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CPA
Advanced Leval
Advanced Management Accounting May 2018
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Advanced Management Accounting
Revision Kit

QUESTION 1(a)

Q A decision tree representing the above information. (8 marks)
A

Solution




Workings

Option A High Demand for 6 years
How Demand for 6 years
H.D for 3 years & LD for 3 years		 3.2 x 6 = 19.2M
1.2 M x 6 = 7.2M
(3.2 x 3 + 1.2 x 3) = 13.2M
Option B HD for 6 years
LD for 6 years
H.D for 3 years & LD for 3 years		 1.8 × 6 = 10.8M
1.6 x 6 = 9.6M
(1.8 × 3 + 1.6 × 3) = 10.2M
Option C
Upgrade		 HD for 3 years provided HD for 3 years
HD for 3 years provided HD for 3 years 		(1.8 × 3 + 2.2 × 3) = 12M
(1.8 × 3 + 0.6 × 3) = 7.2M
Option C
No Upgrade		 HD for 3 year provided HD for 3 years
HD for 3 years provided HD for 3 years		 (1.8 × 3 + 1 × 3) = 8.4M
(1.8 × 3 + 1.6 × 3) = 10.2M


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QUESTION 1b

Q Advise the companv on which capacity option to take given that the objective is to maximise expected monetary value (EMV). (12 marks)
A

Solution


1
2
3
4
5
6		 (19.2 × 0.5 + 7.2 × 0.3 + 13.2 × 0.2) - 10.8
(10.8 x 0.5 + 9.6 × 0.3 + 10.2 × 0.2) - 8
(12 × 0.5 + 7.2 x 0.5) - 4
(8.4 x 0.5 + 10.2 × 0.5)
Higher between 3 and 4 (9.3 - 8)
Higher between 1,2,3 which is 3.6M		 3.6
2.32
5.6
9.3
1.3


The company should choose option A i.e. install fully automatic facility

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QUESTION 2(a)

Q (i) Avoidable costs. (2 marks)

(ii) Sunk costs. (2 marks)

(iii) Differential costs. (2 marks)
A

Solution


(i) Avoidable cost
An avoidable cost is one that will not be incurred if a specific activity is not carried out.

(ii) Sunk cost
A sunk cost is money spent that cannot be regained.

(iii) Differential cost
The differential cost is the cost difference between two alternative decisions or a change in output levels.

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QUESTION 2b(i)

Q (i) The equation of regression line of the data( 2 marks)

(ii) A statistical analvsis of the computer results.(6 marks)

(iii) Outline three factors that might hinder the interpretation of your results above. (6 marks)
Note: Round off your figures to two decimal places.
A

Solution


y = a + b1x1 + b2x2

y = 4.1 + 0.99x1 + 1.76x2

(ii) A statistical analvsis of the computer results.

According to the link depicted by the coefficient of determination r 0.4478, only 44.76% of income spent on entertainment is determined by annual income and household size.

The coefficient can be analysed as follows:

➢ 4.099264 - As a result of additional variables not included in the analysis, there is an increase in revenue spent on entertainment.
➢ 0.985764 - is the increase in entertainment spending when annual income increases by one unit.
➢ 1.762415 - is the increase in amount spent on entertainment as size of the household in increased by one unit
➢ We can conclude that the model is significant based on the F test because F computed is greater than F critical.

(iii) Outline three factors that might hinder the interpretation of your results above.

Factors that might hinder interpretations of the result
➢ Household might have other sources of income
➢ The social standing of the home may influence entertainment spending.
➢ There are a large number of independent variables. When there are a large number of independent variables, interpreting anova results can be challenging and confusing.

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QUESTION 3(a)

Q Outline four costs that should be reported in an environmental cost report (4 marks)
A

Solution


Cost that should be reported in an environmental cost report

➢ Environmental prevention costs: - The costs of activities undertaken to reduce waste output. i.e, the cost of recycling products, training employees, and conducting environmental studies.
➢ Environmental Appraisal costs: - Costs expended by the organization to ensure compliance with regulations and voluntary standards. i.e, Costs associated with product inspection and contaminant testing.
➢ Environmental internal failure costs: - Costs incurred as a result of undertaking activities that resulted in pollutants and waste that were not discharged into the environment. i.e, costs of treating toxic waste and upkeep of pollution equipment
➢ Environmental external failure costs: - Costs incurred as a result of waste disposal activities. i.e the cost of cleaning up oil spills or cleaning up a polluted lake.

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QUESTION 3(b)

Q Describe two models that could be used by a management accountant to scan risks in their operating environment. (4 marks)
A

Solution


Models that could be used by a management accountant to scan risks in their operating environment

➢ Sensitivity analysis: - This entails identifying the primary elements influencing profitability and then subjecting them to adverse change in isolation to measure their sensitivity to changes in company profit.
➢ SWOT analysis: - It is a model used to analysis Strength, Weakness, Opportunities and Threats. Business undertakes SWOT analysis to understand its internal and external environment. Through such analysis strength and weakness can be matched with opportunities and threats
➢ PESTEL analysis: Its a model used to determine the factors which exist in the environment such as Political Economical, Social factors, Technology, Environmental and Legal factors. This enables the organization to develop policies that will enable them to maximize the organization's objectives.
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QUESTION 3(c)

Q Using simulation of the above problem for 10 davs, determine the average daily cost usine the following random numbers:
A

Solution


Demand
Demand(Units)
3
4
5
6
7
8
9
10
11
12		 Probability
0.02
0.08
0.11
0.16
0.19
0.13
0.10
0.08
0.07
0.06		 Cummulative Probability
0.02
0.10
0.21
0.37
0.56
0.69
0.79
0.87
0.94
1.00		 Range
00-01
02-09
10-20
21-36
37-55
56-68
69-78
79-86
87-93
94-99


Lead time
Lead time(Delays)
2
3
4
5		 Probability
0.20
0.30
0.35
0.15		 Cummulative Probability
0.20
0.50
0.85
1.00		 Range
00-19
20-49
50-84
85-99


Simulation
Day Opening stock Demand Clossing stock Make order Lead time Holding Ordering Shortage Total

1
2
3
4
5
6
7
8
9
10
30
22
17
13
48
39
35
24
12
1

 Rn
68
13
09
20
73
07
92
99
93
13

 Units
8
5
4
5
9
4
11
12
11
5
22
17
13
8
39
35
24
12
1
0
-
-
Yes
-
-
-
-
-
Yes
-

 Rn
30
22
17
13
08
39
35
24
12
34

 Days
-
-
2
-
-
-
-
-
2
-
44
34
26
16
78
70
48
24
2
0
-
-
80
-
-
-
-
-
80
0
-
-
-
-
-
-
-
-
-
80
44
34
106
16
78
70
48
24
82
80
582


Average cost = 582/10 = 58.2

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QUESTION 4(a)

Q Budget setting styles.

(i) Imposed style, (2 marks)

(ii) Participatory style. (2 marks)

(iii) Negotiated stvle. (2 marks)
A

Solution


(i) Imposed style

This is a technique of budget making where the top level management makes all draft and proposal without engaging other employees.

(ii) Participating style

This is a technique of budget making where all stakeholders are involved in the budget making process

(iii) Negotiated style

This is a technique of budget making where the consultation is done by both top and operational managers on what seems unreasonable and unrealistic in imposed budget. They are prepared by operational managers through a process of negotiation.

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QUESTION 4(b)

Q (i) Conventional absorption costing using assembly labour hourly rate. (6 marks)

(ii) Activity based costine (ABC). (8 marks)
A

Solution


Working
Overhead Absorption Rate (OAR) = Total Overhead/Total direct labour hours
OAR = 10,980,000/((7 x 900) + (5 x 800) x (8 x 1,000)) = 600 per labour hour

Overhead
➫ American = 600 x 7 x 900 = 3,780,000
➫ Butterfly = 600 x 5 x 800 = 2,400,000
➫ Comfy = 600 × 8 × 1,000 = 4,800,000

Profit statement

Selling price
Prime cost
Contribution margin
Sales unit
Total contribution
Less overhead
Net profit		 American
40,000
(35,000)
5,000
900
4,500,000
(3,780,000)
720,000		 Butterfly
20,000
(16,000)
4,000
800
3,200,000
(2,400,000)
800,000		 Comfy
30,000
(24,000)
6,000
1,000
6,000,000
(4,800,000)
1,200,000


Total profit = 720,000 + 800,000 + 1,200,000 = 2,720,000

(ii) Activity based costine (ABC).

Profit statement

Selling price
Prime cost
Contribution margin
Sales units
Total contribution overheads
Processing cost (W1)
Assembly services (W2)
Quality control(W3)
Selling & Administration (W4)
Net profit		 American
40,000
(35,000)
5,000
900
4,500,000
1,044,000
882,000
643,500
751,875
1,178,625		 Butterfly
20,000
(16,000)
4,000
800
3,200,000
696,000
560,000
572,000
1,002,500
369,500		 Comfy
30,000
(24,000)
6,000
1,000
6,000,000
1,740,000
1,120,000
715,000
1,253,125
1,171,875


Working
OAR = Overhead Cost / Cost driver
W1

Processing services
Processing services =3,480,000 / (4 x 900 + 3 x 800 + 6 × 1,000) = Sh 290 per hour
American - 290 x 4 × 900 = 1,044,000
Butterfly - 290 × 3 × 800 = 696,000
Comfy - 290 × 6 × 1,000 = 1,740,000

W2

Assembly services
Assembly services = 2,562,000 / (7 × 900 + 5 x 800 + 8 x 1,000 ) = Sh 140 per hour

American 140 × 7 x 900 = 882,000
Butterfly 140 × 5 x 800 = 560,000
Comfy 140 x 8 x 1,000 = 1,120,000

W3

Quality control
Quality control = 1,930,500 / 54 = Sh 35,750 per hour

Number of run / set up
American 900 ÷ 50 = 18 runs x 35,750 = 643,500
Butterfly 800 ÷ 50 = 16 runs x 35,750 = 572,000
Comfy = 1,000 ÷ 50 = 20 runs x 35,750 = 715,000
Total number of runs 54

W4

Selling and administration (number of customer order)
3,007,500/(30+40 +50) = Sh 25,062.5 per customer order

American - 25,062.5 x 30 = 751,875
Butterfly - 25,062.5 x 40 = 1,002,500
Comfy - 25,062.5 × 50 = 1,253,125


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QUESTION 5(a)

Q (i) Return on investment (ROI). (3 marks)
(ii) Residual income. (3 marks)
A

Solution


(i) Return on investment ROI
ROI = Operating profit/(Total Asset/Capital) × 100%
Profit Bee = 30% x 450,000 = 135,000
Cee = 35% x 21,000 = 73,500

Bee Cee
ROI 135,000 / 800,000 x 100% = 16.875% 73,500 / 400,000 x 100% = 18.3%


(ii) Residual income
RI = Income / profit - return on capital.
Bee 135,000 - 13% x 800,000 = 31,000
Cee 73,500 - 13% x 400,000 = 21,500

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QUESTION 5(b)

Q (i) Advise on the lowest acceptable transfer price from the perspective of the Tube division for each of the new high resolution tubes. (8 marks)

(ii) Assume that the TV division has identified an external supplier that could provide the high resolution tubes tur only Sh.2,000 each, and the Tube division is willing to pay this price
Evaluate the effect of this decision on the profits of the company as a whole. (6 marks)
A

Solution


Minimum acceptable price Variable cost + Opportunity(lost contribution)

Determining opportunity cost (lost contribution
Selling price
Less: Material cost
:-Direct labour cost
:- Manufacturing overhead (400 × 25%)
Gross contribution
Less: Charitable selling & admin cost

 1,700
(380)
(270)
(100)
950
(50)
900


Workings:
W1

Variable selling cost per unit
3,900,000 - 3,500,000 = 400,000
Per unit = 400,000 / 8,000 = 50
Total contribution cost for units reduced
900 × 3,000 units = 2,700,000

Attribute per unit to transfer
2,700,000 / 2,500 = 1,080 per unit

Variable production cost of new resolution tubes
Direct material
Direct labour
Manufacturing overhead (1 / 3 × 540)
Variable production cost
Add: opportunity cost
Minimum transfer price		 600
490
180
1,270
1,080
2,350


(ii) Evaluate the effect of this decision on the profits of the company as a whole.

Current transfer of 2,350 Profit

Sales - External 5,000 × 1,700
- Internal 2,500 × 2,350
Total sales
Variable cost
External 5,000 × (380 + 270 + 100)
Internal 2,500 × 1270
Selling & admin cost-(50 × 5,000)
Total contribution

Transfer price of Sh 2000

Sales - External 5,000 × 1,700
Internal 2,500 × 2,000
Total Sales
Variable Expenses
External (5,000 × 750)
Internal (2,500 × 1270)
Selling & Distribution (50 × 5,000)
Total Contribution

8,500,000
5,875,000
14,375,000

(3,750,000)
(3,175,000)
(250,000)
7,200.000



8,500,000
5,000,000
13,500,000

(3,750,000)
(3,175,000)
(250,000)
6,325,000


Profit decline
7,200,000 - 6,325,000
= Sh. 875,000

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