost Leadership strategy Differentiation Within each of these strategies a firm may decide to focus. Changing strategies International customers International competitors Primary Activities . image of the product etc. Strategies have to be developed to achieve a competitive advantage over competitors. iii. The cost drivers can either be volume based or transaction based. price. a change in the cost driver will cause a change in the level total cost related cost object. ii. which determine the costs of an activity i. b) Characteristics of modern business that necessitate the information of a strategic cost management system are: i. quality. This can be done from the firm’s objectives. Michael Porter highlighted two basic rules to competitive advantage: i. The company must therefore understand its cost drivers so as to control costs. These are the building blocks by which a firm creates products and services valuable to its customers. The value chain has been shown by Michael Porter as follows. Value Chain Secondary Activities Firm Infrastructure Human Resource Management Technological Development Procurement Inboard Logistic Operators Outboard Logistics Marketing of Sales Service Strategic Positioning The company must identify its strategic choices. which emanates from the firms mission. which may occur due to cost. ii.Answers – Past Papers 124 Value activities are physically and technologically distinct activities a firm performs. brand name. vii. v. Greater product variety Higher selling costs Shorter product life cycle Higher design costs Past Paper Questions and . vi.125 Answers iv. 000 (F) (A) (A) (A) Standard Contribution (shs) (3.000 400 2.000 (A) (A) (A) (A) Standard Contributio n (Shs) 780 1. c) It is not possible to come up with the ‘true costs’ of each good or service produced by the firm due to the following reasons: • • • • Some costs such as overheads cannot easily be traceable to the final product.716) = 1.340.000 9.170.000 4.000 21.354. 354. (b) Weights Based on Budgeted units Model Proportio n 3/10 ½ 1/5 Actual Sales in Budgeted proportion 14.000 Sales Variance (units 3. QUESTION FOUR (a) Mod el Unit s A B C Actu al Units 18.000 (A) 405.000 9. and Budgeted selling prices and Budgeted unit variable cost are held constant.000 2.120) = 780 (3.000 Sales Quantity Variance 600 1.014.900 – 3.000 10. Differences Sales – quantity income is the difference between the amount of contribution margin in the flexible budget based on actual sales .000 (A) 1.014 Sales Quantity Variance (shs) 2.730 – 1.000 4.120 – 1.000 Budget ed Units 15.Answers – Past Papers 126 Note: Each of these points should be explained. The method used to apportion overheads will result in an approximate cost but not the true costs.000 10.170 1.000 Budgete d sales In units 15.680.600 (A) (c) (i) Similarities They both give the difference between the amount of contribution margin in the flexible budget based on actual sales volume at budgeted mix.3. The process of measuring and communicating information is bound to create errors in the costs computed.000 1.000 48.170 (2.950) = 1. Most costs are computed from predicting models which are not 100% accurate and thus may not result in ‘true cost’.000 25.000 50.000 25.000 1.014 A B C Sales Quantity Variance (Shs) 468.000 3.000 units (A) with a cost of Kshs.000 50.400 24.600 48.000 (F) (A) (A) (A) Sales quantity variance in total is 2. Even if it were possible to acquire perfect information so as to come with the ‘true cost’ it may not be desirable because the value of perfect information may be less than the cost of getting that information.000 (A). . management may wish to have some idea of the impact of the change in sales volumes in terms of financial results. cost benefit analysis and control action where possible. If they are concerned with bottom line figure. Information should be presented in a way that is understandable to it’s users. (iii) By analyzing the variances in this way management are able to see how well the business has performed against what should in hindsight have been the standard. none of the information calculated is of much value. if managers are interested in market share. and this can be used to point investigation.000 of extra units give rise to a decrease in turnover of Shs.000). The analysis into planning and operational variances this provides more useful feedback about operational performance. (ii) Arguably. Fixed costs are sunk and irrelevant. Otherwise part of each variance identified would simply reflect the fact that the original budget was wrong. Managers would need to be told the percentage of the overall electronic game market and the markets for individual products that was taken during the period. residual income. in terms of profit will be most useful. However. If managers are interested in turnover it will be useful to have an analysis of the oral impact turnover (unit sales of 2. and of the breakdown by individual product.127 Answers Past Paper Questions and volume at budgeted mix and that amount in the static (master budget). When budgets are next prepared the revised standards can be used. but expressing them in unit terms.354. If it is not possible to set right all of the operational problems. This approach is also useful for feed forward control. Alternatively. the variances. perhaps through factors beyond the control of management. valuation according to contribution is the options to choose. For decision-making purposes.3. so if they are used to an absorption costing system the users will prefer reporting in terms of profits and if they are used to marginal costing is should be presented in terms of contribution. because this only includes cash flows that will change as a result of any decisions. the most meaningful information is provided by not valuing the volume or sub-variances at all. the relevant proportion of operational variances can also be taken into account in future plans. Sales – mix variance is the difference between the amount of contribution margin in the flexible budget based on actual sales volume at budgeted mix. QUESTION FIVE a) ROI . 224. – 0.635 0.077 Revenues Operating Income Operative Income x = Total Asse ts Revenues Total Asse ts Although the proposed investment is small.121 0.939 2. c) 2001 Residual Income Operating Income Newspaper Television Film Studios d) Imputed Interest Divisional Charge Residual Income 1100 – 0. any proposal that reduces the ROI is unattractive.053 0.12 x 2600 = . 2001 ROI (before proposal) = 1 0 1 0 4 0 9 0 =0 2 .222 Given the existing bonus plan. Return on Investment of 0. This will reduce Kanyama’s reluctance to adopt the proposal.239 0. relative to the total assets invested.224 0.12 x 200 = 6 Adopting this proposal will increase the division residual income.2 4 Investment Proposal ROI = 3 0 2 0 0 = 0. It earns less than the 2001.12 x 4900 = 512 160 – (200) 200 (112) RI for proposal = 30 – 0.133 0.12 x 3000 = 0.150 2001 ROI (with proposal) = 1130 5100 = 0.Answers – Past Papers 128 ROI = 2001 Newspapers Television Film Studios b) 0.025 0. 0 4.3 4. To Prep Plant A 1 8 B C Tons/d ay Availab le Penal ty Costs MODI 3. The total mines output per day = 650 tonnes/day The total preparation plant capacity = 700 tonnes/day Therefore introduce a dummy mine to indicate which plant will not be fully used.83 U2 = 30 + 1 2 1503 _ + 1 1 _ 150 0 . Five mines supply three preparation plants.1.0 1. The unit costs for each combination of mine and preparation plant comprise: Unit variable production cost at the mine + unit operating cost at the plant + unit transport cost The values are shown in the following table.8 3 3.129 Answers DECEMBER 2002 QUESTION ONE Past Paper Questions and 1.7 + 1 6 5.2 120 70 0 U1 = 0 705 2 504 5. Vogel’s penalty cost method is used to find the first allocation and the MODI method to test for optimality.8 . 7 1.2 0 U5 = 4 140 + 1 4 + 4 140 0 __ Dum my __ 0 0 0 0 U6 = 38 50 _ 300 Tons/day required 250 180 40 0 + 1 + 4 50 0 __ 200 50 0 200 40 0 .5 4.4 5.4 U3 = 11 40 _ 4 + 1 _ 40 0 80 5.32 U4 = 3 + 1 3 +1 0 _ _ _ 1602 160 0 __ 5 4.5 .2 5.0 3.9 4.Answers – Past Papers 130 From mine 3 4.9 4. 3 V3 = 3. Disadvantages i.7 3. mine 4 supplies 160 tonnes per day to C. Considerable reduction in paper work arising from a reduction in purchasing stock and accounting transaction or procedures. ii. 7 V1 = 3.5 . 3. Preparation plant A has 50 tonnes per day spare capacity even thought it has the cheapest operating costs. Production costs at Mine 3 fall from Shs. increasing costs by 40 x 42 =Shs.4 . mine 3 supplies 40 tonnes per day to A and 40 to C.131 Answers Penalty costs 3. thus affecting cash flow of the organization Difficulty in predicting daily or weekly demand. 34 to Shs.7 .4 Past Paper Questions and There must be (m + n – 1) = 8 entries for a basic solution. All mine output is already taken by the plants and production costs are like a fixed cost and do not affect the allocation. which is a key feature of the JIT philosophy. The total cost of the above allocation are: 70 X 38 + 50 X 37 + 150 X 40 + 40 X 49 + 40 X 45 + 160 X 37 + 140 X 42 = Shs.680 per day.81 . 1. Mine 1 Supplies 70 tonnes per day to A and 50 to B. Reduction in obsolete stocks v. ii.8 3. The extra 40 tonnes per day output will go form Mine 5 to Plant A. 320 per day. There are 8 entries. changes in plant layout and goods services. All the shadow costs are positive.24 V2 = 3.7 .3 1. Additional investment costs in new machinery. . therefore total cost will be reduced by 80 x 4 =Shs. 30 per tonne. which can be used for other profitable activities iv. therefore. 26. i.070/day 2. this is the optimum allocation. QUESTION TWO a) Advantages of Just-In-Time (JIT) Leads to substantial savings in stockholding costs Elimination of waste Savings in factory and warehouse space. iii. and mine 5 supplies 140 tonnes per day to A. mine 2 supplies 150 tonnes per day to B. all of Mine 5’s output is allocated to Plant A which has 50 tonnes per day spare capacity. Mine 5 plans to increase output by 40 tonnes per day from 140 to 180. 000 Total 12. (b) i.000 40.04 0.000 0 12.000 50.400 1.000 The optional safety stock is 400 units ii.370 hours 67 hours (F) x Shs.000 SUMMARY Safety Stock 0 100 200 300 400 500 Stock out cost 12.10 Cost 0 1. Safet Stock Stock out Probabilit Expected Total y out cost @ y Cost (Shs) stock shs.07 0.000 4. P (being out of stock) i. that restrict production or supplies.000 1.04 0.10 0.000 40.10 0.000 2.800 3.000 10.000 30.13 0.300 (F) Shs.600 2.100 (Shs) 500 400 300 200 100 0 100 200 100 300 200 100 400 300 200 100 500 400 300 200 100 0 10. Increased risk due to the greater probability of stock out costs arising from strikes.04 0.000 4.100 2.000 7.07 0.04 0.04 0.000 3.000 20.400 5.07 0.000 20.000 5.e. or other unforeseen circumstances.600 3.600 0 400 1.Answers – Past Papers 132 iii.000 10.000 5.000 8. at optimal safety stock of 400 units = 0.000 0 0.600 7.000 30.437hours 3.500 400 0 Holding Cost @ sh.000 30.300 2.000 10.500 4.07 0.16 0 400 800 700 1.000 10.000 2.10 0.000 20.100 (F) .000 2.600 1.000 20.200 1.500 3.600 1.000 1.13 0.04 QUESTION THREE (a) Productivity September Standard hours of output achieved Productive hours worked (3800 – 430) Variable X Standard charge rate (W1) Productivity Variance 3.20. 270) 1. Expenditure should have been (3.000 = (5. Expenditure should have been (4200 x Shs.000) (A) b) (i) Productivity = Productivity variance (part (a)) Standard cost of output (W2) August September October = 42.194.9% 1.300 x100 = 8. 300 (F) September Excess time should have been (3800 x 10%) 380 hours But was 430 hours Variance (50) hours (A) X variance rate (W1) x Shs.100 x 100 = 1.133 Answers October Standard hours of work achieved Productive hours worked (4200 – 440) Variance X Standard rate (W1) Productivity variance Excess Idle Time Past Paper Questions and 4.070.061 hours 3.300 Variance Shs.0%) .100 = 20.(6.200 x 10%).000 Variance (113.100 = 90.760 hours 301 hours x Shs.300 Variance Shs (15.031.000) (A) Expenditure September: Shs.000 But was 1.031. 420 hours But was 440 hours Variance (20) hours (A) X standard rate (W) x shs.000) (A) October Excess time should have been (4.000 Variance (44.270) 1.026.90.900 x 100 = (4.247.3% 1.000 (ii) Excess Idle Time = Variance (Part (a)) Expected cost (W2) August = 6.134.2%) 1.300 (F) shs.000) A October Shs.800 x Shs.000 But was 1. 000 = (1.000 October = 6.000 126.000 = (10. Standard costs August September October November Productivity Standard hours of output 3.000 Expenditure Gross machine hours 4.000 Expenditure = Variance (par (a))________ Standard machine cost (W2) August = 20.000 114.300) 120.100 Standard cost (x Shs.194.000 1.000 = (13.270) 1.000 etc) 4.Answers – Past Papers 134 120.000 123.000 Expected Idle Time (10% x 4.100 1.080.200 4.300 (W1) 1.000 3.000 (4.300 1.000 1.000 = (10.270 divided by (100.000 380 420 410 Expected cost x Shs.8%) November = (iii) 12.0%) 1.000 November = 111.026.980 Standard cost x shs.000 = (4.107.031.107.9%) September = October 44.026.2%) 114.000 c) The following comments may be made: .437 3.000 1.8%) 123.3%) 1.218.061 3.300 2.000 September = 15. Standard Charge Rate Standard variable machine cost per gross hour is Shs.100 1.031.10%) = Shs.437 4.134.000 = (9.000 = 113.000 Workings 1.134.000 = 126.080.0%) 1.800 4.000 1. ii. 3. 2. iii. Many services organizations have only recently implemented cost systems for the first time. The fluctuation levels of idle time do not have a clear cause. The productivity improvement may have been brought about by means of measured expenditure. 2. iv. but seems to hold steady in November. Fluctuation in excess idle time: Excess idle time has fluctuated in the period. . 1. QUESTION FOUR (a) Large – scale service organizations have a number of features that have been identified as being necessary to drive significant benefits from the introduction of ABC: i.135 Answers Past Paper Questions and 1. In the absence of other information we can suggest the following possible interdependencies. Improvement in productivity: Productivity has improved in each month. machine maintenance or supervision. This has occurred at the same time as when the weaknesses of existing systems and the benefits of ABC systems were being widely publicized. These conditions have provided a strong measure for introducing ABC systems. though they do suggest that the quality improvement process is not yet fully under control. The fact that improvements continue may be due to a learning curve effect. Products and consumers differ significantly in terms of consuming overhead resources. Furthermore. it is higher (more adverse) In October and November. They operate in a highly competitive environment They incur a large proportion of indirect costs that cannot be directly assigned to specific cost objects. do not apply. however. Increasing Expenditure: Expenditure has been increasing. notably between September and October. suggesting that the extra alteration to quality is having a positive effect. perhaps on better quality materials. such as also having to meet financial accounting stock valuation requirements. They market many different products and services. many of the constraints imposed on manufacturing organizations. or a reluctance to change or scrap existing systems. ABC attaches costs to activities and identifies the cost drivers that cause the costs. Facility sustaining costs (such as property rents etc) represent a significant proportion of total costs and may only be avoidable if the organization ceases business. Costs can therefore be managed more effectively in the long term. Many service organizations have not previously had a costing system and much of the information required to set up an ABC system will be non-existent. iii. It may be impossible to establish appropriate cost drivers ii. (c) The uses for ABC information for service industries are similar to those for manufacturing organizations: i. Therefore introducing ABC is likely to be expensive. Thus ABC provides a better understanding of what causes costs and highlights ways of performing activities more effectively by reducing cost driver transactions. Activities can be analyzed into value added and non-value added activities alteration is drawn to areas where there is a potential for cost reduction without reducing the products’ service potentials to customers. ii. iii. Cost objects can therefore be difficult to specify. i. It results in more accurate product and customer profitability analysis statements that provide a more appropriate basis for decision-making. It leads to more accurate product costs as a basis for pricing decisions when cost-plus pricing methods are used.Answers – Past Papers 136 (b) The following may create problems for the application of ABC. It’s often difficult to define products where they are of an intangible nature. QUESTION FIVE (a) Flow diagram OCCUPANCY ADMINSTRATION/ MANAGEMENT CENTRAL SERVICES FACULTY DEGREE COURSES TEACHING DEPARTMENT . 400 per sq.137 Answers Past Paper Questions and (b) Step 1 Apportion occupancy costs = Sh. ft 37.000.500 ft . 15.000 = Sh. 20. 2.000 + 3.000 = Sh.250.800 1.000 by degree courses (in round Sh ‘000’) Business studies Sh ‘000’ Mechani cal Engineer ing Sh ‘000’ Catering Studies Sh ‘000’ Faculty Teaching departments Degree courses .600.000 15.000 + 5.800.530.000.530.000 = Sh.000 = Sh.550.000 + 1.42.000 + 17.000 + 20.500 Step 4 Analyse Sh.000.000 Administration/manag ement Central Services Faculty Teaching Departments Step 2 Apportion Central Services costs: 10.000 + (1. 80.000.000 8.200.000.000.750.20 0 Step 3 Apportion teaching department costs (includes 100% of faculty costs) and administration/management costs to degree courses.920.000 Administration/management = Sh. Teaching department = 8.000) + 55. 105.000 = Sh.550.000.680 5.Answers – Past Papers 138 Sh‘000 ’ 2.000.000 2.000 = Sh.000 Average university cost per student = 105.000 + 7.600 3.000 + (3.92 0 11.7 per external costs 16.680.200 3. 105.000 Sh‘00 0’ 1. 0.000.000 Total degree courses costs = Sh 80. if in the following year intake is up to sixty on the mechanical engineering degree. with a similar level of costs.416 514 224 3. The engineering and catering courses will require much greater use of expensive machinery and equipment. the most obvious of which is the very different nature of the courses. The much lower staff/student ratio will push up the teaching costs per student. This variable is unlikely to have an impact on many of the university costs. Another factor to be considered is the variability in the student numbers.637 822 224 6. .028 336 3.377 5. which in turn will need more room. the average cost per student would fall to nearly that being reported for a catering studies student. These average costs figures must be interpreted with great care by the management. They give a ‘rough’ guide to the relative cost of degree courses but the arbitrary apportionments render them very nearly useless for decision-making. In addition these courses will probably require much greater lecturer input than on the business studies courses. For example.013 1. For decision making incremental costs are required.683 The average cost per graduate will differ from one-degree course to another for several reasons.139 Answers Teaching department Administration/management Central services (base on external cost) Average cost per graduate (c) 2.154 Past Paper Questions and 2. which are mainly fixed in nature. 000. normal distribution) The uncertain variables can be estimated as a continuous probability distribution.000 units (ii) BEP sh. most likely and best possible outcomes.000 Coefficient of variation C.000 = Sh. Simulation is used where analytical techniques are not available or would be very complex. Estimates are made of the mean and standard deviation.40. = 100. (iii) Continuous probability distribution (e.000 δ = E(profit) 40 .g. Usually three values are selected: these are the worst possible. The expected values and standard deviation can then be computed.000 + 50.000 (i) 40 . (iv) Simulation analysis This is a method of analyzing a system by experimentally duplicating its behaviour. (ii) Point estimate of probability This approach requires a number of different values for each of the uncertain variables to be selected. which can then be used to compute expected profit. C .000 – 400.000 BEP units = Total fixed costs Contribution margin = 100.000) + 3(50. For each of these values a probability of occurrence is estimated.40.V = = 1 Expected profit = 4(85.000) – (400.000 =Sh.V = 4 400.000 δ profit =4 x 10.1. standard deviation of profits and probability that the company will break even.000) .Answers – Past Papers 140 JUNE 2003 QUESTION ONE a) Methods used to analyses uncertainty in CV-P analysis (i) Sensitivity analysis This is what if analysis that considers the effect of a marginal change on each of the relevant variables to the decision. b) (i) Current production: Ti only contribution = 10 – 6 = Sh.4 E (Profit) = 4 x 110.000 Proposed production: Ti and T2.000 (10) = Sh. 3 2 1 4 .CM = 4 85 + 3 50 = 3.000 = 123980 units 3.P units = Total fixed costs average contributi on margin AV . The decision therefore is to add T2 to the production schedule since it r educes the coefficient of variation from 1 to 0. We should use the coefficient o f variation.49 Since the mean demand is greater than breakeven point then BEP is not a good criteria in making the decision.9)( 4)( 3)( 8000 )( 5000 ) = 19621 .V) C.62962963 ( ) ( ) Thing one = 85 (123980 135 ) = 78061 units Thing two = 50 (123980 ) = 45919 units 135 in sh BP S = E h B PS E h T tal o = T 1 701 x S1 86 h0 T 2 499 x 8 51 sh = = 70 1 8 .E.62962963 135 135 BEP units = 400.141 Answers = Sh.V = E ( profit ) (iii) δ = 19621 .49. QUESTION TWO a) Overhead absorption is the technique of attributing departmental overhead costs to a cost unit. .000 + 50.000 = 0.000 Past Paper Questions and δΠ = 2 2 2 CM 1 δ12 + CM 2 δ2 + 2r12 + CM 1 CM 2 δ1 δ2 = 4 (800 ) 2 + 32 (5000 ) 2 + 2( −0.9 2 .4 B.1 7 6 BP S E h (ii) Coefficient of variation (C.4 40 .40.6 0 37 5 6 . Alternative bases of apportioning exist such as the number of machine hours or the percentage of particular elements of prime costs incurred in respect of cost units. ABC is based on the principle that activities cause costs and therefore the use of activities should be the basis of attributing costs to cost units. If the method of manufacture is machine intensive for example. iii. related and apply a separate absorption rate to each part of the overhead cost. and those. . A further development is to divide the overheads into those costs. iv It tends to focus excessively on the short term and often leads to arbitrary cuts being made in order to achieve short-term financial targets (ii) The answer should stress that:. This was then used to attribute costs to the cost units on the basis of the number of labour hours used to produce the cost unit. which are machine hour. iii The resource allocation tends to be based on existing strategies rather than considering future strategies. This is the use of multiple rates similar to the principle of activity bases costing (ABC). The budget is therefore concerned with increments to operations that will occur during the period and the focus is on existing uses of resources rather than considering alternative strategies for the future budget period. The focus is on managing activities ii. it is more realistic to absorb the overhead cost on the basis of the number of machine hours instead of the number of labour hours. the basis of overhead absorption was the number of labour hours expected within the budget period and this was then used to calculate an absorption rate per labour hour. It assume that the basic structure of the budget will remain unchanged and that adjustments will be made to allow for changes in volume. The focus is on the resources that are required for undertaking activities and identifying those activities resources that are unutilized or which are insufficient to meet the requirements specified in the budget.Answers – Past Papers 142 Traditionally. efficiency and price levels. which are labour related. b) (i) Incremental budgeting uses the previous year’s budget as the starting point for the preparation of next year’s budget. Attention is given to eliminating non-value-added activities. Costs are identified with particular activities and the performance of those activities is linked with products. i. Incremental budgeting suffers from the following weaknesses: i It perpetuates past inefficiencies ii There is insufficient focus on improving efficiency and effectiveness. 143 Answers iv.e. QUESTION THREE For (a) and (b) . the cost drivers). Past Paper Questions and The focus is on the control of the causes of costs (i. 8 1. ‘m’ 6.4 5.24 33.4 1.3 million Joan should choose contract C.06 0.18 0.6 -19.36 0.Answers – Past Papers 144 Fixed Fee Contract A HD – BC HD – HC MD – BC MD – HC LD – BC LD – HC Sh. c) Three sources of information Joan might use are: 1.1 million EMV for Contract C = Sh.HC 0 0 0 0 0 0 200 200 50 50 10 10 20 70 20 70 20 70 180 130 30 -20 -10 -60 0. Her own track record of actual production and marketing relative to amounts .8 33.2 3.8 4.24 1.04 0. given the objective of maximizing expected monetary value.0 _ Expecte d Monetar y value Sh.0 Contract C HD – BC HD – HC MD – BC MD – HC LD – BC LD – HC 0 0 0 0 0 0 600 600 150 150 30 30 50 150 50 150 50 150 550 450 100 0 -20 -12 0.36 0.2 -28.06 0.12 0.12 0.0 0 -7.18 0. ‘m’ 10 10 10 10 10 10 Share of Revenu e to Joan Sh.2 -7.0 18.6 4.04 0.6 2.4 20.06 0.36 0.2 million EMV for Contract B = Sh. ‘m’ 100 100 0 0 0 0 Share of Costs Borne By Joan Sh.4 -4.12 0. ‘m’ - Net profit to Joan Sh ‘m’ 110 110 10 10 10 10 Join t Pro b 0.04 0.0 Contract HD – BC HD – HC MD – BC MD – HC LD – BC LD .8 -3.24 10.18 0.0 Note HD = High demand MD = Moderate demand LD = Low demand BC = Budgeted Cost HC = High Cost b) From the solution above the EMV for Contract A = Sh.0 18. 440.600 400 1.00 0 High Low method Highest point Lowest point Difference b= X 1.00 0 420. QUESTION FOUR (a) (i) Month 1 2 3 4 Sum Machine Hours X 800 1.0 00 2.50 0 122.3X.600) a = 17 ˆ The cost function is Y = 17 + 0.00 0 60. Regression analysis (ii) .0 00 4.145 Answers Past Paper Questions and 2.200 Y 550 150 400 400 = 0. The tract record of the film station parts in “the rise and fall of cock” film running over budget 3.0 00 160.0 00 X2 640.800.600 4.50 0 570.640.200 400 1.33 (1.0 00 1.000 Maintenan ce Cost Y 350 350 150 550 1.0 00 1.00 0 880.560.400 XY 280.33 1200 ˆ Y = a + bx Substitute Highest point 550 = a + 0.50 0 22.0 00 Y2 122. The geographical location of the technical nature of the stunts set the film.500 302. Examine the tract record costs against budgeted costs for films in the same location and of similar difficulty. 0 0 (1.5 +3 0 Y If Y =4 0 0 ˆ X =.000 (c) a1 = Σx − b1 ΣY n n = 4.6 0 .400  − 3  4  = − 50 4   ˆ X =.4 0 ) 4 0 0 0 = 2 −(ε ) 2 2 nε x x 4( 4 0 .000 =3 320 . 7 6 .144.5 +3 0 ) 0 (4 0 ˆ Y -t 3 2 0 1 4 4 c =1.2 ) ≤ ≤ 3 5 Y 3 2 0 .4 0 −0.3 9 ≤ ≤ Y 4 9 5 We are 95% confident that maintenance cost next period will lie between Sh.600 .3 ( 0 ) Y 5 0 90 = 3 0 ( in S . 7 4 7 (6 .495.3 0 0 x 1.2 ) 3 5 −74 2.1 0 m in 5 ach e hu o rs.6 + 26 2.Answers – Past Papers 146 b= nε x y .0 0 ) −( 4.3( 4.3 b) (i) ˆ Y = 0 + .ε x ε y 4(1.3 5 0 X I x =0 f 90 ˆ = 0 + .0 0 ) =5 Y a = Σ −b ε = 0 n n 4 4 T e fu ctio h n n ˆ is Y =5 +0 x 0 . ˆ se ≤ ≤ + se Y Y tc (6 .0 0 ) 8 0 0 =0 .390 and Sh.0 0 ) −4.000 ) − (1400 ) 2 NΣY 2 − (ΣY ) 2 = 960 .000 ) − 4000 (1400 ) b1 = nΣXY − ΣXΣY = 4(570 .000 1. '0 0 2 h 0' ) ˆ X = a1 + b1 Y 4(1.640 . Is there a saddle point YES NO Can the game be reduce d to domina nce YES Reduce by dominance NO Solve for mixed strategies Determine the value of the game STOP .147 Answers QUESTION FIVE Past Paper Questions and START Prepare the payroll Matrix. .73 A1 Company A1 A2 B1 0. .50 m in R & D B3 = Company B invests Sh. 22) (222.Answers – Past Papers 148 b) (i) Let A1 be company A undertakes a vigorous market campaign.72 0.25 m in Research and Development (R & D) B2 = Company B invests Sh.80 m in R & D Game Matrix Company B B2 B3b 0. In all cases A plays strategy A2 B’s reasonings. 47) A’s Reasonings . .If A plays strategy A1 then B should play strategy B1 to maximize his profits.74 0. 38) (228. then A should play strategy A2. 1) (216.. A2 be Company A does not run the market campaign B1 = Company B invests Sh.76 0.73 0. 28) B3 (184. then A should play strategy A2 to maximize his winnings. 4) (202.If B plays strategy B1 .72 0.73 0.76 Max The game has a saddle point occurring at strategy A3 .78 0. These are the optimal strategies with a game value of 73% of the market share of A implying that B will get a market share of 27%.If A plays strategy A2 then B should play strategy B1 . (ii) B1 A1 A2 Payoff matrix B2 (193. .If B plays strategy B2 .76 0.79 0. 149 Answers Past Paper Questions and The saddle point occurs when A plays strategy A2 and B plays strategy B1 .228 million Company B: Sh. The profit contribution will be: Company A: Sh. 47 million . 0 0 x 0 0 6 . 000 (70.0 0 2 0 .000 litres. 000 2.000.000.0 0 0 0 0 .0 0 5 . 000 210.000.0 0 0 0 0 .0 00) (105.200 Mixing hours of P1 = 2 0 . 000 210.0 0 3 0 0 0 .0 00 (30.0 0 0 1 0 0 0 .0 0 0 3 0 0 0 .0 0 2 0 0 .0 0 0 x 0 0 Other separable costs Extra cost of P2 = 2 .000 Net benefit of changing the mix 80.000.0 0 1 0 0 0 .000 = 240.500 Extra joint processing costs = 60. 000) 35.000 x 500 Blending and refining Extra cost of P2 = 2 0 0 .000.000 x 3.0 0 1 0 0 0 .000.000.000 litres P2 = ⅖ x 400.0 0 x 0 0 6 .0 0 x 0 0 6 .000.000.0 0 (12.0 0 = (400) Extra hours 800 Opportunity costs 800 x 100.0 0 x 0 x 0 00 7 % 6 .0 0 x 0 0 6 .0 00 Savings on cost of P1 = 5 .0 420.000.Answers – Past Papers 150 DECEMBER 2003 QUESTION ONE (a) Proposed production P1 = ⅗ x 400.000 = 160.000 x 7. Incremental revenue from P2 = 60.0 00 Decision The company should change the mix because the net benefit of the change is positive.000 Loss of revenue from P1 = 60.0 00) Saving on cost of P1 = x7 % 6 .0 0 3 0 0 0 . .0 0 Opportunity cost Mixing hours of P2 = = 1.0 0 5 . 000) 10.000.000.000 litres The production of P1 will go down by 60.0 00 28.000 litres while that of product P2 will increase by 60. 151 Answers (b) Past Paper Questions and Other factors include: Demand for the extra units of P2 Effect of change on employees Contracts already signed for supply of materials etc. Future production structure . = 600.6 = 360.2.875 2.000 tonnes max Sh.0 0 8 0 0 1 0 .000 tonnes of output Unit cost of Production Bungoma 1 0 .000 tonnes Busia tonnes And 600.390 per unit Total variable costs per kg of output: Bungoma tonnes And 360.Answers – Past Papers 152 QUESTION TWO (a) General analysis Plant capacity: Bungoma Busia Raw materials: Bungoma Busia From brokers 144.000 0.3.500 .818 per tone range 115.2.200 tonnes of output = 320. 1.828 per tonne range 320.2.000 tonnes max.000 2.200 – 390 + 2.6 0 0 2 0 0 7 .7 0 Other variable costs apart from aw materials Bungoma 1 2 0 .3.000 390 + 3.890 per tonne range 1 – 320.724 per tonne range 1 – 115.8 5 Busia x 2 0 = Sh.000 tonnes 380 + 2.75 360.00 4 .200 380 + 3.500 = Sh.438 .438 = Sh.000 – .344 .00 0 = Sh.000x80 0 1000 270.2.0 0 8 0 0 x1 7 = Sh.0 0 1 0 0.3.438 = Sh.0 0 0 .750 Maximum production for cheap material Bungoma Busia = 115.380 per unit Busia = Sh.344 = Sh.5 0 1 0 .0 0 8 0 0 Brokers material x 2 5 = Sh.000 0.000x80 0 1000 400.40 0 36 0. 962.724 per tonne Busia 320.200 2.000.511.200 @ 2.153 Answers (i) Past Paper Questions and Desired output is 630.824 per tonne.000 – 1.800 tonnes @ Sh.000 O .000 @ 3.818 per tonne and Busines produce 320.750 2.200 tonnes @ Sh.871.2.000 3.000 0 200 2.404.026.000 +1.000 = Total 1.3.200 Current relevant costs: Raw materials for both plants 468. ∴ Recommended production Bungoma plant 360.430.724 per tonne Bungoma produce 194.150 1.890 per tonne Bungoma 244.474.800 724.800 Production of 910.474.000 = Variable costs for both plants 1.000 tonnes QUESTION THREE (a) To LD LD SUM FROM SON PAL 0 100 250 150 2.000.000 tonnes Busia plant 550.000 @ 2.000 2.128.000 (ii) (b) Cost savings 3.300 3.962.800 x 3.724 194.000 tonnes 910.200 = Sh.266.000 + 576.050 100 0 2.000 tonnes Bungoma produce 115.890 = = = 313.200 x 2.000 Kgs Bungoma 115.2.000 250 SO N 10 0 2.200 400 3.890 per tonne Total relevant cost: 115.1.871.718 320.000 tonnes @ Sh.000 1.800.750 400 SUM 200 2.800 @ 3.400 924.20 0 5 0 PAL 150 2.000 x 2.718 per tonne Busia 230.300 SON 100 50 PAL 150 250 LD SUM LD SUM SON 1.000.044.200 250 3.804.000. 500 .500 3.00 0 2.300 PAL 100 2.150 2.05 0 2.500 150 2.50 0 2.30 0 10 0 2.Answers – Past Papers 154 2. 04 0. Z.09Y .11 0.01 x + 0.0.2% (b) Market shares at steady Let X. X.15Z = -0.80 0.29 1 0.23 2 0. SON TV and PAL TV respectively.06 Past Paper Questions and LD SUM SON PAL SON 0.13 0 0.0.29Y .86 = X.02Y .77 0.13 0.25 0.08 0 0.02 0.89 0.22 5 0. Y.77 0.02 0. 1-X-Y-Z 0.23 0.24 x 0.06 0.13 0 0.1% 23.TV.05 0.04 PAL 0.89 0.11 0. Z and 1-X-Y-Z be long run market shares of LD .155 Answers LD 0.80 0.09 0.04…………(i) = -0. SUM TV. Y.04 0.04………… (iii) Equation (ii) x3 + (iii) .04Z .22 0.08 0. 1-X-Y-Z 0. Z.04 0.03 x 0.06 0.05 0.00 0.2% 25.25 2 LD TV SUM TV SON TV PAL TV state 22.06 0.0.77 0.30 0.86 0.04 0.09 0.05Z + 0. Y.06 0.06 0.06………… (ii) = -0.11 0.02 0.80 0.08 0 0.00 0.86 Market shares at the end of December 2003 0.5% 29.09 0.05 0.0.04 SUM 0.89 0. 1 X = 0.3 – 23.87Y + 0.44 .008 -3.4) + (v) 3.23 Substitution for Z using equation (i) -0.3% 23.273) – 0.30.24(0.0.6 0.Answers – Past Papers 156 0.966 = 0.04Z = 0.4% PAL TV (100 – 23 – 27.04X – 0.02Y – 0.00937 0.09 (0.04 0.43Y = .04 -0.6X + 1.04Z = -0.03063 – 0.966Y = .016 .15Y = .0.6Z = .047Z = -0.22 0.273 Substitution for X 0.18 0.4) 26.6Z = .04 -0.89Y = -0.24297 = -0.04 Z = 0.3% ASSUMPTIONS OF MAKOV PROCESS (i) There is a finite number of possible states of nature .23) + 0.396Y = 8.64X – 32.0.01X – 0.0.3.22……………(iv) EQUATION [(I) X5) – [(III) X 4] .448 Y= 8.02297 X = 0.09X -.3.0.0.43Y = .08Y – 0.35Y – 0.64x + 1.234 ∴ Long run market shares are: LD TV SUM TV SON TV 23% 27.15Z = .8.1X – 0.1X – 0..02297 0.64X + 1.448 30.1X = 0.44…………………(v) Equation (iv x 36. Mt. Nyanza zone 4. Western zone 3.000 2 0 x 40. Nyanza zone 4. (v) The various states are assumed to be mutually exclusive and collectively exhaustive QUESTION FOUR (a) Total proportion 6+ 5+ 5+ 4 = 20 Kariuki 1.000 (139zone = 4.000 (110 -- 6 20 x 30.000 (130 – 70) = 2 0 x 30.000 Oketch Will be same as Wafula because they have same ability. Nyanza zone 6 x 40.000 450.000 (120 – 70) = 600.000 (10 – 70) = 450. Western zone 3.000 (139 – 70) = 2 0 x 30. More precisely in market forecasting for instant we assume that there are no new competitors or consumers and none of the old one leaves.000 (110 -Mt.000 x 50. Wambua 1. Mt.157 Answers Past Paper Questions and (ii) The probability of changing states remains constant through out the period of analysis i. x 60.e.000 x 50.000 x 50. Kenya zone 2.000 375.000 (120 – 70) = 720.000 . (iv) We can predict any future state from the current state using the matrix of transition probabilities.000 (110 - 70) = 600. the transaction matrix is static.000 3. Kenya zone 2. (iii) The size and make up of the Markov system do not change for the period to which the analysis applies.000 (100 – Wafula 70) = 540. Kenya zone 2. Eastern zone 6 6 20 2 0 1.000 (100 – 70) = 540. Western zone 70) = 600.000 (120 – 70) = 70) = 500.000 450.000 2 0 x 40. Eastern zone 4 4 4 4 20 20 x 60.000 5 5 5 5 20 20 x 60. Eastern – 70) 20 720. Kenya 540 450 450 360 Data in ‘000’ Western 600 500 500 400 Nyanz Easte rn 45 0 37 5 37 5 30 0 Max. Kariuki Wafula Oketch Wambua 720 600 600 480 720 600 600 480 S.Man/Zone Mt. Kenya 180 150 150 120 120 Mt.Man/Zone Mt.Man/Zon e Kariuki Wafula Oketch Wambua Min S. Kenya Western 120 100 100 80 80 Western Nyanza 0 0 0 0 0 Nyanza Eastern 270 225 225 180 180 Eastern Kariuki Wafula Oketch Wambua 60 30 30 40 ⑳ ⑳ 0 0 0 0 0 90 45 45 0 0 .Answers – Past Papers 158 OBJECTIVE OF THE COMPANY IS TO MAXIMIZE CONTRIBUTION S. of lines 4=4 hence the solution is optimal. Kenya 40 ⑩ ⑩ Western 20 0 0 Past Paper Questions and Nyanza Eastern 70 25 25 0 0 0 0 20 Min No.000 450. of lines 2 < 4. Kenya 30 0 0 0 Western 20 0 0 10 Nyanza 0 0 0 30 Eastern 60 15 15 0 Min.159 Answers Min No.Man/Zon e Kariuki Wafula Oketch 0 Wambua 0 Mt. Kenya Western Eastern Contribution Sh 720.000 450. solution not optimal Entering variable is 20. of lines 3<4 hence solution not optimal entering variable is 10. Kenya Eastern Contribution Sh 720.000 1. Man/Zone Kariuki Wafula Oketch Wambua Mt.000 Salesman 300. (b) Allocation Salesman Kariuki Wafula Oketch Wambua Total contribution Zone Nyanza Western Mt.000 .000 500. S.000 Kariuki Wafula Oketch Wambua Total contribution Or Zone Nyanza Mt.000 500. S.970.000 300.970.000 1. 000) 44. ‘000’ (70.000 7.000 = 22.000) 150.000 8.000 150.000 7.100 .000 B Sh ‘000’ 70.494 Present value Sh.000) 100.000 4.940 31.000 15.’000’ (70.0000 The average ARR for both projects = 8.’000’ (70.000 15.210 TABLE 2 Year 0 1-10 Cashflow A Sh.000.000.270 6.0000 x 100 35.000) 674.494 3.86% (ii) NPV TABLE 1 Year 0 1-10 1-5 Cashflow A Sh.000 35.000 Discount factor at 18% 1. ‘000’ (70.000 100.Answers – Past Papers 160 QUESTION FIVE (a) (i) ARR Investment Average capital employed (dividend by 2) Increase in net cashflows Average ikncrease per year (dividend by 10) Less depreciation per year Average net income A Sh.000 35.100 604.000 8.000 150.127 NET PRESENT VALUE Present value Sh.’000’ 70.000 4.000 Discount factor at 22% 1. 130) TABLE 4 Year 0 1-10 1-5 Cashflow B Sh. The use of cost-pus formulae enables the decision-maker to absorb some of these uncertainties and come up with a price that will be acceptable given the constraints at hard.000 x = 20.000 16 + 2.000 4 6. For example.210. ‘000’ (70. there are problems of volume estimating.490.000 0.000) 39. Secondly.161 Answers (iii) IRR TABLE 3 Year 0 1-10 1-5 Cashflow A Sh. these will point the price setter in the right direction.000 3. Cost-plus pricing will not guarantee against loss making.923 2. ‘000’ (70. cost may be reviews as abase from which the price setter moves.864 NPV Present value Sh.590.490.490 ____ 2. A third explanation of the popularity of cost-based price is the estimates of the company’s own cost may help the decision – maker to predict either competitor’s cost or a competitor’s price.490 A B 18 + 6.000) 10.000 10.4833 NPV Present value Sh. then the company may be able to assume that this parttern will hold for new products and thereby either to predict competitor price or . guarding against the possibility of setting the price too low and incurring losses. However. ‘000’ (70.000 2 2. if a company is operating in an industry where a 30% mark-up is the norm.98% x (b) Several reasons can be advanced in favour of computing target sell prices by means of cost plus formulae. even if the prices are later modified firstly. for instance.230 28.000) 72.210.’000’ (70.000 Discount factor at 18 1.000) 150. the decision maker is faced with uncertainties.640 (2.590.98 = 16.000 Past Paper Questions and Discount factor at 22% 1.000 + 2.000 + 2. Answers – Past Papers 162 to price in such a way as to gain quick acceptance of a new product line. (iii) The stability of the market for the product (iv) The probability of changes in products and/or product mix. (v) Political climate. -. (c) The factors to be taken into consideration in establishing the lengths of the proposed budget are: (i) The type of budget e. . (ii) The economic situation in general. capital expenditure cash or production.Motivation & Autonomy The main reason is that information is rarely (if ever) available to allow an approach based on marginal cost and marginal revenue. sales.g. The marginal cost of South division at an output level of 375.000 = Sh.MCN dTC S = dQ S 550 + 0.4.004QS So profits are maximized where 550 + 0.004QS = 3.400 – 0.002QN = 3.200.0016QN MCN = = 1.000 units is: 550 + (0.850 Q = 375.2.0008Q²N Therefore: MRN = dTR dQN dTC N dQ N = 4.050 At 375.400 – 0.000 units the price that North division would charge for selling the final product is: 4.500QN – 0.000 units).0036QN NMRN = MCS = MRN .500 – 0. Price = 4.000) = 550 + 1500 = Sh.500 – 0.500 – 0.0008 x 375.100 + 0.0036QN Since there is no intermediate market both divisions must agree on the output level so that QS = QD = Q Therefore 0.163 Answers JUNE 2004 QUESTION ONE Past Paper Questions and (a) (i) Profits for the group as a whole will be maximized where the marginal cost of South division is equal to the marginal revenue of North division.0076Q = 2.0008QN Therefore total revenue = 4.004 x 375. The resulting profit from each division would be: .000 (ii) The optimum transfer price is the marginal cost of South division for that output at which the marginal cost equals North division’s net marginal revenue from processing the intermediate product (at output level of 375. 000 (b) (i) In (a) the marginal cost for South division at different output levels were equated to the NMR of North division.500.000 x 2.000 + Sh.000 + 1.100 x 375.000 = Sh.200 Conversion costs (W2) Transferred costs Profit Sh.000 + 550 x 375.50 0 _____ 280.001(375.554.2.000 dNP dQ =0 = = = Q Profit is maximized where That is.625.’000 ’ 1.0076Q = 0 375.500.000 + 1. South division will .500Q – 0.000)² = Sh. It is assumed that the question implies that South division would quote transfer prices based on its marginal costs would at a given output levels.500.100Q + 0.500.0 00 554.850Q – 0.1.004Q) OR Profit = = dπ d Q Revenue – Total Costs 2.000 + 0.000 x 4.75 0 488.850 – 0.757.000)² = Sh.000 units 2.0058Q² .0038Q² .690 units An alternative approach is to equate the net marginal revenue with the marginal cost of the transfers.476.500.6 25 W1 TCS = 1.000 + 0.’00 0’ 768.281.0008Q²) – (1.625.6 25 768. where: 2. Drink’s net profit (NP) will be as follows: NP = (4.002(375.001Q²) – Q(550 + 0.050 Costs (W1) Profit Sh.004QS) to be constant per unit for all output levels.487.575. so that North would regard these transfer prices (550 + 0.0116Q = 0 Q = 245.975.250.850Q – 0.000 Group profit = Sh.Answers – Past Papers 164 South division Revenue 375.25 0 North division Revenue 375.7 50 476.000 W2 TCN = 1.000.000 2850 – 0. 100 x 245.690 + 0.000 + 550 x 245.500) Fault eliminated 0.256.690 = Sh.77 256.4. At an output level of 245.0036Q = 550 + 0.500.690 + 0.0008 x 245.204.36 (Cost = Sh.2 W2 = TCN = 1.856.690)² = Sh.3 . where 3.785.642.690 x 1533 Costs (W1) Profit Sh.5.690 units (ii) The level that maximizes profit for North division determines the transfer price.500 – 0.400 – 0.122.65 2 119.07 332.7 Fault not eliminated 0.77 _ 348.664 W1 = TCS = 1.165 Answers Past Paper Questions and transfer out at a marginal cost of 550 + 0.004QS) = 550QS + 0.000 + 1.690) = Sh.002(245.576.438.652.303 Conversion costs (W2) Transferred costs Profit Sh.004QS and North division will treat this price at a constant sum per unit.004QS Therefore the marginal cost of transfer will be 550 + 0.3.5761 376.856.e.690 x 4.’000’ 1. Therefore the total cost of transfers to North division will be: QS(550 + 0.008QS The transfer price for North division that maximized its profits is where NMR = MC i.1 QUESTION TWO (a) (i) Decision tree if investigation is carried out.’000’ North division 376.008Q Q = 245.690) = Sh.001(245.690 units the transfer price will be: 550 + (0.11 8 Revenue 245.122.303 South division Revenue 245. Not Worth investing further 0.64 Investigation undertaken Cost = Sh.642.000.057.004 x 245.500 Worth investigation and Corrective action taken 0.332.690 units the price that North division would charge for selling the fund product is 4.533 At 245.1. 908.5. Unit contribution = 1.450 Unit loss when surplus is sold = 850 – 500 = Sh. Where the variance is significant and exceeds a specified percentage of standard usage.Answers – Past Papers 166 It is assumed that the Sh.250 x 4.908.250 for 5 months at 2% (5.36 x 5.746 represent the PV of Sh. (iii) - Examples of category 2 variances include: (b) (i) Excessive usage of materials and labour due possibly to wrong working practices on a repetitive operation which is likely to continue if not corrected. On average the benefit of investigating is 8.64 No investigation Worth investigating but not done So variance continues 0.7135) for variances that are not eliminated.36 x 0.5 (ii) Applying the expected value decision rule.3 x 24.500 + 0.200 Order quantity DEMAND PROBABILIT 1100 1200 1300 1400 . The expected cost if the investigation is carried out is: 3. Examples of category 1 variances include: Variance due to random uncontrollable factors and is under control Where the cause is obvious (e.250 x 4.36 The expected cost if no investigation is undertaken is: 0.5 per variance.5 – 8.153 = Sh.153.8.500 + 0.300 – (800 + 50) = Sh.36 x 5.5.7135 = Sh.746* = Sh. the company should follow a policy of investigating variances as a matter of routine.755.500 correction costs applies to all variances that the initial investigation indicates are worth of further investigation.8. a machine fault) and future action has been taken to remedy the situation. Decision tree if an investigation is not carried out: Not worth investigation further 0.350 Unit penalty for stock out = Sh.g.153 * 24.8. The expected cost of investigation is Sh. 3 1200 0.3 < 0.3 0. QUESTION THREE (a) • Formulate the problem and discuss with those concerned in order to determine the constraints.7 − 0.7 − 0.55 0.0 0.55 DEMAND 1100 1200 1300 1400 The best level is to order 1200 outfits.1 Expected contribution 495(a) 475(b) 455 435 473 Past Paper Questions and 460 540 520 500 508 425 505 585 565 503 390 470 550 630 478 On the basis of expected contribution over 1200 outfits: Note: The order costs are constant and therefore ignored.4 0.2 0. P ML MP P = = = = ML MP + ML 350 + 200 450 550 450+ 550 = PROBS 0.1 1.3 Make an order of 1238 outfits.55 3.0 > 0.4 1300 0.000 The others are computed in a similar manner. More precise Interpolation: 1 1200 + 100 x 0.2 1400 0. (ii) The EOQ model does not include stock outs and their penalties and was developed for manufacturing rather than for the special needs of retailers. .55 2.0 0.000 1100 x 450 – 100 x 200 = 475. Workings: (a) (b) 450 x 1100 = 495.55 P(Demand > x) 1.00 0.7 > 0.167 Answers Y 1100 0. • Analyze results. • Formulate proposals. . • Modify the model. • Validate the model. • Prepare the computer program. • Construct the simulation flow chart. • Design the experimental runs.Answers – Past Papers 168 • Formulate the model and decide which variables to include. • Collect the information required and determine the functional relationship and the types of statistical distribution to apply. 2 = 6.5 + 8 X 0.7 + 9X 0.2 + 8 X 0.7 + 6 X 0.6 + 7 X 0.0 = 4.5 5 X 0.6 3 X 0.3 + 7 + 0.1 5 X 0.4 = 7.4 + 6 X 0.2 Past Paper Questions and = 6.1 + 8 X 0.2 4 X 0.2 + 10 X 0.4 = 6.5 4 X 0.4 3 X 0.8 + 10 X 0.2 5 X 0.3 .9 4 X 0.10 + 6 X 0.2 + 10 X 0.0 = 8.0 = 6.3 + 10 X 0.4 = 7.2 + 9 X 0.5 = 5.5 + 6 X 0.2 5 X 0.5 + 5 X 0.4 = 4.2 3 X 0.4 + 7 X 0.4 + 8 X 0.169 Answers (b) Activit A B C D E F G H I J K Expect activity Completion time 4 X 0.2 + 4 X 0.4 = 5. 9 13.9 19.4 C G 5.4 8.0 22.3 I 6.9 33.0 D 5.4 7.9 18.9 E 6.4 B 7.9 A 6.3 44.3 27.2 F 4.6 44.5 13.Answers – Past Papers 170 0 0 6.4 H 27.7 39.4 6.3 J 6.7 K 4.3 33.3 .4 39.0 18. 80 1.00 0.20 0.40 0.20 0.90 0.20 0.40 0.60 0.00 0.40 0. 95 28 66 56 14 84 85 53 90 DAY S RN .30 0.50 0.50 1.00 0.5 6.80 1.20 0.20 0.80 1.00 0. NO .50 0.171 Answers (c) ACTIVITY A Past Paper Questions and DAYS 4 6 9 5 7 10 3 8 4 6 8 5 10 3 5 7 3 4 6 9 5 7 10 4 8 5 7 10 4 6 PROBABILIT Y 0.20 0.20 0.10 0.00 0.20 0.75 9.20 0.50 0.10 0.30 0.80 1. NO .20 0.90 1.00 RN Range 01 – 10 11 – 80 81 – 00 01 – 40 41 – 60 61 – 00 01 – 10 11 – 00 01 – 50 51 – 90 91 – 00 01 – 80 91 – 00 01 – 50 51 – 80 81 – 00 01 41 61 81 – – – – 40 60 80 00 B C D E F G H 01 – 20 21 – 50 51 – 00 01 – 50 51 – 00 01 – 60 61 – 80 81 – 00 01 – 70 71 – 00 I J K Activi ty RN .25 8 .10 1.5 6.40 0. 30 72 95 23 50 14 49 45 86 DAY S RN .40 0.60 0.50 0.80 0.00 0. 59 09 36 60 61 24 05 60 74 DAY S RN .70 0.10 0.25 4.75 8 5. NO .00 0.00 0.50 0.10 0.40 0.50 0.80 1.60 0.60 1.20 0.70 1.00 0.70 0.30 Cumprobabilities 0.5 4. NO .50 1.50 0. 93 54 98 79 81 75 09 98 55 DAY S TOTA L DAYS 30 27 32 22 25 18 19 37 32 AVERAG E DAYS A B C D E F G H I 9 5 8 6 5 7 9 10 8 6 10 8 4 5 3 4 7 8 6 5 8 6 5 3 3 10 8 9 7 8 6 10 5 3 10 8 7.00 0. Provides a means of solution to problems which are of a kind for which the application of analytical methods is unsuitable. 5. A good simulation model may be quite expensive in terms of design personnel and software.75 + 4.25 + 8 + 6. probability distribution of relevant factors is not easy. 6. Data problems: Obtaining reliable/accurate data e.75 days. Simulation is not precise. 4.5 48. 5. 3. 2.75 + 9. it is not an optimization tool.g. QUESTION FOUR (a) (i) Cost behaviour Suggests an inappropriate degree of variability. Simulation is particularly well suited for problems that are difficult or impossible to solve analytically. This makes it even more expensive. Substantial amount of calculation is required.5 + 8 + 4. Managing unused capacity may be applicable in the case of human resources since human resources are more flexible and - .Answers – Past Papers 172 J K 69 40 7 4 09 27 5 4 10 15 5 4 96 83 10 6 27 18 6. 4. Disadvantages of Simulation Technique 1. 3. 6. Degree of assumption is not so great in simulation exercises as it is with analytical methods. Enables a decision maker to compress time in order to evaluate long term effects of alternative policies. (d) Advantages of simulation technique 1. Each simulation model is quite unique in its solutions and inferences are not usually transferable to other problems. Allows an analyst or decision maker to experiment with system behaviour in a controlled environment instead of real life setting that can be very costly and has inherent risk.5 CRITICAL ACTIVITIES A–C–G–H–I–J–K Total completion time = = = sum of completion period for critical Activities. Results estimates which are subject to statistical error. Serves a model for training decision makers. batch level activity costs are divided by the number of units in the batch and product sustaining costs are divided by the number of products produced. To calculate unit product costs.75 4. 2. 7. Most manufacturing companies suffer intense competition Most manufacturing companies have a wide range of products.074.352 213. Costs part (ii) OVERHEADS Factory overheads Set up costs Ordering costs Material handling Admin.608 ÷ 14.000 W Sh.256.667/Spare 750. Handling 3. ABC likes more information for decision making because Detailed tracking of information is therefore not required Information provided is more accurate Cost of any unused capacity is highlighted for management attention. 63.465.200.672 6. . Focuses on the future profitability of products and customers.784 5.334 1.173 Answers Past Paper Questions and can be adjusted in small increments as opposed to physical resources which are required in huge amounts.600.000 24 = Sh.334 1.000.000 3.318 ÷1.840.000 34 = Sh. - (ii) Why ABC might be more suitable (iii) ABC system likely to generate the most accurate costs.8 8 0 4 .820 7. Admin. Human and physical resources should be separated.000 4. 7.160.446 1.733.1. Cost drivers rates Factory overhead: 7 4 .000 36 = Sh. 3.500/m.964 2.106.9 0 9 0 (b) (i) = Sh.166.672 5.024.280.614. Cost of operating an ABC system is very high.000 54 17.276.100 Y Sh.668 5.500.000 X Sh.112 1. 15.667/Mat.433.098.866.00 4.706.062.816 1. hr Set up costs 8.334 7.706.737.000 1.684. Changes in physical usage may be viewed as fixed costs especially where such costs are unavoidable and the treatment will thus be similar to that of traditional costing systems.000 Z Sh.122.704 213.336 81.818 ÷ 1.716.955. Costs = Sh.741/Mat hr.710.274 ÷ 10.000 512.670 25.176/set up Cost of ordering Ord Mat. (ii) Traditional approaches failed to identify the cost of activities and the programmes to be implemented.506 6.805 5. health and social services. The annual budgeting process based on short-term plans was frequently used for policy planning. the programmes that might achieve these objectives are identified and finally. The provision of these activities may be undertaken by different departments such as housing. (iv) Emphasis tended to be on separate planning for each department rather than focusing on activities or functions necessary to achieve organisational objectives.Answers – Past Papers 174 5. one objective of a local authority may be the care of the elderly. QUESTION FIVE (a) The answer should cover the following: (i) Insufficient strategic thinking and long-term planning. However. For example. (ii) Erection of aged-persons dwellings. (b) .630 6. overall objectives are established. The following services may contribute to this objective: (i) Provision of sheltered accommodation. 32 24 56 6. The aim of PPBS is to enable the management of a public authority to make more informed decisions about the allocation of resources to meet the overall objectives of the organisation. the costs and benefits of each programme are determined so that budget allocation can be made on the basis of the cost-benefits of the different programmes.506 2.481 X Sh. secondary. Materials Direct labour Prime cost Overheads Production cost/unit 10 6 16 5. (iii) Provision of domestic health services.805 Unit Production Cost W Sh. (iv) Provision of home nursing services.465 5.686 Z Sh.465 2. 34 18 52 5. secondary. (v) Provision of social and recreational facilities.630 5.857 The difference comes in because ABC allocates more overheads to low volumes of production and less to high volumes of production.522 Y Sh. 10 6 16 2. First. Allocation of resources should be based on long-term planning process and not the annual budgeting process. (iii) Traditional approaches tend to be based on increamental budgeting rather than considering alternative ways of achieving objectives. functions or programmes o be provided thereby establishing a basis for evaluating their worthiness. (c) Problems that have made PPBS difficult to introduce include: (i) PPBS cuts across departmental activities and focuses on programmes rather than departments. . It is extremely difficult to measure the output of services and compare actual accomplishments with planned accomplishments. (iii) Difficulty in defining objectives and stating objectives in quantitative terms. A programme budgeted cuts across departmental barriers by providing estimates of the programme for the provision of the elderly rather than these estimates being included within the three budgets for each of the housing. Consequently. the system does not focus on traditional lines of authority and there is a tendency for heads of departments to be resistant to such changes. health and social welfare departments.175 Answers Past Paper Questions and PPBS relates the estimates of total costs to the care of the elderly programme. (ii) Difficult in matching programme structure to the organisation’s structure to cost control. PPBS forces management to identify the activities. rather than relating costs to various departments. 64 0 714.350 9.14155X (000) High-Low method Let Y = Overheads X = Production in units X 98. ‘000’ Indirect materials Indirect labour Building occupancy Power Equipment depreciation Equipment maintenance Personal property taxes Data processing Technical support 37.240.420 181.100 Y 777.000 56.500 6.000 (1.500 23.470 16.680.000 units .210 15.000 + 141.55X (6 Marks) 629.426 ∴ Ŷ 626.55 Equation Ŷ = = 113.543) a = 626.Answers – Past Papers 176 December 2004 QUESTION ONE (a) Account analysis method Variable Costs Sh.680 + 0.240 Fixed costs Sh.000 800.200 27.000 236.640 = a + 98.100 = 1.900 41.750 113.680 Variable cost per unit ∴ ∴ Ŷ= (b) b = 141.543 Using the high point 777.750 1.420 41.543X ∴ Total cost for 800.000 629.22 0 63. ‘000’ 171.830 7.420 High Low Slope b ΔX = ΔY 63.94 0 629.000 8.426 + 1. 640 + 1.000/Budgeted standard quantity of ingredient F (4000 x 0.426 + 1.2 (000) = Sh.3 kilogrammes x 60) + 0.501 (800) – 59.501 x 800.200 (4 Marks) (d) Multiple regression analysis Ŷ = 632.067 x 113 = 627.166.49 Standard overhead rate = 120. 627.2 kilogrammes x 25) = Sh.501X – 59.000 = Sh.640 717.547 + 1.504 X 800 = 626.2 = Sh.660. (2 Marks) QUESTION TWO (a) Standard cost of materials per kilogramme of output = (0.547 + 1.939 (c) Using linear regression (simple) Ŷ = 626.2 = Sh.65) = 120.400 Past Paper Questions and (4 Marks) ALTERNATIVE Y 777.750. 30 Sh.203. 627.067 (index) X = 800 Index = 113 Y = 632.067 (index) = 632.4 (000) = Sh. 635813.177 Answers Ŷ = 626.750.000 + 1. 627. .459 ΔX Ŷ = 634645. making price index to be an independent variable.543 (800) = 627.600 Standard overhead rate per kilogramme of Y = 0.65 kilogrammes x 40) + (0.229 (4 Marks) (e) Multiple regression analysis is the most appropriate because it considers price changes. 46 per kilogramme of F 2.640.839 + 1167.65 x 46 = Sh.000 – 59.670 59. Or simple regression has highest adjusted R2.660.640 + 1.970 b = ΔY = 1. 65 – 2840)46 = 11040F Overhead expenditure variance = budgeted cost – actual costs = 120.15 – 1210)60 = Sh.15 – 2840)40 = Sh.000 + 48.000) 205.30/1.000 – 126.200 x 30) Actual Cost of output Material Overheads (78. 3409A 1.800 3900F 3409A 1509F 5060A 11040F 6000A 20A 2000F .15 – 860)25 = Sh.65/1.800 126.15 Material mix variance = Actual quantity in actual mix at standard price – actual quantity in standard mix at standard prices F (4910 x 0.800 203.800 126. 4252F N (4910 x 0. 331. 2591A D (4910 x 0.000 329. 152A 1509F Overhead efficiency variance = (standard quantity of F – Actual quantity) Standard overhead rate per kg of F Overhead efficiency variance = (4200 x 0.Answers – Past Papers 178 Standard cost of actual output Material (4.800 Variance calculations Materials price variance = (standard price – actual price) Actual Quantity = SP X AQ – AC = (40 X 2840) + (60 X 1210) + (25 X 860) – 203800 = 3900 F Material yield variance = Actual yield – Standard yield x Standard material cost per unit of output = (4200 – 4910) x 49 = Sh.65 – 2840) 46 = 5060A Overhead capacity variance = (Budgeted input of F – Actual input) x Standard overhead rate per kg of F = (4000 x 0.200 x 49) Overhead (4.000 = 6000A Reconciliation of standard costs and actual cost of output Standard cost of actual production Material variances Material price variance Material yield variance Material mix variance Overhead variances Overhead efficiency Overhead capacity Overhead expenditure Actual costs Sh.20/1.000 331. 15)/460 = 10 Standard cost per supplier delivery (40.000/10) = Sh.000 Standard number of dispatches to customers (4.000/100) = 40 Standard cost per customer dispatch (80.780 (12 Marks) (b) Standard number of deliveries (4000 x 1.000 Actual output exceeds budgeted output by 200 = 5% 4.000 Activity-based costing reconciliation statement .000/40) = Sh. 2.4.179 Answers Past Paper Questions and 333. mix) F 40(2840 – 0. 42.2 x 25 = Sh.000) Despatches (38 x 2000 – 78. cost per unit (Actual Yield – std yield) Std cost of output = (0.15 = 4269.5 = 4270.49 Std yield: 2840 + 1210 + 860 Input 1.Answers – Past Papers 180 Standard cost for actual output Deliveries (1. 126.800 – (2840 x 40 x 1210 x 60 +860 x 25) 203.000 Despatches (42 – 38) 2.3 x 4910) 1.600A = 4.15 Output 1 kg ? 4910 = 2.000) Actual overheads Sh.15kg 4910 ∴ Output = 4910 1.260F .000F 2.700 = 3900 F Material Yield Variance Std.800 – 207.000 6000A 8000F 0 2000A Sh.000 2.5 – 12)4.000 (8 Marks) (Total: 20 Marks) Alternative (a) material and overhead variancies Material price variance (AQ X AP) – (AQ X SP) 203.05 x 40 x 2.65 x 4910) 1.30 x 60 +0.05 x 10 x 4.000) Activity usage variance Deliveries (10. ∴ Material yield 49(4200 -4270) = 3430A Material Mix Variance SP (Actual Mix – Std.000) Despatches (1.000 84.000A 126.000 Activity expenditure variance Deliveries (12 x 4000 – 48.65 x 40 + 0.15 D 60(1210 – 0. 154(2840 – 4200 x 0.154 4000/0.200 = 1.65) 46.181 Answers N 25(860 – 0.4000 10 Std no.05 x 40 – 38) x 2000 = 8000F 2000F .15 Total Material Mix variance = 150A = 1510F Past Paper Questions and Overhead variances Overhead expenditure variance.000 = 46.154 (2840 – 2600) 11077 A Overhead efficiency variance FOAR (Actual quantity – Std. 2000 40 Actual output exceeds budgeted output by 4.65) 46.05 x 10 – 12) x 4000 = 6000A Dispatches (1. 5% 4000 Activity usage variances Deliveries (1. of dispatches 4000 = 40 400 Std cost per customer dispatch 80.05 i.2 x 4910 1. of deliveries (4000 x 1. quantity) 46.15) ÷ 460 = 10 Std cost per supplies delivery 40000 = Sh.154 (2840 – 4000 x 0.154 (110) = 5077A b) Variance analysis based on Activity Based costing (ABC) Std no.000 = Sh.65 = 46. Actual expenditure – Budgeted expenditure (78000 + 48000) – 120000 126000 – 120000 = 6000A Overhead capacity variance FOAR (Actual input – budgeted input) FOAR = 120.e.154(2840 – 2730) 46. ‘000’ 53.00 50.05 x 10 x 4000 = 42.00 (12 Marks) (b) Narok option’s contribution Next best alternative Difference Sh. 623 .225.400.100.440.848.05 x 40 x 2000 = 84.00 330. ‘000’ 68.00 1.848 (52.0 0 2.200.0 0 6.000 Deliveries 1.00 1.000 Dispatches 1.225) 1.052. ‘000’ 62.00 4.800.00 52.000) = Nil Dispatches (38 x 2000 – 78000) = 2000A 2000A Reconciliation Actual overheads 48.850.500 1.200.552.650.00 1.000 QUESTION THREE (a) Narok as a special Order Sh.500.Answers – Past Papers 182 Activity expenditure variances Deliveries (12 x 4000 – 48.00 7.00 Sell the way it is Sh.025.000 + 78.00 2.560.225.0 0 53. 00 12.0 0 68.000 126.50 9.000 = 126.00 1.250 2.400. ‘000’ Sales price Less cash discount 2% Additional manufacturing costs Direct materials Direct labour Variable overheads 50% of direct labour Commission 3% of selling price Total costs Net contribution 52. 250 61.560.000.000.00 14.0 0 Convert to standard model Sh.00 52. 183 Answers Past Paper Questions and ∴ The counter offer price that Farmers Limited is willing to accept from Narok Corporation will be:68,400 – 1,623 = Sh. 66,777,00 (3 Marks) (c) (i) Farmers Limited should accept special orders whenever the firm is operating substantially below capacity, including below the break even point, whenever marginal revenue from the orders exceeds marginal cost. Normally, this would mean that the order should be acceptable as long as the sales price of the order exceeds the variable production costs. The special order will result in a positive contribution towards covering the company’s fixed costs. The fixed factory overhead is not considered in the pricing because it will be incurred whether the order is accepted or not. (3 Marks) (ii) If Farmers Limited is operating above its break even volume and if special order will allow the company to utilize unused capacity efficiently, the special order should be accepted as long as marginal revenue exceeds marginal cost or, in most cases, the sales price exceeds variable production costs. If the sales price exceeds the variable production costs the order will yields a positive contribution towards company’s fixed costs. In this case fixed costs are irrelevant. (2 Marks) (Total: 20 Marks) QUESTION FOUR (a) (i) Degeneracy This is a term in transportation and assignment which refers to a situation where the number of occupied cells is less than n + m – 1 where n is the number of rows and m is the number of columns. (2 Marks) Pure Strategy In a game matrix represent the row and column whose intersection is the saddle point. In a pure strategy player X will play one row all of the time and player Y will also play one of his column all the time. (2 Marks) Mixed Strategy Consist of a probability mixture of more than one strategy. The objective in a mixed strategy involves preparing the opponent from knowing which strategy is used on a given play. This is accomplished by selecting the strategy to be used for each play at random, according to probabilities that can be computed from (ii) (iii) Answers – Past Papers 184 the game matrix. (2 Marks) (iv) Dominance rule This rule states that there are strategies that a given player would never play, irrespective of what the other player does. The strategies which are always avoided are said to be dominated by the other strategies and can be left out from the analysis. (2 Marks) (b) The problem is transportation model and the problem is a minimisation. Cost Computations:- 185 Answers Destinations E W1 A Pla nt B C F Past Paper Questions and G W1 160 160 210 W2 15 0 15 0 11 0 W1 8m 14 0 190 W2 170 170 19 0 19 0 240 W2 210 210 13 0 17 0 (6 Marks) Computation of the above table E.g. A to W1 under E = 30 + 20 + 60 + 30 = 140 A A A A A to to to to to W2 W1 W2 W1 W2 under under under under under E = 30 + 30 + 60 + 50 = 170 F = 30 + 20 + 60 + 50 = 160 F = 30 +30 + 60 + 30 = 150 G = 30 + 20 + 60 + 80 = 190 G = 30 + 30 + 60 + 90 = 210 From the above pick the lowest cost through each combination. The problem is not balance, it has a difference of 1400. Initial table using LCCM. K1 = 140 E R1 = 0 A 140 +3 0 140 +3 0 150 K2 = 120 F 150 K3 = 190 G 190 K4 = 0 Dumm y 0 Capaci ty 0 R2 = 0 B 900 190 100 0 1000 700 0 1300 2000 Answers – Past Papers 186 R3 – 10 C 130 110 10 900 1400 170 0 200 Supply 900 800 800 1000 4000 Degeneracy check No. of filled cell = 6 R+C–1=6 Hence the problem is not degenerate Optimality check The solution is not optimal since there are negative improvement index. Table 2 K1 = 140 E R1 = 0 A 140 K2 = 130 F 150 K3 = 190 G K4 = 0 Dum my Capacit y 1000 190 0 0 700 R2 – 0 B 140 900 R3 – 20 C 130 +1 0 Suppl y 900 +2 0 110 150 300 190 0 0 1100 2000 0 170 +2 0 1400 800 800 200 900 1000 4000 Degeneracy check: No. of filled cells = 6 R+C–1=6 Hence the problem is not degenerate. 187 Answers Optimality check: Past Paper Questions and The problem is optimal since there is no negative improvement index, however the problem is not unique since it has zero improvement index, that means it has more than one solution. Allocation optimal solution 1 Answers – Past Papers 188 Source A A B B C C Destination G Dummy E Dummy F G Units x cost 700 x 190 300 x 0 900 x 140 1100 x 0 800 x 110 200 x 170 = 0 = = = = 12600 0 0 88000 340 00 38100 0 (6 Marks) Unit x cost 300 X 140 700 X 190 600 X 140 84000 C C F G Total minimum cost QUESTION FIVE (a) The balanced scorecard is an integrated set of performance measures derived from the company’s strategies that gives the top management a fast but comprehensive view of the organizational unit (i.e. a division on a Strategic Business Unit (SBU)). The balanced scorecard philosophy assumes that an organization’s vision and strategy is best achieved when the organization is viewed from the following four perspectives. i) Customer Perspective (How do customers see us?) This gives rise to targets that matter to customers perspective. ii) Internal business process (what must we excel in?) This aims to improve internal processes and decision making e.g. quality control. 800 X 110 88000 200 X 170 340 00 38100 0 (6 Marks) Total 42000 13300 0 Total 13300 0 Minimum total cost Optimal solution 2 Source Destination A E A B G E 189 Answers Past Paper Questions and iii) Learning and growth perspective (can we continue to improve and create value?) This considers an organization’s capacity to maintain its competitive position through acquisition of new skills. iv) Financial perspective. (How do we look to shareholders?) This covers traditional measures such as profitability, return on investment e.t.c. By implementing the balanced scorecard, the major objectives for each of the four perspectives should be articulated. These objectives should be translated into specific performance measures and targets for achievement. This method integrates traditional financial measures with operational, customer and staff issues vital in long-run competitiveness. (10 Marks) (b) Benchmarking involves comparing key activities of a company with world class best practices. It attempts to identify an activity, such as customer order processing, that needs to be improved and finding a non-rival organization that is considered to represent world class best practice for the activity, and study how it performs the activity. The objective is to find out how the activity can be improved and ensure that the improvements are implemented. Benchmarking is cost effective since an organization can save time and money avoiding mistakes that other companies have made. They can also avoid duplicating the efforts of other companies. The overall aim should be to find and implement best practice. Benchmarking Benchmarking Benchmarking Benchmarking Benchmarking Marks) in production, stockholding prices, quality, wastage. productivity & efficiency. services. New Production Development. (10 (Total: 20 marks) (3 marks) (ii) Goodness of fit Significance of independent variables Note TC = 2.05 Appears reasonable from the plot D = S1 Assumption of independence not rejected.228 Specification Analysis (a) Linearity (Note: A plot required) (b) Independence of residuals (iii) (iv) D = 1. number of short Vs.05 Appears somewhat questionable from plot. long trips.43 Slope coefficient significant at α = 0.09 Slope coefficient not significant at α = 0.29 Poor goodness of fit Tb = 2. r2 = 0. D = 2. r2 = 0.61 Fair goodness of fit tb = 3.86 Slope coefficient significant at α = 0.05 Appears reasonable from the plot.73 Assumption of independence not rejected.34 Assumption of independenc e not rejected (12 marks) (b) Variables that could be important cost drivers of the company’s operating costs include: 1) Fuel consumed in litres 2) Number of employees 3) Product mix characteristics 4) Route mix characteristics e.Answers – Past Papers 190 CPA PART III MANAGEMENT ACCOUNTING SUGGESTED SOLUTIONS JUNE 2005 QUESTION ONE (a) Evaluation of the linear regression equations Criterion (i) Economic Plausibility Regression 1 Positive coefficient thus economically plausible. but may be in short run for discretionary costs. . Regression 3 Positive coefficient economically plausible r2 = 0. 5) Age and maintenance record of vehicles. Regression 2 Negative coefficient not economically plausible in long run.g.68 Fair goodness of fit Tb = 4. 000 – 500. This data base would be less prone to within the year deferral of maintenance costs to months with low kilometers traveled. However.000 x 5.000.000) 10. (2 marks) Limitations of regression analysis method A sufficient number of observations is required to derive an acceptable cost function. (vi) The cost and the activity level sometimes do not relate to the same period especially where wages paid to one period may be calculated by reference to the output of a previous period. 499. Total costs with a reorder quality of 100 units Annual holding costs = ½ QCh = ½ (100) x 5000 = D 10000 Annual ordering costs = CO = x 2500 = Q 100 Shs.000 50. (ii) The assumption that the function is linear may be misleading. (v) The observed data may be affected by inflation or accounting policy and thus affecting the final function.900 Purchase manager bonus Annual purchase costs Total annual costs = = 10% x (1.000 Total costs with a reorder quality of 200 units Annual holding costs = 200 x 4.000 X 2. 250.500 +10 % 5000 ) ( 100 units (2 marks) (b) To ascertain whether it is worth increasing the purchase quantity to 200 units. we must compare the total costs at each of these quantities. This may not be the case in the analysis. management may also defer maintenance expenditure across years due to pressure from short run profit performance for example. (3 marks) (Total: 20 marks) (i) (d) QUESTION TWO (a) EOQ = 2 DC O Ch = 2 X 10 . (iii) The cost function is valid only within the relevant range.550.000.999 2 .000 50.191 Answers (c) Past Paper Questions and An alternative data base for use in quantitative analysis would be annual maintenance costs and annual kilometers traveled.000 250.000 500.500 = 4.000 50.000 Shs. (iv) The function may not hold where historical performance is different from expected future performance. 000 x 2.000 50.Answers – Past Papers 192 Annual ordering costs = 10 .400 (4 Purchase manager bonus Annual purchase costs Total annual costs = = The optimal order quantity is still 100 units marks) (c) The probability distribution of demand during the lead time is .500 200 10% x (1.900 37.000 x 4.000 – 624.900.000 624.990 125.500 49.562.900) 10.000. 5000 – Saving of 10% on purchasing managers bonus) Conclusion Costs are minimized if a safety stock of 4 units is maintained.24 10.04 0.10 0.14 0.44 1.40 16.88 100. 27000 18000 9000 0 Total Cost 27000 26000 45000 96000 Note: During the year 100 orders will be made (10000/100) Stock-out per year in units is calculated by multiplying the stock-out per order by 100 orders.04 0. Vulnerability of disruptions of supplies due to strike/production difficulties or bankruptcy). Holding costs = Safety stock x (Holding Cost of Shs.32 40.14 0. of stock-out x 1000 Lost contribution.40 0.18 0.04 1.02 Expecte d Value 4.16 1.10 0. The expected costs of various levels of safety stock are as follows: Safety Stock (units) 6 4 2 0 Reorder Point (unit) 106 104 102 100 Stock out per order (units) 0 2 2 4 2 4 6 Stock out per year (units) 0 200 200 400 200 400 600 Probabil ity of stockout 0 0.00 13.193 Answers Demand 106 104 102 100 98 96 94 Frequency 4 10 16 40 14 14 2 100 Past Paper Questions and Probability 0. (ii) Failure to seek out cheap or alternative sources of supply.g. Expected stock-out costs = annual stock-out in units x Prob.00 NB: It is expected that re-order level will be set at 100 units (expected value). (i) .72 13. (6 marks) (d) The following items should be included in the report: The disadvantage of ordering from only one supplier (e.04 Expecte d Stockout Costs 0 8000 20000 16000 32000 40000 24000 Holding costs Shs.10 0. Answers – Past Papers 194 (iii) (iv) (v) It is assumed that no major price increases are anticipated that will justify holding additional stocks or that the stocks are not subject to deterioration or obsolescence. (v) There is assumed to be no uncertainty.3 Unit s 4. (5 marks) The expected value calculation are: Variable Costs (1000 + 10% x 1000) x 10/20 (1000 + 0) x 6/20 = (1000 – 5% x 1000) x 4/20 Shs.000 8. 2460000 4250000 180000 8510000 (b) Shs.95 0 18. (8 marks) (Total: 20 marks) QUESTION THREE (a) Assumptions (i) All costs can be resolved into fixed and variable elements. The answer to (c) assumes that the company will merely lose the contribution on the sales and long term sales will not be affected if a stock-out occurs.6 50 Fixed costs 19000 x 0.3 300 8500000 x 0. (iii) The only factor affecting costs and revenues is volume.2 19000 x 0. Fixed Costs 550 8200000 x 0. 38. investigations should be made as to whether this. (ii) Over the activity range being considered costs and revenues behave in a linear fashion. can guarantee a shorter lead time. (vi) There are no stock level changes or that stocks are valued at marginal cost only.2 1. (iv) The technology.2 = 17500 x 0. 1. The need to ascertain the impact on customers goodwill if a stockout occurs.750 4.650 17. It is assumed that the lead time will remain unchanged.3 = Shs.50 0 4.5 16500 x 0.20 0 9. production methods and efficiency remain unchanged.700 selling price 21000 x 0.5 190 900000 x 0.5 = 15500 x 0.04 0 Shs. or other suppliers. However.200 Expected contribution . 510.195 Answers Past Paper Questions and At price of Shs.000 – 8. different scenarios could be considered. Decision making under conditions of uncertainty. 1800 = (1800 – 1040) 17200 = Shs.000 = Shs.000 The existing selling price is Shs. 1800 should be set.072.197 units Breakeven point = 1800 −1040 17200 −11197 Margin of safety = Expected – BEP = = 6003 17200 = = (iii) Sales − Sales Expectedsa les = units 34.072.000 At price of Shs. In particular. 13. Decision making under conditions of risk (ii) (iii) .562. based on different combinations of assumptions regarding variable costs.200.9% (4 marks) An expected value approach has been used.309. (2 marks) Computer assistance would enable a more complex analysis to be undertaken. then total contribution will be (1600 – 1040) 20. (3 marks) (Total: 20 marks) (iv) QUESTION FOUR (a) (i) Decision making under conditions of certainty. The answer should draw attention to the limitations of this approach such as .000 = 4. selling prices and demand using computers would also enable Morte Carlo simulation to be used for more complex decisions. a selling price of Shs. fixed costs. 12. More than one state of nature exists but the decision maker lacks sufficient knowledge to allow him assign probabilities to various states of nature. Using the expected value approach.Range of possible outcomes is not considered. (6 marks) (ii) Expected profit 13. 11.000 units per annum.e.000. In this environment only one state of nature exists i.Risk is ignored.000 8510000 = 11. 1600 and if demand continues at 20. . The answer should have been based on a comparison of probability distribution. there is complete certainty about the future. 1700 = (1700 – 1040) 18650 = Shs. 4 C4 3.0 maximum There is no saddle point marks) U2 2.2C3 = .0 Column 3.2 1.Answers – Past Papers 196 More than one state of nature exists but the decision maker has sufficient information to allow him assign probabilities to various states.2 0.3 0 1. Hence the game can be reduced to C1 C2 C3 C4 U2 2.0.7 1.2 1.0.2 1.7C1 + 1.8 1.3C3 But C3 = 1 – C1 2.0.8 1.0 C3 1.3 Row Minimum -0.2 U4 -0.5 0.3 ½ Hence the company should play strategies .2 0.2C1 + 1.8 1.0 2.3 Solving this we get 2.7 U3 3.1 1.0 U4 .2 0 (6 Using dominance rule column U1 and U3 are dominated.7 1.2C1 + 1.7C1 + 1.3 (1-C1) ⇒ C1 = 1/80 so C3 = 29/30 The union strategies are done likewise 1/30 29/30 U1 2.5 U4 -0.7 1.5 C2 2.2 0.3 0 (2 marks) Row four and two are dominated. (6 marks) (b) Best strategies: (i) U1 C1 2.9 3.2 (1-C1) = .8 1.1 1.2 1. The final matrix will C1 C3 U2 2.2 ½ U3 0.7 1.5 1. (4 marks) (i) Transfer pricing of products at cost or sales value • With cost – based transfer price systems. This will happen when actions that divisional managers take to improve the reported profit of their divisions also improves the profits of the company as a whole.197 Answers Past Paper Questions and C1: C2: C3: C4 in the ratio 1/30:0:29/30:0 While the union should play strategies U1: U2: U3: U4 in ratios 0: ½: 0: ½ (c) Limitations Managerial decision making environment is rarely ever a zero-sum. This will result in the supplying centre being held accountable for variances arising from the difference between standard and actual cost of transfers. (iv) The environment in which managerial decisions are made is rarely a two person game. there is no incentive for the supplying centre to control costs because any inefficiencies arising in the supplying centre will be passed on to the receiving centre. • When cost based transfer pricing systems are used. thus ensuring that the manager of the (b) . (ii) To provide information that is useful for evaluating the managerial and economic performance of the divisions. Transfers at actual costs are therefore inappropriate for responsibility accounting. Rarely do both parties in real-life game situation have equal information. (6 marks) (Total: 20 marks) (i) (ii) QUESTION FIVE (a) A transfer pricing system can be used to meet the following purposes: To provide information that motivates divisional managers to make good economic decisions. The managers of the supplying centre are therefore motivated to minimize costs. The receiving centre should be held accountable for usage of resources at the standard price. transfer should be at standard cost and not actual cost. (iii) To intentionally move profits between divisions or locations. (iv) To ensure that divisional autonomy is not undermined. When actual costs are used. • When transfers are made at standard cost any inefficiencies of the supplying centre are not passed on to the receiving centre. the receiving centre will be held accountable for the inefficiencies of the supplying division. Consequently. (iii) It is extremely difficult to convert monetary pay-off for the matrix game. transfers are made either at actual cost or standard cost. When transfers are recorded at market prices. linear programming can be used to determine the optimum production level. if the receiving centre did not exist. This transfer price will result in the supplying division being credited with all of the contribution arising from the transfers and the receiving division earning a zero contribution. transfer based on selling prices will represent a more appropriate basis for meeting the requirements of a responsibility accounting system. Where there is a competitive market for intermediate products the current market price is the most suitable basis for setting the transfer price. The transfer price that will induce the supplying division to produce the optimum output level can be derived from the linear programming model. and result in a loss of divisional autonomy and a reported performance that does not reflect the economic performance of the division. Responsibility centre profits are therefore likely to be similar to the profits that would be calculated if the centres were separate independent businesses. (8 marks) • • (c) Transfer prices • When the supplying division does not have sufficient capacity to meet all the demands placed upon it. Therefore. (8 marks) (Total: 20 marks) . there is still a danger that inappropriate transfer prices are set that will not provide an appropriate basis for allocating profits between divisions. then intermediate products would have to be purchased from the outside market at the current market prices.Answers – Past Papers 198 receiving centre is held accountable only for excessive usage of resources. If the supplying centre did not exist. profit centre performance is likely to represent the real economic contribution of the profit centre to total company profits. Alternatively. The allocation of zero contribution to the receiving division will have a negative motivational influence. The transfer price is determined by adding the shadow prices of the scarce resources (as indicated by output from the linear programming model) to the variable costs of the resources consumed by the intermediate product. Where cost-based transfer prices are used. the intermediate product would have to be sold on the outside market at the current market price. 250 = Shs. ingredient 1 Sh. RNRanges .20 + 5.15 + 3.000 5. 0.35 +2.30 Cum Probs.1 + 1. 61.000 x 0.500 Probs. 2.250 (ii) Selling Price Shs.4 = Shs.825 3 Expected cost of ingredient 1 1000 x 0.375)] Expected daily profit = (300 x 4825) – [(2. Cum Probs.5 = Shs. 4.500 x 0.15 0.000 x 0.125 Expected cost of ingredient 2 1500 x 0.500 5.20 0.386.15 0.500 x 0.500 – 1.35 + 5.05 + 2. 2.00 Cost.70 1.00 RNRanges 01 – 15 16 – 50 51 – 70 71 .20 + 2.125 x 250) + (360 x ∴ = 1.3 = Shs. Probs.375 2.25 + 2.447.15 + 4. 4.199 Answers Past Paper Questions and KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD CPA PART III MANAGEMENT ACCOUNTING December 2005 hours QUESTION ONE (a) (i) Let P = Selling price per bottle C1 = Cost of ingredient 1 C2 = Cost of ingredient 2 Amount Produced daily = 2030 5x6 = 300 units Profit = 300P – (250X1 + 360X2) ∴ Expected selling price 4000 x 0.50 0.000 x 0.35 0.500 x 0.000 4.000 x 0.500 x 0. 0.500 x 0. 35 0.000 1.15 0.50 0.500 0.50 1.00 01 11 16 51 – 10 – 15 – 50 .500 2.00 .10 0.05 0.10 0.Answers – Past Papers 200 1.000 2. 0.20 0.201 Answers Cost.00 .20 0.60 1.25 0. ingredient 2 Shs. 1.000 2.500 3.45 0.500 2.00 Past Paper Questions and RN-Ranges 01 – 20 21 – 45 46 – 60 61 . 0.000 Probs.40 Cum Probs.15 0. 000 4.00 0 2.50 0 2.500 300 300 300 300 300 300 300 300 300 300 1 2 3 4 5 6 7 8 9 10 58 30 46 27 99 49 79 16 02 87 Total RN Revenu e Shs.000 1.000 .220 1.650 1.500 4.000 5.500 71 1.160. 5.160 Average Daily Profit = = 1.350 1.650 1.200 1.500 4.500 4.500 3.Answers – Past Papers 202 Da y RN Selli Uni ng ts Price Shs.50 0 2.00 0 2.500 5.080 1.350 1. ‘000’ ‘000’ ‘000’ 360 1.040 1.000 1.350 1. Shs.705 1.00 0 2. Shs.500 5.500 4. ‘000’ 1.165 1.000 2.000 Unit Total Total Daily s Cost Cost Profit X1 + X2 X1 + X2 Shs. 116.080 720 1.000 3.500 2.00 0 2.50 0 2.00 0 2.220 1.580 1. ‘000’ 625 500 500 625 500 500 500 500 625 625 RN Cost X2 Shs. 96 18 34 13 44 09 74 23 88 41 3.000 2.350 1.220 1.000 10 Shs.50 0 250 250 250 250 250 250 250 250 250 250 Total Cost X1 Shs.080 720 1.000 1.350 1.650 24 23 85 24 18 49 32 56 59 Cost X1 Unit s 2.00 0 2.040 1.500 4.345 310 130 185 430 310 70 130 (505) 305 1.500 2.705 (205) 360 360 360 360 360 360 360 360 360 540 720 540 720 540 1. 5 48000− 12000 = 2921.000 48000 x 7. Ch x P P−D 2x12.000x2 . 7.50 + (20% x 25) = Shs.19 or 2921 units Where P is production rate D is usage rate Ch = 2.5 .203 Past Paper Questions and Answers (b) EBQ = 2DCo . 00 0 300 190 10.95 Shs.Answers – Past Papers (ii) Optimal EBQ = = TRC incurred= = TRC Optimal = = 2x12000x10  00 7. 490 (i.000 1.800 1. 100 A + 390 B) for the final product. It is assumed that the company has sufficient capacity to meet demand at the various selling prices.350. Selling price (Sh) Unit contribution (Sh) Demand in units Total contribution (Sh) 200 90 15. 680 (Sh.200 2.5 )( ) 48000 11618.900.49 120001000 ( ) 2066 1 +2 ( 2066 48000− 12000 x7.000 units at a selling price of Sh.00 0 Optimal output is 10. Division B will regard the transfer price as a variable cost.54 Cost of production error = QUESTION TWO (a) The variable cost per unit of output for sales outside the company are Shs.5 +2 2921 48000 Sh.000 2.e.050.5 48000    48000 −12000   204 2065.000 . 110 for the intermediate product and Shs. Optimal output for final product Selling price (Sh) Unit contribution (Sh) Demand in units Total contribution (Sh) 800 310 7. 704.00 0 400 290 5.232. 290. Optimal output of Division B based on a transfer price of Sh. 800.428. 12323.450.000 1.00 0 900 410 5.95 = 12323. Optimal output of intermediate product for sale on external market.49 – 11618.00 0 Optimal output is 7. Therefore total variable cost per unit will be Sh. 290 + 390) and Division B will calculate the following contributions: Selling price (Shs.59 = 2066 units 12000(1000 1 ( 2921 48000 12000 ) )( − ) x7.000 1. 300.200 units at a selling price of Shs.00 0 400 510 2.) 800 900 1. 200 units) to Shs. The Shs.000 1.050. At a transfer price of Shs.200 864.000 900 390 5.100.000 profit will be allocated as follows. 2.000 from converting the intermediate product and selling a final product.800 896.900. 1.000.232. This is sub-optimal for the company as a whole. 900. 120. Profits for the company as a whole for the sale of the final product are reduced from Shs. 2.000(290-100) Shs.800 1. This is the optimal output level for the company as a whole.000.000 1. the variable cost per unit produced in Division B will be Sh.000 (5. Standard setting .200 x (120 – 100)) from internal transfers of the intermediate product. Selling price (Sh) Unit contribution (Sh) Demand (units) Total contribution (Sh) 800 290 7.) Demand in units Total contribution (Shs. 510 (Shs. 2. 800.000 The manager of Division B will choose an output level of 5. 2. 950.088. QUESTION THREE (a) Pricing decisions The learning curve theory is used in cost prediction to enable quotations to be prepared for potential orders.000 220 5.950.000 1. Division A Division B (b) = = Shs. whereas division B will obtain a contribution of 2.000 (7. 120 + 390).050.000 from the sale of intermediate product to external market. 144.000 490 2.200 2.00 The manager of Division B will choose an optimal level of 7. Work scheduling Learning curve enables firms predict the required inputs more effectively and this enables production of more accurate delivery schedules.372.000 units at a selling price of Sh.088.000 units).000 (5. Note that Division A would also earn a contribution of Shs.205 Past Papers Questions and Answers Unit contribution (Shs.100.000 (7.) 120 7. The total contribution for the company as a whole would be Sh.232. 1. Division A would obtain a contribution of Sh.200 units and a selling price of Sh. Division B will calculate the following contributions.00 0 320 2. 915A Actual labour cost (800.1.200) 2.142.Answers – Past Papers 206 In order to set proper standards that will not be easily achieved in future the learning curve is taken into consideration. output) Std.4 x 1250 = 908.4714 2 Labour output variance = 853.848 – 650 (5)0.082.3    206.032 F 1250 680−    (b) (iii) = SR (Actual Mix – Std mix) = 726.000F Semi skilled: 950(1.3) 394.171 A .287 F + 402.706.400 .4  x(680+1256)  726.678 – 952(5)0.745 A Total labour mix variance = ________ 65.678 (Total) Semi skilled 650 hours: Y = 650X0. output = (1936 ÷ (6 = 726.706.400 – 680 x 1.706.600 Labour Mix variance Skilled: 272.000A 384.200 – 1. cost per labour cost = 1.4+ 840.250 (680 – 726.285 (i) (ii) Reconciliation Standard Labour Cost 1. (six and seventh) Skilled: 726.600F Semi skilled: 1.4) 58.5 Std.e.3) = 2.250 49.915A 336.287 F Labour output variance = Std.4+ 840. labour cost (Actual output – std.285 Labour rate variance Skilled: 800.848 (Total) Labour hours for 6th and 7th boat: Skilled: 952 (7)0.171 A Labour efficiency variance = Labour Mix + Labour output = 65.285 2 = 853142.3 hours Standard labour cost of boats assembled in June i.4 hours Semi skilled 650(7)0.3 x 950 = 798.000 Semi skilled: 840.4+ 840.3 x(680+1256) = Semi Skilled: 950 1256−  726.000A Labour efficiency Skilled: 1.848 = 840.281.256 – 840.5 (2-2. (b) Skilled labour: 952 hours: Y = 052X0.285 1.678 = 726.256 x 950 88.281.4714) ∴ = 402.3  840. 4 0.1 0.1 GW 0.05 HDU 0.5 0.5 0.5 0.207 Past Papers Questions and Answers = 336.884 A QUESTION FOUR (a) T = ICU HDU GW Let X = Y = I–X–Y = ICU 0.85 long run share of ICU Patients long run share of HDU Patients long run share of ICU GP patients . 05………….5 0.2419 1xy ∴ =1 0.6.7 6 .55x + 0.6 0. Y.6452 0.5y + 0..760 129.0.6y = .000 HDU: 24. ‘000’ 9.1 0.5x + 0.05y = .85 = [X.05………….1x – 0.19% 64.5y + 0.4 0.0.040 234.240 Long run percentages are: ∴ ICU HDU GW 11.05x – 0.0.4x – 0.0.05 0.6y = -0.1 0.05 (1-x-y) = x 0.1 (1-x-y) = y 0.29% x 4000 x 200.6y = -0.0.55 (0.1 – 0.1120 = 0.5x + 0.1y + 0.5x + 0.1y + 0.1 . x 12 0.0.05y = .55% Shs.05 – 0.05y = .1y = y 0.2 = 0.29% 24.7 x = 0 .000 GW: 64.Answers – Past Papers [X ∴ YI–X– Y] 0.5x + 0. (1) 0. 1-X- 208 0.6.4x – 0.6y = 0.0.1 .52% x 4000 x 50.4x – 0.832 Long run weekly costs ∴ ICU: 11.6x + 0.0.2x = .032 96.5 0.1129) + 0.1129 .000 .55x + 0.5 0.1…………………(2) .05y = x .05 Y = 0.19% x 4000 x 100. 0.6x + 0.0.0.1x = .05 (1-x-y) = x 0.5x + 0.4x + 0. y.1 0.15y = .1429) – 0.5x + 0.5713 = 0.6y = ..1 0.2858 = 0.0.2 0..5 x – 0.85 [x.6y = .0.1 0.05x – 0.0.28575 1 ∴ – 0.6452 Steady State percentages: ∴ ICU HDU GW 14.6y = .58% 57.1429 – 0.0.2.0.3 0.2y + 0.4 0.05 – 0. (1) 0.1429 .15y = .1x – 0.1 (1-x-y) = y 0.4x + 0.5y + 0.3 2 .05y = x .65x + 0.6y = -0.0. 1-x-y] = [x.6x + 0.1 0.05 0.13% Steady state weekly costs ∴ .1 y = 0.05……….65x + 0.6 0.6y = .1y = y 0.5 0.2y + 0.2 0.0.3 x = = 0 .5 (0. y.29% 28.6y = .1 .1 – 0.209 Past Papers Questions and Answers (b) T= ICU HDU GW0. 1-xy] 0.05………….1 -2.5y + 0.07145 – 0. x 4 0.6x + 0.85 0.05 HDU 0. (iii) The size and make up of the Markov system does not change.120 = Shs. (iv) A future state of nature can be predicted given the current state and the transition matrix. 1.000 Average no. 5900 (b) Fixed costs = 210.000 + 840. (v) The various states of nature are assumed to be mutually exclusive and collectively exhaustive. QUESTION FIVE (a) Assumptions of C-V-P • It assumes a single product or a constant sales mix. • The C-V-P analysis applies to the relevant range only. 108. (ii) Transition matrix remains constant.000 (d) Assumptions of Markov Analysis (i) There is a finite number of possible states. • It assumes that the total cost and total revenue functions are linear.Answers – Past Papers ICU: 14. • It assumes that all other variables remain constant other than the one on consideration.1 . • The C-V-P analysis applies only in the short-run.260 342.068 (000) = Shs.58% x 4000 x 100000 GW: 57. • The C-V-P analysis assumes all costs to be variable in calculation of profits for the period. • It assumes that costs can be accurately divided into fixed and variable elements.900 – 316.000 = Shs. 108.3 0. 342.320 114.13% x 4000 x 50000 (c) 114.2 0.29% x 4000 x 200000 HDU: 28.068.4 0.890. Revenue per person: 5000 + 800 + 100 = Shs.000 + 50. • It assumes a fixed complexity related costs. of people Mid points 3000 4000 5000 6000 Probability 0.000 + 790.320 114.900 210 Decision: The hospital should not adopt the proposal of the board of governors because the proposal will increase long run costs by: Shs. 3 0.244 1. ‘000’ 16.000 6.360.60 9.29 19.1_ 1.633 6. ‘000’ 11.000 29.4 0.00 Revenu e Sh.600 0 5.1 Profit from the programme Pages 240 320 400 480 Pages Probabilities 0.400 5.890 16.000 Shs.890 13.000.320 6.800 Costs Sh. Shs. ‘000’ 1.210 0 1.3 0.360 240 320 400 480 Total Sh.2 0.11 0 0 1.00 0 33. 31. ‘000’ ‘000’ 11.49 12. ‘000’ 2.20 0 Profit from the programme Expected profit = = 13.40 14.000 35.600 6.4 0.720 18.00 0 0 6. Shs.49 6.390.000 + 18.000 22.000 17.890 11.030 Shs.11 0 0 dinner and dance 0.600 16. . ‘000’ 5.3 0. ‘000’ ‘000’ 3.50 12.4 0.1 Expected profit Sh.2 0.211 Past Papers Questions and Answers Profit from dinner and dance: No.030.89 15.600 0 4.890 Total costs Profi t Probabili ty Expect ed profit Shs.242 3.720 6.80 0 28. of peopl e Reve nue Food Costs Fixed costs Shs.200 Profit Probability Sh.40 0 0 Total expected profit from Shs. ‘000’ 1.60 0 22.600 2.70 9.61 0 0 1.400 27.911 13.000 23.2 0. ‘000’ 0. ii Checking.200 (including fringe benefits). Samaki Ltd. The unloading equipment used by each employee is rented from a local supplier at a rate equivalent to Sh.. after they are unloaded which can be done at the rate of about 40 per hour. the hooks can be unloaded at a rate of 25 hooks per hour per employee.100 per hour. purchases its hooks from a manufacturer in Mombasa at a price of Sh. The employees working in the warehouse have several tasks: i Placing the hooks into storage. cleaning etc. The predicted demand for the next couple of year is 200.400 per hook. The ships have a capacity of 10.. It takes about a week for an order to arrive at the Samaki Ltd. is able to predict the annual demand with considerable accuracy. The demand for the hooks is constant and Samaki Ltd.000 hooks. The charter services usually charge Sh. iii Removing a hook from inventory and preparing it for shipments to a customer requires about one-eighth of an hour. warehouse in Madagascar. of the hooks in inventory requires about one-half hour per hook per year. iv Security guards general maintenance.Mocks 212 Part III: Comprehensive Mock Examinations QUESTIONS .MOCKS COMPREHENSIVE TEST 1 Time Allowed: 3 hours Answer any FIVE questions.40 per hook (this includes the cost of loading the ship).000 per trip plus Sh. Samaki Ltd. require about 10. must charter a ship.000 hours per year.Questions .000 hooks per year. The average cost per hour of labour is equivalent to Sh. Supervisory time for each shipload is about 4 hours. When a ship arrives at the Samaki warehouse. questions carry equal marks QUESTION ONE 1. Samaki Ltd. exports vital fishing hooks to Madagascar. In order to transport the purchases from Mombasa to Madagascar.20. has developed the following All . a company based in Mombasa. Samaki Ltd. The placing of each order including arranging for the ship requires 5 h ours of employee time. The warehouse has a capacity of 15. etc.000 hooks. The accounting staffs have suggested that simple linear regression be used to determine the cost behaviour pattern of the overhead cost. is considering developing a flexible-budget formula for the manufacturing overhead costs. The accounting staff raised the following issues: • Some members question whether historical data should be used at all to form the basis for a flexible-budget formula.Comprehensive Mock Examinations 213 prediction equation for its general overhead (excluding shipping materials. Production was reduced in one month during 1997 due to wildcat strikes related to political changes in one of the countries. is based on an EOQ. They consider that this method would provide a good and quick estimate of the costs that can be expected to be incurred each month.40 per hook. The following occurrences during the period are considered unusual: 1. what is the cost of the prediction error? (10 marks) (Total: 25 marks) QUESTION TWO The Finance Director of Africa Problems Ltd. and equipment rental): Predicted overhead for the year = Sh. which is determined by the demand for hooks in Madagascar.000 + (Sh. 3. In 1998.240 x Total labour hours). Employee benefits were raised significantly in December 1998 as a result of a labour agreement. 4.20 and the delivery costs average out to about Sh.000.20. The company requires a before-tax rate of return of 20 per cent on its investment.16.160 x Total labour hours) The materials used to ship one hook to a customer costs Sh. Production during 1999 was not affected by any special circumstances. The actual direct-labour hours and corresponding manufacturing overhead costs for each month between 1996 and 1999 were used in the linear-regression analysis.000 + (Sh. 2. . The ordering policy from the manufacturers by Samaki Ltd. Required a) b) Determine the quantity that should be ordered each time and the re-order level (15 marks) If the true overhead prediction equation is: Sh. production was reduced in one month because of material shortages and materially increased (overtime scheduled) during two-months to meet the units required for one-time sales order..000. fringe benefits. Model. one using the data from all 48 months and the other using only the data from the last 12 months. • Other members of the accounting staff suggested that only those months that were considered normal should be used so that the regression would not be distorted. • Still other members felt that only the most recent 12 months should be used because they were the most current. While they recognized that any of the monthly data could include efficiencies. The accounting department ran two regression analyses of the data.Mocks • Some members believe that he use of data from all 48 months would provide a more accurate portrayal of the cost behaviour. they believed these would tend to balance out over a long period of time. The results were as follows: .214 Questions . (2 marks) ii Calculate the estimate of overhead costs for a month when 37.000 .01 Sh. (2 marks) b) Using only the results of the two regression analysis above.96 Required: a) i Formulate the flexible-budget equation that can be employed to estimate monthly manufacturing-overhead costs.000 1.500 direct labour hours are worked.000. 2.23 1.40 3.9655 0. Process A: 2000 units Direct materials Direct labour Overheads 6000 units Direct materials Direct labour Overheads 1.69 11.71 Sh.64 6.400. explain which of the two results is more appropriate as a basis for the flexible-budget formula.Comprehensive Mock Examinations 215 African Problems Ltd Least-square Regression Analyses Data Data from most from all recent Coefficients of the regression equation: Constant 5 Independent variable Coefficient of correlation Standard error of the estimate Standard error of the regression Coefficient for t he independent variable Calculated t statistics for the registration coefficient Statistics required for a 95% confidence interval: 10 degrees of freedom 34 degrees of freedom Sh.47 19.000 760. work in process consisted of the following: Sh. (7 marks) c) Evaluate and explain how each of the four issues raised by the accounting department staff influence our willingness to use the results of the statistical analyses as the basis for the flexible-budget formula.530 2.200.185. on the 1 November 1995.163.210 1. A and B.000 Process B: 3.000 600. (9 marks) (Total: 20 marks) QUESTION THREE A company makes a lotion that is manufactured through two processes.97 1.40045 0.000 400.504 0. On the same date. .000 units.40 0. sales have decreased to approximately 25. Manufactures and distributes a line of Christmas gifts.000 Direct materials Direct labour Overheads On 30th November 1995.000 2. The company had neglected to keep its gifts line current.10 0. 100% complete as to direct materials and 50% complete as to direct labour and overheads.216 Questions . All inventories are valued on the weighted average cost basis and transfers from process A to Process B are treated as part of direct material cost. 560.940.080.500 each. the number of units of this product is small enough to schedule the entire year’s sales in one production run.200.Mocks In both processes the goods were 100% complete as to direct materials and 75% complete as to direct labour and overheads. (Total: 20 marks) QUESTION FOUR Siku Kuu Ltd. the Sales Manager. 10. but she is willing to place probabilities on her estimates.30 0. 100% complete as to direct materials and 50% complete as to direct labour an overheads. The company plans to redesign the gifts each year in order to compete effectively.000 Process B Sh. Process A Sh 1. Show all supporting computations including the inventory flow through each process. The gifts have been redesigned recently and is considered by company officials to be comparable to its competitors’ models.000 probabilities 0. The inability to estimate the sales more precisely is a problem for Siku Kuu Ltd.000 728.20 The units would be sold for sh.000 100. Kama Kawaida. In the month of November.240. Required: The cost accounts for both processes for the month of November 1995. is not sure how many units can be sold next year. Kama Kawaida’s estimates of the number of units that can be sold during the next year and the related probabilities are as follows: Estimated Sales in units 50.000 4.000 125. the following additional costs were incurred. 4000 units were completed and passed form Process A to Process B while 1600 units remained in progress.000 units were passed from Process B into finished goods while 4000 units remained in progress.000 75. As a result.000 units per year fro a previous high of 125.000 1. The planning and control system centers on branch income statements prepared by the Finance Manager.00 0 8.000 17.00 0 7. In his attempts to sell the bank’s services to the Kagera residents. is both competitive and scarce.Comprehensive Mock Examinations 217 If the demand is greater than the number of units manufactured.000 22.850. the extra units cannot be carried over to the next season and would be given away to various charitable organizations. If the demand is below supply.700.800. Required: a) Prepare a payoff table for the different sizes of production runs required to meet the four sales estimates prepared by Kama Kawaida for Siku Kuu Ltd. The Kagera branch.550.000 7. Mr. The head office staff consists of the managing director and finance manager. Explain each step by reference to the situation presented by Siku Kuu Ltd. what size of production run would be selected? (6 marks) b) Identify the seven basic steps that are taken in any decision process. then sales will be lost. on the other hand.A. on the other hand.800.750.600.000 19.00 0 14.) Ltd has only two-branches. and your answer to requirement (a) (14 marks) (Total: 20 marks) QUESTION FIVE The Uganda Bank (E. The production and distributions cost estimates are as follows: UNITS MANUFACTURED 50.000 Variable costs Fixed costs Total costs (S h) (S h) (S h) 9. is located outside Kampala in a large and growing retirement community and as primary retail branch.00 0 125. relied solely on the expected monetary value approach to make decisions.900.800. the manager.00 0 The company intends to analyze the data to facilitate making a decision as to the proper size of the production run. he has found that his only success is the area of foreign deposits. The head office branch is in the center of Kampala and the Kagera branch outside Kampala. The interest rate he can charge is constrained by the fact that the manager of the local competing branch of the other bank while not . is in his first year with the Uganda Bank.000 24.00 0 8. Loan business.800 0 33.550.000 28.600.000 75. Obok. With minor exceptions. If Siku Kuu Ltd.00 0 100.700. the branch managers are permitted to conduct their affairs like the heads of two independent banks. (4 marks) ii Evaluating the performance of individual branches. the best Obok has been able to do is to generate a few goll-carat installment and social security cheque receivable loans. The manger. In spite of his frequent lectures on the merits of leverage. Kamau. which he has to keep in the vault to satisfy the government’s 20% cash reserve requirement. Additionally. It has been further agreed that if Obok could find additional loans. The Kampala branch located in the growing central business district. has found in recent years that while he faces a number of vigorous competitors the principal constraint on his ability to generate new loan business is lack of supporting deposits.218 Questions . This opinion is considered less than acceptable by Kamau. The argument was finally settled by the finance manger. (3 marks) d) Based on your answers to the above. serves primarily commercial customers. as the 22% interest he would have to pay for such funds is higher than the rate he is able to charge loan customers currently at 20%. As a result. while all other rates as well as the level of loan demand at Kampala branch. who indicated that the theoretically correct rate was the rate Obok was paying on savings deposits. which are foreign deposits held in a bank outside Africa. The finance manager has suggested that he lends these funds to Kamau at the Kampala branch. what general statements can you make about the interbranch loan rate appropriate for evaluation of individual managers? (6 marks) . there seems to be fundamental resistance in the part of the Kagera residents to the idea of borrowing even at the 12% rate Obok has been offering. This was acceptable to both managers. Mr. any or all of the funds lent to Kamau would be returned. remained the same? (4 marks) c) Would your answer change if all rates were the same as in (a) above except that he cost of Euro currency dropped to 18%.Mocks actively soliciting loan business is apparently charging rates below the prevailing Kampala prime rate. 10%. he finds himself with substantial excess savings deposits. the vault additionally contains excess lendable funds equal to almost 70% of total savings deposits. although some disagreement arose as to the interest rate appropriate for such a loan. The only alternative source of lending funds is the purchase of Euro currency. (3 marks) b) Would your answer change if the Kagera branch loan rate were to rise to 14%. Required: a) Evaluate the 10% interbranch loan rate and suggest appropriate changes in relation to the following criteria: i Motivating managers to act in a manner consistent with the best interests of the bank as a whole. Comprehensive Mock Examinations 219 (Total: 20 marks) . 500 a unit. 1hr. Ltd. The estimated overhead cost per direct labour hour is: Sh Variable – overhead cost 300 . Each product is processed through both of the company’s manufacturing departments.15 min 1 hour 30 min. The production department believes that linear programming can be used to support and systematize the production schedule for the two products.3000 1 hour Department 2 .600 per kilogramme 4 Kg 2 Kg Direct labour: Department 1 – weekly supply limited to 10 people at 40 hours each at an hourly cost of Sh.Weekly capacity limited to 250 hours 30 min. Ltd. which sells for Sh.Mocks COMPREHENSIVE TEST 2 Time Allowed: 3 hours Answer any FIVE questions.400 Machine time: Department I .220 Questions . The overhead is assigned to products on the bass of the number of direct-labour hours required to manufacture the product. The limited availability of labour.4.250 a unit. manufactures two industrial products: x-100. questions carry equal marks QUESTION ONE Miujiza Co. This base is appropriate for overhead assignment because most of the variable-overhead costs vary as a function of labour time. The following data are available to the production department: Resources required per unit X-100 Y-120 Direct material – weekly supply limited to 1800 Kg at Sh.4. are accumulated on a plant wide basis. Department 2 – Weekly capacity limited to 300 hours 1 hour All 40 min.Weekly supply limited to 15 people at 40 hours each at an hourly rate of Sh. 0 hours The overhead costs for Miujiza Co. materials and equipment capacity has restricted the ability of the firm to meet the demand for its products. and Y-120 which sells for Sh. the legal problems.000.P.P) statement of the problem. If they are acceptable.Comprehensive Mock Examinations Fixed overhead cost Total overhead cost per direct Labour hour 300 ___ 600 221 The production department formulated the following equations for the linear-programming (L. events and outcomes.000. Kata Leo could add an intricate inspection procedure so that all defective computers could be discovered and repaired before they leave the factory.000.625.1. statement of the production problem in line with your findings in (a) above. (8 marks) c) Explain how L.P.1 labour: hours Dept. The cost of his procedure would be Sh.800 Kgs. However. If the units are of an unacceptable quality. Several serious production problems have been encountered.500 Required: a) Formulate Kat Leo’s problem as a “decision table” or “pay off table showing actions. could help Miiujiza Co.P.307. 2 labour: 600 hours Non-negativity: - 4A + 2B <=1. (4 marks) . (6 marks) b) Formulate and label equations for the L. the factory will have a net profit of Sh.1. A = number of units of X-100 to be produced B = number of units of Y-120 to be produced Objective function to minimize costs: Minimize Z = 4250A + 3100 B Constraints: Material: Dept. warranty claims and unfavourable publicity will result in a net loss of Sh. B = >0 B<= (Note. equations prepared by the production department. >= is greater than or equal to and <= is less than or equal to) Required: a) Evaluate the accuracy and application of the L. Kata Leo is concerned whether the units will be of acceptable quality. determine how large a change in the price of direct materials would have to be to change the optimum production Mix of X-100 and Y-120 (6 marks) (Total: 20 marks) QUESTION TWO Kata Leo manages a factory that is currently processing a large order to make hundreds of newly designed computers. 2/3A + B <= 400 1¼ + A => = 0. The consultant is expected to produce one of three possible reports: neutral.3 0. The neutral report would not change the original decision in (b) above.Mocks b) Supposes that both events are equally likely and that Kata Leo bases his decision strictly on expected monetary return.222 Questions .7 unacceptable. Kata Leo assesses probabilities of receiving the various reports as follows: Neutral report Optimistic report Pessimistic report What is the highest price that Kata (10 marks) marks) 0.3 acceptable and 0. optimistic or pessimistic.7 acceptable and 0. changing the probabilities to 0.3 0.3 unacceptable. The pessimistic report would have the reverse effect.4 Leo should pay for the report? (Total: 20 . which action will the management prefer? (6 marks) c) Suppose that Kata Leo could obtain a consultant’s special accounting analysis that would affect his assessments probabilities of acceptable or unacceptable quality. The optimistic report would change Kata Leo’s assessments of probabilities to 0. including all parts and labour for a flat charge of Sh. you are convinced that her attitude towards risk and compensation would be expressed as: F = uz – 2 σ z Where f is the utility value of each expected level of compensation.9 (x – 27) Where Z is compensation based on the excess (shortage) of actual rate of return over the minimum desired rate of return. and σ z is the standard deviation of z and is measured by the expression b2 σ z Required: a) What difficulties in the design of control systems are demonstrated by the above situation? (7 marks) b) Compute Joy Musa’s expected utility from each capital project. (8 marks) c) Which capital project would she choose and why? (5 marks) (Total: 20 marks) QUESTION FOUR Computer Ltd. After holding extensive discussions with Joy.27. Alternative B . x is the actual rate of return and 27 percent is the minimum desired rate of return.000. is in the process of deciding how to service a one-year warranty on the 1.. uz is the expected value of z. b is the weighing of the difference between the actual rate and the minimum desired rate. You have been presented with three alternatives: Alternative A A reputable computer service firm has offered to service the computers.000 computers sold to a large international company.Comprehensive Mock Examinations 223 QUESTION THREE Joy Musa is trying to decide between three capital projects of varying returns and risks as shown below: Internal Rate of Return 32% 27% 42% Standard Rate Deviation 9 6 21 Project A Project B Project C The manager’s performance is measured by the following linear equations: Z = a + b (x – 27) Z = 13 + 0. a is minimum compensation. Service calls in excess of that number would be Sh.500 31.500 calls or less calls calls calls Probability of Occurrence 0.1 1.000 45. as follows: Y = K 0 + K1 x + Z Where y is monthly total operating cost.500 25. The number of calls is likely to be: Event 1.500 calls Chances of Occurrence 10% 70% 20% 100% Total Cost Sh. x is monthly unit production. wishes to study the relationship between the total costs of operating one of its divisions and to the physical output of that division.500 Alternative C You can hire your own labour and buy your own parts. marks) (Total: marks) QUESTION FIVE FMD Ltd.000 service calls at no charge.0 Total Cost Sh. 22.000 31.500 another reputable service firm would provide all necessary parts and up to 1.5 0.2 0.500 Required: a) For each alternative. compute the standard deviation and the coefficient of variation.000 1.Mocks For Sh. (12 marks) b) Which alternative is most risky? Explain. 12.6 each. It decides to begin with a simple linear probabilistic model relating monthly total operating cost to monthly output. Required: (5 20 . and Z is a random variable assumed to follow a normal probability distribution with mean U of zero and standard deviation of o. (3 marks) c) What alternative would be taken? Explain.000 15.2 0.224 Questions . Your past experience with similar work has helped you to formulate the following probabilities and costs: Event Little trouble Medium trouble Much trouble 2.000 2.500 28.500 2.22. (2 marks) (Total: 20 marks) e) .Comprehensive Mock Examinations 225 a) Give a precise interpretation of the parameters K0 and K1 of the model above. obtains the following data on monthly production and costs: Months ago 1 2 3 4 5 Units produced ‘000’ 1 4 10 7 3 Total operating costs K£ ‘000’ s 2 5 9 7 3 Using these data. (6 marks) c) FMD Ltd. In a particular.000 units. (2 marks) b) Give a brief outline of the role of Z in the model. (4 marks) d) Outline how you would go about deciding whether or not the model above fits the data reasonably well and captures the underlying process generating the monthly operating costs. compute the coefficient K0 and K1 of the model. so that an accountant would understand what they stand for. indicate why it is there. (6 marks) Use the model to predict next month’s operating costs at a production level of 2. (13 marks) b) Comment on the performance of the manager.500 1.350 2 Sh. 4.Mocks COMPREHENSIVE TEST 3 Time Allowed: 3 hours Answer any FIVE questions.200 2. 5.226 Questions .800 3 Sh.000 litres of KAG.Sh.Sh. The production manager is supposed to make the largest possible amount of finished product for the least cost.100 = Ug. questions carry equal marks QUESTION ONE Uganda Ltd.250 All .20.15. 7. (7 marks) (Total: 20 marks) QUESTION TWO Katiba Ltd.000 100 litres Ug.000 litres of Chovi were produced during last week.Sh. He has some leeway to alter the combination of materials within certain wide limits.000 litres of 590N and 240.Sh. PRODUCT Selling price Direct labour 1 Sh. The raw materials used in this production were 280. Required: a) A presentation of yield and mix variances. has the following standards for producing an alcoholic beverage: Concentrate 590N 50 litres @ Ug.000 Concentrate KAG 50 litres @ Ug.000 Every 100 litres of input should yield 80 litres of Chovi.400 1. Actual results showed that 400. The company’s director of operations has developed the following price and cost information per unit of each product. No price variances were experienced during the period. is changing its current short-term planning approach in an attempt to incorporate some newer planning techniques that will permit selection of an optimum production mix.Sh.300 = Ug. as long as the finished product meets specified quality standards. the finished product. 5. 000 and Sh.000.000. He has collected the following data about inventory item NPD: .300 per unit.Annual demand 1.31.Comprehensive Mock Examinations Direct materials Variable overhead Fixed overhead 1.000.080 180 1. 6. Show supporting computation but do not solve t he linear programming functions. The probability distribution of total sales is uniform between Shs. He anticipates no need for a safety stock. i What is the probability of at least breaking even at a selling price of Sh.27.000 direct-labour hours and 20. calculate and utilize an optimal order quantity using the EOQ model.890 1.25 per unit . 270 per kilogramme and direct-labour rate is Shs. in particular.620 1.625 per unit . the probability distribution of total sales is uniform between Sh.000. Monthly capacities are 2.81. The results are as follows: . Required: (Parts (a) and (b) below are independent of each other) a) All three products use the same direct material which cost Shs.(11 marks) b) Katiba’s management has decided to produce product 3 only. 54. 900 per hour.000 kilogrammes of direct materials.7.000 and Sh. He wishes to install an inventory control system an.000.080 180 227 Assume the total production level of 60. He collected some data about the most recent 20 orders made for inventory item NPD.54. Formulate and clearly label the linear-programming (LP) functions necessary to maximize Kariba’s net income. He also ran a regression using the number of units in each order to predict the total cost of the order. At a selling price lowered to Shs.7200 per unit.000.Inventory insurance and other variable costs of storage paid at year-end Sh.Purchase price Sh. He is unsure about the cost behaviour associated with ordering inventory. Fixed overhead is assumed to be the same for each product.200 per unit (5 marks) ii Which pricing strategy yields a higher expected profit? (4 marks) (Total: 20 marks) QUESTION THREE James Ugenya is the Final Director of Ugenya Ltd. The sales and marketing director has presented the following results of a price analysis for product 3.000 units made up of equal amounts of each product.0.080 180 1.250 units Ugenya’s opportunity rate of return is 10 per cent.080 1. at a selling price of Sh. what optimal order quantity would you recommend? (4 marks) b) What is the 95% confidence interval of the variable ordering cost per unit ordered? (3 marks) c) List two regression assumptions that must be maintained in order to answer (b) above.228 Questions . or wait for one year to see if the mixer has .4125x 0. The presents value (PV) of net cash flows form making and selling the liquidizer are estimated by the company to be sh.2 million if it develops five years from now. whereas 30% thought it would be launched in four year’s time.50 per order plus Sh.2 million. if the market develops one year from now and sh. The company could abandon the whole project. e) Assuming that the recommendations in (a) above were implemented. He has now returned with details of a new type of food mixer that is being developed over there.0 r2 = 0.83 55.8 million. (3 marks) d) The actual costs of ordering turned out to be Sh.375 per unit ordered.3. CECL have not developed a liquidizer before.0 + 3. CECL are considering the design and manufacture of a liquidizer gadget attachment to be used as an extra gadget for the new mixer when it is sold in Kenya.4. The chief designer’s notes show that 10% of the experts he questioned in both the UK and USA believed the new mixer would reach the Kenyan market in a year’s time. what was Ugenya’s cost of prediction error! (10 marks) (Total: 20 marks) QUESTION FOUR Chakula Engineering Company Limited (CECL) recently sent their chief designer to the USA and UK to review developments in the American and British Markets.Mocks Total cost in shillings = Standard errors of the coefficients 11. A number of alternative courses of action present themselves. and the remainder suggested a five-year delay before it reached Kenyan.54 x = number of units ordered Where EOQ ={ 2AP}½ { S } Where: A P S Annual inventory requirement Ordering cost per order Carrying cost per item per annum Required: a) Using only the data given above. they feel they have only a 50% chance of a successful development at present. and whilst it immediate development would cost Sh. with a 70% chance of success. but they would be late into the market and the PV of their receipts they estimate at Sh.40.4. the mixer could only come on the market at the four or five year point from now. They would then abandon or develop the liquidizer at a PV cost of Sh. (20 marks) QUESTION FIVE The Hatari Weapons Ltd. Fixed costs are incurred equally each year.8 million. Eight rockets will be built during the first year of the contract and the remaining 24 will be completed during the second year.Comprehensive Mock Examinations 229 penetrated the Kenyan market. The company. Total fixed costs will amount to approximately Sh. Required: Using a decision tree approach. Revenue is to be recognized on the basis of completed rockets. (5 marks) c) Assuming the contract is awarded to the company. however.8 million.000. with details of the constituent parts of the cost structure and the profit added. as a result of past experience.1.600. (5 marks) b) Draw up a quotation showing the total price to be quoted. anticipates it could expect a 75 per cent learning curve and that the steady state would not be achieved during this production run. Required: a) Calculate the total labour hours that will be required to build the 32 rockets. always adds 25 per cent profit margin to the estimated costs of the contract for which they tender. advise the company on the course of action to adopt. desires to submit a tender for 32 “string-tosurface” rockets required by Vita Ltd.400. including the expenditure of Sh. draft estimated income statements for the first and second years of the contract life. (5 marks) (Total: 15 marks) . it is estimated that each rocket will cost approximately Sh.000 hours of direct labour at a direct labour cost of Sh.150 per hour. Building the first rocket would require approximately 400.1.000 over the two years it will take to build the rockets all of which would have to be recovered against this contract. At this point.50 per direct labour hour.000 for material and variable overhead costs. and no costs are deferred over the two-year period.000 on acquiring extra product data during the second year of delay. The Hatari Weapons Ltd. and the chance of a successful development would be 90%. Variable overhead costs which vary with direct labour amount to Sh. 4 0.Mocks COMPREHENSIVE TEST 4 Time Allowed: 3 hours Answer any FIVE questions.000 200.20 . can produce a product using either labour-intensive or machine-intensive operations.000 300. (8 marks) b) Determine the following for each production method: i Expected profits.000.000. The following possible outcomes and associated probabilities have been estimated by management. questions carry equal marks QUESTION ONE Mwendandamu Company Ltd.’s management should consider before deciding on the production method. Number of Units 150. (4 marks) (Total: 20 marks) Demand Probability 0. Cost of each method are as follows: Labour – intensive Sh.3 0.1. (2 marks) ii Probability of at least breaking even. 15 900.400. (2 marks) iii Probability of profits of at least Sh.000 Machine – Intensive Sh 5 2.230 Questions .10 Unit selling price Price (Sh) Probability 20 23 25 0.40 0.000 All Variable costs per unit Fixed cost Demand for the product and unit selling price are uncertain.000 250.000 Required: a) Develop probability tree to show the possible profits from labour-intensive and machine-intensive production.20 0.40 0. (2 marks) c) Which production method do you prefer and why? (2 marks) d) Discuss other factors that Mwendamu Company Ltd. the immediately proceeding tasks and for each task duration the most likely estimate (L).Comprehensive Mock Examinations 231 QUESTION TWO Uchunguzi Ltd. . optimistic estimate (O) and the pessimistic estimate (P). plans to conduct a questionnaire survey. The table below shows the tasks involved. 08333 (4L + O + P) O = 0.10.24 150 1. 75 litres of material X @ Sh.000. Actual costs per day are Sh. Can the project be implemented within the budget? (Hint: Determine critical path first). for the duration of each task are estimated from the most likely (L).21 45 litres of material Y @ Sh. has set the following standards: Sh.Mocks Task A B C D E F G H I J K Pilot Survey Interviewer recruitment Interviewer training Interviewer allocation Interviews undertaken Data entry on computer Interviewer debriefing Data analysis Writes a report Precedin g Task A B D B C.575 1. F G G HH I.500. (9 marks) (Total: 20 marks) QUESTION THREE Mitumba Ltd. Optimistic (O) pessimistic (P) estimates by using the formulae: M = 0. J Most likely (L) 10 8 6 8 20 6 4 10 8 Number of days Optimis Pessimi tic stic (O) (P) 8 4 6 6 16 4 4 8 4 24 12 6 10 36 8 4 12 24 Using the project evaluation and review technique (PERT) the meantime.08333 (P – O) Required: a) Compute the mean duration and standard deviation for each task.645 This standard mix should produce 135 litres of Maliza juice. . M and standard deviation O. E. (11 marks) b) The project is budgeted to cost Sh.30 30 litres of material Z @ Sh.350 720 3.232 Questions .000. 000.000 litres of Y at actual cost of Sh.000 12.18.000 litres of X at actual cost of Sh.620. During 1993. In 1993. mix and price variances. Required: a) What was the breakeven point (turnover) under the original situation prevailing in 1993? (5 marks) .31.000 owing to savings in selling expenses. since total fixed expenses manufacturing and selling) would increase to Sh. Total fixed expenses (manufacturing and selling) were Sh.000 1.000 and net profit was 10 per cent of turnover. 180.28.000 because of the additional warehouse and delivery facilities required: If the 1993 distribution system were continued. This net savings in selling expenses from eliminating the “middleman” was impressive.800. Sh. Viatu’s marketing research group was asked to predict the effects of eliminating distributors from the channels of distributors and selling direct to retailers.000 litres of Z at actual cost of Sh. a number of Viatu’s competitors had begun selling their products through distributors. Viatu Ltd. under the provision that the selling price per unit would remain unchanged. but net profit for 1994 would rise to Sh.000 litres were used during March 2000. 39. however. The marketing analysis yielded the following predictions: Turnover in1994 would drop 20 percent from the 1993 figures.500.000 Required: Comprehensive computation showing the yield. Purchases are made as needed. The group was instructed to predict both changes in sales volume and changes in selling expenses.900.. the turnover was Sh. a shoe manufacturer had always sold its products through distributors.000 The good quality output was as follows: 60. Actual results showed that 75.000 1.000 litres at standard cost of Sh. so that all price variances related to materials used. results would replicate 1993.000 75. (Total: 20 marks) QUESTION FOUR Through the end of 1993. 1994.87.18 702.27 Total material variance to be explained.100.000 24.500.50 __342.9.17.50 756.Comprehensive Mock Examinations 233 The company does not maintain any stocks of raw materials. it became clear by early December 1994 that sales would reach only 66.000 turnover level. produces two products. The survey further concludes that virtually any amount of product K-B can be sold immediately without difficulty.000 if the 1993 distribution system had been continued. any unsold quantity at the end of the week will be discarded. Weekly production does not have to be equal to weekly sales for any of the company’s products. and reduced 1994 production on the 70. One unit of input X processed in Department 1 total will yield three units of product K – A and two units of K – B.7. Unfortunately. Variable costs per unit and total fixed costs were as predicted.50 per unit of K-A processed and each unit of K-C can be sold at a price of Sh.000 and Viatu cut back productions so that no ending inventory remained. K-A and K-B by a joint process. One unit of product K-A is needed to produce one unit of K-C.234 Questions . (7 marks) b) LP Ltd.000 units and for product K-C is 5.000 units per week. market and technology constraints. since all three products are perishable.75 per unit at the split-off point. The variable operating costs in Sh. Required: (i) Formulate a linear programe to determine the optimal weekly production mix for LP Ltd. (10 marks) (Total: marks) QUESTION FIVE a) Briefly give five examples of business applications of linear programming. If K-A is processed further.000 hours per week.000. adopted the new directdistribution plan for 1994. Compute the cost of Viatu’s prediction error. Viatu Ltd. Variable processing costs incurred in Department 2 amount to Sh.50 per unit of input X processed.50 product K-B can be sold at Sh. Furthermore raw material X can be acquired up to a maximum quantity of 40. three hours per unit of K-A processed are needed. Highly skilled labour is required in each of the two departments and the total available labour force is limited to 80.5 direct-labour hours.22. (8 marks) 20 .000 units.2. Assume that sales would have been Sh.500.Mocks b) What would be the breakeven point (turnover) under the proposed situation for 1994? (5 marks) c) On the basis of this analysis.10 per unit or processed further in Department 2 to for product K-C. Each unit of product K-A can either be sold at the split-off point for Sh.500. that maximizes profits subject to the various production. However. Do not solve for optimal values but clearly define your variables.87.8. To process one unit of X requires 1. The company ‘s market survey shows that the maximum weekly demand for product K-A is 40. (5 marks) (Total: 20 marks) .15 and Sh. Assume further that all other constraints have zero marginal values. the maximum market demand for K-C constraint and the maximum supply of X constraint are Sh.15 respectively.10. Sh. the marginal values associated with the maximum market demand for K-A constraint. What is the maximum achievable contribution? Show calculations. assume that at the optimum.Comprehensive Mock Examinations 235 (ii) Independent of (a) above. If not sold during the second day its value drops to zero and Peter Oloo donates it to children’s home. Failure to satisfy demand costs Peter Oloo Sh. questions carry equal marks QUESTION ONE Peter Oloo is a fishmonger in Kisumu.40 and sells it for Sh. Required: a) Simulate Peter Oloo’s operations for 8 days clearly indicating profits made each day.20 for every fish supplied to the customer.20. As a result of adverse business changes in the region. the “Miracle”. if the fish is sold the following day it will fetch only Sh. Peter Oloo’s Policy is to satisfy the days demand from the fresh fish first.Mocks COMPREHENSIVE TEST 5 Time Allowed: 3 hours Answer any FIVE questions. the supply and demand for fish are subject to random variations making it difficult to project the next day’s business.236 Questions . and any further demand will be satisfied from the stock of fish from previous day. (16 marks) b) What are the average daily profits for Peter Oloo? Use the following random numbers 573423709751483681320931644925928345 (4 marks) (Total: 20 marks) QUESTION TWO Africa 1 and Kenya 1 are competing importers of lightweight industrial pick-up truck. Market research suggests that there is . Management accounts in relation to the previous 300 days reveal the following mode of behaviour: Number of fish purchased from fishermen 100 200 300 400 500 Number of days Number of fish Sold to customers 100 200 300 400 500 Number of days All 30 60 90 90 30 300 45 60 90 75 30 300 Peter Oloo buys each fish at Sh.60 if sold on the same day. There are no backorders in the business. an aggressive entrepreneur.10.000 but discounts may be available. using algebra.000 price difference. (8 marks) c) Prepare a statement for the Management Accountant showing the strengths and weaknesses of simulation as a management technique. From africa1’s point of view. Past experience suggest that Africa1’s market share and profit will give the greatest monthly profit from the sale of Miracles. kenya1 normally changes its prices monthly. when Kenya1 has a higher price. (2 marks) iv An expression for market share when Kenya1’s price is lower than Africa1’s. then Africa 1 secures about 45% of the market and Kenya 1 . showing: i An expression for monthly profits.000 price difference. If both companies share the same price.Comprehensive Mock Examinations 237 demand for such vehicles of about 1. (2 marks) b) Draw a flow diagram to show how the model would be used to simulate pricing and demand behaviour using a computer. (2 marks) iii An expression for market share when Kenya1’s price is higher than Africa1’s. 55%.10. its price should be around Sh. Required: a) Develop a simulation model from Africa1’s point of view.400.000 depending upon exchange rates. On the other hand. (4 marks) (Total: 20 marks) QUESTION THREE Paul Akili. but also the price that Kenya 1 charges. For one such product. Africa1’s Management Accountant has ruled out trial and error pricing an has decided to develop a simulation model to investigate price behaviour patterns based on monthly periods. The following pattern seems to have emerged. The management Accountant at Africa 1 has the task of determining the price to charge for the vehicle that will give the greatest monthly profit from the sale of Miracles. The price to the dealer is about Sh. Past experience suggest that Africa1’s market share and profit depends not only on the price it charges. When Kenya 1 has a lower price. (2 marks) ii An expression for market share when Kenya1’s price is the same as Africa 1’s. .200 units per year evenly spread over the year and that bearing in mind the facilities available on the truck. then Africa 1 loses about 3% market share for every Sh. is working on some make – or – buy decisions and a related inventory system.550. then Africa 1 gains 2% market share over and above the 45% per sh. (8 marks) (Total: 20 marks) QUESTION FOUR a) Racquet Sports produces a variety of racquets for the sports industry.3. Assume that the inventory cycle precisely repeats every year.228 to alter his inventory policy.Mocks he decides to use the classic economic – lot – size model with no stockouts to determine an optimal order quantity.1.342 per physical unit per year.819 incremental – costs – per order prediction but is precisely correct in all other predictions.140 per average unit.2. State and solve the equation to predict the maximum amount Paul Akili should pay to discover the true incremental cost per order if: (i) (ii) This true costs is sh.000 1. that each unit will cost sh. correct except that the actual incremental cost of storage is sh.3.565.000 Percenta ge of Total Sales 50 . Average Selling Product Tennis racquet Price per unit 4. Required: a) What is the optimal order quantity? (1 mark) b) What are the total relevant costs of inventory from following your policy in (a) above? (3 marks) c) Suppose that Paul Akili is incorrect in his sh. It makes racquets for tennis. (6 marks) a) What happens t your answer in (c) above if we admit that Paul Akili has also made errors in predicting demand price and the cost of storage? (2 marks) b) Suppose Paul Akili implements the solution in (a) above for two years. The table below presents the relevant data for the products produced. and the incremental cost of storage will be sh. If it costs Akili a total of sh. Paul Akili implement the solutions in (a) above and will not alter it for one full year.000 Racquet Sports Data Average Average Variable Contribut ion Cost per Margin unit (Sh) (Sh) 3. squash and badminton.881 per order and In the absence of any knowledge to the contrary. that the incremental cost of processing each order (and receiving the ordered goods) will be Sh.819 in this case.1.238 Questions . and are. c) Further supposes that all of his initial predictions were. state the equation to determine the cost of prediction error of not changing his inventory policy at the beginning of the second year. He initially predicts that annual demand will be 2000 units. 800.30.30.800 as a transfer price lead to optimal decisions for Majimbo Ltd? Show the net effects on cash flows.800. The supplier who bids sh. The supplier who bid sh.000 1.500 from Division Z of Majimbo Ltd. c) Will the use of sh. Suppliers outside Majimbo Ltd.? Explain (5 marks) b) Suppose Division Y is working at full capacity and can provide the needed part to Division X or to an outside customer at an assumed market price of sh.Comprehensive Mock Examinations Squash racquet Badminton racquet 2. assume that the outlay costs to Y of filling the order were sh. Which has spare capacity that will increase A’s contribution to overall company profits by sh. Does the use of the international market prices lead to optimal decision for Majimbo Ltd.500 1.3.31. Further.000 will not buy any materials from Majimbo Ltd.31. Finally assume that Y.22.500 2. division Y would have to meet the sh. that is overall break-even point in shillings sales? (7 marks) (iii) Determine the profits if the plants operates at 70 per cent of the plant capacity.200. Have given two bids for sh.000 bid.000 239 40 10 100 Annual fixed costs – Sh. Required: a) Prepare a diagram of the cash flow for both alternatives.500.31. (5 marks) (Total: 20 marks) QUESTION FIVE Majimbo Ltd. if market pricing were the rule.1. (10 marks) d) What is the minimum transfer price (inclusive of the opportunity cost?)? (5 marks) . unlike the outside suppler does not buy from Z because Majimbo Ltd is so large and communications are so bad that the division Y management is unaware of this alternative.000 of total sales.500 1. Required: (i) Determine the contribution percentage on each shillings of sales for each of the products produced and sold.000 Production capacity – Sh. Is a multi-divisional company operating in several countries. (6 marks) (ii) What is the overall contribution that each sales shillings provides toward covering the firm’s fixed costs. Division X wants to buy component for its final product.000 and 31.500 1.31.4.000.000.800 will in turn buy some raw materials for sh. (2 marks) b) Explain the limitations of the techniques you have used to solve part (a) above. 240 Questions .Mocks (Total: 20 marks) . 00 400. 20.00 1 1 25 40 13.Comprehensive Mock Examinations 241 ANSWERS .240 = 5.48 2 x 200 .00 10.800 1.40 Total cost per unit EOQ = 93.100 Hours required: on loading On storage Total Labour cost Overhead cost 5 4 9 1.00 4.MOCKS COMPREHENSIVE MOCK EXAMINATIONS COMPREHENSIVE TEST 1 QUESTION ONE (a) Annual Demand = 200.000 x 23.48 .000 ½ 100 80 180.440 23.240 Shs.40 467.00 40.48 273.40 13 200 13 2 0 0 x 200 13 2 0 0 x 160 Cost of capital 20% x 467.000 hooks Cost per Order Hours Cost per Ship Chartered Hours required to place an order Hours required to supervise on loading Total hours Labour cost 9 x 200 Overhead cost 9 x 160 Total Cost per unit of average Inventory Hours required per hook per day Labour costs (½ x 200) Overhead cost (½ x 160) Cost of capital filed up in inventory variable Costs expected at the time of purchase Purchase price Shipping cost Equipment rental 1 2 5 x Sh.830 hooks 273 . 53 + Sh.142 5.52 2 = ∴ Cost prediction error = 1.Original decision order size is 5.52 EOQ = 2 Dco = Ch 2 x 200 .163.202.500) = Sh.000 x 1 5 2 360 Answers .191.781.53 + Shs.738. given original decision TRC = 200.000 x 23.203 – 1.000 hooks Actual cost per order = 23.203 Actual 5.142 = Shs.590.960 = 5.715 + Sh.960 1.736.59 Data from most Recent EMO =163.240 + 9(240 – 160) = 23.142 2 Actual results.48 + ½(240 – 160) + 0.Mocks = 3.52 = 1.000 x 23.2(240 – 160) ( 1 3 2 0 0) = 314.738.000 x 23.191.781.000 + (Shs. given alternative parameter (a) new rate = 16.2965 (Direct labour hours) (ii) Data from all EMO = Shs.242 Reorder Level = DL = 200.736191.725 + Shs.600.830 + 2.40045 (37.29655(37.2.960 = 1.1.520 x 314.960 Actual cost per unit of inventory = 273.000.830 x 314.000) .2.000 is irrelevant Annual demand = 200.6. 6.185.736.520 + 5.520 hooks 314 .Results of optimal decision.90.830 .240 x Total Labour hours) The Shs.846 hooks .2.061 QUESTION TWO (a)(i) Estimated manufacturing Overhead (EMO) Data from all EMO = 185.40045 (Direct labour hours) Data from most Recent EMO = Sh.52 TRC = D Co + O Ch Q 2 Optimal = 200. 23 for a 95% confidence interval. (c) QUESTION THREE PROCESS A – Weighted Average Method (WAM) (i) Units flow INPUT Beginning WIP Added materials TOTAL 2. it should be eliminated from the observations that are used to develop the regression equation. they may occur in the future. if the calculated t-statistic exceeds the table t-statistic for a specified confidence interval level. Issue 4 The use of historical data is a reasonable starting point and furnishes a sound foundation for developing a flexible budget formula provided that these have been drastic changes in casual and/or cost relationships.01 which is greater than the t-statistic of 2. if the abnormality is unlikely to occur.155 (b) 243 The results develop from the most recent 12 months are preferred because the t statistic for the 12 months data is 3. there is no reason to exclude observations due to the point in time at which they occurred.Comprehensive Mock Examinations = 236.000 3. The 48-month data have a t-statistic which is an important selection creation because. This means that the equation developed from the regression is statistically acceptable. the indications that the true value of the regression coefficient may be different from zero. This could include adjustments for any unit cost increase. and therefore should be included. Issue 1 Other things equal. is the 12 month data provide a better estimating equation than 36 months data. obtaining more observations by using additional months may introduce spurious elements which are no-longer relevant to estimating future manufacturing overhead. Otherwise. That. Some would say that since aberrations has occurred in the past. However. However.600 MATERIAL CONVERSION . Issue 3 This issue is valued only if there is reason to believe that the underlying casual relationship has changed (for example: New Technology) or that shilling cost levels have changes. Issue 2 There are differing philosophies on this matter.284. Of course. the equation derived from the regression analysis should be modified for any information that management expects will affect the cost estimate in the future. the more observation the better. This happens to be the case in this problem. it does not necessarily follow that there will be a balancing of variations in efficiencies. 748.600 1.000 4.748.000 1.600 4.000 5.000.600 2.000.000(100 %) 1.808.000 (100%) 800 (50%) 4.000 Answers .000 5.600 5.000 1.000.000 2.244 Units to account for OUTPUT Transferred out Ending WIP Equivalent units (ii) Cost flow (Sh) Beginning WIP Current cost Cost to account for (iii) Cost per unit (Shs) Equivalent units Cost per unit (Shs) (iv) Cost Application Shs Transfer to Process B End up WIP Equivalent cost 5.800 1.000 (1.100) 1.940.000 .000 1.808.000 2.000 (4.940.Mocks 4.100 = 585 (Workings) 4.308.000 x 1.748.440.600 525 4.600 x 525) + (800 x 585) 5.000 3.800 + 1.600 (100%) 5. 440.600 5.400.600 PROCESS B (i)Units Flow INPUT TOTAL TRANSFERRED IN MATERIAL CONVERSION Beginning WIP Added materials Added from Process A Units to account for OUTPUT Transferred out Ending WIP Equivalent units (ii) Cost flow (Shs.) Beginning WIP Current cost Cost to account for 6.440.000 4.000 14.000 x 1.800.000 5.440.000 10.000 14.440.940.000 12.00 0 11.00 0 10.Comprehensive Mock Examinations INPUT Beginning WIP Materials Labour Overheads PROCESS A ACCOUNT Units Amount (Shs) 2.000 Ending WIP 728.000 4.000 1.600 1.300) 00 3.000 3.0 (10.960.308.000 10.000 (iii) Equivalent cost per unit (sh) ÷ ÷ Equivalent units Cost per unit (sh) 1.14 3.600 ____ 5.000 5.000 14.000 Units 4.000 2.800.000 ÷ 14.000 245 OUTPUT Amount(S hs) 4.400.000.748.000 700 Transferred to Finished Goods Ending WIP Equivalent costs (SHS) (WORKINGS) 13.000.960.800.000 560.300 (iv) Cost Application 12.000 4.000 ________ 5.360.000 282.000 ____ 1.0 00 4.080.000 4.000 1.000 Transfer to process B 3.00 2.0 00 16.000 2.86) + 0 4.000 317.000 (317.00 0 10.0 00 .14) 16.400.000 8.748.000 (282.86 1.000 4.00 0 4.000 (700) + 4.000 14.000 ÷ 14.000 6. Mocks .246 Answers . 800.000 16.3) + (28.000 QUESTION FOUR (a) Demand 50 75 100 125 EMV Probabili ty 0.900 EMV @ 100.400 x 0.600) 8.000 Transferre d out 4.400 x 1 = 7.000 14.450 28.400 EMV @ 75.950 14.4 0.000 5.4) + (21.600 x 0.240.440.1 0.900 x 0.000 2.000 units because it yields the highest expected monetary value of Shs.700 (3.000 Ending WIP 4.950 x 0.400 x 0.2) = 11.000 Productions = 7.200.950 11.000 Units 247 OUTPUT Amount (Shs) 10.000 _____ 14.000 0 4.13.4) + (21.450 Profit (profit payoff) = (selling price x Quantity) – Total Costs Working ‘000’ EMV at 50.000 Production = (-8.00 13.400 7.000.9 million.400 7.950 14.00 0 _________ 16.000 _____ 4. Search for alternative courses of Action .3 0.400 21.000 production = (-3.000 production = (-3.400 2.5) = 13.4) + (16. Identify objectives 2.1) + (8.450 14.950 x 0.360.900 EMV @ 125.450 x 0.1) + (3. (b)Steps 1.550 x 0.450 Decision Produce at a production Run of 100.5) = 13.800.2 Production Runs ‘000’ 50 75 100 7.000 3.400 7.000 560.900 21.950 16.900 125 (8.400 7.1) + (8.000 4.800.Comprehensive Mock Examinations PROCESS B ACCOUNT INPUT Units Beginning WIP Material Added Transferred in Labour Overheads Amount (Shs) 6.950 13.400 14.550) 3.600 x 0.900 x 0. it’s not clear that it is appropriate for evaluating branch performance. With this rate the Uganda Bank (E. it is difficult or impossible to evaluate them meaningfully as separate entities. rate (This structure would also provide the appropriate motivation. as transfers would take place except when the Uganda Bank (Ltd) loan rate dropped below the Kampala Branch cost of funds or Kampala branch loan rate which ever is higher or when the Kampala Branch cost of funds rose above the Uganda Bank (EA) Ltd Loan rate).248 3. 4. - - - - - b) Given an increase in the Kampala branch loan rate to 14% as well as no significant increase in Loan demand at this branch the “Outlay cost plus opportunity cost” rule will seem to profit to retention of the 12.5% transfer rate advocated in (a) as Mr.e. Obok .A) Ltd. it is worthy noting that the need for dual rates highlights the fact that the branches are sufficiently interdependent so as to make evaluation as individual financial performance centers a questionable practice. 6. After all.5%). given that Uganda Bank Ltd’s only source of funds is the 22% Eurodollars. receives all the credit for the 7. Perhaps a transfer rate equal to the 20% Uganda Bank (EA) Ltd loan rate is appropriate for evaluating the performance of the Kampala Branch. Answers . 7. while the Kampala Branch will always show a loss of slightly less than it’s fixed and other expenses. 5. Gather data about alternatives Select Alternative course of Action Implement the decision Compare actual and planned outcomes Respond to divergencies from plan. 20% -12. Thus the best policy may be to use dual rates.5% incremental contribution acting separately. with the Uganda Bank rate being tied to the Kampala Branch cost of funds and the Kampala Branch rate being tied to the Uganda (EA) Ltd.A) Ltd (a) Solution to (i) and (iii) Where this transfer rate will provide the proper motivation. Since neither branch can obtain the 7. (i. This would however fail to compensate Uganda Banks for the costs associated with soliciting and serving the loans.5% incremental system-wise contribution associated with lending Kampala Branch deposits at Uganda Bank Ltd. Moreover.Mocks QUESTION FIVE UGANDA BANK (E. this incremental contribution is to a large extent attributable to the Kampala Branch. Some students may raise the question about whether dual rates may lead to “Loose” cost of control by both branches. At this point. each branch will be enjoying extremely favourable transfers prices. the outlay cost plus opportunity cost rule is still applicable because our objective is to put Obok in a position where he would not have “excess capacity” (i. Obok to solicit loans with rates below the Uganda Bank (EA) Ltd rate. c) Assuming a decrease in the Eurodollar rate to 18%. .5% + (14.5%). where he is servicing something less than the potential Kampala Branch Loan Demand).e. in sight of the loan rate differential between the two branches. (In general.e. Only if the Uganda Bank Loan rate drops below 14% would we prefer to have Mr. .5% transfer rate advocated above remains proper from a motivational point of view. 18% . the 12. as long as the Eurodollar rate is below the Uganda Bank rate. . Thus the incremental contribution of the Kampala Branch is 5. because the total bank profit-maximizing function of the Kampala Branch is to act as a saw material supplier for Uganda Bank.0 – 12. (The word solicit was used because it is necessary to make a limited number of “Loss-Leader” loans in order to compete for the deposit business. Under these circumstances. Thus the appropriate transfer rate would be slightly above 14% because this is the lowest rate at which it is disadvantageous for Mr.) Mr. excess lendable funds) and therefore no opportunity cost on these funds. as well as a 12% Loan rate at Kampala Branch. Obok lend his funds at Kampala Branch. if separate evaluation is to be made.12. it is usually a competitive necessity that the loan be made. Obok will be motivated to solicit and transfer deposits to Uganda Bank so long as the Eurodollar rate is greater than his loan rate and/or cost of funds). the “general rule” in the chapter is interpreted as 12. total bank profits will be maximized only if all funds above the reserve requirement are transferred to Uganda Bank (EA) Ltd. . if the Kampala Branch had not been built. Uganda Bank would be making an incremental contribution of 2% (i. a transfer price tied to the Eurodollar rate will also provide the proper motivation. Specifically.5%) = 14% on any funds having a valid opportunity cost.5% (i.e. the dual rate structure outsourced above is still appropriate.If a credit worthy pastor of the retired community requests a loan.e.. The use of the 14% rate for evaluation of branch performance raises the same problems outsourced above.18%).In a service. It was pointed out in the above discussion on the transfer rate appropriate for evaluating branches that the branches are sufficiently interdependent so as to make individual evaluation - - . 20% . and the appropriate transfer price for evaluation of branches is the 18% Eurodollar rate.Comprehensive Mock Examinations 249 still has “excess capacity” (i.However.In other words. however it is possible to clearly indicate that incremental contribution attributable to each branch with a transfer price. Obok’s performance is dependent on the prevailing Uganda Bank (EA) Ltd. This type of fluctuation could probably be avoided by using the dual rate structure for management evaluation. Kamau’s performance is dependant on the rate Mr. Loan rate. The same conclusion applies to management evaluation. even the approach is less than acceptable to the extent that Mr. If income statements are to be used for evaluating managers. The resulting 2% decline in Mr. variables over which neither of them really has control. 20% for Mr. they should probably be based on dual rates combined with measures of variable more closely connected with managerial performance such as deposit and loan market share and cost control performance.e.Obok’s contribution is no way related to his performance or to any decision variables under his control. A related problem is the fact that the income figure may fluctuate for seasons unrelated to the performance of the individual manager. Kamau) advocated above and that after the decline in the Eurodollar rate in (c) it was decided to use 18% for evaluation. assume that we had decided to use the dual rate (i. - - - - .5% for Mr.250 Answers .Mocks by an income statement based on transfer prices of limited value. For example. Obok and 12. However. Obok has to pay on savings deposits while Mr. 2X3 ≤ 2200 (3) Cost price product X1 (0.1 x 120) +(0.1X1 + 0.6 0.2 0.1X2 + 0.1 0 No limit Fertilizer selling price/tonnes 83 81 81 251 Selling Price Per tonne Manufacturing cost (Excluding raw material) Z = 21X1 + 25X2 + 16X3 0.51 + 11 = Sh.21 X2 = 81 – 56 = Sh.60 Tones 2000 Potas h 0.2 x 60) + (0.1 0.3 Shs.15 0 Tones 1200 Phosph ate 0.2 x 120) + (0.1x 150) + (0.1 0.2X2 + 0.45 + Sh.1X2 + 0.65 Contribution X1 = 83 – 62 = Sh.56 Product X3 (0.60)+ (0.62 Fixed Sh.1 Shs.11 per tonne Product X2 (0.6 Total Price = Sh.2X1 + 0.6 0.6 Shs.6 x 10) = 15 + 6 + 24 + 6 = Sh.1 x 0.1X1 + 0.2 0.1x 150) + (0.1 Shs.1x 150) + (0.1 0.6 x 10) + 11 = 15 + 12 + 12 + 6 + 11 = Sh.16 .6 x 10) + 11 = 30 + 6 + 12 + 6 + 11 = Sh.12 0 Tones 2200 Filler 0.2X3 ≤ 1200 (1) 0.1 x 120) +(0.25 X3 = 81 – 65 = Sh. Available 0.1 x 60) + (0.Comprehensive Mock Examinations COMPREHENSIVE TEST 2 QUESTION ONE Three Nitrat products e X1 X2 X3 Price per tonne Max.2X3 ≤ 2000 (2) 0.2 0. 1 -16 X5 1 0 0 0 X5 0 1 0 0 X5 0 0 1 0 Solution Quantit y 1.1X1 + 0.200 2.1 0.000 = Sh. X4 given total nitrate available in tonnes.2X3 + X4 = 1200 (Nitrate in tones) 0.000 Final Matrix as given in question Interpretation Production Procedure 4.000 Calculated as follow Z = 21 X1 + 25X2 + 16X5 = 21 x 4.1X1 + 0.000 = 84.284.000 2.1X3 + X5 = 2000 (Phosphate in tones) 0.2 0.000 + 25 x 8.1X2 + 0.000 unit of product X2 Do not produce product X5 The total contribution from the production is Sh. X2 X3 . Everyone tonne of this chemical available (above 1200 tonnes) will increase the production by Sh.40 (subject to a maximum which can be calculated) . the final table gives shadow price of Nitrate.000 + 200.170 (subject to maximum which can be calculated.1X3 + X6 = 2200 (Potash in tonnes) Z = 21X1 + 25X2 + 16X3 (Maximize) b) X4 when there is no production of X1 .000 unit of product X1 Procedure 8.2 0.1X2 + 0.1 0. When all X4 is consumed.000 10. Similarly X5 and X6.200 0 Ratio 12.000 Dual price or shadow prices.1 0.1 -25 X5 0. every extra tonnes.Mocks 0. i) ii) Chemical Nitrate has been fully. c) Initial Simplex Table Basic Variab le X4 X5 X6 Z d) X1 0.2 -21 X2 0. will increase the profit by Sh. used and is a scarce quantity.2X2 + 0.252 Z = 21 X1 +21 X2+ 16 X3 Answers .1X1 + 0.1 0. Similarly chemical phosphates has been fully used.000 22.284. Hence on economic grounds it should not be produced. there is still a surplus of 600 tonnes i. . Hence it has no scarcity value.e. Production of X5 will reduce the overall profit by Sh. 2200 – 600 = 1600 tonnes has been used.22 per unit.Comprehensive Mock Examinations iii) iv) 253 Potash not been fully used. -625.3) – 625. don’t inspectSh.512.000 (0.000 -37.000.5) + -37.3 Gain -625.187.500 0.500 Failure 0.187.5) = Shs.000 (0.500 = 137.500 Kata Leo would prefer to avoid inspecting because the expected gain is better than by inspecting (c) Effect of changes inprobabilities Events Success Optimistic report: Probability of Event Actions: Don’t inspect Inspect Pessimistic Repo rt Probability of event Don’t inspect Inspect 0.500 (ii) = 37. 1.500 The expected values with imperfect information (The reports) would be: If neutral.000.000.000(0.500 If optimistic.7) – 625.000 (0.500(0.000.3) = 512.000 -37.000 -37.500 Unacceptabl e Shs.000 -37.000 (0.3 1.500 (i) = 37.000 -37.-37.500(0.500 (b) If you don’t inspect: EMV = 1.5) = -37.000.254 QUESTION TWO KATA LEO Answers .500 (i) = 1.7) = 137.500 If you Inspect: EMV = -37.5) – 625. don’t inspect Sh.Mocks (a) Events Acceptable Actions Don’t inspect Inspect Shs.500 0.000 (0.7 Gain 1.500 (ii) = 1.500 Expected value = 512.000.000 -37.7 -625.500 Expected values Neutral Optimisti c Pessimisti c Expected value .500 If pessimistic Inspect Sh. 92(21) = 7.01) = 2.5 = 13 = 26.000 = 37.500 (0. the design of control systems that promote congruence is hampered by lack of knowledge of subordinates alternatives and risk attitudes.7.92 = 3.01 -7.92 B 13 4.9 (x – 27) = 13 + 0.500 (0.7.29) f = 13 – 2(4.5 – 2(7.Comprehensive Mock Examinations Probability Don’t Inspect Inspect (i) (ii) 0.52 δZ f Workings Project A Project B Project C UZ= 13 + 0.28 C 26.2QZ = 17.000 (ii) 195.9 (27 – 27) UZ = 13 + 0.3 512.000 – 187.86 3.92(9) 0.3) = 210.3) + 512.5 17.5 δZ = 0.5 – = .92( δ) = 0. The problem may be used also to highlight the fact that superiors do not have the same information possessed by subordinates’ every action is infeasible.000 (i) -15.28 .500 255 210.500 0.500 = Sh.500 (0.500 0.52 f = UZ.3 187.9 (42 – 27) = 17.4) = 15.29 δZ = 0.92 (6) = 4.500 QUESTION THREE (a) Not only does this problem gives an opportunity to consider utilities.86) 2(17. Thus. but it underscores a major difficulty in the design of control system.4 -37.01 f = 26.000 = 187.9 (32 – 27) UZ = 12 + 0.5 7.86 δZ = = 17. how to measure performance and tie compensation to performance in such a way that goal congruence is more likely. (b) Projects UZ A 17. That is the top manager desires the subordinates to take the actions that help reach top management goal.29 2.000 The maximum price that should be paid for the report is the difference in the expected value with the report and the expected value with the existing information: 195. 1 Total cost 12.500 28. = 3132 .V = δ = =0 εR 27 .V 0 C .5 0 = S s .16.500 Shs.000 − 27 .1 0.150 ) 2 0.000 15.2 0.150 Standard deviation ( δ) δ = ( 22 .8 2 .000 45.150 ) 2 0.500 −25 .100 Sh.000 ALTERNATIVE B Event 1000 calls or less 1500 calls 2000 calls 2500 calls Expected cost Probability 0.500 31.25.500 Expected cost 11.5 +( 25 .2 +(3 .Mocks δ = C oefficien t of valuation C.500 −25 .5 0 −2 .000 Expected cost 1. (a) ALTERNATIVE A Standard deviation ( δ) (27 .150 ) 2 0.250 5.1 0 ) 2 0.500 4.256 QUESTION FOUR Computer Ltd.49 = 0.000 ) 2 1 = 0 Answers .3.700 3.100 5.2 0.1 2 .V.1 = 9.2 +( 28 .4 1 0 5 5 1 0 h 3 9 Coefficient of variation C.500 −25 .7 0.200 Standard Deviation ( δ ) .5 0.125 25150 ALTERNATIVE C Event Little trouble Medium trouble Much trouble Expected cost Change of occurrence 0.1 Total cost 22.200 10.500 25. V C .200 (c) The most risky alternative is Alternative C with the highest Standard deviation of Shs.200 ) 2 0.Comprehensive Mock Examinations 257 δ = 12 .29 = Shs 258 .ΣxΣy nΣx 2 − (Σx) 2 = 5(170) .9.258 . (c) Alternative C is the best option as it yield the lowest cost of Shs.000 −16 .(25) 2 Σy (Σx 2 ) − (Σx(Σxy ) nΣx 2 − (Σx ) 2 26(175) . Z represents the effect of these random factors. QUESTION FIVE (a) (b) Parameter (K0) is interpreted as the weekly “Fixed costs” of operating the department and (K1) as the variable costs per unit of output.200 ) 2 0.000 −16 .8 (2) = 2.57 C .2800 .000 = shs .8 5(175 .200 ) 2 0.1 +(15 .29 16.7 +(45 .716 .1 = 85 . However reliance on simple number may buy information that the executive may need for a wise decision. The random variable Z.2 + 0.(25) (26) = 0.258.57 which is a more relative treasure of risk. n =5 Σxy = 170 B1 = Σx = 25 Σy = 26 Σx 2 = 175 (c) nΣxy .2 5(175) . In say week there are a great number of random factors that throw total costs y “off the line” – that cause it to differ from what it would be if an exact linear relationship existed.29 as well as the highest coefficient of variation of 0.16.200 compared to the other alternatives. is there because the Linear relationship between y and x is not exact.V = 9258.25 (170) = 1.000 −16 .8 Next weeks operating costs would be Sh.9.(25) 2 B0 = = (d) Y = 1.29 C oefficien t of variation = 0. 2. are normally distributed with mean zero and a constant variance negative a histogram & scatter diagram 4. a high correlation between church attendance and beer consumption may not be logical. The errors on residuals e. The underlying relationship is linear – scatter diagram. iii) Testing the assumptions (Specification tests) The necessary assumptions in linear regression are: 1.g.Mocks Logical relationship (economic plansibility) The analyst should study the data to see whether any relationship which exist is logical e. The independent variable x is assumed to be known and is used to predict the dependent variable y. (r) Standard error of the slope (Sb) T or Z – statistic depending on samples size Note: For a simple linear regression only one of the tests should be done. b) Testing the size of the slope by use of Coefficient of correlation. The errors are independent (auto correlation) _ Use Durbin Watson • • • . 3.258 (e) i) Evaluation of the regression model The tests undertaken can be grouped into Answers . Goodness of fit These tests can be divided into two a) Testing the whole model (that is all independent variables taken together) by use of ii) • • • Coefficient of determination (r2) Std error of estimate (Se) (MAD) F – statistics. 000 ) 0.000.00 0 250.100 240.000 = Shs. this resulted in an equal trade off.000 x Sh.000 liters @ a standard Cost of 250 per litter = 100.000 (U) Mix Variances 590N -30.000 (F) 4.000 Shs.000) Yield variances 590 N -30. 0 liter The difference in quantities were.000. However.000 Good output was 400.000. (1) Budget ed Liters 250.000.000 x (100 – 200) shs.000 Differences -30.72.000 (F) b) The manager apparently altered the mix by introducing a higher proportion of the less expensive ingredients.250 per =Shs.000 = 100.Comprehensive Mock Examinations COMPREHENSIVE TEST 3 QUESTION ONE a) liter 80 280.= +1.= +3.4.00 520.000 Material efficiency variance = Shs.5 (500.000.28. there would be a higher proportion of the cheaper ingredient at all times.000 (U) = +2.00 0 500.200 KAG +10.000 (F) KAG +10. As you might suspect the yield of good product is likely to suffer from a higher than normal proportion of the cheaper ingredient.000 259 Yield and Mix Variances Standard costs of finished products is Shs.200 Shs.6.000 240.000.20.000 +10.000. =.000 liters of 590N @ Shs.000 -20.000.000 x (300 – 200) sh.5(500.300 520. QUESTION TWO a) Let 1 be A .000 litters of KAAG @ Shs.000 Material 590N KAG TOTAL Calculatio n 0.000 x Sh.000. If this phenomenon would not occur.000.00 0 (2) Actual Liter 280.000 (f) . 000 A.) 1 4.25 + 4.960 Contribution margin 450 1.5 1. Some possible consumers • No autocorrelation • No heteroscedasticity • Normality of disturbance terms Actual S = 0.Mocks 1.023 1.350 1.080 5.890 270 7 S = 0.980 1.043.800 900 2 1.417 to 4.275) = 4.620 1.5A + 2B + 2.75) = 4.250 900 2.101.625 (2.080 270 4 2. B. given original parameters = 184.625 +1 X (31.220 1.023 b) The value of t form tables exhibit 18 degrees of freedom is 2.890 1.250) 55 = 184.200 variable costs Direct labour 1.5 1.080 Variable overheads 1.500 Workings 2 3 Selling price 5.050 3.810 Total variable costs 4.440 Labour hours Direct labour costs hourly rate Direct materials Direct material costs Rate per Kg QUESTION THREE a) EOQ = 2AP = S 2(1.75 ± 0.400 7.810 1.101)0 implies a confidence interval form 1.625 + 0.800 2.9 units c) d) .1875 i Original decision.250 Direct materials 1.25 + 2.5C+ ≤ (hours) 2000 GA + 4B + 7C + ≤ (kilograms) 20.1 (31. 2.260 2 be B 3 be C Objective function (Z) MaxZ = 450A + 1440B + 1980C Constraints: Answers . 5A + 2B ≥ 0 (N0n-Negativitiy) (Shs. C.350 900 1.620 270 6 1.9 ≈ 185 units 4. C = 1.98 .49 184. optimal decision would provide total cost of iii Given the original decision instep (i) and the alternative parameters in step (ii).9(4.Comprehensive Mock Examinations 261 ii Alternative parameter values Shs.375) = 742.50 and 4.9 2 ____ iv Cost of prediction error (ii) – (iii) –2.375. compute the financial result.250 (50) + 184. 8m) 0 4m 5 yrs time 3.262 QUESTION FOUR Payoff 10% years time 8 million 30% 4 years time 5 million 60% 5 years time 3.12m 0.72 m 0 0 0 Decision Wait for one year and then delay for one more year then develop for expected pay off of Shs.Mocks 140 4.2 m 0 Successful 0.7 4.72 m .2m Abandon 1.11 m Developed now 1.72 m Wait for one year Abandon 1.2 million Answers .4m) Abandon 3.72 m Delay further By one year Successful Develop (1.3 0 (2m) (1.36 Develope Unsuccessful 0.9 Unsuccessful 0.5 Successful 2.1.1 O Abandon 10 4 m 4 yrs time 3 1 * 3 0.3 0.22 m 0.5 Successful 0.8 m 3.6 5m 3. 6 Total = 0.500/Rockets .3 P(market in 5 years time) = 0.280.000 2 Price of the Rockets = 4.500 Fixed costs = 1.650.4150375 + 1 OR 3.800.500 x 50) 151.000 x 8)-0.000 3.000 c) Average hours f or 8 rockets Y8 = 400.4150375 + 1 Y24 = 400.500 4.037.000.000 (32)-0.000 =Shs.6) = 1 3 QUESTION FIVE Yx = ax b +1 wher e a = 400.600.000.000.625 Variable overhead (3.3 ÷ (0.650.875 Fixed costs Total costs Profit mark up ¼ .600.4150375 Log 2 263 a) Yx = Y32 Y32 = 400.350.037.Comprehensive Mock Examinations Workings P(market in 4 years time) = 0.1 = 1 3 1.145.500 x 150) 455.000 hours = 1.00 = 1.500 b) Quotation Material (40.4150375 + 1 = 400.000 24)-0.75 = −0.500 – 1.5849625 = Shs. “000” 1.000 (32) 0.037.000 Direct labour hours ( 3.312.000 Shs.037. x 32) 1.000.3.3 + 0.162.687.487.9 * 0.350.000 hours Log of (learning curve important rate) b= Log 2 = Log 0.500 hours = Shs. Mocks .264 32 Answers . 000 Fixed overhead (1.500) Profit (Loss) 1.162.000 Direct labour (1.000 227.500 .000 (40.500 x 150) 253.500 (1.350. “000” Shs.Comprehensive Mock Examinations 265 Draft of Estimated Income 1st year 2nd year Shs.390.312.375 Fixed overhead 800.5 x 2} 1.000 x 8) 320.125 Variable Overhead (1.097.687.687.390.500 x 50) 84. “000” Sales {145.000 x 50) 67.340.312.000 x 24) 960.5 x 24} 3.487.500 {145.000.000.000) (2.000 800.000 x 150 202.500 (1.500 Less: Material (40. 4 200.000 192 P(25) 0.2 0.4 108 0.02 72 42 576 1.000 P(25) 0.4 0.Mocks COMPREHENSIVE TEST 4 QUESTION ONE a) Demand Machine intensive (18) 0.16 96 0.4 Shs.4 0.2 0.2 250.266 Answers .000 168 P(25) 0.4 0.16 112 16 36 P(23) 0.12 36 36 Selling price Joint Labour intensive probability Shs.08 88 28 128 P(23) 0.3 150.4 84 300. ‘000’ 0.06 36 P(20) 0.08 88 0.1 P (23) 0.4 0.08 0.04 24 0. ‘000’ (18) P(20) 0.000 120 0.12 P(20) 0.04 104 64 P(23) 0.126 .04 60 P(25) 0.2 P (20) 0.2 0.4 0. 08 + 0.33332 1.000.04 + 0.6666 1.88 machine intensive = ( 1 – 0.08 + 0.04 + 0.666 σ Critical path B –D – E – G – H – J – K.000 (i) (ii) (iii) (iv) Constant demand Constant variable.33328 0.04 + 0.16 + 0.1.126.16 Machine intensive = 0.08 + 0.04 + 0.04 + 0.16 + 0.12) = 0.08 + 0.6666 0. fixed cost Constant selling price Government legislation QUESTION TWO a) M = 0.52 c) d) The best production method is machine intensive with the highest expected profit of Shs.000) Labour intensive = 0.000 Actual cost = 44 x 10.000 .1.1.33332 1.16 + 0.000 Machine intensive= Shs.06664 0 0. Project duration = 44 days Budgeted cost = Shs.12 + 0.8333 (P – O) A B C D E F G H I J K b) M 3 13 6 4 3 4 11 3 2 5 5 0.000 = 440.08 + 0.000 267 (ii) P(Break even) = 0. 576.08 + 0.126.Comprehensive Mock Examinations Profit = (Selling price – Variable) Demand – Fixed cost b) (i) Expected profit Labour intensive = Shs.06 + 0.33332 0 0.04 = 0.33332 1.88 (iii) P(Profits at least Shs.02 = 0.500.08333 (4L + O + P) σ = 0. Mocks The project can be implemented within the budget since the budgeted cost is greater than the actual cost.268 Answers . . Comprehensive Mock Examinations 269 44 9 K 5 39 39 J 5 8 34 34 7 H I 3 31 31 2 6 G 11 20 20 5 E 3 17 C 6 17 F 4 4 0 4 13 13 2 2 14 3 H 3 B 13 0 0 I . 666 0.3) = -300 (U) -4.001 x Shs.000 = .270 QUESTION THREE The difference in quantities were: Material Detailed computati on 0.50 M Variable expenses 61.806 (U) Z + 1.668 Sales = 87.666 Yield variance X – 5.666 0. X 12.000 24.75M Fixed Expenses 17.000 (U) 27.24.M 17.3 = .667 x Shs.2 x 66. (30 – 24.00 (F) Y (30 – 31.224 (U) Z + 1.C x Sales C.5) Shs.333 .667 x Shs.000 x Shs.999 13.5) Shs.708 (U) Y – 4.97.405 (U) (Rounded) Price Variance X (21 – 18) Shs. X 24.3 = +24.3) = +18.000 (F) QUESTION FOUR a) Answers .333 66. X 39.5 x 66.000 (U) Z (24 – 28.24.300 (F) 210.17.5_= Shs.000 x Shs.001 x Shs.5 Profit 8.3 x 66.25 M BEP (sh) = = F.75M (10% of sales) Expenses 78.701 (F) Y – 4.000 = + 117.137.000 12.333.5 x 87.333 19.58. (21 – 24. (24 – 24.632(U) (Rounded) Mix variance X – 5.000 75.667 -4001 1000 -8.5 M Sh Sales 87.24.000 Difference -5.54.666 (1) Budgeted or standard Quantity of inputs 33.3 = .3) = -22.5 M Net profit 10% of turnover Fixed expenses = Sh.000 = .Mocks X Y Z (2) Actual quantity of Inputs 39.36. Comprehensive Mock Examinations [87.5 – 61.25] 271 . 75B + 15C – 2.C Cost of Error 66.5X .9 M 18.7M 8.C N.C C.75 .5 Profit Total Expenses Fixed Cost Variable Cost B E P (Sh) = F.272 b) Sales 80% of 87.5M 39.7.1 Actual 66.9M 7. materials and facilities to best advantage.42.M F.6M 18.7 = Sh.6 18.9M x 70 = 70 – 42 = Shs. b) (i) Let A = quantity of product K – A sold at split off point B = quantity of product K – B produced and sold C = quantity of product K – C produced and sold D = quantity of input X used Objective – max = 10A = 8.9 9.1.050M Predict 70M 42 28 18.250.9 M 42 M = 18.Mocks 60.75M Sales V.5M 8.C x Sales C.000 c) Prediction Assuming no change was made Sales projection Profit would be With Change Sales Variable Cost C.1 M Answers .9 7.M F.5 39. (v) Any other situation of combining labour.M 70 M 9.7 87.9M 26.9 26.P QUESTION FIVE a) (i) Determination of optimum product mix (ii) Determination of optimum machine and labour combinations (iii) Determination of optimum material mix (iv) Determination of optimum use of storage and shopping facilities. 1. D.1. X (ii) 075.000 (supply) -2x ≤ 0 (joint process) .5x ≤ 80.000) + 15(5.Comprehensive Mock Examinations NB: subject to 273 Coefficient of C price minus separable processing cost A C B A A.000 (Labour) ≥ 0 (Non-Negativity) Z = 10 (40.3x ≤ 0 (joint process) 1.000 (market) x ≤ 40. C.000) + 15(40. The maximum achievable contribution is therefore Shs.000 075. B.000 (market) ≤ 5.000) = Sh.000 +C 3C + ≤ 40. . 6 0.00 0 7 12.0 00) __(2.00 0) 6.0 00) ____(4.Mocks COMPREHENSIVE TEST 5 QUESTION ONE a) No.2 0.65 0.00 0) 10. of fish purchased Purchases 100 200 300 400 500 No.000 8.0 00) ____2.3 0.1 0.00 0) (2.000 6 24.3 0.9 1.0 0) ____8.00 0 (10.000 3 6.0 00) ____6.0 00 (16.00 cost 0) Net 4.00 0 (20. Balanc e c/f 100 300 100 100 300 RN 00 –14 15 – 34 35 – 64 65 – 89 90 – 99 Profit 4.000 profit 2 12.35 0.274 Answers .000 (4.15 0.000 .00 0 Less (12.0 cost of 00) sales Less deficit (2.3 0.2 0.1 DD 400 200 100 300 400 400 200 200 Sale 300 200 100 300 400 400 200 200 Cumulativ e 0.1 0.00 0 (14.0 00) ____2. of days 45 60 90 75 30 RN 73 23 09 51 83 81 20 31 Probability 0.00 0 (16.0 RN 0 1–2 3–5 6–8 9 Number of fish sold to consumers Demand 100 200 300 400 500 Day 1 2 3 4 5 6 7 8 RN 5 4 7 7 4 6 3 9 SS 300 300 400 400 300 400 300 500 No.000 2.00 0) Shortf all 100 - Total profits for 8 days Workings Days 1 Sales 18.25 0.9 1.1 Cumulativ e 0.00 0 8 12.000 (12.0 00) ____(6.15 0.3 0.00 0 (10.000 (6.00 0) 5 20.00 0) 4 18.000 2. of days 30 60 90 90 30 Probability 0. Comprehensive Mock Examinations b) Average profits = 10.1.000 = Shs.250 8 275 . (ii) If PA = PK =. then monthly sales = 1200 = 100 units 12 Africa 1’s monthly sales may be defined as 100 MA (i) Africa 1’s monthly profit ΠA = 100 M A = (PA – 400.Mocks If the annual sales are about 1200 per annum.000 b) The flow diagram includes a nested loop. a range of prices set by Kenya 1 will be generate. then MA = 0. then for every Shs.PA ‘Price steps’ 10.45 (iii)If PK > PA.276 QUESTION TWO a) Let PA = African 1 price for Miracle PK = Kenya 1 price for miracle. The first loop will be used to set Africa1’s price for miracle and for every price set by Africa 1.03 PA – PK 10.000).000 difference. Africa 1’s price grows by 2% These are PK .10. .45 – 0.000 (iv) If PK < PA MA = 0. MA = Africa 1 market share S = Africa 1 monthly sales ΠA = Africa 1 monthly profits Answers . 02 10.000 ( ) Print Market share and profit Set a new Kenya 1 price Yes Set a new miracle price No Yes END .45 – 0.03 MA = 0.45 PA – PK 10.000 MA = 0.45 – 0.000 PK – PA ∏ =100MA P A − 400.Comprehensive Mock Examinations 277 START Set price For miracle Generate Kenya 1 Price for Miracle PA = PK Compar e PA& PK PA < PK MA = 0. 131.50 Total relevant cost using units used.3489) (342) 2 EOQ = 2 x 2.3449 + ½ x 211.7584 units.Mocks QUESTION THREE a) EOQ = 2 x 2.3449 = 53.3449 units EOQ with Sh. 2000x3819 211.3449 (342) 211.819 342 = 211.000 x 3.881) + 1 (24.7584 units Total relevant cost with accurate EOQ at 115.50. 156.000 (3. = 2000x3819 115. 24.727 .940 Optimal Cost = Sh.10 b) TRC = D Co + ½ QCL Q = 2.3449units Current EOQ = 211.72.278 Answers . = 2x2000x381 9 1140 = 115.32397 342 TRC Optimal = _ 2.3449 2 c) TRC Actual = 2. = Sh.000 x 1.50 + 228 = Sh.606.881) + 1 (148.819) + 1 (211.32397) 342 148.60 Cost of prediction error ∴ = Total relevant Cost with actual EOQ EOQ Total relevant cost with + Sh.870.280 (1.000 (1.881 = 148.7584 + ½ x 115.32397 2 =Sh.606. 1140 storage cash.3449 x 1140. 228 = 156.964.964.000 211.60 – 131.7584 x 1140 = Sh. 154.180 211.000 x 50% x 100 4.3.131.692.180 2 Optimal Costs = = Sh.3449) 1. (i) Tennis = 1.965) – 228 = Shs.819 =115.414 of second year.727 = Sh.00 .50 = 40% x 615.307.5% Overall contribution ∴For Tennis For Squash = 50% x 615.819) + 1 (211. QUSTION FOUR a) Lacquet Sports Percentage.213 279 d) The cost of prediction error will also change to reflect the errors in other areas e) Cost of prediction errors Cost Incurred = 2.75837 ) 1.385 = Shs.000 x 3.385 = Shs.000 0.3499 2 = Shs.607 – 131.500 Total Contribution Margin (ii) Overall break-even-points Fixed Costs margin = 200.965 The cost of not charging at beginning = (156.000 x 40% x 100 Contribution = = 12.000 Squash 16% 2.000 x 10% x 100 4% 2.385 = (shs) _____ 32.500 Badminton = 1.24.615.819) + 1 (115.000 115.607 EOQ Optimal = 2 x 2.940 – 50.Comprehensive Mock Examinations Cost of perdition error = 53.156.000 (3.325 = Shs.75837 1.75837 (3.264.140 2.5% = Total = = 1. 00 (iii) Profit = Sales (IMR) – Fixed Cost = (700.000 2) Buy at Shs.800 – (4.000 x 0. CVP Analysis Limitations. Risk an uncertainty are ignored and perfect knowledge of cost and revenue function is assumed. Labour and all the components of variable overheads) Vary in accordance with the same activity indicator.538.500 b) i.31. the effect of learning curve. CVP analysis makes the assumption that changes in the level of output are the sole determinants of cost and revenue changes. iv.800 This case illustrates how external market prices may not be automatically lead to optimal decisions for the company as a while. Extra discounts. It makes them inappropriate where the time scale spars several years.800 price is accepted. Variable costs and sales are unlikely to be linear. viii. Fixed costs are likely to change at different activity levels (A stepped fixed cost scope is probably the most accurate representation). In this question. v. ii. even in a non-transfer pricing content.31.000 at Shs.31. It is assumed that the firm is a price taker and a perfect market is deemed to exist. (1) Buy at Shs. QUESTION FIVE a) Transfer Pricing The cash flows are diagrammed below for both alternatives 1) Buy at Shs.000 1. 61.500 – Outside supplier .27. It is assumed that revenues and all forms of variable costs (Materials.385 = Shs.50 Shs. there is a net advantage of Sh.000 = Shs. vi.280 Answers .200 if the Shs.500) = Shs.325) – 200. special price contracts and other similar matters make it likely that the variable costs and revenue units are some form of curve rather than a straight line.Mocks For Badminton = 10% x 615. The charts depict relationships which are essentially short-term. This is likely to be a gross over simplication in practice although volume changes of course do have a significant effect on and revenues.385.30.1. This is an over-sight on most realistic situations etc.30.800 Cash flow for Firm as a whole Shs. vii.800 Masimbo Ltd (2) Buy Shs. It is assumed that either there is a single product or a constant mix of products or a constant or mark-up on marginal costs.28.30. iii. overtime payments.31.615. 300 ____ 19.000 12.31.30.500 Cash outflow has Firm as a whole Majimbo Ltd Buy outside @ 31.500 Outflow of Y Cash outflow has firm as a whole (2) Sh31.800 would have been wrong.500) _____ 22.800 (22.800 Outside (2) Shs31.1.800 more of it’s goods.31.800 (31.Comprehensive Mock Examinations 281 X (1) Shs. However.800 (1) Sh22.500) Outflow of X Contribution ½ (31.800 (2) Sh. the problems of managerial effort and autonomy well probably become more troublesome.500 Another Outside supplier The conflicts among the two criteria for decentralization.500) ½ (4. if the system is not designed to give X some credit for its self sacrifice. NET EFFECT ON CASHFLOWS Buy inside @ 31. The cash flow are diagrammed for both alternatives.300 3.800) 9. Z will also benefit.500 NB Z (2) Shs.000 (2) Shs.800 – 22.31.800 Buyer X (1) Shs. The firm as a whole will benefit if X pays Shs.4.800.31.500 – 1.500 Outside supplier . Goal congruence says that X be instructed or induced to pay Shs. b) The decision to transfer at Shs.1.500 Y (2) sh22. 22.500 + [ (31.80 .800/= contribution: Y (31.800 – 22.500 Z (1) (2) Buy inside Buy outside (1) NET EFFECT ON CASH FLOWS Buy inside (2) @ 31.500 .500 – 1. The minimum transfer price should be Outlay cost to point of transfer + opportunity cost for the firm as a whole.000 + 12.500) Sh + 3.500) ] = Shs.800 – 22.800/= - Outflow of Y 31.300 Cash outflow for Firm as a whole -19. 22.Mocks (2) sh4.22.800/= .282 Answers .500 outflow of X Buy outside @ 31.34.300 Z (4.500) Sh + 9.500) + (4.500 cash outflow for firm as a whole c) The general rule will work correctly.500 – 1. 980 1. The management Accountant recently attended a seminar on activity based costing and decides to consider using it at SPL Agencies.00 0 300 MPS 1. The management Accountant meets with all the senior manages and other middle level managers. They buy from pharmaceutical companies and resells to each of three different markets. Hours of shelf-stocking Each customer purchase order consists of one or more line items. Store deliveries 4.90 0 30.000 SPL Agencies has been using gross margin percentage {(Revenue ÷ Cost of Goods sold)÷ Revenue}to evaluate the relative profitability of its customers groups (distribution outlets). . these individuals agree that there are five key activity areas at SPL Agencies.50 0 10. • • • General supermarket chains (GSC) Drugstore chains (DC) M and P Single-store pharmacies (MPS) The management Accountant of SPL Agencies reported the following data for August 2003. 4. Cartons shipped to a store per delivery 5. Average Revenue per delivery (shs) Average cost of goods sold per delivery (shs) Number of deliveries GSC 30.Revision Questions and Answers 283 Part IV: Revision Questions and Answers MANAGEMENT ACCOUNTING Questions QUESTION ONE SPL Agencies specializes in the distribution of pharmaceutical products. 5. 1. Cost Driver Purchase orders by customers 2.800 1. 2. Line items per purchase order 3.00 0 120 DC 10. Activity Area Customer purchasing order processing Line item ordering Store delivery Cartons shipped to stores Shelf-stocking at customer store 1. Generally. A line item represents a single product (such as Actifed Panadol Tablets). 3. The August 2003 operating costs (other than cost of goods sold) of SPL Agencies are Shs 301. SPL Agencies staff stack cartons directly onto display shelves in a store.280 line items 1.1 21. Each product is delivered in one or more separate cartons. These operating costs are assigned to the five activity areas. there is no charge for this service and not all customers use SPL Agencies for this activity. 5.840 71. 2.240 301.080 Other data for August 2003 include the following: Total number of orders Average number of line items per order Total number of cartons shipped per store delivery Total number of store deliveries Average number of hours of shelf – stocking per store delivery GSC 140 14 300 120 3 DC 360 12 80 300 0.000 orders 63. (11 marks) (Total: 20 marks) QUESTION TWO SIMTON Limited has been operating a standard cost system and has accumulated the following information in relation to variances in its monthly management accounts: .080. Comment on the results.000 2. Customer purchase order processing Line – item ordering Store deliveries Cartons shipped to stores Shelf stocking at customer stores Required: (a) Compute the August 2003 gross – margin percentage for each of its three distribution markets and SPL Agencies operating income.6 MPS 1. 3.284 Questions Each store delivery entails the delivery of one or more cartons of products to a customer. (c) Compute the operating income of each distribution market in August 2003 using the activity based costing information. Currently.000 cartons 640 hours 1.000 10. The costs in each area and the quantity of the costs allocation base used in that area for August 2003 are as follows: Activity Area Total costs Total units of cost August 2003 allocation base (shs) used in August 2003 80.500 10 16 1.000 76. 4. (b) Compute the August 2003 rate per unit of the cost allocation base for each of the five activity areas.420 store deliveries 76.000 0. Out of category B. iii.250 per month and the company’s policy is to assess the present value of such costs at 24% per annum for a period of five months. The cost of investigating averages is Shs 3. of 64 36 100 ii. iv. Variances fall into two categories total variances Category A: Not worth investigating B: Worth investigating % of No. The average size of any variance not connected is Shs 5. . but the remainder has continued.500 and that of connecting variances averages Shs 5.Revision Questions and Answers 285 i. connective action has eliminated 70% of variances.500. 000 A. to present the position if an investigation is.000 These volumes are believed to equal the market demand for these products.50 100 80 60 90 330 20. (i) Carried Out (4 marks) (ii) Not carried (4 marks) (b) Recommend.50 437. (4 marks) (Total: 20 marks) QUESTION THREE Chemex limited manufactures three garden furniture products A B and C.286 Required (a) Questions Prepare two decision trees. The sales director has already accepted an order for 5. whether or not the company should follow a policy of investigating variances as a matter of routine.000 50 40 30 45 165 40. Explain briefly why you have suggested it. which if not supplied would incur a financial penalty of Shs 20. with supporting calculations. The products are made from a specialist timber. These quantities are included in the market demand estimates above.000.a 15. 1. The budgeted unit cost and resource requirements of each of these items are detailed below.000 150 100 75 112. (2 marks) (c) Explain briefly two types of circumstances that will give rise to variances in category A and two to those of category B.500C. .000 square metres per annum.000B and 1. Timber cost Direct labour cost Variable overhead cost Fixed overhead cost Total cost Budgeted volumes p. A memo from the procurement manager advises you that because of a problem with the supplier it is to be assumed that this specialist timber is limited in supply to 20. (6 marks) (d) Mention any one variation in the information used that you feel would be beneficial to the company of you wised to improve the quality of the decision making rule recommended in (b) above. The cost of the timber is Shs 20 per square metre. The fixed overhead costs are attributed to the three products on the basis of direct labour hours. The labour rate is Shs 40 per hour. which should be paid per square metre in order to obtain extra supplies of the timber. (10 marks) b) Calculate and explain the maximum prices.Revision Questions and Answers The selling prices of the three products are: A B C = Shs 200 = Shs 500 = Shs 400 287 Required a) Determine the optimum production plan and state the net profit that this should yield per annum. (10 marks) (Total: 20 marks) . 00 per hour). 80% of the extra material used is due to purchasing from the cheaper source. which was introduced. which may be considered as a representative of future periods. The executive towel is made in a conversion process in which the variable conversion cost per product unit of output is estimated at Shs 12. 4800 hours of conversion process time at a variable cost of Kshs 20. The conversion process manager is deemed responsible for material usage and conversion process efficiency and expenditure variances. (5 marks) ii. i. 2.50 per square metre is used to produce 8. (5 marks) It has been established that the reasons for the variances for the period ended 31 December 2002 are as follows.time basis. whether decisions should be based on: 1. ii. Production capacity is available in order to produce in excess of 5. 000 units of the executive towels. Suggest.50 (a half hour at Shs 25.000 units of the executive towels if the demand dictates. The actual events for the period ending 31 December 2002. . The variances over which each manager has control or The effect of each material cost variance and conversion cost variance i.00 per square metre on a just-in. are as follows: 27. i. giving your reasons. Raw material is purchased at Shs 5. ii. Required: Calculate standard cost variances for material usage and price and for conversion process efficiency and expenditure for the period ended 31 December 2002. A charge in the processing method was implemented at the start of the period. The purchasing manager has the responsibility for the servicing of raw material.000 units of the executive towels. The purchasing manager has made the decision to0 buy from a cheaper source.288 Questions QUESTION FOUR Tumbo Limited makes and sells executive towels to which the following standard information relates: i.00 per hour is used to a achieve the output of Shs 8. The balance off extra material usage is due to the amended processing method.000 square metres of raw material purchased at Shs 4. . (6 marks) Prepare a report which discusses ways in which the alternative decision making focus in each off sections (a) and (b) of the question has contributed to a change in decision making strategy by the company. the balance of extra hours id due to the change to a cheaper material source. (4 marks) (Total: 20 marks) ii.Revision Questions and Answers ii. Prepare a schedule of costs for the four alternative strategies. 289 60% of the extra hours used is due to the ammended processing method. which incorporate different combinations of existing and amended material sources and conversion process methods and hence determine the profit maximizing strategy. Required i. it is expected that the following costs and revenues will apply for the function: Shs. Based on past experience and current prices and quotations. Costs 700 2. there is a concern that an economic recession may adversely affect both the number of persons attending the function and advertising space that will be sold in the programme published for thee occasion.290 QUESTION FIVE Questions Kenya Charity Organization has been holding annual dinner and dance for the last 100 years with the primary intention of raising funds. Raffle shs5 per person Photographs shs1 per person Programme advertising is shs70 per page A sub-committee formed to examine more closely the likely outcome of the function discovered the following from previous records and accounts: No of tickets sold 250 – 349 350 – 449 450 – 549 550 – 649 Total No of programme No of past occasions 4 6 8 2 20 No of past Average revenue from Dinner and Dance Hire of premises Band and entertainments Raffle prices . This year. Price if tickets shs20 per Average revenue from.800 800 Photographer 200 Food at shs 12 per person (With a guarantee of 400 Persons minimum) Programme: Revenues person Dinner and Dance A fixed cost of shs 2000 Plus shs5 per page. .Revision Questions and Answers pages sold 24 32 40 48 occasions 4 8 6 2 20 291 Several members of the sub-committee are in favour of using a market research consultant to carry out a quick enquiry into the likely number of tickets and the likely number of pages of advertising space that would be sold for this year’s dinner and dance. Required i. but lack of it may results in unrealistic plans. (b) Recommend. The cost classifications which the management accountant should use or ignore. Your answers should be in the context of strategic planning goal of sustaining competitive advantage at minimum cost through speedy delivery of quality products to clients. discuss whether a company should make quantities of a component used in a manufacture of a product or buy in the component from an outside supplier or out source. (4 marks) List and comment briefly on examples of the cost implications of each of the factors underlined in the above statement which may occur from lack of relevant and appropriate operational planning.292 Questions Required: (a) Calculate the expected value of the profit to be earned from the dinner and dance this year. Poor communication and inadequate performance measurement. and ii. Factors which may affect the behavior of costs and hence the accuracy of the cost analysis and the relevance of the decision making. ii. Required In the context of the above statement. whether or not the Kenya Charity should spend Shs 500 on the market research enquiry and indicate the possible benefits the enquiry could provide. (Total: 20 marks) QUESTION SEVEN A summary of additional information relating to the above points is as follows Units Probabil ity Advanc e order (kshs) Consvers ion Discount Conversi on premium . with relevant supporting financial and cost date. (6 marks) i. which should be incorporated in each of strategic planning and operational planning. inconsistent goals. State key features or characteristics. (10 marks) (Total: 20 marks) QUESTION SIX a) Decision-making situations under short-term conditions require consideration of. (10 marks) b) Coordination between operational and strategic planning is very essential in any organization. 00 1.0 00 12.0 00 8. The estimated cost structure of the product per unit is as follows: • • • Raw materials. (9 marks) (Total: 20 marks) Bottom Limited identified a market for a new product at a selling price of shs 300 per unit. The level of demand for the product will not be know when the advance order for special ingredient B is entered into.3 0. Using figures from your answer to (a) as relevant.00 4.5kg @ Kshs.5kg Other variable costs.Revision Questions and Answers (kshs) - 293 (kshs) - High Medium Low Special ingredient B order discount or premium cost on conversion from: Low to medium Medium to high Low to high Medium to low High to medium High to low 15.50 1.00 12. medium or low – which correspond to the requirements of a high. ii.5 0. 60% of selling price Bottom Limited must place an advance order for the coming year with the supplier of special ingredient B.00 9. It intends to enter into advance contract for special ingredient B for the coming year at one of 3 levels.00 0 0.00 Required: (a) Prepare a summary which shows the total budgeted contribution earned by Botton Limited from the new product for the coming year for each of the nine possible outcomes which may result from the above data.00 2. 5 per kg. high. indicate the advance level order size which should be chosen for special ingredient B and comment on the management attitude to risk where decision is based on each of the following criteria: i. Special ingredient B 1. It has yet to quantify its estimate of the volume of the market in production units.00 14. (11 marks) i. 8. medium or low of demand for the product. Maximizing expected value Maximax Maximum iii.00 3.2 10. A set of . which should be chosen for special ingredient B and comment on the management attitude to risk where decision is based on each of the following criteria. Required:  Prepare a summary. which shows the total budgeted contributions earned by Bottom limited from the new product for the coming year for each of the nine possible outcomes.  . a penalty payment. medium or low. However.294 Questions probabilities have been estimated by management as to the likelihood of demand for the product being high. premium in excess of the original price of supply is payable for the total quantity of special ingredient B which is purchased. which may result from the above data. the following points should be noted: • • Where the advance order entered into for special ingredient B is lower than that required for the level of demand which is actually achieved. Where the advance order entered into for special ingredient B is in excess of that required for the actual level of demand achieved. The amount of special ingredient B actually supplied will always be equal to the actual demand level. because of the effects of unidentified volume on supplier costs. a discount from the original price of supply is allowed to Bottom Limited for the total quantity of special ingredient B which is purchased. Using figures from your answer to (a) as relevant indicate the advance level order size. requires units of the product available from Badi Division as input to a product. (iii) Deciding whether or not to accept a contract. Required: Prepare a draft report in a format that is presentable to the senior management team of Kwaree Group limited. This outside supplier can supply 75% of Lewi Divisions requirements. which utilizes 80% of its production capacity. Badi Division produces a single product for which it has an external market.” The report should incorporate references to specific environments/organization type(s) and examples of the management accounting tools that would be of use. (14 marks) (b) The management accountant may make use of opportunity cost in the following situations: (i) Operation of a standard cost system. (6 marks) (Total: 20 marks) QUESTION NINE Kwaree Group limited has recently recruited you as the Accounts manager. Both are components that have a wide range of industrial applications. which will affect the likely achievement of group profit maximization from the sourcing decisions made by Lewi Division in the above situation.Revision Questions and Answers 295 QUESTION EIGHT (a) Badi Division is part of the Dendi Group. Lewi Division. Required: Discuss aspects of transfer pricing principles and information availability. You have been contacted to help in preparing a report entitled “How to design an effective management accounting information system. (Total: 20 marks) QUESTION TEN Tobil Limited produces two products namely Winfil and Bootfil. The outside source may wish to quote a higher price of Lewi Division only intends to take up part of its product availability. Tobil Limited share of the market for winfil is insignificant but is one of . Required: Discuss the relevance of the use of opportunity cost in each of the above applications. Lewi Division has a potential source of supply from outside the Dendi Group. which is part of the Dendi Group. which will be sold outside of the group. (ii) Setting transfer prices from one division to another. Lewi Divisions requirements are equal to 40% of Badi Divisions production capacity. 5 per Kg and labour costs Shs.625 Labour 54. Tobil Limited is unable to influence these prices. Questions Winfil is a long-established The market price off winfil is shs320 and that of Bootfil is Shs.5 Kgs of material 20 35. Calculators sold 30 40 50 60 70 80 90 No of days Level of sales occurred 10 20 50 30 15 5 5 135 . 7. The company’s economic order quantity is 1. 10. The resource requirements for producing one unit of each of the two products are: Products hours Winfil Bootfil Process hours 10 7. 237. Solomon’s Limited works a five-day week for 48 weeks a year.000 labour hours.75 Materials cost Shs. The lead-time is 5 days guaranteed and the cost of holding a calculator is sh20 per year. product and Bootfil is a new product. The estimated demand is 12.200 calculators. Required: Advise the company of output combination of winfil and bootfil that will maximize its profit in the coming year. (14 marks) Draft a memorandum suitable for the circulation to Tobil limited board of directors explaining the commercial limitations of the model you have used in your answer in part (a) above. During the coming year the company will have the following recoveries available to it.296 a limited number of suppliers of bootfil. The demand figures have been analyzed for the last 27 weeks.5 18. (Support your advise with full financial analysis).000 process hours.50. Other costs are constant. (6 marks) (Total: 20 marks) QUESTION ELEVEN Solomon’s Limited sells an electric calculators but finds that it runs our of stock on occasions and thus loses the contribution on missed sales. 3.000 Kgs of material and 15.000 units per year which can be purchased at shs100 each and sold at Shs 155 each. 8 per hour. The re-order level at which the company would meet it’s 95% requirement. A1.no bid. Company B is considering three alternative courses of action: B1.bid only on the hardware B3.500 calculators and does not carry any safety stock because of the guaranteed delivery time. then thee expected payoff to company A is a loss of 3 (A gain of 3 to Company B). If company A bids a3 and Company B bids b2. The annual stock-out costs of using the present re-order level. then the expected payoff to Company A is again of 2 (units of utility). We estimate thee payoffs in all other possible alternatives and summarize the information in the table below. Ideally it wishes to satisfy customers on average at least 95% of the time whilst minimizing the associated costs. Player B B1 A1 A2 Player A A4 Required: A3 -1 2 -2 -2 1 -1 1 -3 0 b2 3 3 2 b3 .bid only on the hardware A3. Company A is considering four alternative courses of action. If Company A bids a1 and Company B bids b1.Revision Questions and Answers 297 At present Solomon’s Limited uses a re-order level of 2. Company B is going to have a loss of 2.bid on both B2.no bid. (5 marks) (Total: 20 marks) QUESTION TWELVE Two companies are considering their bid strategy for installation of a computer center in a new university.bid only on the software A4. Required: 1.bid on both the hardware and the software A2. (15 marks) 2. c.3) (-7.18) C2 (0. (4 marks) Questions The labour contract between Uchumi Company and its workers is about to expire and a new one has to be negotiated. A quantity. -21) (-2.3) (-8. The need for replacement pullets is relatively constant and the cost associated with the placing and receipt of an order is Shs30.10) c3 (-1. The inventory cost policy that Minwa Tods ltd has traditionally employed is to charge 22% of the purchase cost as the annual inventory holding cost for any item in the inventory.15) Required: Determine the solution of the game if: a. -1) (4. The Company has similar strategies (c1 to c2) the payoff matrix is as follows: Company U1 U2 U3 U4 C1 (5.4) (-4. The average yearly requirement for the past 3 years has been 6.298 a.18) (3. Co-operation is not allowed. (3 marks) Solve the problem. b.000 or more pullets at a time.12) (-7. (4 marks) (Total: 20 marks) QUESTION THIRTEEN Minwa Tods Limited purchases a large number of wooden pullets for use in the storage and transportation of its products to replace those cost or damaged in transit. Find whether a pure-strategy solution exists. The standard price charged by the major manufacturing company is Shs16 per pallet.9) (-12.2) c4 (-2.000 pullets. which can be applied realistically to this year as well. (5 marks) The Company and the union can negotiate. -9) (13 -25) (-4. -2) (1. (4 marks) What are the limitations of a game theory in business applications. Show that the discount is not financially . b. -6) (7. (6 marks) c) The manufacturer offers a discount of 4% if Minwa Tods order 4. From previous wage bargaining the union have certain strategies from the most hardline (u1) to the most compromising (U4). Required: a) Determine the optimum order quantity and the consequent time between orders (3marks) b) Describe the assumptions you have made in part (a) and assess their likely validity within the context of this question. it’s known that capacity for next week for machines Y and Z is 6. (5 marks) (Total: 20 marks) QUESTION FOURTEEN (a) In transportation problems the following difficulties do occur.unique optimal solution. recommend the optimal .) of each machine are given in the following table: A 24 28 22 Products B 26 26 20 C 22 30 26 X Machines Y Z Furthermore. The unit costs (in Shs. the unit cost of these products varies depending upon the machine used.Revision Questions and Answers 299 beneficial to Minwa Tods. degeneracy. inequality of supply and demand and non . If the production manager would like the minimum cost schedule to have the smallest number of changeovers of production on machines. (6 marks) If this optimal solution is not unique. Required: (i) Explain the underlined words. (3 marks) (a) Yoloks molders limited had orders to be completed next week for three of its products A. What percentage discount would be required for Minwa Tods to order 4. (3 marks) (ii) Explain how the transportation algorithm is adapted to overcome the above difficulties. B. describe all other production schedule with the minimum cost.000 units and for machine X is 4.000 or more pullets at a time? (6 marks) d) State the effect on the company’s inventory policy described in (a) if the supply of pullets has a variable lead-time. Use the transportation model to find the minimum cost production schedule for the products and machines. ii. Determine minimum cost. However. and all thee 3 can produce each of the products at the same production rate.000 units. Required: i. C as given the table below: Product A B C order units 8000 4800 2000 There are 3 machines available for the manufacturing operations. 000-5.000-2.2 40 recovered % This process takes a further three months before payment is finally received. payment is received at the end of: .1 You may assume t6hat these is no relationship between the size of the account when its settled and the proportion recovered and that all accounts are settled on the last day of the month.4 0. which is ultimately recovered varies as follows.5% per month.2 0. If the amount owing exceeds shs 1 million.000. at the end of month four.000 500. Proportion Probability Upto 0.1 0.000 Probability 0.e.000. Size of account (Shs) Upto 200. the size of the accounts issued by Chopa is shown by the following distribution. Any accounts still not paid after three months are dealt with in one of two ways.60 40. Experience has shown that 80% of all accounts are settled within one month and 70% of the remainder is settled during the second month after the customer has been sent a standard overdue account letter of those accounts still unpaid after two months. for any particular account.3 0.000 200. marks) QUESTION FIFTEEN Questions (8 (Total: 20 marks) Chopa manufacturers limited operate 30-day terms for all its customers. Required: What is the probability that.000-1. the debt is sold to a debt collecting company in return for 50% of the sum involved which is obtained after a further month i.000.62 0. 50% are settled during the third month after a ‘final demand’ has been sent. In recent months.000 1. the Company institutes legal proceedings to recover the money.000. the proportion of the original sum owing.000. The Company’s cost of capital is the equivalent of 1. Taking into account the legal costs involved.3 0. If the amount owing is less than Shs 1 million.1 40.300 solution.000 2.000-500.61 40.3 0. (d) Account 1 8 8 7 5 7 (e) Account 2 9 9 8 2 9 (10 marks) (Total: 20 marks) .9422 5 0.9563 4 0.9283 6 0.Revision Questions and Answers (i) The second month (ii) The third month (iii) The fourth month (iv) The sixth month 301 (5 marks) What is the expected present value of a new account which has Shs 2 million outstanding.9707 (5 marks) Show how the system as a whole may be simulated by using the following random digits to determine the present value of two simulated accounts. Month Factor (c) 1 2 3 0.9145 0. Monthly Discount factors are.9852 0. 840 = Sh 3 per line item.000 (v) Shelf-stocking at customer stores = 10.500 GPM (MPS\0 = 1980 – 1.8% 10.00 0 438.00 0 180.280 (iii) Store deliveries = 71.980 Operating Income For Period Ending August 2003 Gross profit (GSC) = (30.00 0 301.000 Total Gross profit Less operating cost Operating profit 108.1% 1.000 .500 – 10.800 X 100% = 9.500 – 10.000) x 300 Gross profit (MPS) = (1.92 0 b) (i) Customer purchase order processing = 80.900 GPM (DC) = 10.000 = Shs 50 per store delivery 1.420 (iv) Cartons stopped to stores = 76.000 X 100% = 2.000 = Shs 1 per carton 76.000 X 100% = 4.000 (ii) Line item ordering = 63.9% 30.000 180. 21.000 = Sh 40 per order 2.000 150.00 0 150.08 0 136.980 – 1.240 = Shs 16 per hour 640 c) Operating income based on ABC For the period ending August 2003 Gross profit as in (a) 108.900 – 30.800) x 1.000) x 120 Gross profit (DC) = (10.Answers 302 Answers QUESTION ONE a) Gross profit margin % = Revenue – cost of sales x 100% Revenue GPM(GSC) = 30.900 – 30. item ordering (iii) Store deliveries (iv) Cartons shipped to stores (v) Shelf-stocking at customer store Operating profit (loss) 303 (5.746 (wl) (continuing variance) = Shs (i) Workings: Present value of Shs 5. 0.36 x Shs.64 No investigation Worth investigating but not done .760 (14.a (Shs 5.64 Investigation undertaken Costs = Shs 3.000) Comment Drug-store is performing better than the other distribution chains with an operating profit of Shs 80.500) Fault eliminated 0.880) (6. The expected cost of the investigation is carried out as: Shs3.5.760.250 for 5 months @ 24% p.600) (7.000) (24.000) (5.400) (12.960) (15.3 x 24.000) (16.000) (45.250 x 4.500 With Investigating and Correspondence taken (shs.000) (36.760 (60.153.000) (50. QUESTION TWO SIMTON LTD (a) (i) Not with investigating 0.760) 48.36 0. Decision tree if an investigation is not carried out. 5.000) (1.500) conctrine action + 0.500 + (0.7 Fault eliminated 0.7135) = Shs 24.880) 80.Revision Questions and Answers Less operating costs (i) Customer purchase order processing (ii) Line.36 x 0.000) (2.600) 5. 5.746 = Shs 8.500 correction cost applies to all variances that the initial investigation indicates are worthy of further investigation.3 It is assumed that the Shs. QUESTION THREE (a) Chemex Limited Timber required per unit (m2) Budgeted sales volume (units) Total timber required (m2) A 2. 3.36 The expected cost if no investigation is undertaken = 0.33 32. The expected cost of investigation is Shs 8. (100÷20) 15. 150÷20) 20.00 Timber requirements 2.50 5.7135x) = 0. 50÷Shs.500 and Shs. Compared with an expected cost if no investigation is undertaken of Shs 8. It would therefore be appropriate to determine the value of variances which justify investigation.36 x 4. the befits from investigation are Shs 750 per variance. d) Examples of category A variances include: e) The above analysis assumes that the average variance is Shs 5. the company should follow policy of investigating variances as a matter of routine.000 100.50 7.000 Total 325.250 and additional costs of Shs 5. 3.5(shs.000 160. Costs of investigation and corrective action are Shs.909. Let x be savings per month.153.000-200.500) + (0. Presumably.000 150.000m2(325.36 x Shs 5. working practices are changed every five months.36 x 0.909.000) A B C Unit contribution (shs) 80.0 00 Production requirements exceed the available supply of materials by 125.250 in excess of standard continue for five months.500 + (0.5(shs.00 (shs) Ranking 1 3 1 The scarce materials should be allocated as follows: Materials Balance used unused . On average.7135x ∴ Only variances in excess of Shs 4. 20) 40.500 irrespective of the amount of the variance.36 x Shs 5.00 (m2) Contribution per m2 32.0(shs.250 x 4.000 B 7.00 175.7135 = Shs 8.000 C 5. 5.304 Answers So variance continue 0.3 x 4. The expected cost of investigation is equal to the expected cost of no investigation where: Shs. c) Applying the expected value decision rule.610 should be investigated.000 23.000 75. 33 in excess of the acquisition cost of materials.Revision Questions and Answers A (40.000 units x 5) B (25.400.000 m2 should have cost (shs5) But it costed (x shs 4.000x shs90) Profit 783.000 units x 2.000 25.000 C (15.50)+(15.50) Material price variance 8.000 B (3.33 (Shs 20 + 23.000 units x 160) 2.000 shs 121.000 - 305 The above production plan is sufficient to meet the order that has been accepted.500 (F) 4.000 (A) shs 135.000 45)+(20.000 (F) (ii) If the decisions are based on variances over which each manager has control.000 m2 3.000 (A) 120.000 96.000 m2 (A) x shs5 15.400.000 units x 80) 3.200.275 Fixed overheads(40.000 Shs 13. QUESTION FOUR (i) 8000 units should have used (x 3 m2) But it used Usage variance mm2 X standard cost per metre Material usage variance 27.000 75.000 m2 27. The company should not pay above Shs 23.000 25.000 hours 4.000/75 = 3.000 units should have taken (0.800 hours should have cost (shs 25) But cost (x shs20) Conversion process expenditure variance 24.333 units x 175) 583.000x112.000 100. . The maximum purchase price is Shs 43.800 hours 800 hours x shs25 hours 20.33 (see part (a) for calculation).333 units) 100.275 (a) The above production plan indicates that maximum sales demand for furniture products A and C has been met but there is unutilized demand for the furniture product B.275 Total contribution 6.000 24. The profit arising from the above production plan is calculated as follows: Shs A (40. The purchasing manager has control over the material price variance and he is likely to continue to purchase raw material from the cheaper supplier as such action will result in a favourable measure against which he will be assessed.5) C (15.000 and a contribution per metre for material used of Shs 23. Therefore any additional materials purchased will be used to make B yielding a contribution per unit of Shs 175.000 x Shs 5.33).5 hours) But took Efficiency variance in hours X standard cost per hour Conversion process expenditure variance 4.183. 4. New machines or staff training could well reduce this variance. The total conversion process variance is a favourable variance of Kshs. Principally. This could result in the purchase of a higher-quality (but not too expensive) raw material with the aim of reducing wastage. 2. The total material variance is an adverse variance of shs1500. he could well request additional expenditure to improve the efficiency and effectiveness of the process. Additional expenditure on improvements to the processing method would therefore not be desirable . because of the Kshs.306 Answers The conversion process manager would want to reduce the adverse material usage variance and so could desire additional expenditure on high-quality raw material. 15. If decisions are based on the effect of each of the variances. Given that the conversion process efficiency variance over which he has control is also adverse.000.000 adverse usage variance. employee training or improved quality control procedures. 50 Conversion process 0.075 (wl)x8000x Shs.5) x 60% = 0.000 - Existing material Amended process Amend ed materi al Existin g proces s Amende d material Amende d process 123. 20 0.3 (wl) x 8000 x Shs.50 3.000 118.375 (wl) x 8000 x Shs.000 220.600 96.5 x 8000 x Shs.60.375 – 3) x 80% = 0. 075m2 2 Actual hours per unit of the executive towel (with amended process and amended source) = 4800 = 0.3m2 Additional usage per unit due to amended conversion process =(3. 20 120.524 x 8000 x Shs.000 = 3. 25 0. 4. . Existin g process Material 3 x 8.500 100.000 89.000/8. 4. giving a total material and conversion cost of Kshs 212.000 x Shs.000 217.104.56 x 8000 x Shs.075m2 ∴ If source changed standard usage per unit = 3.500 The profit maximizing strategy is to use the existing material source and the amended conversion process.3m2 If process charged./60.Revision Questions and Answers 307 (b) Existin g materi al. 5 3. Workings: 1 actual material usage per unit of product (executive towels) with amended process and amended source) =27. 5 3.600 . standard usage per unit = 3.375m2 Additional usage per unit due to amended material source = (3.6 hours 8000 Additional hours per unit due to amended conversion process =(0.800 212.6 x 8000 x Shs. 25 0.600 223.06 hours.800 - 121.3753) x 20% = 0. 5 + 0.24) = 0.56 hours If source charged.524 hours. ∴ If process charged. .5) x 40% = 0. standard hours per unit = (0. standard hours per unit = (0.6 – 0.5 + 0.06) =\ 0.024 hours.308 Answers Additional hours per unit due to amended material source (0. ii.3 10.420 300 400 500 600 4 6 8 2 20 ∴ Expected profit p. Therefore the following assumptions are made in answering this question: That the dinner need not be held each year i.800 4.2 0.360 Costs Shs 2.0 1.50 1. .680 2. for dinner = Kshs.a.50 3.800 3.400 4.900 390 0 0 1.240 2.240 Profit(lo Expecte ss) shs d value (b) (440) (88) 80 32 600 180 1.Revision Questions and Answers 309 QUESTION FIVE KENYA CHARITY ORGANIZATION (a) Expected value of profit Dinner & Dance No of Freque ticket ncy s sold Probabili ty (a) Reven Food Fixed Profit(los Expect ues costs costs s) (b) ed excludi (shs) (shs) value ng (ax5) progra shs ms 0.120 112 236 Expected profit from programmes = Kshs. If the dinner is cancelled no programmes are sold or produced.500) (300) 0 0 0.500 1. i. 236 ∴Total expected profit = 1656 (1420=236) (b) There is no indication given on the reliability or the results expected from the market research enquiry so that this part of the question cannot be answered without making assumption.100 330 0 0 0.000 0 0 0.50 (1.000 6.200 2. if the enquiry shows that not enough tickets will be sold to produce a profit the dinner can be cancelled.2 7.20 4.3 0.50 2.600 7.e. 1.80 4.1 15.4 13. The shs2000 fixed cost is an avoidable charge if no programmes are produced.1 Incom e (shs) 1.00 4.420 Programmes Pag es sold 24 32 40 48 Freque ncy 4 8 6 2 Probabili ty (a) 0.80 4.120 2.160 2. iii.4 0. 310 iv. . the schedule of the programme demand could occur for any level of ticket sales.e. Answers The programmes sales (an associated probabilities) are independent of the number of tickets sold i. 06 0. incremental cash flow. which arise as a consequence of choosing a particular course of action (a) Future Costs Any cost that was incurred in the past and cannot now be recovered in a cost and is therefore not relevant to decision making. which should be used for decision making.6) (113. are relevant costs: in general.3 0.1 Total loss as Kshs Joint probabil ity (prTxprP) (b) 0.6) (7.6) 252.8 and the survey costs Kshs. 500 and thus it’s not worthwhile.004 0.2 0.2 0.2 Profit (loss) on programme sales with Kshs 600 (440) 80 1120 Pr P 0. whereas fixed costs are irrelevant to decision because they will be incurred regardless of the course of action taken. however. all short-run decision are assumed to improve. a school of thought that argues that fixed costs are not always irrelevant. In general. (b) Incremental Costs Incremental costs are the additional cost incurred as a result of decision and is therefore relevant. Depreciation is not. (a) Short run visible costs . 252. variable costs are relevant costs because they are only incurred if a decision to do something is taken.2 0. Any costs will be incurred in the future regardless of whether or not the decision is taken (committed costs) are not relevant. which is relevant to decision making. (c) ©Cash Flow It is assumed that a decision is taken to maximize ‘satisfaction’ of the person or organization in question. There is. Only costs that will be incurred in the future if a particular course of action is taken are relevant.Revision Questions and Answers 311 Based on these assumptions.08 0.0) (77. ‘satisfaction ‘ if they increase net cash in flow. Although the time value of money affect the worth of cash flow from a project over a longer period.8 ∴The total avoidable expected loss is Kshs.02 Expected loss (axb) Kshs (900) (1940) (1420) (380) (54. They have put forward the idea of the attributed cost whi8ch is made up of the following.4 0. QUESTION SIX COST CLASSIFICATIONS FOR DECISION MAKING The cost (and benefits). the expectable loss can be calculated: (Loss when 300 tickets sold (P= 02) Kshs (1500) (1500) (1500) (1500) Pr T 0. therefore a relevant cost and it is only information pertaining to a cash flow.2 0. future. It will be (or should be) circulated to all interested parties within the organization and perhaps even to the press. the required level of company profitability. It will trigger the production not of direct action but of a series of lesser plan for sales. for example. (c) Indivisible traceable costs. the purchases and disposal of subsidiary companies or major fixed asset. Strategic planning is the process of setting or changing the longterm objectives or strategic target of a organization. and so on. marketing. and an operational plans to achieve this would be sales reps’ weekly sales target. thereby making labour a semi-variable cost. opportunity costs (the benefit forgone by choosing one option instead of the next best alternative) are relevant. Costs behaviour and decision-making Although it is easy to generalize and to state that. Historic costs are not. variable are relevant to a decision and fixed cost are not a proper understanding of the behaviours of c0osts is vital to ensure that the cost analysis is accurate. For example a strategy may be to increase sales by 5% per annum for at least five years. direct labour and direct machinery costs. Operational planning work out what specific tasks needs to be carried out in order to achieve the strategic plan. These would include such maters as the selection of products and markets. Some employees ay be made redundant if internal manufacturing ceases and may not be fully utilized on other work. or whether it should buy the product from an outside supplier. (Note: we use the word ‘strategic’ and . Production. The direct material cost may include discounting for material that are used for a variety of items. A make or buy problem involves a decision by an organization about whether it should make a product with its own internal resources. One area in which the concept of relevant costs is needed is the make or buy situation.312 Answers (b) Divisible fixed costs. Consider the simple example in part (a) of the answer. b. It will generally be formulated in writing. and only after much discussion by committee (the board). the principal relevant costs are the differential costs between the two options. the fixed part of which would have to be estimated. c. The direct labour cost may not be wholly variable in the short term. If an organization has the choice of whether to manufacture a component internally or buy in from outside and it has no source resources that put a restriction on what it can do itself. A fixed cost is divisible if significant shifts in the level of activity will require increases in the total amount of that costs. the fixed cost. This is an indivisible fixed costs that can be traced directly to a product or function Finally. A notable characteristic of strategic planning is as follows. a. And so on. The variable cost per unit could be made up of direct materials. The company overall costs may increase if the level of such materials purchased falls. Some operational managers may therefore choose to focus on quality of products while others attempts to produce as many product as possible as quickly as they can. For example. This will lead to lack of co-ordination. repairs and maintenance cost of machinery would vary withy the level of activity but machines would still need a certain level of maintenance even if they were not being used. if an organization measures only conventional accounting results it will know how much stock it has and how much it has spent on ‘carried out’. The resulting extra costs will be at odds with the strategic planning goal of minimum costs. Otherwise. Inadequate performance measurement will mean that the organization has little idea of which area is performing well and which need attention. and time wasted dealing with complaints and rectification work. Equally. Poor communication between the senior management who set strategic goals and lower level operational management could mean that operational manager are unaware of the strategic planning goal of sustaining competitive advantage at minimum cost through speedy delivery of quality products to customers. Inconsistent strategic planning and operational planning goals may mean that additional cost are incurred. Notable characteristic of operational planning are the speed of response to changing conditions and the use and understanding of non-financial information such as data about customer orders or raw material input. 4. Over ambitions plan may also mean that more stocks are produced than an organization could realistically expected to sell (meaning the costs of written-offs. Mistakes and failure are almost inevitable. there will be bottlenecks in some operational areas. If quality of products and speed of delivery are the main source of competitive advantage a business needs to know how good it is these thing. opportunity costs of wasted production resources and unnecessary stock holding cost are incurred. It will not know the opportunity cost of cancelled sales though not having stock available when need or not being able to deliver it on time. For example. This means poor quality products. again the costs is the opportunity cost of cost sales.(the 2. ii) 1. an operational plan may require additional inspection point in a production process so as to ensure that quality products are delivered to customers. and wasteful idle time in other areas.Revision Questions and Answers 313 ‘operational’ in the sense implied in the well-known work of Robert Anthony). still others will simply keep their heads down and do as little as possible. needing expensive extra resource in the short term. but also in terms of customers complaints and deed back. the quantity of products need to be measured in terms not only of sales achieved. 3. . costs include lost sales arranging for returns. Unrealistic operational plan will force staff to try hard with too few resources. Finally.314 Answers company might. It is therefore obvious that the behavior of costs associated withy a decision must be fully understood and their relevance to that decision ascertained before the decision is finally made. . The estimate of direct attribute fixed costs may be subjective judgments. accounts of which may not have been taken). such as deciding which supervisor salaried would be avoidable if the service were contracted out. the costs of buying in may also be high subjective. The variable costs may be based on past data that does not take account of potential reduction or increases in productivity due to factors such as untrained staff or new machines. one the other hand. Accounts may not have been taken of costs such as increases or decreases in tie spent delivering the components (from abroad perhaps) or complaints or costs resulting from badly made component. be considering selling the machinery. 0 Shs.0 620. medium.50 Production demand (units) X contribution per unit High 15.0 892.00 77.0 192.0 714.5 696. high actual demand Cost of B = 15.5 705.0 452.0 270.5 930.000 High advance order.0 225.0 620.50 0 Medium 12.0 428.000 Low 8.0 1165.5 KG X Shs 10 = Shs 225. ‘000’ 225.000 .0 247.5kg x 5) Variable cost (60% x 300) Shs.Revision Questions and Answers 315 QUESTION SEVEN BOTTOM LIMITED The variables in this instance are advance order size (high. medium.50 180. 300.50 930.0 168.50 620.000 X 1.162.0 620.0 1165.000 77.5 216. low).000 77.00 42.50 1.0 915.0 228. ‘000’ 1162.0 392.5 930.5 930.0 Workings: Cost of excluding costs of special ingredient B Selling price Raw materials (8.0 Cost of ingr edie nt B(w ks) Net co ntr ib uti on High High Medium Low High Medium Low High Medium Low Shs.000 77.0 234. low) and actual level demand (high. ‘000’ 937. Advance ord er size Actual dem and Contributio n excl udin g ingr edie nt B(wk s) Shs. 5kg x Shs.100 High medium low = 0.000 x 1.000 x 1. This approach takes a neutral attitude towards risk since all possible outcomes and probabilities are taken into consideration. low actual demand (Shs.000 (b) (i) maximizing expected value EMV EMV EMV = 0.5kg x Shs (10 +3) = Shs 234.650 If management wishes to maximize expected value. in this instance choosing the strategy which . medium actual demand Cost of B = 12.5kg x Shs (14 – 1.5) + 0.000 Low advance order.000 X 1. medium actual demand (Shs. 247.650 = 0. 1 discount) Cost of B = 15. a medium sized advance order should be placed.000 x 1. medium actual demand (Shs 1. high actual demand (Shs.5kg x Shs.00 premium) Cost of B = 8.5(696) + 0.50 discount) Cost of B = 12. (ii) Maximax The maximax decision rule involves choosing the strategy with the possible result.2(392) = Shs 707. 3.000 Medium advance order.316 Answers High advance order. low actual demand (Shs. low actual demand Cost of B = 8. (12 +4) = Shs. (14 – 2) = (Shs 1.3(892.5(705) + 0. 192.5kg x Shs (12 – 1) = Shs. 9.50) = Shs 225.5kg x Shs.5kg x Shs 14 = Shs 168.000 x 1.50 discount) Low advance order.000 x 1.3(915) + 0. 216. (10 + 9) = Shs 228. high actual demand (Shs 2 discount) Cost of B = 15.000 x 1.5) + 0.00 premium) Cost of B = 12.000 High advance order.2(428) = Shs 717.5kg x Shs. 12 = Shs. 4.000 Medium advance order.000 x 1.5(714) + 0.2(452) = Shs 710.00 premium) Cost of B = 8.000 Low advance order.3(937.500 Medium advance order. 392. market price less costs not incurred on transfers). there is a 20% chance that the lowest possible contribution of Shs 392. It’s possible that these may be some costs incurred on external sales of the product. If Lewi Division is able to acquire the product from an external supplier at less than the market price.Revision Questions and Answers 317 maximizes contribution. The decision maker would therefore choose to place a low-sized advance order. so that there is a chance of contribution of Shs 937. However.000 could occur. The degree of autonomy granted to the individual division will affect how freely information flows.500.000. the transfer price of those products representing this proportion of Badi Division’s production capacity should be set at the product’s market price (because the opportunity cost of not making the transfer would be the contribution forgone on an external sale).000 respectively. information must flow freely between Lewi and Badi Division. QUESTION EIGHT Generally. although it offers the chance of the highest contribution.000 and Shs.e. transfer prices should be set at marginal cost + opportunity cost of the transfer to Dendi Group. which are not incurred when the product is transferred internally (such packaging and delivery costs). 428. the transfer price they offer is likely to be as high as the market will bear. In order that transfer prices can be set at marginal plus opportunity cost to the group of the internal transfer of the product. which has a lowest possible contribution outcome of Shs. (iii) Maximum The maximum decision rule involves choosing the strategy that offers the least unattractive worst outcome. Such a transfer price allows Badi Division to earn the same profit on internal transfers and external sales and means that Lewi Division will not consider buying from external suppliers quoting a price higher than (ii) . if management of Badi Division is allowed a significant degree of autonomy whereby they make decisions independently and are not tied down by instructions from head office. The decision maker would therefore choose to make a high advance order. 452. Such an approach takes a risk-seeking attitude since. which would provide contributions of Shs. the transfer price should be an adjusted market price (i. As per the transfer pricing policy. Such an approach therefore takes a risk-averse attitude. group profits will therefore be increased because Badi Division can sell at market price and Lewi Division can purchase at less than the market price. This is better than the course possible outcome from high and medium advance order sizes. in this instance choosing the outcome strategy which maximizes the minimum contribution. If this is the case. (i) Badi Division has an external market for 80% of it’s production capacity. The opportunity cost can be used in standard costing systems which report the contribution gained or lost as a result of deviations from the budget. but it may lead to behavioral problems. Opportunity cost is relevant in the setting of transfer prices if the transferring division is working at full capacity and is able to sell it’s output externally at a profit. decide on the source of the product that it requires. The remaining 10% represents sales that Badi Division makes outside the Group.. Opportunity costs are particularly if the standard costs are updated so that planning and operational variances cam be identified. It provides a common basis for the valuation of resources which have a number of competing demands on them. which is equivalent to 30% (75% x40%) of Badi Division production capacity. the sales volume variance can then be analyzed to show the potential contribution gained or lost as the result of various deviations from the budget ii. Given that 20% of Badi Division’s production capacity is spare. The 10% should therefore be offered to Lewi Division at and adjusted market price. For example. The use of opportunity costs also help to avoid overstating the costs of a contract because it excludes irrelevant sunk or past costs. iii. the division should aim to supply 20% of this 30% at marginal cost. If a contract involves the use of resources which can be used profitably in other ways. Lewi Division can therefore compare these prices against those being offered by the outside supplier and. Lewi Division will therefore not buy from any external supplier quoting a price in excess of the marginal cost of the product for this proportion of its requirements. The resulting transfer price should result in the most profitable use of the transferring divisions resources. The output from the 20% of Badi Division’s production capacity not utilized on supplying the external market should be offered to Lewi Division at transfer price based on the marginal cost of the product (because there id no opportunity cost associated withy transferring this output to Lewi Division). (b) i. taking into account that a higher price may have to be paid if the full 75% is not purchased from the outside supplier. where the opportunity cost is the contribution forgone from the external sale. . the transfer price would be equal to variable cost plus opportunity cost. Badi Division should therefore offer the following transfer (iii) (iv) prices • • 20% of production capacity at marginal cost 80% of production capacity at adjusted market price. opportunity cost can be a useful concept.318 Answers the adjusted market price fo9r this proportion of it’s requirements. In this case. The external supplier can supply 75% of Lewi Division’s requirements. skills and system knowledge of the potential users. These objectives may encompass a wide range of issues from high-level strategic plan to the control of detailed operating activities.g. Strategic information need will tend toward long term. Given a spectrum from long term strategic to short term operation information need. suppliers.Revision Questions and Answers 319 N/B Out of all the above three case. The recording and processing methods adopted need to consider. This planning. access and controllability and other organizations • Needs. detail and speed and any trade-off between them • Security. such as the labour hours worked during the month. costing. To provide the base for the effective use of management accounting techniques. To facilitate control and decision making c. controlling and decision-making activities are essential of the organization is to achieve its objectives. trade associations and government. The design of the system should consider the management accounting tools that there are likely to be utilized e. There is therefore a need to identify the information needed for abroad range of business activities. • Expected planned life of the system • Developments in MIS • Available resource and time constraints in terms of commissioning dates The above discussion should include reference to a specific organization of which the candidate has experience/knowledge. structure and style • The appropriate accuracy. budgeting. external and global data. • Other general issues that need to be considered are. consideration should be given to. whereas detailed operational information need are likely to come from within the business. QUESTION NINE Management accounting information has three principal objectives: a. which is obtainable from customers. Aid to short term planning and strategic planning b. TQM. . bench making can these system deliver the information need of these techniques. the main problem is the identification of opportunity cost in practice and the fact that changing conditions may mean opportunity costs change frequently. the data source will probably exhibit the following characteristics. • Collecting and recording monetary and non-monetary information • The influence and need of management accounting techniques • The influence of IT system • The type of business entity In deciding on the format of the report generated. • Analysis and dissemination to relevant individuals and group • Management culture. 875 60.5W + 18.6: 70.625B Subject to: 10W + 7.625 = Shs 26.e 85.6 B (Shs) 106. (i) Can only be used when relationships can be assumed to be linear.000 (process hours) 20W + 35.6) + 193(70.40 234.625B ≤10 .000 (materials) 54.5/kilo Labour Shs 8/hour Selling price contribution Maximize z = 85.675) P R O D U C T B ‘0 0 0’ 8 7 6 5 4 3 Labour Process hours Optimum point Material Contribution line AP PR O X 19 3B 2 1 1 55w 6 2 3 4 5 Product W ‘000’ Maximum contribution = 153(85.00 174.875 237. B.00 166.000 (labour hours) W. .898.40 320.320 QUESTION TEN a) Let: Winful be W (output) Bootful be B (output) Material Shs 7. it thus cannot be applied appropriately in situations where the relationship isn’t linear. ≥ 0 (non negativity) W (Shs) 60.5B ≤ 3.75B ≤15 .625 Answers The constraints are graphed and the contribution line drawn at a slope of 1.21200: 1B (i.6W + 70.00 85.625 (b) Limitations of LP model. (iii) It also assumes that units produced are resources allocated are infinitely divisible which is not always the case in reality. (ii) Linear programming can only be used if an optimal solution actually exists.50 70. 5 13.125 0.04 0. QUESTION ELEVEN Solomons Limited a) Cost of Stock Resafety order level 250 0 outs Holdin g stock 0 Possible Costs (shs) 50 100 150 200 Total 50 100 150 Total 50 100 Total 50 Total 0 Total Probabilit y Shortage 0.600 cost = Shs 19.04 cost = Shs 4.800 0.11 0.400 2.22 0.3 Average demand = 54.22 0.00 1.11 0.04 cost = Sh 9.04 0.900 0.800 (from the table) (b) From the table.0 cost = Shs 3.37 0.07 0. Average usage in lead time 543 x 5 = 270 units .2 3. at 450 – re-order level has the minimum cost and enables the company meet its 95% requirement. Workings: Units sold 30 40 50 60 70 80 90 No of days 10 20 50 30 15 5 5 135 Probability 0.7 3.04 0.600 ∴ Annual stock out cost of using present re-order level of 250 = Shs 19.1 6.6 54.04 No of orders 10 10 10 10 10 10 10 10 10 10 10 Shortag e costs (shs) 6050 6050 3300 4400 3025 2200 3300 1100 2200 1100 0 300 30 600 350 400 450 70 130 180 1.15 0.600 3.Revision Questions and Answers (iv) 321 The model assumes that the contribution per unit for each product and the utilization of resources per unit are the same whatever quantity of output is produced and sold within the output range being considered.00 Units x probability 2.3 units per day = 54 units per day.700 0.11 0.0 18.2 7.04 cost =Shs 3.04 1. 55 Answers .322 Orders per annum = 12.000 = 10 1.200 Stock out cost per unit = Shs 155 – shs 100 = Shs. Σai = bj = l 2ai – 1a4 = -ai+a4 3ai – 2a4 = 0 2ai – 2a4 = 2 5ai = 2 ai = 2/5 a4 = 3/5 3bi – 2b2 = 0 2bi +2b2 = 2 5bi = 2 bi = 2/5 b2 = 3/5 EXPECTED VALUE OF THE GAME = 8/25 – 6/25 – 6/25 +9/25 = 8/25 +9/25 = 17/25 In the long run.18) (3. a wins 17/25 and that b losses 2 U1 U2 U3 C1 (0.-2) (1.Revision Questions and Answers 323 QUESTION TWELVE GAME THEORY b1 a1 a2 a3 a4 Max 2 -2 -2 -1 2 b2 -1 1 -3 1 1 b3 3 3 2 0 3 min -1 -2 -3 -1 No saddle point (i) Reduction process from above.-21) (-2.3) C3 (-2. 12) C2 (-1. a1 is better than a3 thus eliminate a3 b1 is better than b3 thus eliminate b3 a4 is better than a2 thus eliminate a2 2/5 3/5 bi bj 2/5 a: 2(4/25) 1(6/25) 3/5 a: -1 1(9/25) Let aij bij Proportion of each player playing their respective strategies. 3) (-8. 9) OX1 +X2 + 4X3 = -1X1 + 3X2 – 4X3 OX1 + X2 + 4X3 = -2X1 – 2X2 – 8X3 X1 + X2 + X3 = 1 . -1) (4.4) (-4. g. opponent’s strategies. (v) Data availability: Data may not be early or readily available e. that is 1 ½ every month approximately.000 = 19 320 ∴The orders should be placed every 19/12 years. (ii) Presence of government: the government is usually a participant sometimes an active player and in other situations.000 pallets per year. 9) Answers X1 +4X2 = 3X1 – 4X2 = -2X1 – 8X2 (c) LIMITATIONS OF GAME THEORY IN BUSINESS APPLICATIONS (i) Game theory has weary theoretical foundations for example it does not adequately cater for negotiations. (ii) Cost of ordering and storage are known and fixed. the government acts as an arbitrator. (iv) As the number of players increase. This assumes that the pallets are lost or damaged on a regular basis and that production is uniform throughout the year. coalitions and informational asymmetry. No of orders per year = D EOQ = 6. the analysis becomes exceedingly complex. Cost of order Co = Kshs. and independent of the order size. Both of these are unlikely to be strictly the case in practice. QUESTION THIRTEEN ()a Determine the optimum order quantity and consequent time between the orders: Annual demand D = 6. 12) C4 (-2.22x16 The optimum order quantity is 320 pallets. (i) Demand for pallets is spread evenly through the year. 16 per pallet Cost of holding Ch = 22% of 16 per pallet per year EOQ = 2CoD Ch = 2x30x6. There is no provision on how to incorporate this in game theory. 0. ()b Assumptions implicit in the EOQ model. -1) (4. 30 per order Cost of purchase C = Kshs. and pay-off specification. 4) (-4.324 (ii) U2 U3 C2 (1. 3) (-8. This is probably true fro the storage . collusions. 12) C3 (3.000 = 320pallets per order. (iii) Presence of trade unions: trade union members belong to competing firms. The assumption is probably not reliable for the ordering costs since the order size is likely to affect the cost of delivery.000 TC = 3x 0 6 0 .0 0 2 +1 . unloading etc. (iii) Lead time is known and fixed so that new order arrives just as the stock level falls to zero.7 ∴ 1.78% ()d If the lead time is variable the company may go out of stock of pallets if the re-order level is fixed. TC. 15.000 100 2 100 45 + 70. ()c Total annual year is: TC = Co D EO Q cost of stockholding and purchase.0 0 5 66 0 = 45 + 6. the purchase price = 96% of Kshs 16 = Kshs.963.030.000 + 0. This problem can be reduced by the holding of a buffer stock. This is a higher cost.4X = 97.000 320 2 = 562.4 per year.3 x .160 = Kshs. The discount is not worth having.030.000= Sh97.22x16x +16x6.4 + 92. + Ch per year At EOQ = of 320 320 + 0.0 0 4 0 . then: TC = 30x 6. 16.030.2+ 96. The size of this buffer .165 The discount which must be offered is (100 – 94.22)% = 5. when EOQ = 4. since the saving in the purchase price and ordering costs does not compensate for the increased storage costs.2 x 5 6 4 0 .080.4x When TC4000 = TC320 45 + 1.7 TC = 30x 6. This assumption may be reliable – it depends on the supplies. since they are based on the costs of capital. in shillings per EOQ 2 + CD Kshs.4x + 960x = 45 +1.2.758.125.3 x . Suppose at this breakeven point the purchase price is x% of Kshs.36 Therefore.22x ( xx16) x 400 + ( xx16) x6.000 4.125.Revision Questions and Answers 325 costs.0 0 +0 2 1 . Consider the purchase price at the point at which the total annual cost is the same with and without the discount.7 x = 94.5+ 563.4x = 97.000 With the discount. 98. 326 Answers stock would be chosen so that the probability of a stock out is reduced on an acceptable level. Therefore there is excess capacity of 1200 units. then an empty cell is selected and treated as if it were an allocated cell.i It is a transportation algorithm whereby the allocation of a number of routes used is less than (number of rows + number of columns – 1) Inequality of supply and demand It is a requirement of the transportation algorithm whereby it requires that the total amount demanded at all the destinations to be equal to the total amount available at all the origins. if the actual number of routes used is one too few.ii Degeneracy The difficulty may be overcome by the use of dummy routes. then a dummy destination is added which has a demand equal to the excess supply. Inequality of supply and demand If the above statement (a(i)) is not true. A dummy product must be included in the transportation tableau. The transportation costs for all routes involving the dummy are zero. If the transport allocation is degenerated by two routes. we can allocate a very small amount to this cell. . QUESTION FOURTEEN (a) . If the total supply exceeds the total demand.800 units. then a dummy origing is added which has a supply equal to the shortfall. A zero shadow cost means that items may be moved into that cell without increasing the total cost of the allocation. If we wish. Non-unique optimal solutions are not a difficulty in the transportation problem.000 units Total requirements is 14. to chose the allocation of routes to be used. The amount allocated should be so small that the associated transport costs can be ignored. If any of the costs are zero. (b) (i) Find the minimum transportation method: cost production schedule using the Total capacity of the machine is 16. then we use two empty cells in this way. If the total supply is less than the total demand. for which the demand is1200 units next week. but it does mean that the decision maker must use some criterion other than cost. then algorithm cannot be used until a dummy origin or destination has been added to satisfy this condition. Non – unique optimal solution The existence of other optimal allocations can be identified by examining the shadow cost. . etc. For example. Non-unique optimal solution The optimal solution is non-unique if there is more than one allocation of routes which produce the minimum cost. then alternative optima exist. is the first penalty selected.Revision Questions and Answers 327 Set up a transportation tableau and use of Vogel’s methods to make the initial allocation. is the first allocation made etc. the penalty 26. The allocation 600. . for example. Key: unit production cost Y X Allocation The subscripts indicate the order in which the allocation are made. no of rows + no of columns – 1 = 3 + 4 – 1 = 6 which is the same as the number of allocated cells.800 Z 2 1. For each empty cell. then V1 = 24 V3 = 22 U2 = 4 V4 = 4 U3 = 2 V2 = 22 For the empty cells: S12 S14 S22 S23 S33 S34 = = = = = = 26 – (0 + 22) = 4 0 – (0 – 4) = 4 26 – (6 + 20) = 0 30 – (4 + 22) = 6 26 – (-2 + 22) = 6 0 – (-2 – 4) = 6 . we split the unit cost Cij into a raw component Ui and a column component. we require: No. Vj. we calculate the shadow cost.8002 0 6 62 For a basic allocation. Test of Optimality For each allocated cell.2004 Demand : Penalty 0 2 2 2 2 24 B - Products C 2 20003 2 2 2 0 4 4 43 3 2 Dummy 0 1.200 0 0 Capacity 0 Penalty 22 2 2 26 2 2 0 20 4 0 2 4. of allocated cells = no of rows + no.328 Answers A X 20004 Y 4. of columns – 1 In this case. Sij where Sij = Cij – (Ui + Vj) Allocated Cells C11 C13 C21 C24 C31 C32 = = = = = = 24 = U1 + 22 = U1 + 28 = U2 + 0 U2 +V4 22 = U3 + 20 = U3 + V1 V3 V1 V1 V2 Let U1 = 0. The allocation is basic. Machine Y makes 4.000 A and is fully used.800 B and is under-used by 1.000 2 This solution requires only one changeover (Machine X) and therefore is preferred choice. Machine Z makes 6.800 + 22 x 1.000 Z and is fully utilized.800 (ii) Select the optimum allocation which has the least number of machine change over. We find that N = 4.200 A and 4. The minimum cost of production is: Machine X makes 2. The preferred minimum cost production schedule is: Machine X makes 2.800 and that the solution has become degenerated.800 B and is fully used.200 + 20 x 4. Using the stepping stone method we can allocate N items to cell (Y. the solution is still optimum.800 - Products C 2 2000 2 2 2 3 2 Dummy 0 0 1. B) and adjust the row and column allocations.800.200 units.Revision Questions and Answers 329 All of the shadow cost are positive or zero. However.000 A and 2. Machine Z makes 1.800 = Shs 348.800 A and is under – used by 1. The total cost is Shs 348. S n * denotes that the account is not settled at the end of month n. we know that this is a nonunique optimum. The current optimum schedule requires machine changeovers (1 of each machines X and Z).200 units.000 C and is fully used. The problem may be illustrated by a tree diagram: .000 + 22 x 2m000 + 28 x 4. The minimum cost is 24 x 2.000 A and 2. Machine Y makes 4. therefore the allocation is optimal – since there is a zero shadow cost. The alternative optimum is: A X 24 B 2 4.200 0 Ma chi ne 2000 Y Z 6. QUESTION FIFTEEN a) Sn denotes that the account is settled at the end of the month n. 000 is (0.4 = 0.4 + 0.2 x 0.330 b) Answers S1 S*1 0.1) = 0.3 x 0.6 P(a/c settled at end of month 4) =P(S1 x P(S*2) x P(S3*) x P(s4) x P(a/c ≤ Shs 1.5 x 0.000. A = Σ(Px X Ak) where Pk is the probability that payment Ak is received at the end of month K.3 x 0. Estimate of the expected proportion recovered if legal action is taken.5 P (a/c settled at end of month 2) = P(S1*) x P(S2) = 0.7 = 0.5 x 1 x 0.5 0.2 x 0.63 .000) = 0.000. legal proceedings are taken.3 x 0.5 x 1 x 0.5 = 0.2 x 0.3 + 0.1 + 0.2 x 0.018 P(a/c settled at end of month 6) =P(S1*) x P(s2*) x P(s3*) x P(S6) x P(a/c >Shs 1m) = 0.9 x 0. therefore if its not paid by the end of month 3.7 x 0. Proportion of accounts ≤ Shs 1.2 + 0.012 c) Expected value of a new account of Shs 2 million.3 + 0.14 (i) P (a/c settled at end of month 3) = P(S1*) x P(S2*) x P(s3) = 0.2 S*2 S3 0.6 = 0. Expected present value of amount outstanding = ∑P X x Ak r   1 +  100   k The value of the debt is Shs 2 million.3 S*3 0.03 Payment is received at the end of month 4 only if the amount is less than Shs 1 million agency used. Expected proportion recovered = Σ(mid-point proportion x probability) = 0.2 = 0.7 0.2 x 0.8 S2 0. 94 0.9 1.000.4 x = 1912.000 3.000.000 1.000 750.6 x x 0.000 – 2.000.14 0. Upto 200.000.000 = Shs 1.03 0.000 1.2 0.Revision Questions and Answers 331 The expected amount recovered = 0.260.1 0.4 x = 1941.5 x 1 = 0.2 x 0.000 = A6 P(a/c of Shs 2 million settled at end month 6) = P(S1*) x P(s2*) x P(S3*) x P(S6) = 0.500.97 1.03 . 1.63 x Shs 2.970 2 x 0.06 0.500.9145 = 1152.03 0.8 0.000 – 5.3 0.940.03 1940.000 200.1 Cumulati ve probabili ty 0.3 0. the proportion of the debt recovered.9852 2 x 0.14 0.1 0.3 0.8 0.26 = 1970.000 350.000.000 (ii) Account settled End of month Probability Cumulati ve probabili ty 0.8 0.26 PV of amount received Shs.00 Random number 00 – 79 80 – 93 94 – 96 97 .3 x 0. million Expected PV (millions) 0.0 Random number 0 1–2 3–5 6–8 9 1 2 3 4 or 6 0.060 d) The variables in the problem are: 1.03 2 x 0. (i) Size of the account Size of account Shs.000 2.3 x Total The expected PV of the amount Kshs.6 0. Size of the account 2.8 0. Time taken to settle the account 3.9563 1.03 = P6 Accoun t settled at end month 1 2 3 6 Probabili ty Pk Account received A/C Kshs. 100. million 2 2 2 1.03 0.14 0. If legal proceedings are required.99 Mid point Shs.000 – 500.000 Probabil ity 0. 500.050 Account 2: The first RN9 produces an account size of Shs 3. 87. the RN 8.4 0. 98.000.000 x 0.456. The next RN is 2.8 0.2 0.4 – 0. select a settlement time of 4 or 6 months.5 0.600.7 Above 0.000 x 0.6 – 0.4 0.0 Random number 0 1–3 4–7 8-9 Account 1: Using the random digits in the order given.5 x 0.5 x 0.5. produces an account value of Kshs 1.1 0.9707 = Shs 1.000.500.4 0.8 0. Therefore the PV of the amount received is: Shs 1.2 1. Since the account is > Shs 1 million.9145 = Shs 1. Therefore the present value of the amount received is: Shs 3.500. The next 2 random digits.380. produces a settlement time of end of month 2.9 Simulations Answers Probabilit Cumulative y probability 0.1 0.500. .6 0.3 0.332 iii) If legal proceedings are taken: Proportion Mid point received Upto 0. which selects the proportion recovered as 0. The next two digit RN.8 0. legal proceedings are taken and a proportion is recovered at the end of month 6. 0675 0.3508 0.2939 0.1141 0.1 1.2088 0.2673 0.3461 0.3907 4 0.0987 0.1879 0.2794 0.0948 0.3289 0.2764 0.3665 0.2 0 0.1217 0.2734 0.3810 0.3438 0.6 0.3980 8 0.3413 0.2612 0.8 0.1985 0.2967 0.3770 0.3159 0.1331 0.Management Accounting Tables 333 Table I Areas under the Standard Normal Curve from 0 to Z 0 Z Z 0.2157 0.1950 0.0080 0.3790 0.3389 0.2258 0.5 0.3133 0.0636 0.3051 0.2324 0.3315 0.1 0.1103 0.1915 0.1443 0.0 0.2704 0.2580 0.1808 0.3621 0.1623 0.2 0.3849 1 0.2422 0.0478 0.1480 0.3888 3 0.2389 0.1293 0.3365 0.1554 0.2881 0.3962 7 0.7 0.3212 0.4 0.2190 0.2910 0.3925 5 0.0793 0.2518 0.0319 0.1517 0.2823 0.1026 0.2549 0.1406 0.3531 0.0398 0.2642 0.0910 0.1591 0.2224 0.1255 0.3485 0.0438 0.0557 0.3830 0.0871 0.0596 0.3577 0.1736 0.1368 0.0239 0.1064 0.1772 0.3186 0.4015 .2486 0.3643 0.3238 0.3023 0.0 1.3073 0.0160 0.2291 0.0279 0.0359 0.3599 0.2357 0.3686 0.0040 0.0120 0.3944 6 0.1700 0.0754 0.1179 0.3 0.9 1.0199 0.2123 0.2454 0.3106 0.1844 0.1664 0.3264 0.3554 0.0517 0.2996 0.2852 0.0714 0.3729 0.0000 0.3340 0.2054 0.3997 9 0.2019 0.3708 0.0832 0.3869 2 0.3749 0. 4997 0.4909 0.4982 0.4664 0.4693 0.4983 0.4931 0.4842 0.4946 0.4474 0.4887 0.4115 0.4875 0.4971 0.4984 0.4686 0.4979 0.4996 0.4997 0.4884 0.4956 0.1 2.4292 0.4953 0.4997 0.4871 0.4929 0.4972 0.4049 0.4998 .4913 0.4965 0.4861 0.4778 0.4943 0.4573 0.4994 0.6 2.4955 0.4893 0.0 3.4962 0.4669 0.4975 0.4319 0.4989 0.4973 0.2 3.4625 0.4992 0.4978 0.4656 0.4995 0.4591 0.4966 0.4192 0.4990 0.4982 0.4960 0.4857 0.4949 0.4904 0.4993 0.4484 0.4996 0.4911 0.4994 0.4756 0.4854 0.4719 0.3 2.8 1.1 3.4 1.4987 0.4934 0.6 1.4993 0.4995 0.4772 0.4265 0.4564 0.4066 0.4131 0.4 2.4991 0.4761 0.0 2.4991 0.4864 0.4985 0.4582 0.4994 0.4222 0.4699 0.4846 0.4838 0.4993 0.4987 0.4370 0.4990 0.4726 0.4995 0.4441 0.4906 0.4830 0.4834 0.4963 0.4996 0.4649 0.4994 0.4599 0.4997 0.4992 0.4959 0.4991 0.4798 0.4463 0.4890 0.4633 0.4306 0.4985 0.4968 0.4803 0.4986 0.4515 0.4706 0.4608 0.4850 0.4992 0.7 2.4279 0.4535 0.4082 0.4812 0.4990 0.4993 0.4916 0.4995 0.4922 0.4995 0.5 2.4382 0.4793 0.4988 0.334 Management Accounting Tables 1.4996 0.4974 0.4981 0.4997 0.4808 0.4945 0.4957 0.4878 0.4750 0.4948 0.4641 0.4941 0.4332 0.4744 0.4877 0.4951 0.4868 0.4767 0.4406 0.4987 0.4821 0.4989 0.4452 0.4996 0.4738 0.4995 0.4788 0.4898 0.4920 0.4826 0.4495 0.4986 0.4732 0.4997 0.4977 0.4817 0.4997 0.4970 0.4783 0.4525 0.4918 0.4988 0.8 2.4 0.4345 0.4967 0.4994 0.2 2.4781 0.4177 0.4032 0.5 1.4429 0.4357 0.4394 0.4236 0.4932 0.4964 0.4554 0.4997 0.4927 0.4896 0.3 1.4147 0.4938 0.4207 0.4761 0.4940 0.7 1.4780 0.4936 0.4901 0.4989 0.4418 0.4992 0.4952 0.9 2.4671 0.4881 0.3 3.9 3.4979 0.4997 0.4099 0.4925 0.4976 0.4162 0.4713 0.4545 0.4984 0.4251 0.4616 0.4974 0.4678 0.4505 0.4997 0.4996 0. 5 0.4999 0.002 .4999 0.9 0.5 0.4999 0.1 0.036 2.8 0.4998 0.014 3.8 0.023 3.4999 0.4999 0.5000 0.4999 0.029 2.1 0.4999 0.8 3.5000 0.018 3.4998 0.9 0.184 1.7 0. Copyright 1972 McGraw-Hill Publishing Co.4999 0.5000 0. Table II Normal distribution Shaded area = p 0 Z P Z P Z P Z P 0.0013 0.0003 0.5000 0.0 0.0 0.003 0.5000 * From Statistics by SPEIGEL.005 0.9 0.4999 0.1 0.6 0.4999 0.006 0.067 2.6 0.4 0.2 0.5000 0.3 0.4999 0.4999 0.115 2.345 1.1 0.4999 0.212 1.0007 Z 0.500 1.4998 0.008 3.045 2.7 0.4998 0.Management Accounting Tables 335 3.4998 0.4999 0.4999 0. Ltd.7 3.382 1.4998 0.081 2.0 0.4 0.2 1.055 2.9 0.308 1.5000 0.011 3.3 0.4999 0.274 1.6 0.4999 0.460 1.4999 0.4998 0.421 1.4 0.4 0.5000 0.136 2.0 0.4999 0.159 2.0010 0.5000 0.4999 0.2 0.4998 0.7 0.3 0.4998 0.4999 0.003 0.4999 0.4999 0.4998 0.4998 0.4999 0.5000 0.4999 0.2 0.242 1.6 3.4999 0.5 0.0005 0.8 0.3 0.4998 0. Used with permission of McGraw-Hill Book Company.097 2.4999 0.4999 0.5 3. 602 2.447 2.457 2.841 4.729 .10 1.145 2.179 2.604 4.045 2.567 2.032 3.552 2. The table gives the values for the area in both tails.833 1.761 1.262 2.500 2.143 2.306 2.717 1.898 2.980 1.365 2.485 2.921 2.110 2.055 3.706 1.896 2.060 2.703 1.782 1.571 2.10 6.812 1.106 3.01 63.492 2.467 2.042 2.704 2.303 3.711 1.120 2.860 1.473 2.861 .714 1.660 2.707 3.671 1.05 2.718 2.390 2.583 2.314 2.947 2.684 1.721 1.479 2.701 1.977 2.807 2.645 .771 1.965 4.797 2. 0 t The table shows the total of the shaded area Area in both tables combined Degree of freedom v=1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Area in both tables combined .015 1.706 4.499 3.250 3.093 .462 2.6170 2.000 1.925 5.326 .819 2.02 2.052 2.796 1.048 2.541 3.708 1.763 2.960 .074 2.699 1.771 2.740 1.681 2.336 Management Accounting Tables Table III Percentage points of the t distribution.753 1.160 2.228 2.878 2.658 1.358 2.539 Degrees of freedom v = 21 22 23 24 25 26 27 28 29 30 40 60 12 ∞ .131 2.821 2.895 1.746 1.201 2.02 31.132 2.747 3.169 3.012 2.734 1.365 3.508 2.080 2.776 2.021 2.518 2.01 2.650 2.056 2.756 2.657 9.05 12.576 .101 2.821 6.493 1.787 2.764 2.697 1.064 2.423 2.920 2.624 2.998 2.182 2.069 2.831 2.355 3.750 2.779 2.353 2. 725 2.528 2.Management Accounting Tables 337 20 1.845 .086 2. 815 5 13.338 Management Accounting Tables Table IV The X² distribution 0 X² value Degrees of freedom v=1 2 3 4 5 Cut-off Level of significance 5% 1% 3.81 2 18.592 14.991 9.067 .34 7.488 7 15.841 6.27 9.08 11.635 5.070 6 16.210 11.47 5 6 7 12. 66 6 23.09 0 21.919 18.507 16.307 20.Management Accounting Tables 339 8 9 10 15.20 9 . 68 (9.06) 6 234 (5.340 Management Accounting Tables Table V Percentage points of the f distribution V1 = Degrees of freedom for numerator 1 1 2 3 161 (4.44 (6.21 (8.71 (6.20) 3.68 (6.46 (8.39 (5.23) 12 244 (6.25) 9.49) 10.10) 3.78) 4.01) 3.30) 11 243 (6.87 (7.18) V2=Degrees of freedom for numerator 4 5 6 7 8 9 10 11 12 Values of f: Right tail of the distribution for P = .27) 4.51 (98.84 (9.74 (27.71) 6.81) 6.00 (15.47) 3.13) 5.34 (5.40 (99.10 (7.02 (4.67) 4.58) 3.15) 4.40) 8.47) 3.82) 7 237 (5.50 (6.94 (4.00 (4.91) 3.80 (4.14 (5.18 (5.74 (9.05 (10.34) 6.85) 2.25) 5.22 (5.39) 10 242 (6.74) 2.41 (12.78 (10.30 (99.65) 4.83 (6.95 (10.97 (4.39) 4.89) 4.76 (27.55) 3.63 (6.06 (7.64) 3.76 (9.09 (14.69) 5.052) 18.26 (15.95 (4.981) 19.19) 3.96 (14.38) 8.32 (11.41) 8.07 (7.99) 3.79 (13.07 (5.33 (99.06) 3.80) 4.05 Right tail of the distribution for P = .45) 4.82) 3.69 (4.15 (8.91 (4.01 (in brackets).1 (7.21) 3.05) 4.59 (6.04) 4.03 (7.46) 3.06) 2.999) 19.38) 2.81 (27.98 (7.38 (99.93) 3.37 (99.96 (10.35) 3.04 (14.02) 4.99 (13.76) 2.20 (5.98) 4.52) 5.80) 3.859) 19.65) 4.28 (5.13 (5.97) 4.92) 4.11 (5.16 (15.26) 5.64) 4.67) 3.93 (14.26) 5.94 (27.24) 6.62) 3.95) 4 225 (5.48 (5.48 (6.74) 3.056) 19.67) 6.12) 7.98) 5.85 (4.37) 3.11) 2.50) 9 241 (6.46) 2.82 (4.88 (6.33) 2 200 (4.26 (8.40) 2.73 (6.41) 5 230 (5.33) 8.91) 6.58 (6.79 (4.21) 4.75) 5.65) 8 239 (5.93) 2.67) 3.98) 4.39 (15.93) 3 216 (5.72) 3.73 (4.33 (5.15) 4.71) 2.49 (5.625) 19.49) 6.26 (5.12 (7.39 (8.90 (4.19) 3.45) 4.07 (5.30) 9.09 (5.78 (27.35) 3.106) 19.55 (30.22) 3.12 (10.88 (10.75 (9.01 (4.82 (10.00) 3.19 (11.59) 3.88) 2.13 (34.36 (99.00 (99.79) 3.99) 3.62) 3.08) 3.98) 3.36) 8.37) 4.01) 9.23) 5.54) 3.87) 3.45) 4.07) 3.94 (18.32) 3.42) 3.082) 19.022) 19.26) 3.42) 8.928) 19. .31 (5.55) 4.63 (6.46) 6.71) 3.79 (7.28 (8.75) 3.28 (29.00 (7.06) 4.59 (16.17) 9.92 (4.69 (6.59 (12.01 (28.54) 2.35 (8.34 (7.57 (6.53 (9.91 (14.84 (27.18) 2.764) 19.36 (5.12 (28.05) 5.34) 8.70 (4.86 (4.27) 5.14 (10.23 (5.41 (99.25 (99.84) 3.16 (99.60 (6.20) 6.74 (10.56) 4.61 (16.88 (27.00) 5.10 (5.29 (5.39) 3.68) 4.37 (5.71 (21.97 (7.47) 3.39 (99.7 (9.403) 19.63) 2. Management Accounting Tables 341 . 3293 0.2 0.9986 0.0016 0.0033 0.1438 0.6703 0.7 0.00 1.9994 6 1.4966 0. (b) Table of cumulative Poisson probabilities Number of occurrences (x) 2 3 4 0.0031 6 0.1637 0.00 1.4 0.5488 0.000 0.4 0.9999 0.00 0.8187 0.993 0.9824 0.9963 Mean (m) 0.0045 0.9769 0.3595 0.6065 0.6065 0.9996 0.0 0 0.0164 0.9967 0.1 0.4066 0.8442 0.3679 1 0.6703 0.000 0.3679 5 0.6 0.00 1.9920 0.9999 1.9953 0.000 0.9982 0.0536 0.9384 0.9810 0.00 0.9992 0.8 0.00 1.0030 0.00 1.8088 0.7 0.5 0.9372 0.4493 0.9998 0.0126 0.0001 0.9988 0.9856 0.0905 0.1217 0.4066 0.00 1.0284 0.9999 0.7358 5 1.000 0.0 0 0.3476 0.0002 0.0005 Table shows probability of a given number of occurrences for a given mean (m).9998 0.0333 0.0011 0.0383 0.8187 0.0077 0.9048 0.9977 0.7408 0.00 1.342 Management Accounting Tables Table VI (a) Table of individual Poisson probabilities Number of occurrences (x) 2 3 4 0.000 0.0012 0.9999 Table shows probability of finding x or fewer occurrences for a given mean (m).1839 0.3679 1 0.0050 0.000 0.00 0.1 0.0001 0.0004 0.0001 0.00 1.5488 0.000 0.000 0.9 1.000 0.0111 0.000 0.3033 0.3659 0.2681 0.8781 0.4966 0.9197 0.9526 0.4493 0.0758 0.0072 0.00 1.9909 0.0494 0.0153 Mean (m) 0.0613 0.0007 0.0007 0.0198 0.00 1.7725 0.00 1.9 1.8 0.9963 0.00 1.00 0.00 1.0020 0.9998 1.00 1.9098 0.9997 0.6 0.3 0.00 1.9048 0.9997 0.0003 0.0002 0.9943 0. .7408 0.1647 0.2 0.0002 0.5 0.9659 0.0988 0.9630 0.2222 0.3 0.0003 0.9866 0. 297 1.150 1.159 1.192 2.340 1.511 3.419 1.587 1.288 2.486 1.539 1.714 1.050 1.300 5.519 2.040 1.561 1.427 8 1.610 1.801 2.658 3.710 1.145 1.100 1.803 4.874 2.835 11 1.813 3.624 Years (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 20 25 1 1.430 25 1.062 13.606 1.677 1.070 1.353 2.410 2.604 13.811 1.276 1.116 1.110 1.252 3.072 1.211 2.195 1.585 Years (n) 1 2 3 4 5 6 7 8 9 10 11 12 1.464 1.369 1.225 1.192 7.601 1.501 1.732 1.079 2.368 1.094 4 1.713 4.840 3.759 3.367 1.102 1.643 1.477 1.030 1.082 1.436 2.130 1.641 30 1.161 1.160 1.004 3.313 11.594 2.999 2.974 2.125 1.980 2.551 1.061 1.232 1.562 1.796 2.133 1.441 3.478 13 1.870 2.405 1.157 10.768 5.030 1.172 4.144 2.661 6.838 1.826 3.106 3.282 2 1.922 .152 3.082 1.219 1.180 1.502 2.149 1.412 1.384 1.749 2.386 4.827 6.886 2.993 2.177 6.322 1.573 1.407 1.521 1.986 3.149 1.806 2.001 3.186 3.423 1.939 2.108 4.937 3.777 20 1.392 1.250 1.583 4.207 3.870 5.216 1.313 2.117 5.277 1.772 1.666 7 1.807 5.883 4.481 1.126 1.498 3.379 4.300 1.260 1.191 2.685 1.275 8.504 1.435 5.443 1.040 1.411 4.358 2.403 1.127 1.074 2.294 1.642 5.578 2.138 3.700 3.020 1.594 1.565 2.718 1.773 3.278 3.476 2.295 1.243 1.665 1.853 3.011 2.012 1.558 1.167 1.791 1.051 1.653 3.061 1.159 6.518 1.126 1.960 7.925 2.797 4.468 1.010 1.856 3.641 3 1.052 3.197 2.262 1.416 1.967 2.041 1.083 1.310 4.194 1.105 2.261 2.226 15 1.785 5.346 1.785 8.630 1.851 1.059 3.104 1.395 3.005 2.093 1.076 2.558 2.689 1.338 1.488 2.360 1.046 4.234 6.344 1.660 3.786 17.426 1.252 2.090 1.662 18 1.346 1.188 1.629 1.386 2.166 1.397 2.138 1.311 1.707 4.828 1.254 1.191 1.331 1.060 1.440 1.061 1.159 2.082 2.292 Interest rates (r) % 16 17 1.623 10 1.217 1.172 2.Management Accounting Tables 343 Table VII Compound interest Table shows value of £1 at compound interest (1 + r)n Interest rates (r) % 5 6 1.848 9 1.685 2.268 1.210 1.727 10.815 4.105 1.842 2.319 1.720 2.695 6.100 2.230 1.316 1.195 2.469 1.267 1.480 1.220 1.949 2.839 3.602 1.853 3.728 2.690 2.332 2.762 1.080 1.953 2.190 1.265 1.518 4.124 1.580 2.200 1.094 1.759 4.539 1.170 1.021 4.452 3.836 14 1.342 3.140 1.898 1.158 1.066 3.172 1.305 1.120 1.176 19 1.304 2.513 1.689 1.367 2.451 9.020 1.604 8. 686 0.371 0.064 9.083 0.229 0.083 14% 0.108 0.990 0.728 0.513 0.641 Table VIII Present value factors.788 0.007 10.886 7.751 0.736 264.681 0.855 0.558 0.215 0.407 38.700 0.534 0.803 2% 0.397 0.936 6.149 0.050 705.461 40.636 0.250 0.898 5.107 0.205 0.933 0.853 0.818 5.183 0.500 0.924 0.319 0.093 0.804 0.070 0.494 0.980 0.769 0.137 15.596 11.555 0.980 0.061 0.298 30.452 0.669 8.962 0.621 0.208 0.820 0.292 0.589 32.327 0.322 0.140 0.456 0.361 0.123 12% 0.714 0.106 50.064 0.184 1% 0.351 0.257 0.497 0.182 0.811 0.400 0.855 0.920 5.138 13.376 0.147 11.916 10.974 27.386 0.877 0.230 4.676 0.287 0.081 0.888 0.467 0.820 0.396 14.254 11.163 0.792 0.294 0.199 0.053 0.417 0.424 0.826 0.943 0.146 0.187 0.350 0.095 0.247 0.284 0.270 0.076 8.601 0.870 0.887 0.705 0.190 22.837 0.135 0.926 0. Present value of £1 (1 + r)-n Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Interest rates (r) % 6% 8% 0.683 0.374 51.237 0.519 0.261 7.263 0.350 0.625 0.961 0.116 0.513 0.456 0.737 28.507 0.756 0.393 62.270 0.239 0.698 23.857 0.650 0.905 0.046 .822 0.334 4.215 0.535 6.942 0.790 0.564 0.870 0.861 0.288 8.180 0.758 0.265 19.469 0.523 21.497 0.896 4.338 95.394 0.592 0.463 0.104 0.130 0.422 10% 0.474 9.743 26.368 0.871 0.366 32.836 0.287 39.925 0.665 0.760 0.794 0.699 9.906 0.660 0.853 0.198 0.164 0.429 77.153 7.893 0.290 0.839 15.703 0.232 0.552 18.658 0.344 Management Accounting Tables 12 13 14 15 20 25 3.315 0.951 0.420 13.675 0.540 0.432 0.123 0.923 0.123 0.731 0.887 5.572 0.363 4.646 17.404 0.890 0.475 0.583 0.0896 0.056 15% 0.630 0.592 0.942 0.422 86.874 6.909 0.462 5.797 0.627 0.647 4% 0.840 0.141 0.971 0.577 0.879 0.439 0.160 0.442 0.599 10.350 6.567 0.186 190.699 12.073 0.539 23.743 0.308 0.388 8.163 0.000 4.675 0.828 0.218 0.340 0.331 0.093 0.312 0.773 0.580 7.735 0.492 6.429 0.914 0.712 0.747 0.527 0.889 0.278 0.658 7.988 9.961 0. Management Accounting Tables 345 23 24 25 0.170 0.146 0.780 0.247 0.043 0.049 0.406 0.059 0.112 0.030 .066 0.375 0.035 0.092 0.622 0.040 0.634 0.788 0.038 0.158 0.390 0.102 0.262 0.610 0.074 0.233 0.795 0. 009 0.168 0.003 0.006 0.003 0.410 0.076 0.031 0.350 0.451 0.065 0.037 0.002 0.002 30% 0.820 0.125 0.009 0.718 0.335 0.847 0.038 0.108 0.071 0.015 0.002 0.346 Management Accounting Tables Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 16% 0.112 0.006 0.085 0.010 Interest rates (r) % 22% 24% 0.006 0.806 0.051 0.008 0.014 0.099 0.075 0.009 0.198 0.094 0.370 0.003 0.012 0.303 0.080 0.015 0.021 0.060 0.049 0.051 0.079 0.314 0.610 0.032 0.694 0.195 0.139 0.007 0.024 18% 0.194 0.743 0.227 0.145 0.012 0.167 0.060 0.476 0.005 0.005 0.004 26% 0.672 0.833 0.275 0.012 0.004 0.010 0.512 0.019 0.123 0.051 0.862 0.204 0.025 0.800 0.222 0.552 0.162 0.026 0.437 0.034 0.482 0.112 0.004 0.026 0.191 0.516 0.018 0.009 0.006 0.016 0.056 0.019 0.033 0.066 0.250 0.025 0.011 0.003 28% 0.016 20% 0.025 0.050 0.178 0.069 0.159 0.640 0.093 0.015 0.069 0.026 0.062 0.373 0.020 0.062 0.328 0.609 0.001 .017 0.108 0.592 0.023 0.012 0.043 0.137 0.402 0.263 0.075 0.794 0.007 0.005 0.551 0.135 0.052 0.004 0.341 0.781 0.116 0.477 0.233 0.040 0.093 0.084 0.579 0.022 0.178 0.045 0.262 0.028 0.035 0.249 0.207 0.031 0.008 0.054 0.015 0.023 0.168 0.032 0.769 0.018 0.028 0.044 0.007 0.014 0.179 0.094 0.107 0.125 0.137 0.423 0.019 0.500 0.013 0.055 0.397 0.005 25% 0.134 0.269 0.116 0.650 0.225 0.031 0.038 0.291 0.354 0.061 0.192 0.042 0.020 0.210 0.455 0.040 0.144 0.370 0.033 0.227 0.007 0.043 0.007 0.279 0.157 0.410 0.022 0.266 0.028 0.641 0.099 0.524 0.039 0.315 0.044 0.162 0.086 0.010 0.305 0.011 0.630 0.