Subject: MANAGEMENT ACCOUNTING

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  • 20 Marks

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.

The Management Information System (MIS) division of KayCee Ltd provides consulting services to its clients as well as to other divisions within the group. Consultants always work in teams of two on every consulting day. Each consulting day is charged to external clients at GH¢750, which represents cost plus a 150% profit markup. The total cost per consulting day has been estimated to be 80% variable and 20% fixed.

The director of the Human Resources (HR) division of KayCee Ltd has requested the services of two teams of consultants from the MIS division on five days per week for a period of 48 weeks, and has suggested that she meets with the director of the MIS division in order to negotiate a transfer price. The director of the MIS division has responded by stating that he is aware of the limitations of using negotiated transfer prices and intends to charge the HR division GH¢750 per consulting day.

The MIS division always uses Internal video-conference equipment on all internal consultations which would reduce the variable costs by GH¢50 per consulting day.

Note: The conference equipment can only be used when providing internal consultations.

Required:

a) Calculate and discuss the transfer prices per consulting day at which the MIS division should provide consulting services to the HR division in order to ensure that the profit of KayCee Ltd is maximized in each of the following situations:

i) Every pair of consultants in the MIS division is 100% utilized during the required 48-week period in providing consulting services to external clients, i.e. there is no spare capacity.
ii) There is one team of consultants who, being free from other commitments, would be available to undertake the provision of services to the HR division during the required 48-week period. All other teams of consultants would be 100% utilized in providing consulting services to external clients.
iii) A major client has offered to pay the MIS division GH¢264,000 for the services of two teams of consultants during the required 48-week period.

(14 marks)

b) Explain THREE (3) limitations of negotiated transfer prices.

(6 marks)

…

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.Read More »

  • 20 Marks

MA – Mar 2023 – L2 – Q1a – Other aspects of performance measurement

Calculate EVA for Vilagio Engineering for 2021 and 2022 and comment on its performance.

Vilagio Engineering (VE) is a listed company manufacturing pumps and valves for use in the irrigation sector. The CEO has tasked you to assess Vilagio’s performance using Economic Value Added. Below is an extract of their financial statements.

Income Statement extract for the year:

Additional information:
i) Capital employed at the end of 2020 amounted to GH¢350 million.
ii) VE had non-capitalised leases valued at GH¢16 million in each of the years 2020 to 2022. Ignore amortisation calculations.
iii) VE’s pre-tax cost of debt was estimated to be 9% in 2021 and 10% in 2022.
iv) VE’s cost of equity was estimated to be 15% in 2021 and 17% in 2022.
v) The target capital structure is 70% equity, 30% debt.
vi) The rate of taxation is 30% in both 2021 and 2022.
vii) Economic depreciation amounted to GH¢64 million in 2021 and GH¢72 million in 2022. These amounts were equal to the depreciation used for tax purposes and depreciation charged in the income statements.
viii) Interest payable amounted to GH¢6 million in 2021 and GH¢8 million in 2022.
ix) Other non-cash expenses amounted to GH¢20 million per year in both 2021 and 2022.

Required:
a) Estimate the Economic Value Added (EVA) for Vilagio Engineering for both 2021 and 2022, and comment on the company’s performance.
b) State THREE (3) advantages and TWO (2) disadvantages of EVA.
c) Explain the relationship between EVA and Net Present Value (NPV).

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  • 9 Marks

MA – Mar 2023 – L2 – Q2a – Standard costing and variance analysis

Prepare a production plan to maximize profit using throughput approach with given labor hours and demand.

The statement below relates to the costs and selling price of a unit of three products produced by a company:

Additional information provided:
Labour rate per hour for all the products is GH¢8
Demand for the year in units: A – 4,000; B – 2,500; C – 3,600
Available labour hours: 65,000
Required:
i) Prepare a production plan that will maximize profit using the throughput approach.
(9 marks)
ii) Calculate the Through Put Accounting Ratio for each product assuming that the conversion
cost is based on the annual demand.
(6 marks)

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  • 5 Marks

MA – Mar 2023 – L2 – Q2b – Standard costing and variance analysis

Explain four considerations management should take into account before investigating adverse material usage variance.

PTC, for the past couple of months, recorded adverse variances in material usage for one of its products. As a result, Management is considering carrying out an investigation on these adverse variances.

Required:
Explain FOUR (4) considerations that Management should take account of before proceeding with the investigation.

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  • 10 Marks

MA – Mar 2023 – L2 – Q3b – Budgeting

Prepare a budgeted income statement for AJ Ltd based on given projections and assumptions for 2023.

The Income Statement of AJ Ltd for the year ended December 2022 was as follows:

Projections for 2023:

Sales: The current sales represent 15% of market share. Management plans to increase this to 20%. Meanwhile, industry experts are projecting a 12% growth in the sector.
Cost of Sales: Improvement in material quality will reduce cost of sales by 5% from the current level.
Other Expenses:
i) Administrative costs will increase by 20% over the 2022 actual figure.
ii) Selling and distribution costs will increase by 18% over the 2022 actual figure.
iii) Finance costs will remain at the same percentage of sales revenue as in 2022.

Required:
Prepare the budgeted income statement for the year 2023.

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  • 15 Marks

MA – Mar 2023 – L2 – Q4a – Discounted cash flow

Determine whether Arkoo Ltd's project is viable using the NPV method.

Question:
Arkoo Ltd (Arkoo) is planning to invest GH¢5 million in its sound engineering studio with a life span of 10 years. Arkoo charges GH¢5.50 for every compact disc (CD) produced with an associated cost of GH¢4.80. The company plans to produce 8,700,000 CDs each year. Arkoo evaluates all investment opportunities against a discount factor of 21%.

Required:
i) Determine whether the project is viable or not using the Net Present Value (NPV) method.
ii) Calculate the percentage by which the following conditioning factors of Arkoo must change
in order for NPV to be zero.

  • Selling price (3 marks)

    • Variable cost (3 marks)

  • Sales Volume (3 marks)
  • Initial investment (3 marks)

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  • 5 Marks

MA – Mar 2023 – L2 – Q4b – Budgetary Control

Define budgetary control and its purpose in business operations.

i) Explain budgetary control. (2 marks)

ii) Recommend TWO (2) ways by which budgetary control can help to provide information to ensure operational continuity. (3 marks)

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  • 20 Marks

MA – March 2023 – L2 – Q5 – Cost-volume-profit (CVP) analysis

Prepare a profit statement based on demand and propose an optimal production plan considering resource limitations and price adjustments.

The following data relates to the planned activity of three products of Parlour Plc:

Demand (units):
Tintin: 15,000
Panpan: 10,000
Sonson: 12,500
i) Due to the general rise in prices, the company envisages that labour and variable production overhead costs will rise by 20% while material costs increase by 15%. It is the policy of the firm to maintain at all times the current mark-up (to the nearest whole number) on the total variable cost for each of the three products.

ii) The following resources are available to support the production:

Material: 60,000kgs
Labour hours: 65,000 hours
iii) The three products are complements, and the company envisages that 50% of the demand for all products has to be met for any operating year.

iv) The annual fixed cost, which will not be affected by the price adjustment, is estimated at GH¢42,500.

Required:
a) Prepare a profit statement assuming the company has capacity to meet all demand and considering the needed adjustments to reflect the proposed price changes. (8 marks)

b) Based on the resource limitation and proposed adjustment, what should be the optimal production plan? (10 marks)

c) Determine the associated profit from the optimal production plan. (2 marks)

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  • 20 Marks

MA – Nov 2019 – L2 – Q1a – Performance analysis

Calculation of key financial ratios for GRAT Authority and evaluation of financial performance from 2017 to 2018.

GRAT Authority operates passenger railway services and is responsible for the maintenance of track signaling equipment, and other facilities such as stations. In recent years it has been criticized for providing poor services to the traveling public in terms of punctuality, safety, and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities, and track maintenance programs in an attempt to address these criticisms.

Summarized financial results for GRAT Authority for the last two years are given below:

Extracts of Statement of Profit or Loss account for the year ended 31 December

Statement of Financial Position as at 31 December

Required:

a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings.

i) Return on capital employed (ROCE)
ii) Net profit margin
iii) Asset turnover
iv) Current ratio

b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios.

c) Suggest THREE (3) non-financial indicators that could be useful in measuring the performance of a passenger railway service and explain why your chosen indicators are important.

d) Explain the term short-termism and suggest ways in which a long-term view can be encouraged.
(Total: 20 marks)

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  • 6 Marks

MA – Nov 2019 – L2 – Q2a – Decision-Making Techniques

Explains how profit maximization leads to shareholder wealth maximization and how constraints, satisficing, and optimizing affect decision-making.

a) Management Accountants are often engaged in decision-making processes that would yield optimal results, given a limited amount of resources available. Such decisions are expected to yield to shareholder wealth maximization through the maximization of profits. Unfortunately, however, constraints sometimes lead to satisficing rather than optimizing decision making.

Required:
i) Explain how profit maximization can lead to shareholder wealth maximization. (4 marks)

ii) Explain how constraints, satisficing, and optimizing affect the management accountant’s decision-making. (6 marks)

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  • 20 Marks

Determine the optimal transfer pricing for consulting services between divisions within KayCee Ltd based on varying capacity scenarios.

The Management Information System (MIS) division of KayCee Ltd provides consulting services to its clients as well as to other divisions within the group. Consultants always work in teams of two on every consulting day. Each consulting day is charged to external clients at GH¢750, which represents cost plus a 150% profit markup. The total cost per consulting day has been estimated to be 80% variable and 20% fixed.

The director of the Human Resources (HR) division of KayCee Ltd has requested the services of two teams of consultants from the MIS division on five days per week for a period of 48 weeks, and has suggested that she meets with the director of the MIS division in order to negotiate a transfer price. The director of the MIS division has responded by stating that he is aware of the limitations of using negotiated transfer prices and intends to charge the HR division GH¢750 per consulting day.

The MIS division always uses Internal video-conference equipment on all internal consultations which would reduce the variable costs by GH¢50 per consulting day.

Note: The conference equipment can only be used when providing internal consultations.

Required:

a) Calculate and discuss the transfer prices per consulting day at which the MIS division should provide consulting services to the HR division in order to ensure that the profit of KayCee Ltd is maximized in each of the following situations:

i) Every pair of consultants in the MIS division is 100% utilized during the required 48-week period in providing consulting services to external clients, i.e. there is no spare capacity.
ii) There is one team of consultants who, being free from other commitments, would be available to undertake the provision of services to the HR division during the required 48-week period. All other teams of consultants would be 100% utilized in providing consulting services to external clients.
iii) A major client has offered to pay the MIS division GH¢264,000 for the services of two teams of consultants during the required 48-week period.

(14 marks)

b) Explain THREE (3) limitations of negotiated transfer prices.

(6 marks)

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  • 20 Marks

MA – Mar 2023 – L2 – Q1a – Other aspects of performance measurement

Calculate EVA for Vilagio Engineering for 2021 and 2022 and comment on its performance.

Vilagio Engineering (VE) is a listed company manufacturing pumps and valves for use in the irrigation sector. The CEO has tasked you to assess Vilagio’s performance using Economic Value Added. Below is an extract of their financial statements.

Income Statement extract for the year:

Additional information:
i) Capital employed at the end of 2020 amounted to GH¢350 million.
ii) VE had non-capitalised leases valued at GH¢16 million in each of the years 2020 to 2022. Ignore amortisation calculations.
iii) VE’s pre-tax cost of debt was estimated to be 9% in 2021 and 10% in 2022.
iv) VE’s cost of equity was estimated to be 15% in 2021 and 17% in 2022.
v) The target capital structure is 70% equity, 30% debt.
vi) The rate of taxation is 30% in both 2021 and 2022.
vii) Economic depreciation amounted to GH¢64 million in 2021 and GH¢72 million in 2022. These amounts were equal to the depreciation used for tax purposes and depreciation charged in the income statements.
viii) Interest payable amounted to GH¢6 million in 2021 and GH¢8 million in 2022.
ix) Other non-cash expenses amounted to GH¢20 million per year in both 2021 and 2022.

Required:
a) Estimate the Economic Value Added (EVA) for Vilagio Engineering for both 2021 and 2022, and comment on the company’s performance.
b) State THREE (3) advantages and TWO (2) disadvantages of EVA.
c) Explain the relationship between EVA and Net Present Value (NPV).

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  • 9 Marks

MA – Mar 2023 – L2 – Q2a – Standard costing and variance analysis

Prepare a production plan to maximize profit using throughput approach with given labor hours and demand.

The statement below relates to the costs and selling price of a unit of three products produced by a company:

Additional information provided:
Labour rate per hour for all the products is GH¢8
Demand for the year in units: A – 4,000; B – 2,500; C – 3,600
Available labour hours: 65,000
Required:
i) Prepare a production plan that will maximize profit using the throughput approach.
(9 marks)
ii) Calculate the Through Put Accounting Ratio for each product assuming that the conversion
cost is based on the annual demand.
(6 marks)

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  • 5 Marks

MA – Mar 2023 – L2 – Q2b – Standard costing and variance analysis

Explain four considerations management should take into account before investigating adverse material usage variance.

PTC, for the past couple of months, recorded adverse variances in material usage for one of its products. As a result, Management is considering carrying out an investigation on these adverse variances.

Required:
Explain FOUR (4) considerations that Management should take account of before proceeding with the investigation.

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  • 10 Marks

MA – Mar 2023 – L2 – Q3b – Budgeting

Prepare a budgeted income statement for AJ Ltd based on given projections and assumptions for 2023.

The Income Statement of AJ Ltd for the year ended December 2022 was as follows:

Projections for 2023:

Sales: The current sales represent 15% of market share. Management plans to increase this to 20%. Meanwhile, industry experts are projecting a 12% growth in the sector.
Cost of Sales: Improvement in material quality will reduce cost of sales by 5% from the current level.
Other Expenses:
i) Administrative costs will increase by 20% over the 2022 actual figure.
ii) Selling and distribution costs will increase by 18% over the 2022 actual figure.
iii) Finance costs will remain at the same percentage of sales revenue as in 2022.

Required:
Prepare the budgeted income statement for the year 2023.

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  • 15 Marks

MA – Mar 2023 – L2 – Q4a – Discounted cash flow

Determine whether Arkoo Ltd's project is viable using the NPV method.

Question:
Arkoo Ltd (Arkoo) is planning to invest GH¢5 million in its sound engineering studio with a life span of 10 years. Arkoo charges GH¢5.50 for every compact disc (CD) produced with an associated cost of GH¢4.80. The company plans to produce 8,700,000 CDs each year. Arkoo evaluates all investment opportunities against a discount factor of 21%.

Required:
i) Determine whether the project is viable or not using the Net Present Value (NPV) method.
ii) Calculate the percentage by which the following conditioning factors of Arkoo must change
in order for NPV to be zero.

  • Selling price (3 marks)

    • Variable cost (3 marks)

  • Sales Volume (3 marks)
  • Initial investment (3 marks)

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  • 5 Marks

MA – Mar 2023 – L2 – Q4b – Budgetary Control

Define budgetary control and its purpose in business operations.

i) Explain budgetary control. (2 marks)

ii) Recommend TWO (2) ways by which budgetary control can help to provide information to ensure operational continuity. (3 marks)

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  • 20 Marks

MA – March 2023 – L2 – Q5 – Cost-volume-profit (CVP) analysis

Prepare a profit statement based on demand and propose an optimal production plan considering resource limitations and price adjustments.

The following data relates to the planned activity of three products of Parlour Plc:

Demand (units):
Tintin: 15,000
Panpan: 10,000
Sonson: 12,500
i) Due to the general rise in prices, the company envisages that labour and variable production overhead costs will rise by 20% while material costs increase by 15%. It is the policy of the firm to maintain at all times the current mark-up (to the nearest whole number) on the total variable cost for each of the three products.

ii) The following resources are available to support the production:

Material: 60,000kgs
Labour hours: 65,000 hours
iii) The three products are complements, and the company envisages that 50% of the demand for all products has to be met for any operating year.

iv) The annual fixed cost, which will not be affected by the price adjustment, is estimated at GH¢42,500.

Required:
a) Prepare a profit statement assuming the company has capacity to meet all demand and considering the needed adjustments to reflect the proposed price changes. (8 marks)

b) Based on the resource limitation and proposed adjustment, what should be the optimal production plan? (10 marks)

c) Determine the associated profit from the optimal production plan. (2 marks)

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  • 20 Marks

MA – Nov 2019 – L2 – Q1a – Performance analysis

Calculation of key financial ratios for GRAT Authority and evaluation of financial performance from 2017 to 2018.

GRAT Authority operates passenger railway services and is responsible for the maintenance of track signaling equipment, and other facilities such as stations. In recent years it has been criticized for providing poor services to the traveling public in terms of punctuality, safety, and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities, and track maintenance programs in an attempt to address these criticisms.

Summarized financial results for GRAT Authority for the last two years are given below:

Extracts of Statement of Profit or Loss account for the year ended 31 December

Statement of Financial Position as at 31 December

Required:

a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings.

i) Return on capital employed (ROCE)
ii) Net profit margin
iii) Asset turnover
iv) Current ratio

b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios.

c) Suggest THREE (3) non-financial indicators that could be useful in measuring the performance of a passenger railway service and explain why your chosen indicators are important.

d) Explain the term short-termism and suggest ways in which a long-term view can be encouraged.
(Total: 20 marks)

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  • 6 Marks

MA – Nov 2019 – L2 – Q2a – Decision-Making Techniques

Explains how profit maximization leads to shareholder wealth maximization and how constraints, satisficing, and optimizing affect decision-making.

a) Management Accountants are often engaged in decision-making processes that would yield optimal results, given a limited amount of resources available. Such decisions are expected to yield to shareholder wealth maximization through the maximization of profits. Unfortunately, however, constraints sometimes lead to satisficing rather than optimizing decision making.

Required:
i) Explain how profit maximization can lead to shareholder wealth maximization. (4 marks)

ii) Explain how constraints, satisficing, and optimizing affect the management accountant’s decision-making. (6 marks)

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