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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  • 10 Marks

MA – Nov 2020 – L2 – Q3a – Performance Analysis, Other Aspects of Performance Measurement

Identify and explain the four perspectives of the Balanced Scorecard.

a) The aim of a balanced scorecard is to provide a comprehensive framework for translating a company’s strategic objectives into a coherent set of performance measures. It allows managers to look at the business from four different perspectives.

Required: Identify and explain these FOUR (4) perspectives.

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  • 15 Marks

MA – Nov 2020 – L2 – Q2b – Budgetary Control, Cash Budgets and Master Budgets

Prepare various budgets and an income statement for October 2019 for Mercury Company’s TomaCan product.

Mercury Company’s management wants to prepare budgets for one of its products, TomaCan, for October 2019.

The firm sells the product for GH¢75 per unit and has the following expected sales (in units) for these months in 2019:

July August September October November December
6,000 7,000 8,000 9,000 10,000 11,000

The production process requires 5 kilos of Atadwe and 3 kilos of Ginger. The firm’s policy is to maintain an ending finished goods inventory each month equal to 15% of the following month’s budgeted sales, but in no case less than 1,300 units. All materials inventories are to be maintained at 10% of the production needs for the next month, but not to exceed 3,000 kilos. The firm expects all inventories at the end of September to be within the guidelines. The purchase department expects the materials to cost GH¢1.75 per kilo for Ginger and GH¢5.00 per kilo for Atadwe respectively.

The production process requires direct labor at two Skill Levels (SL). The rate for labor at SL1 is GH¢45 per hour, and for SL2 is GH¢25 per hour. SL1 can process one batch of TomaCan per hour, while SL2 uses double the time of SL1 for the same output. Each batch consists of 10 units.

Variable manufacturing overhead is GH¢100 per batch plus GH¢75 per direct labor-hour. Fixed production overhead is GH¢51,240. It is the plan of Mercury Company to spend a third of variable and fixed production overhead costs on selling and administration expenses. The company is in the 25% tax bracket but enjoys a rebate of 50% because of its location. The company uses an actual cost system. The unit cost of production in October is the same as that of September.

Required: On the basis of the preceding data and projections, prepare the following budgets:

i) Production budget for October (in units).
ii) Direct materials purchases budget for October (in kilos).
iii) Direct materials purchases budget for October (in Cedis).
iv) Direct manufacturing labor budget for October (in Cedis).
v) Income statement for the month of October 2019.

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  • 7 Marks

MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

The quarterly demand for an item of raw materials is estimated at 2,000 units at a purchase price of GH¢180 per unit. It is estimated that the cost per order will be GH¢270 and the cost of holding a unit of material in inventory will be GH¢24.

Required:

i) Compute the optimal order quantity, and total minimum costs. (4 marks)

ii) Suppose a supplier offers 5% quantity discount for purchase of 8,000 units, should the offer be accepted? (3 marks)

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  • 5 Marks

MA – Nov 2020 – L2 – Q2a – Introduction to Management Accounting

Distinguish between Target Costing and Kaizen Costing in cost management.

a) In cost management, Target costing and Kaizen costing play key roles. Distinguish between these two cost techniques.

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  • 15 Marks

MA – Nov 2018 – L2 – Q2b – Budgetary control

Preparation of a budgeted profit and loss account for Uswa Ltd and explanation of the term "budget manual."

Uswa Ltd is engaged in manufacturing and sale of footwear. The company maintains one central factory and warehouse and sells its products through company-operated retail outlets as well as through distributors. Management is in the process of preparing the budget for the year 2018 on the basis of the following information:

  • The marketing director has provided the following annual sales projections:
Category No. of Units Retail Price Range (GH¢)
Men 1,200,000 100 – 400
Women 500,000 85 – 250
  • It has been estimated that 30% of the units would be sold through distributors who paid GH¢95 and GH¢70 per footwear for men and women respectively.
  • The remaining 70% will be sold through company-operated retail outlets.
  • The previous pattern of sales indicates that 60% of these units are sold at the minimum price; 10% units are sold at the maximum price and remaining 30% at a price of GH¢200 and GH¢120 per footwear for men and women respectively.
  • The company incurs a variable cost of GH¢45 per footwear regardless of whether sales are through company-operated retail outlet or distributors.
  • The company operates 22 outlets all over the country. The fixed costs per outlet are GH¢12,000 per month and include rent, electricity, maintenance, etc.
  • Fixed costs for the factory and head office are GH¢4.5 million and GH¢1.5 million per month respectively.

Required:

i) Prepare a budgeted profit and loss account for the year 2018 for Uswa Ltd. (13 marks)

ii) Explain the term “budget manual.” (2 marks)

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  • 20 Marks

MA – Nov 2020 – L2 – Q1 – Budgetary Control

Prepare a financial analysis statement showing the current annual forecast of costs, revenues, and profits for the years 2019-2021 for a motor car manufacturer.

A motor car manufacturer has been specializing in the production and sale of Bedford model cars. The model is somewhat outmoded, and the current sales forecast indicates that the current (2018) sales level of 150,000 will be the same as in 2019 but will decline to 130,000 cars in 2020 and 110,000 cars in 2021. The company supplies according to orders received, and no stocks are held. Carbon monoxide emission regulations will prevent the model from being manufactured and sold after December 2021.

The company’s current estimates of the selling price and costs in 2019 are as follows:

Per car (GH¢) Amount (GH¢)
Selling Price 11,200
Production costs:
– Material and Labour (vary with production volume) 3,600
– Assembly 4,000
– Delivery 2,500
  • 75% and 40% of the assembly and delivery costs respectively are fixed, and the remainder vary with production volume.
  • In addition, the company estimates that it will incur the following non-production costs:
    • Marketing costs of GH¢60 million would be amortized on a straight-line basis over three years.
    • The Administration costs of GH¢10 million are fixed per annum.
    • The selling price, variable costs per car, and total fixed costs are expected to remain constant throughout the period from 2019 to 2021.

The company’s Managing Director is unhappy with the current annual profit forecasts for 2019–2021 based on the information above and believes that the company has the potential to increase the profit to a desired level of GH¢245 million in each of the years 2019 to 2021. The Managing Director has undertaken a strategic review and developed the following strategies to eliminate the gap:

Strategy 1: A marketing proposal will enable the company to enter a new overseas market with the result that the total (including the overseas market) sales level will be stabilized at 160,000 cars per annum from 2019 to 2021. The market entry costs will be GH¢30 million for each of the three years.

Strategy 2: A re-design of the car will enhance its sales appeal and will permit the company to increase its selling price to GH¢12,000. The re-design costs are GH¢30 million and are to be amortized over three years on a straight-line basis.

Strategy 3: A radical cost reduction program will improve efficiency and lower all variable costs by 20%. This will add GH¢70 million to the annual fixed overheads each year from 2019 to 2021.

Required:

a) Prepare a financial analysis statement showing the current annual forecast of costs, revenues, and profits for each of the years 2019 to 2021 and briefly comment on the figures. (Ignore the time value of money)

b) Calculate the profit gap for 2019, 2020, and 2021.

c) Estimate the profit in 2019 if:

i) Strategy 1 was implemented;
ii) Strategy 2 was implemented;
iii) Strategy 3 was implemented.

d) Evaluate which strategy to implement

 

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  • 4 Marks

MA – May 2020 – L2 – Q5c – Decision making techniques

Determine the optimal selling price for a new product by analyzing cost and revenue data.

Blasius Ltd has just decided to produce a new line of item, namely bed, that can be sold in its retail shops throughout the country. It has provided you with the following information concerning the total cost of annual production and the prices at which that production could be sold:

Annual production units Total cost (GH¢000) Selling price (per unit) (GH¢)
2,500 100.3 70.8
5,000 186.3 66.7
7,500 287.8 62.5
10,000 405.0 58.3
12,500 537.8 54.2

Required:
Determine the optimal selling price for the bed. (4 marks)

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  • 6 Marks

MA – May 2020 – L2 – Q5b – Decision making techniques

Explain the concept of shadow price and assess the acceptability of a timber supply offer based on shadow pricing.

b) A timber merchant from Takoradi made a proposal to Blasius Ltd to supply this specialized timber which is in short supply but at the cost of GH¢4.5 per square metre.

Required:

i) Explain the term shadow price. (2 marks)

ii) Identify the shadow price which should be paid per square metre and comment on the acceptability of the offer. (4 marks)

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  • 10 Marks

MA – May 2020 – L2 – Q5a – Relevant cost and revenue, Decision making techniques

Determine the optimum production plan for Blasius Ltd based on given resource constraints and calculate the total contribution.

Blasius Ltd is a leading manufacturer of furniture in Ghana. The company manufactures these three garden furniture products – chair, bench, and table. The budgeted unit cost and resource requirements of each of these items are detailed below:

Product Chair (GH¢) Bench (GH¢) Table (GH¢)
Timber cost 5.00 15.00 10.00
Direct labour cost 4.00 10.00 8.00
Variable overhead cost 3.00 7.50 6.00
Fixed overhead cost 4.50 11.25 9.00
Total Cost 16.50 43.75 33.00

Budgeted volumes per annum:

Product Quantity
Chair 3,500
Bench 1,900
Table 1,350

These volumes are believed to equal the market demand for these products. Fixed overhead costs are attributed to the three products on the basis of direct labour hours. The cost of the timber is GH¢2.00 per square metre.

The products are made from a specialized timber. A memo from the purchasing manager advises you that because of a problem with the supplier, this specialized timber is limited in supply to 20,000 square metres per annum.

The sales director has already accepted an order for 500 chairs, 100 benches, and 150 tables which, if not supplied, would incur a financial penalty of GH¢2,000. These quantities are NOT included in the market demand estimates above.

The selling prices of the three products are:

Product Selling Price (GH¢)
Chair 20.00
Bench 50.00
Table 40.00

Required:

a) Determine the optimum production plan and state the total contribution that this would yield. (10 marks)

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  • 4 Marks

MA – May 2020 – L2 – Q4c – Decision making techniques, Relevant cost and revenue

Explain how a management accountant can use make or buy analysis and limiting factor principles to solve management problems.

c) Explain how a management accountant can use make or buy analysis and the limiting factor principles to achieve optimal solutions to an internal management problem. (4 marks)

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