Subject: PERFORMANCE MANAGEMENT

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

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

Question

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)

Answer

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Tags: Cost of Capital, Division Performance, Investment Centres, Profitability Ratios, Residual Income, ROI
Level: Level 2

Topic: Divisional Performance Measurement

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

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

Question

Define the following concepts:

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

Answer

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Tags: Investment Centre, Performance Measurement, Residual Income, Responsibility Accounting, ROI
Level: Level 2

Topic: Divisional Performance Measurement

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

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

Question

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:

Revenue is derived from rentals and ancillary services.
Both centers have a cost of capital of 15%.
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)

Answer

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Tags: Current Ratio, Gearing Ratio, Interest Cover, Liquidity Ratios, Profit margin, Quick Ratio, Residual Income, ROCE
Level: Level 2

Topic: Divisional Performance Measurement

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.

Question

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)

Answer

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Tags: Capacity Constraints, Constraints, Dual Prices, Linear Programming, Objective Function, Production Plan, Slack Variables
Level: Level 2

Topic: Decision-making techniques

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

Question

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)

Answer

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Tags: Globalisation, Internet Usage, Management Performance, MIS
Level: Level 2

Topic: Environmental and Social Performance Management
Series: MAY 2015

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.

Question

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)

Answer

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Tags: Contribution analysis, Marginal Costing, Product Mix, Profitability
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2015

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.

Question

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)

Answer

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Tags: Balanced Scorecard, Goal Congruence, Investment Appraisal, Residual Income, ROI
Level: Level 2

Topic: Balanced Scorecard
Series: MAY 2015

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.

Question

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)

Answer

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Tags: Budget Position, Competitor Pricing, Cost Analysis, Demand Elasticity, Pricing Policy
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2015

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.

Question

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)

Answer

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Tags: Investment Appraisal, Management Performance, Residual Income, ROCE, Straight Line Depreciation
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: MAY 2015

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.

Question

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)

Answer

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Tags: Cash Flow, Financial Ratios, Financial Statement Analysis, Gearing, Liquidity, Profit Analysis
Level: Level 2

Topic: Introduction to Performance Management
Series: MAY 2015

PM – NOV 2016 – L2 – Q5 – Standard Costing and Variance Analysis

Question tests calculation and interpretation of material price, usage, mix and yield variances for a petroleum additive manufacturer.

Question

Okeke and Sons produces a new petroleum additive called ‘EPBC’ used in increasing petrol engine efficiency, while at the same time reducing its fuel consumption. The actual and budgeted quantities in litres of materials required to produce ‘EPBC’ and the budgeted prices of materials in October 2016 are as follows:

You are required to:

a. Calculate the individual chemical and total direct materials price and usage variances for October 2016. (4 Marks)

b. Calculate the individual chemical and total direct materials yield and mix variances for October 2016. (4 Marks)

c. What conclusions would you draw from the various variances calculated in (a) and (b) above? (4 Marks)

d. State ONE possible cause of each of the variances computed in (a) and (b) above. (3 Marks)

Answer

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Tags: Cost Variances, Material variances, mix variance, Price Variance, Usage Variance, yield variance
Level: Level 2

Topic: Standard Costing and Variance Analysis
Series: NOV 2016

PM – NOV 2016 – L2 – Q4 – Decision-Making Techniques

Question requires analysis of airline operations to determine profitability of different pricing and charter decisions through contribution analysis.

Question

Aghobe Air owns a single aircraft which operates between Lagos and Kano. The normal flight schedule is that flights leave Lagos on Mondays and Thursdays and depart from Kano on Wednesdays and Saturdays. Aghobe Air cannot offer any more flights between Lagos and Kano. The only seat available on the aircraft is economy class.

The following information is available: Seating capacity of the aircraft is 360 passengers. Weekly average number of passengers per flight is as follows:

Additional information:

(i) Food and beverages service cost N1,000 per passenger but at no charge to the passengers;

(ii) Commission to travel agents paid by Aghobe Air (All tickets are booked by travel agents) is 8% of fare;

(iii) Fixed annual leased costs allocated to each flight is N2,650,000 per flight;

(iv) Fixed ground services (maintenance, check in baggage handling, etc.) cost allocated to each flight N350,000 per flight;

(v) Fixed flight crew salaries allocated to each flight is N200,000 per flight; and

(vi) Fuel cost is unaffected by the actual number of passengers on the flight.

Required:

a. Determine the net operating income made by Aghobe Air on each one way flight between Lagos and Kano. (5 Marks)

b. The market research unit of Aghobe Air indicates that lowering the average one way fare to N24,000 will increase the average number of passengers per flight to 212. Should Aghobe Air lower its fare? (5 Marks)

c. A tourist group known as Sea Bird Tour Operator approaches Aghobe Air on the possibility of chartering the aircraft twice each month from Lagos to Kano and back from Kano to Lagos. If Aghobe Air accepts the offer, it will only offer 184 flights in each year. Other terms of the offer include:

For each one way flight, Sea Bird Tour Operator will pay Aghobe Air N3,750,000 which covers cost of charter for one way, use of flight crew and ground service staff. Sea Bird Tour operator will pay for fuel costs, food and beverages.

Should Aghobe Air accept the offer from Sea Bird Tour Operator? (5 Marks)

d. What factors should be taken into consideration in taking the decision in (c) above? (5 Marks)

Answer

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Tags: Airline Operations, Capacity Planning, Cost Analysis, Decision Making, Financial Analysis, Revenue Analysis
Level: Level 2

Topic: Decision-making techniques
Series: NOV 2016

PM – Nov 2016 – L2 – Q3 – Costing Systems and Techniques

Question tests understanding of Activity Based Costing features and benefits, along with organizational performance measurement through financial and non-financial indicators.

Question

Adelab Nigeria Limited is a manufacturer of industrial gear. Over the years, the company has collected, allocated and absorbed overhead cost based on the traditional absorption costing technique.

The current economic recession in the country and stiff competition in the market are seriously affecting the company’s performance and market share as its competitors have in recent times, introduced discounts to their customers. The customers of Adelab have therefore been putting pressure on the company to follow suit and few of these customers have started patronising the company’s competitors who offer discounts on every purchase.

To address these problems and other strategic and operational issues affecting the company, the Board of Directors of Adelab decided recently to appoint a seasoned management expert as Business Process Executive (BPE). The BPE recently advised the Board to organise a management retreat. The focus of the retreat is strategic management, cost control and performance management. During the course of the retreat, new costing techniques such as activity based management, life cycle costing, target costing, Kaizen costing, throughput accounting, backflush accounting, just in time approach to inventory management, etc., were discussed by the BPE. The need to also consider both financial and non-financial performance measurements was also discussed. The BPE further highlighted the need for the company to link its Key Performance Indicators (KPIs) to its strategic and operational Critical Success Factors (CSF), to achieve a better focus and improve its financial performance.

In a board meeting after the retreat, the following discussions took place:
Technical Director: “To improve our financial performance I think I will have to agree
with the BPE‟s submission at the retreat that we replace absorption costing approach
with an Activity Based Costing (ABC) system. I believe this will help us to put a tap on
cost and thus improve cost control and increase profit margins. We can then pass
some of these costs reduction to our customers in form of discounts”.
Managing Director: “Yes, I agree with your opinion but I also think we need to
monitor our performance in both financial and non-financial terms. For example, loss
of sales could be due to charging a higher price than our competitors and as well as
producing bad quality product. I therefore think that, while we should consider
introducing activity based costing, we should also consider ways in which the
company could monitor and assess performance on a wider basis”.

You are required to:

a. Describe FIVE key features of Activity Based Costing (ABC) and provide SIX advantages and FOUR disadvantages of adopting Activity Based Costing (ABC) approach to cost accumulation. (10 Marks)

b. Explain the need for the measurement of organisational and managerial performance giving examples of the range of financial and non-financial performance measures that might be used. (10 Marks)

Answer

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Tags: Activity-Based Costing, Cost Control, Financial Metrics, Non-Financial Metrics, Performance Measurement
Level: Level 2

Topic: Costing Systems and Techniques
Series: NOV 2016

PM – Nov 2016 – Q2 – Cost Management Strategies

Question requires explanation of Life Cycle Costing concepts and calculation of unit costs over 3-year product lifecycle for a CD manufacturer.

Question

Tadesco Limited manufactures Compact Disks. It is planning to introduce a new model and production will begin very soon. It expects the new product to have a life cycle of three years and the following costs have been estimated.

You are required to:
a. Explain Life Cycle Costing and state what distinguishes it from traditional costing technique. (10 Marks)
b. Calculate the cost per unit over the whole life cycle and comment on the price to be charged. (10 Marks)

Answer

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Tags: Cost Analysis, Life Cycle Costing, Manufacturing Costs, Product Life Cycle, Traditional Costing
Level: Level 2

Topic: Cost Management Strategies
Series: NOV 2016

PSAF – Nov 2019 – L2 – Q1 – Public Sector Financial Statements

Prepare financial statements and journal entries for Ogogo Local Government based on trial balance and transactions provided, and identify external controls and challenges.

Question

Ogogo Local Government is one of the 26 Local Governments in Alimosho state of
Federal Republic of Wazobia. The Local Government has adopted Treasury Single
Accounting (Direct method) and prepares its accounts using IPSAS accrual basis.
There has been wide spread fraud since the retirement of the Treasurer of the
council about two years ago. However, there was no adequate information to
suggest that there was fraud or misappropriation of funds. The Chairman invited
you to his office as the new Treasurer and handed over some of the financial data
from treasury department to you as detailed below:
The trial balance for the year ended December 31, 2017 is as follows:

The following transactions took place in the Office of the Treasurer of the Local
Government for the year ended December 31, 2018.
i. Listed below are the revenue and expenditure items for the year ended December 31, 2018

(ii) Code 1 is used as prefix for revenue, 2 for recurrent expenditure and 4 for
capital expenditure
(iii) Preliminary investigations carried out revealed the following irregularities,
which occurred and were discovered within the year:
• Included in the payments for the expenses under primary health care department were various duplicated vouchers amounting to N7million;
• There were some falsifications in the bills for items bought for the provision of water under other charges. The total discrepancies amounted to N3million.
(iv) The following agreed revenue demand notices were sent to the indigenes of the Local Government during the year.

(v) Included in the payments under works and housing is the cost of motor
vehicles of N25 million while medical equipment costing N35 million was
included in primary health care department expenses.
(vi) Included in the payments under works and housing is the cost of land
including construction of access roads, certificate of occupancy etc, amounting
to N100 million. The land was acquired by the Local Government and sold to
local prospective land owners at a cost of N520,000 per plot. The land consists
of 200 standard plots for the construction of houses of their choice. Only 150
plots were fully subscribed and paid for during the year.
(vii) Included in the payments under finance department is the cost of office
stationery of N25 million while the value of office stationery based on stock
sheet as at December 31, 2018 was N6.5 million.

viii) Capital grant from the State Government was received on December 31, 2017
and utilised in 2018.
(ix) The capital expenditure paid during the year was for the acquisition of land for the new Local Government Health Centers.
(x) Some of the accounting policies for depreciation adopted by the Government include the following depreciation rates;

Note: All non-current assets were purchased at the beginning of the
year.
(xi) The following expenses were incurred but not settled as at end of the year.

You are required to prepare:
a. The journal entries to record the loss of fund (3 Marks)
b. The statements of financial performance for year ended December 31, 2018
(15 Marks)
c. The statement of financial position as at December, 31 2018 (17 Marks)
d. Identify FIVE external controls and FIVE problems of Local Government in
Nigeria (5 Marks)

Answer

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Tags: Financial Performance, Financial Position, IPSAS, Local Government Finance, Public Sector Accounting
Level: Level 2

Topic: Public Sector Financial Statements
Series: NOV 2019

PM – Nov 2016 – L2 – Q1 – Decision Making Techniques

Evaluate profit maximization, machine bottlenecks, and inventory valuation using marginal and throughput accounting approaches.

Question

Hicenta Limited makes three products Soyi, Milco and Yoghurt. All the three
products must be offered for sale each month in order to provide a complete
market service. The products are fragile and their quality deteriorates rapidly
shortly after production.
The products are produced on two types of machine and worked on by a single
grade of direct labour. Fifty direct employees are paid N80 per hour for a
guaranteed minimum of 160 hours per month.
All the products are first pasteurised on a machine type A and then finished
and sealed on a machine type B.
The machine hour requirements for each of the products are as follows:

Machine Information:

Machine Type	Product	Hours per Unit
Machine A	Soyi	1.5
Machine A	Milco	4.5
Machine A	Yoghurt	3.0
Machine B	Soyi	1.0
Machine B	Milco	2.5
Machine B	Yoghurt	2.0

The capacity of the available machines type A and B are 6,000 hours and 5,000
hours per month respectively. Details of the selling prices, unit costs and
monthly demand for the three products are as follows:

Product Costs and Demand:

Product	Selling Price (N per unit)	Concentrate Cost (N per unit)	Other Direct Material Cost (N per unit)	Direct Labour Cost (N per unit)	Overheads (N per unit)	Profit (N per unit)	Maximum Monthly Demand (units)
Soyi	910	220	230	60	240	160	1,200
Milco	1,740	190	110	480	620	340	700
Yoghurt	1,400	160	140	360	520	220	600

Although, Hicenta Limited uses marginal costing and contribution analysis as
the basis for its decision making activities, profits are reported in the monthly
management accounts using the absorption costing basis. Finished goods
inventories are valued in the monthly management accounts at full absorption
cost.
You are required to:

a. Calculate the monthly machine utilisation rate for each product and
explain which of the machines is the bottleneck/limiting factor.
(6 Marks)
b. Use current system of marginal costing and contribution analysis to
calculate the profit maximising monthly output of the three products.
(6 Marks)
c. Explain why throughput accounting might provide more relevant
information in Hicenta‟s circumstances. (6 Marks)
d. Use a throughput approach to calculate the throughput-maximising
monthly output of the three products. (6 Marks)
e. Explain the throughput accounting approach to optimizing the level of
inventory and its valuation. Contrast this approach to the current system
employed by Hicenta. (6 Marks)

Answer

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Tags: Bottlenecks, Contribution analysis, Inventory Valuation, Marginal Costing, Optimization, Profit Maximisation, Throughput Accounting
Level: Level 2

Topic: Decision-making techniques
Series: NOV 2016

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

Question

Eko Limited is a small manufacturing company producing two high-quality products called ‘Kay’ and ‘Lay’. Both products use a raw material Tee (costing ₦30 per kg) in their manufacture. The Directors are reviewing the company’s stock management policies for the forthcoming year as part of the annual budget preparation cycle.

Due to the product specification, quality is an important factor and a quality control inspection takes place immediately after the production cycle has ended. At this point, any inferior products are rejected and only good production becomes available for sale. In addition to these losses, a certain quantity of waste is unavoidable from material Tee due to the cutting process for both products.

The following forecast information has been extracted from departmental estimates for the year ending 31st December 2020 (the budget period).

	Product Kay	Product Lay
Sales (quality approved units)	23,000	10,000
Finished goods stock increase by year-end	275	185
Post-production rejection rate (%)	2	3
Material Tee usage (per completed unit, net of wastage)	2kg	3kg
Material Tee wastage (%)	5	10

Additional Information:

Usage of raw material Tee is expected to be at a constant rate over the period.
Annual cost of holding one unit of raw material in stock is 17% of the material cost.
The cost of placing orders is ₦30 per order.
Eko Limited maintains a constant 1,000 kg of safety/buffer stock of material Tee regardless of the quantity ordered each time.

Required:
a. Prepare operational budgets for the year ending 31st December 2020 under the following headings: (Show your workings clearly)
i. Production budget for Products Kay and Lay (in units). (5 Marks)
ii. Purchases budget for Material Tee (in kgs and value). (5 Marks)

b. Calculate the Economic Order Quantity for Material Tee (in kgs). (5 Marks)

Answer

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Tags: Economic Order Quantity, Production Budget, Raw Material Purchase
Level: Level 2

Topic: Budgeting and Budgetary Control
Series: MAY 2022

PM – May 2022 – L2 – SA – Q6 – Budgeting and Budgetary Control

Preparation of flexible budgets for varying production levels and analysis of variances.

Question

Ezenwa Nigeria Limited is a company which produces a single product on an assembly line. The budget personnel has been availed with the following information which represents the extremes of high and low volumes of production which the company will achieve over a three month period.

Costs	Production of 80,000 units	Production of 160,000 units
Direct materials	3,200,000	6,400,000
Indirect materials	480,000	800,000
Direct labour	2,000,000	4,000,000
Power	720,000	960,000
Repairs	800,000	1,200,000
Supervision	800,000	1,440,000
Rent, insurance and rates	360,000	360,000

Additional Information:
Supervision is a “step function”. To this end, one supervisor is employed for all production levels up to and including 100,000 units. For higher levels of production, an assistant supervisor whose remuneration is N640,000 will be added.

Required:
a. Prepare a set of flexible budgets for presentation to the Production Director to cover the following levels of production over a period of three months:
i. 80,000 Units
ii. 100,000 Units
iii. 120,000 Units
iv. 140,000 Units
v. 160,000 Units (9 Marks)

b. During the three months July to September 2021, 100,000 units were produced. Actual costs incurred during this period were as follows:

Costs	Amount (N)
Direct materials	4,150,000
Indirect materials	580,000
Direct labour	2,700,000
Power	760,000
Repairs	885,000
Supervision	850,000
Rent, insurance and rates	320,000

Required:
i. Prepare a budget report for presentation to the Production Director displaying all relevant variances. (3 Marks)
ii. For each variance, suggest any further investigations which might be required and the necessary actions required to be taken by the Director. (3 Marks)

Answer

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Tags: Flexible Budget, Production Costs, Variance Analysis
Level: Level 2

Topic: Budgeting and Budgetary Control
Series: MAY 2022

PM – May 2022 – L2 – SA – Q5 – Cost-Volume-Profit (CVP) Analysis

Analysis of Abayomi Plc's financial data to determine break-even sales and evaluate budget adjustments.

Question

Abayomi Plc produces and sells two major products, A and B. The budgeted income statement for the year to December 31, 2022 is given below:

The budgeted selling prices of the products are:

A: ₦120
B: ₦180

Required:
a. Determine the breakeven sales in units for each of the products, using the budgeted data. (6 Marks)

Now assume that the following changes are made to the budget:
(i) Unit selling price of product B is reduced to ₦160.
(ii) Direct material cost is expected to drop by 10% for product A and 20% for product B.
(iii) Direct labour costs for each product will increase by 10%.
(iv) Additional ₦456,000 will be spent on advertising.
(v) 80% of total revenue will be derived from product B.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Break-even Sales, Cost Analysis, Product pricing, Profitability
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: MAY 2022

PM – May 2022 – L2 – SA – Q4 – Costing Systems and Techniques

Analysis of activity-based costing applications and challenges in large service organizations.

Question

Large service organisations, such as banks and hospitals, used to be noted for their lack of management accounting techniques and their relatively unsophisticated budgeting and control systems compared with large manufacturing organisations. But this is changing and many large service organisations are now revising their use of management accounting techniques, especially as it relates to activity-based approaches.

Required:
a. Explain which features of large-scale service organisations encourage the application of activity-based approaches to the analysis of cost information. (5 Marks)

b. Explain which features of service organisations may create problems for the application of activity-based costing. (5 Marks)

c. Explain the uses for activity-based cost information in service industries. (5 Marks)

d. Many large service organisations were at one time state-owned, but have been privatised. Examples in some countries include electricity supply and telecommunications. They are often regulated. Similar systems of regulation of prices by an independent authority exist in many countries and are designed to act as a surrogate for market competition in industries where it is difficult to ensure a genuinely competitive market. Explain which aspects of cost information and systems in service organisations would particularly interest a regulator, and why these features would be of interest. (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Activity-Based Costing, Cost Information, Service Industry
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2022

Subject: PERFORMANCE MANAGEMENT

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