Subject: MANAGEMENT ACCOUNTING

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  • 4 Marks

MA – Nov 2024 – L2 – Q5b – Profit Maximization and Batch Selection

Determination of the optimal number of printer batches to import and sell to maximize profit.

Awuah deals in online business, importing and selling printers. The cost of each set of printers varies depending on the number purchased, although printers can only be purchased in batches of 1,000 units. Awuah also has to pay import taxes which vary according to the quantity purchased. Awuah has already carried out some market research and identified that sales quantities are expected to vary depending on the price charged.

The following data has been established for the first month:

Number of Batches Imported and Sold Average Cost per Unit (Including Import Taxes) (GH¢) Total Fixed Costs per Month (GH¢) Expected Selling Price per Unit (GH¢)
1 10.00 10,000 20
2 8.80 10,000 18
3 7.80 12,000 16
4 6.40 12,000 13

Required:

Determine the number of batches of printers Awuah should import and sell to maximize profit.

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  • 16 Marks

MA – Nov 2024 – L2 – Q5a – Limiting Factor Decision and Profit Maximization

Determination of the optimum production plan considering scarce resources.

Manche produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Product C L
Unit Selling Price (GH¢) 130 160
Resources per Unit:
Direct Labour (GH¢8 per hour) 3 hours 5 hours
Material A (GH¢3 per kg) 5 kg 4 kg
Material B (GH¢7 per litre) 2 litres 1 litre
Machine Hours (GH¢10 per hour) 3 hours 4 hours
Fixed Overhead (GH¢8 per hour) 1 hour 1 hour

Market research shows that the maximum demand for products C and L during August 2024 is 500 units and 800 units respectively. This does not include an order that Manche has agreed with a commercial customer for the supply of 250 units of C and 350 units of L at selling prices of GH¢100 and GH¢135 per unit, respectively. Failure by Manche to deliver the order in full by the end of August will cause Manche to incur a GH¢5,000 financial penalty.

At a recent meeting between the Purchasing Manager and Production Manager to discuss the production plans of C and L for August, the following resource restrictions for the year were identified:

  • Direct Labour Hours: 90,000 hours
  • Machine Hours: 90,000 hours

The resource restrictions were evenly distributed throughout the year.

Required:

i) Prepare the optimum production plan for August 2024 using relevant computations. 
ii) Determine the contribution from adopting this plan. 
iii) Using relevant computations, show whether Manche should complete the order from the commercial customer assuming any excess labour hours for not making the contract can be used to produce 300 units of product ‘F’ with a contribution of GH¢55 per unit.

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  • 5 Marks

MA – Nov 2024 – L2 – Q4b – Standard Costing and Variance Investigation

Explanation of the use of standard costing in decision-making and key factors to consider before investigating variances.

Standard costing has been employed by organizations as a control technique to analyze the deviation of results from those that are expected.

Required:

i) Explain TWO ways managers have effectively deployed standard costing as a tool in decision-making analysis.

ii) Explain THREE key factors a manager should consider before deciding to institute an investigation into reported variances.

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  • 15 Marks

MA – Nov 2024 – L2 – Q4a – Cost-Benefit Analysis (CBA) for Public Sector Investment

Evaluation of a healthcare capital investment project using cost-benefit analysis.

The Faith Specialist Hospital (FSH) is a special government health facility under the Ghana Health Service (GHS) that provides specialized medical scans for complex health conditions. Management of FSH is planning to install an ultra-modern imaging machine that will improve the quality and accuracy of scans. The new installation will require an additional capital investment of GH¢420,000. The GHS policy on capital projects is that all new projects should achieve an internal rate of return of at least 30%.

Forecast demand for the services of this new machine over its five-year useful life are as follows:

Year Number of Scans
1 1,250
2 2,700
3 3,500
4 1,400
5 675

Projected charge per scan: GH¢650
Variable costs per scan:

  • Consumables: GH¢330
  • Labour and overheads: GH¢176

Operating fixed costs per year: GH¢264,000 (includes depreciation on a straight-line basis)

Apart from the financial forecasts above, it is also envisaged that the project will produce non-financial benefits in several forms. Although it is hard to place a precise value on this, expert opinion suggests that this could approximate GH¢70,000 per annum.

Required:

i) Using cost-benefit analysis (CBA) computations, evaluate if the project should be undertaken.

ii) Enumerate TWO limitations of evaluating projects in the public sector.

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  • 5 Marks

MA – Nov 2024 – L2 – Q3b – Activity-Based Costing (ABC) in the Service Sector

Assessment of ABC's applicability in the service sector and identification of four units in healthcare where it can be applied.

In their effort to build equitable, resilient, and sustainable systems for health, both The Global Fund and Gavi have approached you on the implementation of ABC systems to improve their customer profitability analysis.

Required:

Assess the applicability of Activity-Based Costing (ABC) in the services sector. In explaining your answer, identify four units in the healthcare sector where ABC systems are applicable and specify an appropriate cost driver for each.

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  • 10 Marks

MA – Nov 2024 – L2 – Q3a – Flexible Budget and Variance Analysis

Preparation of a flexible budget and calculation of sales, material, and labour variances.

The budget and actual income statement of Shatta Company PLC for the month of April have been presented in the table below:

Budget Actual
Output (production and sales) 10,000 9,000
GH¢ GH¢
Sales Revenue 175,000 162,000
Raw Materials (80,000) (100,000 meters) (64,380) (74,000 meters)
Labour (35,000) (5,000 hours) (30,960) (4,300 hours)
Fixed Overheads (35,000) (36,225)
Operating Profit 25,000 30,435

Required:

i) Prepare a flexible budget for Shatta Company PLC.

ii) Calculate the following variances using the marginal costing system:

  • Sales (price, volume)
  • Material (price and usage)
  • Labour (rate and efficiency)

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  • 5 Marks

MA – Nov 2024 – L2 – Q2b – Ethical Standards in Business

Explanation of the need for ethical standards in business with reference to threats to ethical behavior.

According to the IESBA Handbook of the International Code of Ethics for Professional Accountants, 2024 Edition, a distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest and uphold ethical standards.

Required:

Explain the need for ethical standards in business (make reference to threats to ethical behavior).

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  • 15 Marks

MA – Nov 2024 – L2 – Q2a – Budgetary Control

Preparation of a budgeted profit and loss account for Ankawa LTD for the year ending 31 December 2025.

Ankawa LTD makes and sells a single product ‘Dee’. The following information is available for use in the budgeting process for the year 2025.

i) Sales targets have been proposed for four quarters in 2025 and the first quarter in 2026:

Year Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 (2026)
Sales (GH¢) 240,000 160,000 144,000 224,000 192,000

Selling price per unit of Dee is expected to be GH¢20.

ii) Inventory levels

  • At 31 December 2024: Finished units of Dee: 3,000 units

  • Raw materials: 7,000kg

  • Closing inventory of finished product Dee at the end of each quarter is budgeted as a percentage of sales units of the following quarter:

    • Quarters 1 and 2: 25%
    • Quarters 3 and 4: 35%

  • Closing inventory of raw materials is budgeted to fall by 600kg at the end of each quarter.

iii) Product Dee unit data:

  • Material: 8kg at GH¢1.60 per kg
  • Direct labour: 1.2 hours at GH¢3.50 per hour

iv) Other budgeted quarterly expenditure for 2025:

Quarter Fixed Overhead (GH¢) Capital Expenditure (GH¢)
Quarter 1 10,000 10,000
Quarter 2 18,000 –
Quarter 3 27,000 –
Quarter 4 30,000 –

v) Depreciation

  • Property is depreciated on a straight-line basis at 5% per annum based on total cost.
  • Value of property as at 31 December 2024: GH¢100,000.

vi) Inventory of product Dee is valued on a marginal cost basis for internal budget purposes.

Required:

Prepare the budgeted profit and loss account for the year ended 31 December 2025.

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  • 10 Marks

MA – Nov 2024 – L2- Q1b – Return on Investment (ROI)

Computation of ROI for different one-off transactions and advice on whether they should be undertaken.

Dondo LTD is a manufacturing company based in Nsawam. The following data represents the budgeted performance of Dondo LTD for the year 2025:

Amount (GH¢’000)
Profit 660
Plant and equipment (net of depreciation) 1,560
Working capital 750

Dondo LTD is considering undertaking the following separate one-off transactions:

  1. A cash discount of GH¢16,000 will be offered to its customers annually. This will, on average, reduce the trade receivables figure by GH¢60,000.
  2. An increase in average inventories by GH¢80,000 throughout the year. The increased inventory level is expected to increase sales, resulting in GH¢30,000 increased contribution per annum.
  3. At the beginning of the year, the company will buy a plant worth GH¢360,000. This is expected to reduce operating costs by GH¢105,000. The plant has a five-year useful life with nil residual value.

Required:

i) Compute the ROI for each of the one-off transactions above. 
ii) Advise Dondo LTD on whether the above one-off transactions should be carried out.

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  • 10 Marks

MA – Nov 2024 – L2 – Q1a – Transfer Pricing

Explanation of three reasons why Kako PLC determines transfer pricing centrally.

Kako PLC is a multinational company with production divisions trading in many countries across the globe. Trade takes place between a number of the divisions in different countries, with intermediate products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of the company to determine centrally the right transfer price without reference to the managers in the division.

Required:

i) Explain THREE possible reasons for Kako PLC to determine transfer prices of goods from the head office.

ii) Explain TWO criticisms of the central determination of transfer pricing.

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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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