Subject: PERFORMANCE MANAGEMENT

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  • 15 Marks

PM – Nov 2024 – L2 – Q7b – Divisional Performance Measurement

Evaluating division performance using ROI and residual income methods with adjusted cost of capital.

Ngerige and Sons Limited has four operating divisions spread across four cities in Nigeria: Lagos, Kano, Gombe, and Enugu. These divisions are treated as investment centres for performance reporting purposes. The following information is available:

Particulars Lagos Kano Gombe Enugu
Divisional Investment (N) 10,000,000 4,000,000 3,000,000 7,000,000
Divisional Sales (N) 53,000,000 23,000,000 24,600,000 29,400,000
Divisional Variable Costs (N) 50,000,000 22,000,000 23,400,000 27,400,000
Specific Fixed Costs (N) 1,500,000 750,000 600,000 800,000

The company’s annual general fixed cost is N1,300,000, apportioned to divisions based on sales. The cost of capital for Ngerige and Sons Limited is 7.5%. Ignore taxation.

Required:

i. Evaluate the performance of the divisions using the following methods:

  • ROI method. (3 Marks)
  • Residual Income Method. (3 Marks)

ii. Re-evaluate the residual income situation for the company given an adjusted cost of capital of 10%. (3 Marks)

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  • 6 Marks

PM – Nov 2024 – L2 – Q7a – Divisional Performance Measurement

Definitions of Responsibility Accounting, Investment Centre, Return on Investment (ROI), and Residual Income.

Define the following concepts:

i. Responsibility accounting
ii. An investment centre
iii. Return on Investment (ROI)
iv. Residual income

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  • 16 Marks

PM – Nov 2024 – L2 – Q6 – Divisional Performance Measurement

Comparative analysis of Owerri and Isiekenesi event centers based on financial performance metrics

Omegboje and company is a medium-scale outfit that specializes in the rental business in Owerri and Isiekenesi towns. The company operates a large event center in each city, supplying chairs, tables, and canopies for both outdoor and some indoor events.

Each event center manager has some independence in operations and earns a performance bonus of 10% of sales if they achieve more than the standard return on capital employed (ROCE) of 50%.

The following financial data is available for the two centers for the years ending December 31, 2020, and 2019:

Additional Information:

  1. Revenue is derived from rentals and ancillary services.
  2. Both centers have a cost of capital of 15%.
  3. Ignore taxation and inflation.

Required:

a. Discuss the relative performance of the two centers based on: i. Return on Capital Employed (ROCE) ii. Residual Income iii. Profit Margin iv. Current Ratio v. Quick Ratio vi. Gearing Ratio vii. Interest Cover
(7 Marks)

b. Compute the performance bonus for the centers (if any), showing your workings.
(4 Marks)

c. Briefly outline the role of a Management Accountant in project management.
(4 Marks)

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  • 30 Marks

PM – Nov 2024 – L2 – Q1 – Decision-Making Techniques

Optimization of Oshimiri Nigeria Limited's production plan to maximize profits under resource constraints using linear programming.

Oshimiri Nigeria Limited, a company based in Aba, produces two grades of industrial vanish. The selling price and associated unit variable costs for vanish Grade A and Grade B are shown below:

Particulars Grade A Grade B
Selling Price N2,100 N1,500
Material X (N240/kg) N480 N240
Skilled Labour (N144/hr) N720 N288
Unskilled Labour (N60/hr) N120 N180
Variable Overhead (N84/machine hr) N168 N336

The fixed overhead costs are N2,600,000 per month. The company plans to maximize profits.

The availability of resources for the following month is as follows:

  • Material X: 25,000 Kg
  • Skilled Labour: 48,000 hours
  • Unskilled Labour: 39,000 hours
  • Machine hours: 50,000 hours

Required:

a. Identify the objective function and the constraints of the model to be used in determining the optimum production plan for the following month. (5 Marks)

b. Determine the optimum production plan for the month and the associated profit. (5 Marks)

c. Explain the concept and significance of dual prices and slack variables in the context of the model used by the company in this scenario. (4 Marks)

d. Calculate the dual prices for constraints identified in this scenario. (10 Marks)

e. Suggest ways in which the management can overcome the capacity constraints identified above during the month and the cost implications. (6 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q7 – Environmental and Social Performance Management

Discuss the concept of globalisation, its impact on management information systems, and arguments against its influence on management performance

The use of internet has made the entire universe a global village. Managers can comfortably sit in their offices connected to the internet and the world wide web to obtain all necessary information for their business needs.

Required: a. Discuss the concept of globalisation and how management information systems have enhanced effective management performance. (10 Marks)
b. What arguments will you advance against globalisation as it relates to management performance? (5 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q6 – Costing Systems and Techniques-

Determine the most profitable product mix for Markus Limited, and prepare a profitability statement for the optimal product mix.

Markus Limited manufactures three products and operates a marginal costing system.

The following information has been extracted from the company’s records:

Products X Y Z
Units budgeted to be produced and sold 3,600 6,000 3,400
Selling Price (₦) 120 110 100
Requirement per Unit:
Direct Material (kg) 5 3 4
Direct Labour (Hours) 4 3 2
Direct Labour Hour rate (₦) 4 4 4
Direct Material Cost per Kg (₦) 8 8 8
Variable Overheads (₦) 14 26 16
Fixed Overheads (₦) 20 20 20
Maximum possible sales (units) 8,000 10,000 3,000

All the three products are produced from the same direct material using the same types of machine and labour. Direct labour, which is the key factor, is limited to 37,200 hours.

Required: a. Determine the most profitable product mix. (6 Marks)
b. Prepare a statement of profitability for the product mix. (9 Marks)

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  • 15 Marks

PM – May 2015 – L2 – SB – Q5 – Balanced Scorecard

Evaluate the use of the Balanced Scorecard and analyze investment decisions for Carossi Limited using ROI and RI.

CAROSSI Limited makes quality wooden products such as tables, chairs, benches, and doors. Historically, the company has used mainly financial performance measures to assess the performance of the company as a whole. The company’s Chief Executive Officer has just been informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.

CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams. Each Division is managed by a divisional manager who has the power to make all investment decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically, investment decisions have been made by calculating the Return on Investment (ROI) of any opportunities, and presently, the return on investment of each Division is 18 percent.

A recently appointed manager for Division X strongly feels that using Residual Income (RI) to make investment decisions would result in better ‘goal congruence’ throughout the organisation.

Investment Details for Each Division:

Division X Division Y
Capital required for investment (₦m) 88.2 46.0
Revenue generated from investment (₦m) 46.4 28.1
Net profit margin (%) 30 35

The company is seeking to maximise shareholders’ wealth.

Required: a. Describe the Balanced Scorecard Approach to performance measurement. (8 Marks)
b. Determine both the return on investment and residual income of the new investment for each of the two divisions. Comment on these results and take into consideration the manager’s views about residual income. (7 Marks)

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  • 20 Marks

PM – May 2015 – L2 – SB – Q4 – Costing Systems and Techniques

Analyze the pricing policy and budget position for Badegy Limited, considering competitor price changes and cost inflation.

BADEGY Limited is a medium-sized company. The company is in the process of deciding its pricing policy for the next period.

The following information is available from its records:

Previous Period:

  • Revenue: ₦13,000,000
  • Units Sold: 100,000 at ₦130
  • Costs: ₦10,000,000
  • Profit: ₦3,000,000

Current Period:

  • Revenue: ₦13,780,000
  • Units Sold: 106,000 at ₦130
  • Costs: ₦10,774,000
  • Profit: ₦3,006,000

It was discovered that between the previous and current periods, there was a 4% general cost inflation, and it is forecast that costs will rise further by 6% in the next period. As a matter of policy, the company did not increase the selling price in the current period, although competitors raised their prices by 4% to allow for the increased costs.

A survey by a team of management consultants found that the demand for the product is elastic with an estimated price elasticity of demand of 1.5. This means that volume falls by 1.5 times the rate of real price increase. Various options are to be considered by the Board.

Required: a. Show the budgeted position of the company if it maintains the ₦130 selling price for the next period when it is expected that competitors will increase their prices by 6%. (15 Marks)
b. What would the budgeted position be if the company also raises its price by 6%? (5 Marks)

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  • 20 Marks

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

Pakex is a division of an automobile group that has five years remaining on a leased premises in which it sells self-assembled motorcycles. The management is proposing an investment of ₦48 million on immediate improvements to the interior of the premises in order to stimulate sales by creating a more effective selling environment. The following information is available:

(i) The expected increase in revenue following the improvements is ₦40 million per annum. The average contribution to sales ratio is expected to be 40%.

(ii) The cost of capital is 16% and the division has a target Return on Capital Employed of 20% based on the net book value of the investment at the beginning of the year.

(iii) At the end of the five-year period, the premises improvements will have a NIL residual value.

(iv) The management staff turnover at Pakex division is high. The division’s investment decisions and management performance measurement are currently based on the figures for the first year of the proposal.

In addition to the above information, there is an alternative proposal that suggests a forecast of the increase in revenue per annum from the premises improvements as follows:

Year 1 2 3 4 5
Increase in Revenue 56 40 40 24 16

All other factors are expected to remain the same.

Required: a. Prepare a summary of the statement of the management’s investment proposal for years 1 to 5 showing Residual Income and Return on Capital Employed for each year using the straight-line depreciation method. (10 Marks)
b. Comment on the use of the figures from the Statement in (a) above as a decision-making and management performance measure. (4 Marks)
c. Calculate the Residual Income and Return on Capital Employed for year 1 using the alternative proposal. (6 Marks)

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  • 20 Marks

FM – May 2015 – L2 – SB – Q2 – Introduction to Performance Management

Prepare profitability and cash flow statements, and compute liquidity and gearing ratios for Ozoigbondu Nigeria Limited.

Ozoigbondu Nigeria Limited is a company that is into buying and selling of plastic containers. The company is financed by a capital of ₦15 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively.

The Company has been in trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales are collected as follows: (i) Cash sales is 40% of the monthly sales. (ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay for all supplies in the month following. The company’s stock policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2010 to 2014:

2010 2011 2012 2013 2014
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses 200,000 220,000 240,000 280,000 360,000

Additional Information: (i) The company purchased a motor vehicle in July 2013 which was paid for in September 2013. The cost of the motor vehicle was ₦5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was ₦4,000,000.
(iv) The company’s salaries, rent, and expenses were paid in the month they were due.

Required: a. Prepare a Profitability Statement for 2012, 2013, and 2014. (10 Marks)
b. Prepare a Cash Flow Statement for 2012, 2013, and 2014. (7 Marks)
c. Determine and comment on the liquidity ratio (current ratio) for 2014. (2 Marks)
d. Compute the gearing ratio. (1 Mark)

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  • 15 Marks

May 2023 – L2 – SA – Q7 – Pricing Decisions

Calculation of minimum price Kola Plc should quote for 400 units of special security padlock keys using learning curve principles.

Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:

Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.

Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.

Required:

Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)

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  • 15 Marks

PM – May 2023 – L2 – SA – Q6 – Cost Management Strategies

Evaluate the financial impact of hiring equipment and assess sensitivity to changing demand.

TK is a theme park. The following information is available for the forthcoming month:

Forecast daily ticket sales and prices:

Ticket Price per ticket Forecast Sales
Pre-booked discounted ticket N580 1,500
Standard ticket N780 8,000
Premium family ticket (admits 4) N3,700 675

The theme park will be open for 30 days in the month.

Costs:

  • Variable costs per person per day are forecast to be N2050.
  • Fixed costs for the month are forecast to be N130,000,000.

Pricing Information:

  • The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will be sold.
  • A premium family ticket admits four people to the theme park and allows them to go to the front of the queues in the theme park. The price of a premium family ticket has been set at N3,700 to maximize profit.

Market information shows that for every N100 increase in the selling price of a premium family ticket, the demand would reduce by 25 tickets. For every N100 decrease in the selling price, the demand would increase by 25 tickets.

The theme park has adequate capacity to accommodate any level of demand for premium family tickets. It is assumed that four people would always be admitted on every premium family ticket sold. Sales of the different ticket types are independent of each other.

Equipment Hire:

TK is considering hiring some automated ticket reading equipment for the forthcoming month. The hire of this equipment would increase fixed costs by N5,000,000 for the month. However, variable costs per person would be reduced by 8% during the period of the hire.

Required:

a) Calculate the financial benefit of hiring the equipment for the forthcoming month given its impact on variable cost and the price charged for premium family tickets. (11 Marks)

b) It has now been realized that a competing theme park is planning to offer discounted ticket prices during the forthcoming months. It is thought that this will reduce the demand for TK’s standard tickets. TK will not be able to reduce the price of the standard tickets for the forthcoming month.

Discuss the sensitivity of the decision to hire the equipment to a change in the number of standard tickets sold per day. (Note: Your answer should include the calculation of the sensitivity.) (4 Marks)

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  • 15 Marks

PM – May 2023 – L2 – SA – Q5 – Risk Assessment and Internal Control

Evaluate which project (A or B) the company should invest in, based on projected cash flows and cost of capital.

A company is considering whether or not to invest in any of the two projects where the initial cash investment would be ₦13,000,000 for Project A and ₦14,000,000 for Project B. The project would have a five-year life, and the estimated annual cash flows are as follows:

Project A

Year Cash inflows (₦) Cash outflows (₦)
1 6,000,000 3,000,000
2 8,000,000 4,000,000
3 10,000,000 4,000,000
4 9,000,000 3,000,000
5 6,000,000 3,000,000
Total 39,000,000 17,000,000

Project B

Year Cash inflows (₦) Cash outflows (₦)
1 10,000,000 5,000,000
2 9,000,000 4,000,000
3 8,000,000 3,000,000
4 8,000,000 3,000,000
5 4,000,000 2,000,000
Total 39,000,000 17,000,000

The company cost of capital is 10%.

The estimates of cash outflows are considered fairly reliable. However, the estimates of cash inflows are much more uncertain. Several factors could make the annual cash flows higher or lower than expected.

  • Factor 1: There is a 20% probability that government measures to control the industry will reduce annual cash inflows by 25%.
  • Factor 2: There is a 30% probability that another competitor will also enter the market; this would reduce the estimated cash inflows by 10%.
  • Factor 3: There is a 40% probability that demand will be stronger than expected. The company would not be able to supply more products to the market, but it would be able to sell at higher prices and cash inflows would be 5% higher than estimated.

Required:

a. Calculate the expected net present value of the two projects. (10 Marks)
b. Which of the projects will be more profitable? (5 Marks)

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  • 20 Marks

PM – May 2023 – L2 – SA – Q4 – Decision-Making Techniques

Evaluate the costs and desirability of mutually exclusive contracts for Tayo Limited, considering penalties and other relevant factors.

Tayo Limited is a civil engineering company based in Benin. Contracts are carried out under the supervision of project managers who are sent out from Head Office and remain on-site for the duration of the contract. The project manager recruits local labour and arranges for plant and materials to be provided by Head Office.

Some time ago, the company successfully tendered for two contracts that have now become mutually exclusive. It is currently considering which of these to accept. Both jobs would last for 12 months.

The following information about each contract is available:

Notes:

(i) The materials which would be used on the Abuja job have increased in money value by 60% over their purchase cost. Tayo Limited has no other use for these materials on any other contract apart from the Abuja one, but they could be re-sold to other companies in the industry at 90% of their value. Transportation and other selling costs would further decrease the cash inflow from the sale by 16.67% of the sales price.

(ii) The materials for the Lagos job have no other obvious use, but could be sold for scrap if the contract were cancelled. The scrap value would be 10% of cost, and costs of transport, etc., would be paid by the scrap merchant. It is likely, however, that the materials could be used next year on another contract in substitution for a different material normally costing 20% less than the cost of the materials to be used on the Lagos contract.

(iii) Local labour can be hired as and when required.

(iv) Plant is depreciated on a straight-line basis, and the interest on plant charge is a nominal cost added for accounting purposes.

(v) The two contracts would require similar plant, although more plant would be required for the Lagos than for the Abuja job. The plant not required on the Abuja job would be sub-contracted out by Head Office for ₦200,000 per annum.

(vi) Head Office administration costs are fixed at ₦2,500,000 for the coming year. This excludes project managers’ salaries.

Required:

a. Present the data to management in a form which will assist in making the decision as to which job to undertake. Provide notes to explain the principles which have been used in selecting the data and to support any calculations made. (12 Marks)

b. Comment on the appropriateness of the approach used in your analysis. (4 Marks)

c. List briefly any other factors which ought to be considered before finally making the decision in this case. (4 Marks)

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  • 20 Marks

PM – May 2023 – L2 – SA – Q3 – Decision Making Techniques

Evaluate the desirability of a contract for Product X by analyzing the labour, material, and overhead costs involved.

Kenny Limited (KL) has been offered a contract that, if accepted, would significantly increase next year’s activity levels. The contract requires the production of 20,000 kg of product X and specifies a contract price of N10,000 per kg. The resources used in the production of each kg of X include the following:

Resources per kg of X:

Labour:

  • Grade 1: 2 hours
  • Grade 2: 6 hours

Materials:

  • Material A: 2 units
  • Material B: 1 litre

Costs:

  • Grade 1 Labour: N400 per hour
  • Grade 2 Labour: N200 per hour
  • Material A: Replacement cost N1,000 per unit, Net Realisable Value N900
  • Material B: Replacement cost N3,200 per litre, Net Realisable Value N2,500
  • Fixed production overheads: N60,000,000 based on 300,000 productive labour hours
  • Incremental overheads for the contract: N22,800,000
  • Variable production overheads: N300 per productive labour hour

The contract could also result in a 5,000-unit decrease in sales of another product, Y, which contributes N7,000 per unit in revenue and incurs variable costs of N1,200 and 4 hours of Grade 2 labour per unit. However, avoiding the production of Y will save attributable fixed overheads of N5,800,000.

Required:

a. Advise KL on the desirability of the contract. (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing system used by KL. (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a) and (b) above. (6 Marks)

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  • 20 Marks

PM – May 2023 – L2 – SA – Q2 – Decision-Making Techniques

Construct payoff tables, determine profitable print numbers, and discuss decision rules for football program sales.

The local football club has asked for your advice on the number of programmes that should be printed for each game. The cost of printing and production of programmes for each game, as quoted by the local printer, is ₦1,000,000 plus ₦400 per copy. Advertising revenue which has been agreed for the season represents ₦800,000 for each game.

Programmes are sold for ₦150 each. A review of sales during the previous seasons indicates that the following pattern is expected to be repeated during the coming season of 50 games:

Number of programmes sold Number of games
10,000 5
20,000 20
30,000 15
40,000 10

Programmes not sold at the game are sold as waste paper to a paper manufacturer at ₦100 per copy.

Assuming that the four quantities listed are the only possibilities, you are required to:

a. Prepare a payoff table. (6 Marks)

b. Determine the number of programmes that would provide the highest profit if a constant number of programmes were to be printed for each game. (4 Marks)

c. Explain why you should buy 30,000 or 40,000 copies, assuming one of these is the most profitable quantity, despite the fact that the most probable sales are 20,000 copies per game. (2 Marks)

d. Calculate the profit which would arise from a perfect forecast of the numbers of programmes which would be sold at each game. (4 Marks)

e. Discuss the major limitations of the expected value criterion in decision making. (4 Marks)

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  • 30 Marks

PM – May 2023 – L2 – SA – Q1 – Working Capital Management

Calculate Vestapricy Ltd's cost of goods sold, analyze the working capital cycle, and apply decision rules for inventory management in Owerri.

Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt. It produces a tracking device that is attached to motor vehicles. The device is designed to help locate the whereabouts of stolen motor vehicles within the country. The company’s capital (or cash operating cycle) is the length of time between the payment for purchased materials and the receipt of payment from selling the goods made with the materials.

The table below gives information extracted from the annual accounts of Vestapricy and Company Limited for the past three years.

Extracts from Vestapricy and Company Limited annual accounts for 31st December 2020 to December 2022:

2020 2021 2022
Inventory:
Raw materials 108,000 145,800 180,000
Work in progress 75,600 97,200 93,360
Finished goods 86,400 129,600 142,875
Purchases 518,400 702,000 720,000
Sales 864,000 1,080,000 1,188,000
Trade receivables 172,800 259,200 297,000
Trade payables 86,400 105,300 126,000

Other information is as follows:

  1. All purchases and sales are on credit.
  2. Direct wages:
    • 2021: ₦300,000
    • 2022: ₦250,000
  3. Production expenses:
    • 2021: ₦72,600
    • 2022: ₦171,995
  4. The company’s policy is that any data that will be used from the statement of financial position in determining the working capital cycle period will be average based.

Required:

a.
i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce the length of the working capital cycle. (5 Marks)

b. In 2023, the company (Vestapricy) decided to open a new small apple shop in Owerri to be managed by a shopkeeper. The shopkeeper is deciding on the number of boxes of special apples it hopes to buy each day. A box of apples earns a contribution of ₦400 and costs ₦250.

Demand for apples is uncertain and could vary from 30 boxes to 10 boxes. Any apple that is purchased but not sold will be thrown away at the end of the day.

The shopkeeper has decided that he will buy 10 boxes, 20 boxes or 30 boxes each day, and these are the only three options he wants to consider.

Required:

i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is based on:

  • The Maximax decision rule.
  • The Maximum decision rule.
  • The Minimax regret decision rule.
    Give reasons for your decisions. (8 Marks)

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  • 15 Marks

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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  • 15 Marks

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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  • 15 Marks

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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