Series: NOV 2015

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CSME – Nov 2015 – L2 – Q7 – Corporate Strategy Formulation

Analyzes reasons for slow growth in DAB phone sales, uses the S-shaped growth curve to evaluate market stages, and suggests sales improvement strategies.

Ade John is a graduate of XYZ University. For his final project work in the Department of
Electronics and Electrical Engineering, he designed a cell-phone that is rugged, cheap,
handy and not sophisticated.
During his national service year, he kept toying with the idea of manufacturing the cellphone. To ascertain that there is a market for the phone, he carried out a series of market surveys among rural farmers, artisans, market women, etc. Each time, he was convinced that a market actually exists for his design. He also made contact with some manufacturers of cell-phone components. He entered
into an agreement with CKT Japan to import cell-phone accessories to enable him
assemble them in Nigeria. DAB phone is the first of its kind in the Nigerian market and
production and assembly commenced in a small room in his uncle‟s house at Ikare.
The first batch of phones manufactured by DAB Company was supplied to cell-phone
vendors in cities on „sale or return‟ basis. To encourage distributors to accept the
phones, a 15% margin was allowed. In addition, independent sales persons (hawkers)
were given between 10 -12% margin to sell the product. In spite of the low price of DAB
phones, demand was disappointing at the end of the first year. Nevertheless, Ade John is
still optimistic about the commercial viability of the phone if only he could develop an
effective strategy to market the DAB phones

Required:
a. Identify and explain TWO reasons for the slow growth of sales of DAB phones. (4 Marks)
b. With the aid of an S-shaped growth curve, evaluate market development of DAB phones. (6 Marks)
c. Recommend the strategies that Ade John can use to improve sales. (5 Marks)

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CSME – Nov 2015 – L2 – Q6 – Corporate Governance

Evaluates how specific corporate governance issues impact the effectiveness of a company's governance.

Explain briefly how the following key issues in corporate governance establish how well or badly a company is governed:

a. The role and responsibilities of the board of directors
b. The composition and balance of the board of directors
c. Financial reporting, narrative reporting, and auditing
d. Directors’ remuneration
e. Risk management and internal control

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CSME – Nov 2015 – L2 – Q5 – Corporate Governance

Outlines key responsibilities and duties of the board in corporate governance, relevant for improving corporate structure and performance.

The owner of ABC Company learned from a conference and a professional magazine that weak corporate governance accounted for recent corporate failures in Nigeria. Many board members were found lacking a clear understanding of board responsibilities and duties.

Required:
The Managing Director will soon address the board and has requested a paper detailing the board’s responsibilities and duties.

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CSME – Nov 2015 – L2 – Q4 – Risk Management and Corporate Strategy

Analyzes strengths and weaknesses of Toyin Trust Insurance Plc pre- and post-2000 ownership changes, and suggests strategies for sustaining the company.

Toyin Trust Insurance Company is one of the duly registered insurance companies in Nigeria. Ten years after it started operations in 1990, the company had become a household name in the market. Its strengths included timely payment of claims and introduction of quality products that captured changing customers’ needs.

At inception, the company was 100% foreign-owned, with five of the seven directors being experienced expatriate insurance practitioners. However, by 2000, over 90% of the equity had been transferred to Nigerian investors. In 2009, following reorganization, many experienced senior managers resigned, and inexperienced staff took over key positions, leading to a decline in service quality and a 40% drop in premium collection.

Required:

a. Analyze the strengths of Toyin Trust Insurance Plc before 2000. (5 Marks)
b. Analyze the strengths and weaknesses of Toyin Trust Insurance Plc after 2000. (5 Marks)
c. Suggest essential strategies to sustain Toyin Trust Insurance Plc. (10 Marks)

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CSME – Nov 2015 – L2 – Q3 – Ethics in Business

Describes the nature of business and professional ethics, Kohlberg’s theory of moral development, and criticisms of the theory.

Kalu, a competent consultant and accountant, works in Bosun and Company Limited. The company realized that almost all of its newly employed entry-level staff are deficient in business and professional ethics. Consequently, the Human Resources Manager recommended to the CEO that a training program on business and professional ethics should be organized. Kalu is nominated as a resource person to speak at the training program.

Required:
a. How should Kalu explain the nature and importance of business ethics and professional ethics? (6 Marks)
b. Advise Kalu on how he should analyze Kohlberg’s theory of moral development in an attempt to explain to the trainee participants how people generally develop a sense of morality both in personal and professional life. (10 Marks)
c. Discuss any TWO of the criticisms of Kohlberg’s theory. (4 Marks)

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CSME – Nov 2015 – L2 – Q2 – Risk Management and Corporate Strategy

Develops a risk management program for theft, diversion, and safety issues; includes risk reduction and financing techniques.

Dolly Homes Plc is a real estate firm based in Abuja. The firm builds residential apartments and office blocks in five states of the federation. The objective of Dolly Homes Plc is to deliver high-quality, aesthetically designed, and professionally built homes/offices to its customers at competitive prices. It employs several skilled and casual workers, construction supervisors, construction engineers, architects, and quantity surveyors.

The company maintains a store at each of its building sites, each manned by a storekeeper and an assistant. Building materials are purchased centrally and delivered to sites per material schedules prepared by the quantity surveyor.

Patronage from middle and high-income brackets has been impressive; however, recently, the company has been receiving complaints about poor quality. The most alarming complaint involved a legal threat for injuries sustained when a kitchen cabinet collapsed in a client’s home.

Management’s investigation revealed theft of materials, diversion, and re-work waste due to poor finishing. There were also job site accidents, leading to employee injuries, lost hours, and increased medical claims.

Management decided to establish a risk management program to address theft, diversion, and health/safety issues.

Required:
a. As an Accountant, develop a risk management program to address Dolly Homes Plc’s problems. (8 Marks)
b. Advise management on techniques to reduce the frequency of risk exposures in the future. (6 Marks)
c. Suggest risk financing techniques to protect the company’s staff from injuries and accidents. (6 Marks)

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CSME – Nov 2015 – L2 – Q1c – Corporate Governance

Discusses the difference between rules-based and principles-based professional ethics in accountancy.

What is the main difference between a rules-based and a principles-based code of professional ethics for accountants?

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CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

There are different methods of managing and controlling risks. Explain and illustrate any THREE of the following approaches to risk management:
i. Risk Diversification
ii. Risk Transfer
iii. Risk Sharing
iv. Risk Hedging (15 Marks)

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CSME – Nov 2015 – L2 – Q1a – Risk Management and Corporate Strategy

Explains credit risk management concepts, including exposure, losses, residual risk, and appetite.

The finance director of Basket Company is preparing a proposal to present to the board of directors. He believes that the company is much too cautious in its policy of giving credit to customers. At the moment all customers are given 30 days’ credit. He believes that by increasing its exposure to credit risk, and increasing credit terms to 60 days, the company will achieve an increase in annual sales of up to 20%. He also thinks that some improvements in debt collection procedures will reduce the level of bad debts, although some bad debts cannot be avoided. He thinks that the value of sales where there is a default will fall each year from 2% of sales to 1.8% of sales. He proposes that in order to increase annual sales and profits, the company should be willing to increase its risk appetite and accept the risk of higher bad debts.

Required:

  1. Using this example of managing credit risk, explain and illustrate the meaning of:
    i. Exposure to risk
    ii. Risk of losses
    iii. Residual risk
    iv. Risk appetite

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PSAF – Nov 2015 – L2 – Q7 – Public Sector Reforms

Distinguish between basic infrastructure and development projects with examples and identify funding sources and characteristics.

In order to achieve some development objectives, nations place emphasis on priority programmes like the provision of basic infrastructure and development projects, all of which require appropriate funding.

Required:

a. By means of specific relevant examples, distinguish between “basic infrastructure” and “development projects”. (3 Marks)

b. Discuss TWO development objectives which the priority programmes you refer to in (a) above are planned to achieve. (4 Marks)

c. Identify TWO sources of funding for these priority projects stating TWO distinct characteristics of each source identified and TWO factors that facilitate the commercial viability of the projects. (8 Marks)

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PM – Nov 2015 – L2 – Q7 – Performance Measurement Systems

Evaluate weaknesses in Stuck Ltd’s MIS and suggest improvements for enhanced strategic decision-making.

Stuck Ltd manufactures industrial glues and solvents in a single large factory. Approximately 400 different inputs are used to produce the 35 specialist outputs, which range from ultra-strong glues used in aircraft manufacture to high-impact adhesives for construction sites.

Two years ago, with the company only just breaking even, the directors recognized the need for more information to control the business. To assist them with their strategic control, they established a Management Information System (MIS). This system is now operational but provides only the following limited information to the directors via their networked computer system:

  1. A summary business plan for this and the next two years. The plan includes details of expected future incomes and expenditure on existing product lines. It was produced by a new member of the accounting department without reference to past production data.
  2. Inventory balances on individual items of raw materials, finished goods, etc. This report is highly detailed and comprises 80% of the output from the MIS itself.
  3. A summary of changes in total demand for glues and solvents in the market over the last five years. This information is presented as a numerical summary in six different sections, with each section taking up one computer screen, so only one section can be viewed at a time.

Required:

(a) Comment on the weaknesses in the information currently being provided to the directors of the company. (9 Marks)

(b) Suggest how the information may be improved, with particular reference to other outputs the MIS might usefully provide to the directors. (6 Marks)

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PM – Nov 2015 – L2 – Q6 – Decision-Making Techniques

Evaluate whether Tee Company should replace Green with Brace and the best timing for changeover.

Tee Company makes and sells a product, the Green, which is nearing the end of its life. A replacement product, Brace, has been designed and test marketed, and the company is trying to decide when to replace Green with Brace. Tee Company only has the capability to produce one of the two products at a time.

Sales of Green are expected to be 100,000 units in the first quarter of Year 7 and are forecast to fall after that so that each quarter’s sales will be 10% less than those of the previous quarter. Green has a selling price of ₦14 per unit, and its Contribution to Sales ratio (C/S ratio) is 40%. The fixed costs of making Green in Year 7 will be ₦200,000 per quarter.

Test market results for Brace were very good, and demand for similar products is growing rapidly. Tee Company believes that sales of Brace can be predicted by the following equation:

Y = 80,000 + 6,000 T

Where:

  • Y = Sales of Brace in units per quarter
  • T = Time, measured in quarters. For the first quarter of Year 7 (January to March Year 7), T = 1; for the second quarter of Year 7, T = 2; etc.

The selling price of Brace will be ₦16, and its contribution per unit will be ₦6. Fixed costs will increase to ₦240,000 per quarter if Green is replaced by Brace.

To avoid disruption of the production of Tee’s other products, the changeover between Green and Brace must take place on either 1 January Year 7 or 1 July Year 7. The costs of changeover will differ depending upon which date is chosen, and the following information is available:

  1. Some of the machinery used to make the Green will no longer be required for the Brace. The written-down value of this machinery will be ₦250,000 on 1 January Year 7, and ₦220,000 by 1 July Year 7. Its net realizable value at 1 January Year 7 will be ₦140,000, but by 1 July Year 7, it will be ₦30,000.
  2. Some redundancies will result from the change of products. Redundancy payments of ₦40,000 will be made if the changeover occurs on 1 January, but these will rise to ₦50,000 by 1 July. The five administration workers concerned are each paid ₦20,000 per annum and will not be replaced. Their wages are not included in the costs given above.

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PM – Nov 2015 – L2 – Q5 – Standard Costing and Variance Analysis

Calculate material, labour, and variable overhead variances, and discuss causes for variances in KOMERE Limited’s cost system.

KOMERE Limited operates a Standard Costing System. Below are the standard and actual costs for October 2015:

Standard Cost Information:

Direct Material:

  • A: 20 kg at N100 per kg = N2,000
  • B: 30 kg at N80 per kg = N2,400

Direct Labour:

  • Skilled: 10 hours at N40 per hour = N400
  • Unskilled: 10 hours at N25 per hour = N400

Variable Overhead Cost:

  • 10 hours at N20 per hour = N200

Total Standard Cost per unit = N5,250

Actual Results:

  • Direct Material:
    • Material A: 105,000 kg purchased at N10,290,000; 99,000 kg consumed
    • Material B: 148,000 kg purchased at N11,988,000; 144,000 kg consumed
  • Direct Labour:
    • Skilled Labour: 56,000 hours at N2,352,000
    • Unskilled Labour: 56,000 hours at N1,344,000
  • Variable Overhead: N1,064,000
  • Actual Production: 4,800 units

Required:

(a) Calculate all the relevant variances. (8 Marks)

(b) What are possible causes of the variances computed? (7 Marks)

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PM – Nov 2015 – L2 – Q4 – Strategic Management Accounting

Examine strategic and performance issues MOOJ Ltd. must consider before adopting internet trading.

The existing business of MOOJ Ltd. is very profitable, with forecasts for the next year
showing that this trend of profitability will continue.
MOOJ Limited manufactures all of its own clothes, and then sells these direct to the
public through 105 branches located around Nigeria. The branches are not run as profit
centres; prices are set centrally for the clothes and the costs of each branch are
monitored at the Head Office. Surprisingly, there is no minimum or maximum turnover
requirement for each branch. In the company‟s view, this enables staff to focus on
customer service without the concern of meeting a profit figure. The strategy obviously
works well, given the company‟s results.
The existing Information Technology (IT) infrastructure is based around each shop
maintaining its own inventory records. There is no Wide Area Network (WAN) and Head
Office has few integrated systems.
The Directors recognise that the current IT infrastructure of MOOJ Limited is inadequate
for Internet trading.
The Board of MOOJ Limited is currently discussing whether or not to start selling clothes
on the Internet.

Required:
Identify and discuss the strategic and performance management issues that the Board of
MOOJ Limited will have to address prior to a decision being taken regarding trading on
the Internet.

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PM – Nov 2015 – L2 – Q3 – Costing Systems and Techniques

Prepare profit or loss statement for each product W, X, Y, and Z, and evaluate impact of discontinuing additional processing.

Casko Limited manufactures four products from a single chemical process and a single
raw material. The production director is considering proposals to discontinue certain
production process and has provided the following information:
(i) The cost of raw materials for the year just ended was N1,320,000.
(ii) The initial processing costs amounted to N2,564,600.
(iii) All the four products W, X, Y and Z are produced simultaneously at a single split-off point.
(iv) Product Y is sold immediately without further processing.
(v) The other three products are subjected to further processing before being sold.
(vi) It is the company‟s policy to apportion the cost prior to split-off point on a suitable
sales value basis.
(vii) The output, sales and the additional processing costs for the past year were as
follows:

Product Output (units) Sales (N) Additional Processing Costs (N)
W 400,000 3,840,000 800,000
X 89,230 1,160,000 640,000
Y 5,000 160,000
Z 9,000 1,200,000 40,000

The proposal being considered by the management is to sell the products to other
processors immediately after the split-off point without any of the present additional
processing. The additional processing costs of products W,X and Z would either no
longer be incurred or be charged to an alternative profitable use. The prices per unit to
be obtained from the other processors would be: W: N6.40, X: N8, Y: N32, and Z: N100.

You are required to prepare a statement of:
a. i. The profit or loss on each of the four products. (10 Marks)
ii. The change in the profit or loss given in your solution to
(i) above, if the proposals being considered were adopted. (8 Marks)
b. Identify TWO long-run pricing decision approaches that are relevant
to a price setting firm. (2 Marks)

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PM – Nov 2015 – L2 – Q2 – Standard Costing and Variance Analysis

Calculate material price and usage planning and operational variances for wheat used in baking cake and bread, and discuss the benefits of these variances.

Pestel Limited produces cake and bread which it supplies to a major supermarket in
Abuja. It holds no inventories because it adopts the Just-In-Time (JIT) system.
The standard cost of the wheat used in baking the products is N200 per kg. Each piece
of cake uses 0.5kg of wheat while each loaf of bread uses 2kg of wheat.
The production levels for cake and bread for the month of October were as follows:

The actual cost of wheat in October was N232 per kg. 496,000kg of wheat was used to
bake the bread and 190,000kg was used to bake the cake.
The global prices of wheat increased by 18% in the month of October.

At the beginning of the month, the supermarket group made an expected request for an
immediate shape change to the cake resulting in 5% more wheat than previously
required. This change also brought about production delays which caused a reduction in
production by 20,000 units of cake in that month. The production director is given the
task of purchasing relevant input materials and any production request which occur,
although he does not take responsibility for setting standard costs.
Required:

(a) Compute the following variances for the month of October for each product and in total:

(i) Material price planning variances, (4 Marks)

(ii) Material price operational variances. (4 Marks)

(iii) Material usage planning variances, (4 Marks)

(iv) Material usage operational variances (4 Marks)

(b) Discuss the benefits of planning and operational variances to a management accountant. (4 Marks)

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PM – Nov 2015 – L2 – Q1 – Decision-Making Techniques

Comparison of two machine purchase options - ZIGMA 5000 and DELPHA 7000 using profitability statement, cash flows, payback period and NPV.

The Board of Directors of Danda Company Limited is proposing the purchase of either of two machines that have been proved adequate for the production of an engineering product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in the first year would be affected by installation challenges and inadequate understanding of the operating instructions of the machines.

Information available from the production profile of the two machines are as shown below:

ZIGMA 5000:

Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:

Cost of plant is N18,300,000 while the life span is 6 years.

Other information relevant to the company’s operations and administration are:

(i) Selling price per unit is N300.

(ii) Variable cost per unit is N150.

(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.

(iv) Company depreciation policy is straight line basis.

(v) The budgeted production capacity is 100,000 units.

(vi) No opening or closing inventory is envisaged.

(vii) All sales are for cash.

(viii) All costs are for cash.

Required:

a. Prepare the SIX year profitability statement for the two machines. (6 Marks)

b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)

c. What is the payback period for the two machines? (7 Marks)

d. Determine the Net Present Value (NPV) of the two machines if the acceptable discount rate for the company is 15%. (7 Marks)

e. Which of the two machines should the company acquire? (4 Marks)

 

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TAX – Nov 2015 – L2 – Q7 – Taxation of Trusts and Estates

This question requires the computation of income tax payable by trustees and the amount due to beneficiaries from the settlement of Chief Sarki Oliver for the 2010 year of assessment.

Chief Sarki Oliver died peacefully in his sleep on 31 December 2009. He is survived by three children – Jimmy, Ngozi, and Charles. Two Trustees were appointed for the Settlement created in favor of the children to ensure that they were not badly affected by the demise of their father. Details presented by the two Trustees for the year ended 31 December 2010 are as follows:

Income N’000
Rental income (gross) 225,000
Trading income 250,000
Dividends (gross) 170,000
Interest on bank deposit 107,500
Sundry income 105,000
Total Income 857,500

Additional Information: (i) The Interest income is from Super Bank plc
(ii) Administrative and other expenses amounted to N32,000
(iii) Interest on debt repayment by the Settlement was N25,000
(iv) Fixed annuity to a beneficiary was N41,000 (Gross)
(v) Each beneficiary is entitled to 1/5 share of the net distributable income
(vi) Under the terms of the Trust Deed, the Trustees made discretionary payments to:

  • Jimmy N30,000
  • Ngozi N26,000
  • Charles N15,000
    (vii) Capital allowances – N64,000
    (viii) Trustees’ remuneration: Fixed amount of N25,000 each plus 2% of Computed Income
    (ix) The children have no other income.

In view of the recent agitation by the extended family members, you were contracted as
a consultant to compute the following:

Required:
a. Compute the income tax payable by the Trustees on the Trust income. (8 Marks)
b. Calculate the amount due to each beneficiary of the Settlement. (7 Marks)

 

 

 

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TAX – Nov 2015 – L2 – Q6 – Companies Income Tax (CIT)

This question involves the computation of total capital allowances for JohnGab Ltd's first five years and capital allowances for the first three years of assessment.

As part of the induction programme for the newly recruited staff of your firm of Tax Consultants, you have been saddled with the responsibility of making a presentation on companies tax computation for beginners during the firm’s training session.

The following data were submitted for the purpose of the training:

JohnGab Limited, a training company, was incorporated on 1 June 2008 but commenced business on 1 September 2008. The following information is made available to you:

Period Assessable Profit (₦’000)
Four month-period ended 31 December 2008 37,500
Year ended 31 December 2009 60,000
Year ended 31 December 2010 90,000

The following assets were purchased during the period:

Date Asset Cost (₦’000)
5 June 2008 Land and building 17,500
1 July 2008 Motor car 6,000
15 October 2008 Machinery 14,000
28 February 2009 Furniture 3,750
1 May 2009 Delivery van 5,000

In order to clearly explain the extant rules on computation of capital allowances by
companies, you are required to:
a. State the basis periods of assessment and compute the total capital allowances for the first five years of assessment. (5 Marks)
b. Calculate the capital allowances due to be utilized for the first three years of assessment in respect of the qualifying capital expenditure incurred by the company. (5 Marks)

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TAX – Nov 2015 – L2 – Q5b – Companies Income Tax (CIT)

This question requires the computation of Adebola Nigeria Limited's tax liabilities and withholding tax payable for 2013 and 2014.

Adebola Nigeria Limited has been trading for many years. The company makes up its accounts to 31 December annually. The extracts from its Statement of Comprehensive Income for the years ended 31 December 2013 and 2014 (as adjusted for tax purposes) are as follows:

Year ended 31 December 2014 (₦) 2013 (₦)
Profit for the year 14,000,000 10,000,000
Bank interest received (gross) 2,400,000 1,600,000
Debenture interest received (gross) 800,000 800,000
Dividend received from Adesemowo Ltd. (Net) 720,000 720,000
Dividend paid to shareholders (gross) 6,000,000 4,000,000

Required:
i. Compute the company’s tax liabilities for the relevant years of assessment. Ignore capital allowances. (5 Marks)
ii. Determine the net withholding tax payable or receivable by Adebola Nigeria Limited, arising from dividends paid and received by it. (4 Marks)

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