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CPA
Advanced Leval
Advanced Management Accounting May 2019
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Advanced Management Accounting
Revision Kit

QUESTION 1a

Q (a) Highlight four fields in which the use of environmental management accounting (EMA) is applied. (4 marks)
A

Solution


Fields in which the use of environmental management accounting (EMA) is applied

• Strategy formulation

• Monitor, measure and cost control

• Project implementation

• Financial budgeting

• Control the management information system for reliable results.

• Investment evaluations and product pricing

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QUESTION 1b

Q Compute the planning and operational variances that analyse the actual performance taking into account the anticipated learning effect. (8 marks)
A

Solution


Average approach ȳ = axb

Total approach y = axb + 1

Using total approach

b + 1 = -0.152 + 1 = 0.848

x = 6

a = 2,400 / 6 = 400

y = 400 x 60.848 = 18,228 hour

Variances

Planning variances = Original std - Revised std Value

Efficiency variances = Revised std value - Actual value

Conventional variance = Planning + Efficiency

Labour cost

Planning = 1,680,000 - 1,680,000 / 2400 x 1,828 = 400,400F

Operational 1,680,000 / 2,400 x 1,828 - 1,365,000 = 85,400 A/315,000F

Labour efficiency

Planning (2,400 - 1,828) x 1,680,000 / 2,400 = 400,400F

Operational = (1,828 - 1,950) 1,680,000 / 2,400 = 85,400 A/315,000F

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QUESTION 1c(i-ii)

Q (i). For each decision, determine the expected monetary value. (4 marks)

(ii). Advise the management of Marima Ltd. on the action to take assuming that Rima Ltd. could supply perfect information at a cost of Sh.5 million, (4 marks)
A

Solution


EMV
Decision
Neither
Product 1 only
Product 2 only
Both		 EMV (Payoff Prob)
0
30 × 0.3 + 15.6 x 0.5 + 7.2 x 0.2 = 18.24
25.2 x 0.3 + 14.4 x 0.5 + 7.2 x 0.2 = 16.2
52.8 x 0.3 + 8.8 x 0.5 + 3.2 × 0.2 = 20.88


Decision: Introduce both product

Value of instruction (VOI)
VOI EMV with information - EMV without information
= (52.8 x 0.3 + 15.6 x 0.5 +7.2 x 0.2) - 20.88 = 4.2
Actual cost = 5

Advice:
Mariana ltd should therefore not pay to acquire information since the fees charged of 5million is too high compared to Sh 4.2million.


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QUESTION 2a

Q (a) Discuss five challenges associated with the return on investment (ROI) approach in financial performance measurement. (10 marks)
A

Solution


Challenges associated with the return on investment (ROI) approach in financial performance measurement

➢ It ignores the time value of money

➢ It ignores different useful lives of different projects

➢ It does not recognize the effect of qualitative factor

➢ It does not recognize inflation

➢ It ignores the external factors

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QUESTION 2b

Q Using simulation of the above problem for 10 weeks, determine the average weekly cost using the following random numbers:(10 marks)
A

Solution


Montecarlo analysis for Dentland
Demand (unit)
2
3
4
5
6
7
8		 Probability
0.02
0.08
0.22
0.34
0.18
0.09
0.07		 Cummulative probability
0.02
0.10
0.32
0.66
0.84
0.93
1.00		 Range
00-01
02-09
10-31
32-65
66-83
84-92
93-99


Montecarlo analysis for lead time
Weeks
1
2
3
4
5 		Probability
0.23
0.45
0.17
0.09
0.06		 Cummulative probability
0.23
0.68
0.85
0.94
1.00		 Range
00-22
23-67
68-84
85-93
94-99


Simulation table
Weeks Opening Stock Demand Closing stock Make order Lead Time Holding cost Ordering cost Shortage Cost Total

1
2
3
4
5
6
7
8
9
10
60
55
49
44
41
36
30
23
15
41		 Rn
50
68
52
08
59
81
85
95
15
89		 Units
5
6
5
3
5
6
7
8
4
7
55
49
44
41
36
30
23
15
11
34
-
-
-
-
Yes
-
-
-
-
Yes		 Rn
-
-
-
-
90
-
-
-
-
28		 Weeks
-
-
-
-
4
-
-
-
-
2
1,925
1,715
1,540
1,435
1,260
1,050
805
525
385
1,190
-
-
-
-
350
-
-
-
-
350
-
-
-
-
-
-
-
-
-
-
1,925
1,715
1,540
1,435
1,610
1,050
805
525
385
1,540
Total cost 12,530


Average weekly cost = Total cost / No of weeks = 12,530 / 10 = 1,253


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QUESTION 3a

Q Under the current transfer pricing system. prepare a profit statement showing the profit for each of the divisions and for Kitchen Masters Ltd. as a whole. Your sales and cost figures should be split into external sales and inter-divisional transfers, where appropriate. (6 marks)
A

Solution



Sales - External
Internal
Total sales
Variable cost
Internal transfer cost
Fixed cost
Profit		 B division Sh 000
(120 × 80) 9,600
(80 × 75) 6,000
15,600
(20 × 200) (4,000)

(4,400)
7,200		 A division Sh 000
(80 x 450) 36,000

36,000
(245 x 80) (19,600)
(80 × 75) (6,000)
(7,440)
2,960		 Kitchen Master Ltd Sh 000
45,600

45,600
(23,600)

(11,840)
10,160

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QUESTION 3b

Q Evaluate the maximum profit that could be earned by Kitchen Masters Ltd. if transfer pricing is optimised. (8 marks)
A

Solution



Sales - External
Internal
Total sales
Variable cost
Internal transfer cost
Fixed cost
Profit		 B division Sh 000
(180 × 80) 14,400
(20 × 65) 1,300
15,700
(20 × 200) (4,000)

(4,400)
7,300		 A division Sh 000
(80 x 450) 36,000

36,000
(245 + 65)60 (18,600)
(20 × 65) (1,300)
(7,440)
8,660		 Kitchen Master Ltd Sh 000
50,400

50,400
(22,600)

(11,840)
15,960


Maximum profit for kitchen master Sh 15,960,000

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QUESTION 3c

Q Discuss the issues of encouraging divisional managers to take decisions in the interest of the company as a whole, where transfer pricing is used. Provide a reasoned recommendation of a policy that Kitchen Masters Ltd. should adopt. (6 marks)
A

Solution


Issues of encouraging divisional managers to take decisions in the interest of the company as a whole, where transfer pricing is used

Goal congluence

Here, departments and divisions work differently in order to fulfill the corporate aim of the entire organization, i.e., each division should act in a way that would enable the achievement of the corporate purpose.

Legal obligation

The firm's ability to comply with legal requirements, such as taxation and customs duty, should be aided by the transfer price determination. It shouldn't be created in a way that will penalize the business. The kitchen manager should use the cost plus strategy. These techniques assist the divisional manager in reaching the corporate goals.

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QUESTION 4a

Q (a) Highlight four ethical standards of management accountants. (4 marks)
A

Solution


Ethical standards of Management Accountants

1. Competence - Improve knowledge and skills, perform job duties in accordance with applicable laws and regulations, make accurate and timely recommendations, identify and help manage risks.

2. Confidentiality - Information should be kept confidential unless disclosure is legally required, authorized, or permitted by the owner. Let relevant people know the importance of confidential information, and refrain from using confidential information in illegal or unethical ways.

3. Integrity - Minimize or report a conflict of interest, avoid any behavior that affects an employee's job, avoid work that voluntarily harms the reputation of the profession, and put ethics and integrity above personal interests.

4. Credibility - Report any delays or deficiencies in information in accordance with the law or the organization's policies, communicate any professional limitations or other constraints that might affect responsible judgment or successful performance, and communicate all pertinent information that could affect a user's interpretation and understanding of the reports or analyses.

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QUESTION 4b(i)

Q Using the high-low points technique, identify the behaviour of cost of sales, selling and distribution costs and administrative costs. (6 marks)
A

Solution


y = a + bx

Cost of sales

5,000 = 9 + 8,000b

5,500 = a + 9,000b

500 = 1,000b

b = 0.5,

a = 1,000

5,000 = a + (8,000 × 0.5)

y = 1,000 + 0.5x

Selling and distribution

900 = a + 9,000b

800 = a + 8,000b

100 = 1,000b

b = 0.1, a = 0

y = 0.1x

Administrative cost

1,500 = a + 9,000b

1,500 = a + 8,000b

0 = 1,000b

b = 0

a = 1500

y = 1500

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QUESTION 4b(ii)

Q Draw a contribution break-even chart and identify the monthly break-even sales value and area of contribution. (4 marks)
A

Solution



Sales
Cost of sales
Gross profit
Variable cost
Selling & distribution
Administration costs
Contributions
Fixed costs
Cost of sales
Selling and distribution
Profit		 March
8,000
(4,000)
4,000

(800)
(0)
3,200

(1,000)
(1,500)
700		 April
9,000
(4,500)
4,500

(900)
(0)
3,600

(1,000)
(1,500)
1,100

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QUESTION 4b(iii)

Q (iii) Assuming a margin of safety equal to 30% of the break-even value, calculate Bidii Ltd.'s annual profits. (2 marks)
A

Solution


CMR = Contribution / Revenue

CMR for March = 3,200 / 8,000 = 0.4

CMR for April = 3,600 / 9,000 = 0.4

Rbe = F / CMR = 2,500 / 0.4 = Ksh 6,250

Profit = 30% x 6,250 = 1,875 x 12 months = 22,500

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QUESTION 4b(iv)

Q Annual value of sales required from the new outlet in order to achieve the same profit as previously obtained from the single outlet. (4 marks)
A

Solution


At point of indifference

π Single = π double outlets

π = CMR x R - F

Thus: (0.4R x 0.9) - 2,500 = 0.4 x R - (2,500 + 10,000 / 12)

0.36R - 2,500 = 0.4R - 3,333

R = 20,825


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QUESTION 5a

Q Explaining the current status of Global Chain Ltd., prepare a balanced scorecard report covering the four perspectives, using the above information. (12 marks)
A

Solution


Balanced scorecard report covering the four perspectives
Perspective
Financial

Customer

Internal business Processes

Leaning & Development

Measure
Sales
Expenses
Loyalty
Satisfaction index
Lead time
Processing time
Staff promotion
Staff grievances'		 Comment
Poor
Poor
Good
Dangerous
Good
Poor
Good
Poor

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QUESTION 5b

Q (i) Advise on the revenue that Hazina Ltd. would earn if the selling price of a bottle of perfume was set in such a way that profits would be maximised for the forthcoming budget period (6 marks)
(ii) Explain the use of rolling budgets in planning and management control process at Hazina Ltd. (2 marks)
A

Solution


P = a-bq

450 = a - 125,000b
420 = a - 135,000b
30 = 10,000b

b = 0.003

a = 825

450 = a - (125,000 x 0.003)

Thus P = 825 - 0.003q

At profit maximamization MR = MC

Profit π = 0

π = TR = TC

π = p x q
TR = (825 - 0.003q)q

TR = 825q - 0.003q2

MR = ƏTR/Ə = 825 - 0.006q

MC = Variable cost = 210

825 - 0.006q = 210

825 - 210 = 0.006q

q = 102,500

P = 825 - (0.003 × 102,500) = 517.5

Revenue = p x q = 517.5 × 102,500

Sh 53,043,750

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