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CPA
Advanced Leval
Advanced Management Accounting November 2016
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Advanced Management Accounting
Revision Kit

QUESTION 1a

Q Describe four ways of aligning business operations with environmental issues.
A

Solution


Aligning Business Operations with Environmental Issues


Aligning business operations with environmental issues is crucial for sustainable and responsible business practices. Adopting environmentally friendly practices not only helps companies reduce their ecological footprint but can also enhance their reputation, attract environmentally conscious customers, and contribute to long-term profitability. Below are several ways to align business operations with environmental issues:

1. Environmental Impact Assessment:


Conduct a thorough assessment of the company's current environmental impact. Identify areas where the business can reduce its negative effects on the environment.


2. Set Clear Environmental Goals:


Establish specific, measurable, and time-bound environmental goals. These goals could include reducing energy consumption, minimizing waste generation, or decreasing carbon emissions.


3. Energy Efficiency:


Implement energy-efficient technologies and practices. This can involve using renewable energy sources, improving insulation, and optimizing heating, ventilation, and air conditioning (HVAC) systems.


4. Waste Reduction and Recycling:


Implement waste reduction strategies and promote recycling within the organization. Encourage employees to reduce, reuse, and recycle materials. Establish partnerships with recycling facilities to dispose of waste responsibly.


5. Supply Chain Sustainability:


Collaborate with suppliers and ensure they adhere to sustainable and ethical practices. Evaluate and choose suppliers based on their environmental performance and work towards creating a sustainable supply chain.


6. Green Product Development:


Innovate and develop products that are environmentally friendly. Consider using recycled materials, reducing packaging waste, and ensuring that the entire product lifecycle has a minimal impact on the environment.


7. Water Conservation:


Implement water-saving technologies and practices. Monitor and reduce water consumption within the business operations and encourage water conservation among employees.


8. Employee Awareness and Training:


Conduct training sessions to raise awareness among employees about environmental issues. Encourage them to adopt eco-friendly practices both at work and in their personal lives.


9. Environmental Policies and Certifications:


Develop and implement environmental policies that guide the company's commitment to sustainability. Consider obtaining environmental certifications to demonstrate compliance with recognized standards.


10. Corporate Social Responsibility (CSR):


Integrate environmental initiatives into the company's CSR programs. Communicate the company's commitment to environmental responsibility transparently to customers, employees, and stakeholders.


11. Government and Regulatory Compliance:


Stay informed about environmental regulations and comply with them. Proactively engage with regulatory bodies to ensure that the company's operations align with current and future environmental standards.


12. Monitoring and Reporting:


Regularly monitor and evaluate the environmental performance of the business. Implement reporting mechanisms to communicate progress to stakeholders and the public.

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QUESTION 1b

Q (i) Labour cost variance.

(ii) Labour rate variance.

(iii) Labour efficiency variance:

(iv) Labour mix variance

(v) Idle time variance.
A

Solution


Workings

Standard Analysis
Group
Skilled
semiskilled
Unskilled

 Number
30
15
10

Rate
80
60
40

Amount
2,400
900
400
3,700


Standard hours = 40 hrs / 2,000 x 1,600 = 32 hrs

Standard cast = 32 × 3,700 = 118,400

Actual cost Analysis
Group
Skilled
semiskilled
Unskilled

 Number
40
10
5

Rate
70
65
30

Hours
40
40
40

Amount
112,000
26,000
6,000
144,000


Actual hours
Skilled
semiskilled
Unskilled

40 × 40
10 × 40
5 × 40
55		 = 1,600
= 400
= 200
2,200


Standard hours for actual production
Group
Skilled
semiskilled
Unskilled
Number
30
15
10 		Weekly loan
32
32
32 		Total hours required
960
480
320


Actual hours used = Total actual hours - Idle time
= 2,200 - (55 x 4) = 1,980

(i) Labour cost variance.


Labour cost variance = standard labour cost - Actual labour cost

118,400 - 144,000 = 25,600A

(ii) Labour rate variance


= (Std Rate - Actual Rate) Actual Labour Hours

Skilled
Semiskilled
Unskilled

(80 - 70)1,600
(60 - 65)400
(40 - 30)200

16,000F
2,000A
2,000F
16,000F


(iii) Labour Efficiency Variance


(Std hrs - Actual hrs) Std rate

Skilled
Semiskilled
Unskilled

(960 - 1,600)80
(480 - 400)60
(320 - 200)40

51,200A
4,800F
4,800F
41,600A


(iv) Labour Mix Variance


Std labour mix - Actual labour mix

Skilled:-Standard mix
-Actual mix

Semi-skilled = Std mix
Actual

Unskilled=std mix
-Actual mix

Skilled
Semiskilled
Unskilled

1980 x 6/11 = 1080 x 80
40 x 36 = 1,440 x 80

1980 x 3 / 11 = 540 x 60
10 x 36 = 360 x 60

1980 x 2 / 11 = 360 x 40
5 x 36 = 180 x 40

= 86,400 - 115,200
= 32,400 - 21,600
= 14,400 - 7,200

= 86,400
115,200

= 32,400
= 21,600

= 14,400
= 7,200

= 28,800
= 10,800F
= 7,200F
10,800A


(v) Idle time variance


Idle time x Standard rate

Skilled
Semiskilled
Unskilled

(40 x 4)80
(10 x 4)60
(5 x 4)40

= 12,800A
2,400A
800A
16,000A


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QUESTION 2a

Q (i) The re-order level.

(ii) The safety stock level.
A

Solution


(i) The re-order level.




X1 = X̄ + Zσ;
Z = 0.5 - 0.15
0.35 inside the table 1.04

Analysis table
Demand (x)
(300 + 399) ÷ 2 = 350
(400 + 499) ÷ 2 = 450
(500 + 599) ÷ 2 = 550
(600 + 699) ÷ 2 = 650
(700 + 799) ÷ 2 = 750
(800 + 899) ÷ 2 = 850
(900 + 999) ÷ 2 = 950

 Prob (p)
0 ÷ 86 = 0.00
16 ÷ 86 = 0.19
20 ÷ 86 = 0.23
25 ÷ 86 = 0.29
14 ÷ 86 = 0.16
8 ÷ 86 = 0.09
3 ÷ 86 = 0.03

 x̄=xp
0.0
85.5
126.5
188.5
120.0
76.5
28.5
626.0		 δ=√ε(x-x)2 prob
(350 - 626)² 0 = 0
(450 - 626)² 0.19 = 5,885
(550 - 626)² 0.23 = 1,328
(650 - 626)² 0.29 = 167
(750 - 626)² 0.16 = 2,460
(850 - 626)² 0.09 = 4,516
(950 - 626)² 0.03 = 3.149
√17,505


δ = √17,505 = 132
X₁ = X̄ + Zσ
X₁ = 626 + (1.04 x 132)

X₁ = 626 + 137 = 763 = re-order level

(ii) Safety Stock Level


= X₁ - X̄
=763 - 626 = 137 units

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QUESTION 2b

Q (i) If the customer above paid Sh.87,500,000 for the first machine, determine the price he would have to pay later for a second machine.

(ii) Advise the management of Innovators Ltd. on the price quotation per machine if the customer above places an order for the third and the fourth machines as a single order.
A

Solution


(i) If the customer above paid Sh.87,500,000 for the first machine, determine the price he would have to pay later for a second machine.

Learning Curve Analysis

a = 2,000 hrs

b = logr / log2 = log0.9 / log 2 = -0.152

b + 1 = -0.152 + 1 = 0.848

2nd Machine time = Y2 - Y1

y = axb+1

= (2,000 x 20.848 ) - (2,000 x 10.848) = 1,600 Hours

Analysis schedule
Material cost
Labour cost (1600 × 15,000)
overhead cost (50% × 24,000)
Total cost
Markup = (25% × 61,000)
Selling price 		Sh."000"
25,000
24,000
12,000
61,000
15,250
76,250


(ii) Advise the management of Innovators Ltd. on the price quotation per machine if the customer above places an order for the third and the fourth machines as a single order.

y = Y4 - Y2

= (2,000 × 40.848) - (2,000 x 20.848) = 2,880 hrs

Analysis table
Material cost(25,000 x 2)
Labour cost
overhead cost (50% × 43,200)
Total cost
Markup = (25% × 114,800)
Selling price 		Sh."000"
50,000
43,200
21,600
114,800
28,700
143,500


Price per machine = 143,500 / 2 = sh.71,750,000

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QUESTION 3a

Q Prepare statements showing the various expected outcomes of each of the choices open to Best deal Ltd.
A

Solution


Sh 150 Sh 240


Selling price
Material cost (2 × 40)
Labour& variables cost
CM per unit		 No
Contract
150
(80)
(50)
20 		Contract
40,000
150
(75)
(50)
25 		Contract
60,000
150
(70)
(50)
30 		No
Contract
240
(80)
(50)
110 		Contract
40,000
240
(75)
(50)
115 		Contract
60,000
240
(70)
(50)
120


Realizable value on sale of excess material

Selling price
Less P: selling cost (3 + 4.5 + 1.5)
Realisable value 		More than 16,000kg
29
(9)
20 		Less than 16,000kg
24
(9)
15


Determining pay offs
Payoffs (CM per unit x Sales volume) - Fixed Cost-Profit / Loss on sale of excess material


Selling of price 150 sh

No contract


40,000 kg


60,000kg


 Units 000
20
30
40
20
30
40
20
30
40 		Sh."000"
20 × 20 - (380 + 120) = -100
20 × 30 - 500 = 100
20 × 40 - 500 = 300
25 × 20 - 500 = 0.0
25 × 30 - 500 = 250
25 × 40 - 500 = 500
30 × 20 - 500 - 20 × 15 = -200
30 × 30 - 500 = 400
30 × 40 - 500 = 700


Selling of price 240 sh

No contract



40,000kg



60,000kg



 Units 000
18
16
20
24
18
16
20
24
18
16
20
24 		Sh."000"
110 × 18 - 1,600 = 380
110 × 16 - 1,600 = 160
110 × 20 - 1,600 = 600
110 × 24 - 1,600 = 1,040
115 x 18 - 1,600 - 320 = 150
115 × 16 - 1,600 - 180 = 60
115 × 20 - 1,600 = 700
115 × 24 - 1,600 = 1,160
120 × 18 - 1,600 - 360 = 200
120 × 16 - 1,600 - 420 = -100
120 × 20 - 1,600 - 300 = 500
120 × 24 - 1,600-240 = 1,040


Payoff table at selling price Sh 150
Outcome
Option
 20,000 30,000 40,000
No contract
Contract 40,000 kg
Contract 60,000kg
Probability		 -100
0
-200
0.1		 100
250
400
0.6		 300
500
700
0.3


Payoff table at selling price Sh 240
Outcome
Option
 18,000 16,000 20,000 24,000
No contract
Contract 40,000 kg
Contract 60,000kg
Probability		 380
150
200
0.1		 160
60
-100
0.3		 600
700
500
0.3		 1040
1160
1040
0.3


Expected Monetary Value EMV

At selling price of sh 150

No contract = -100 x 0.1 + 100 x 0.6 + 300 x 0.3 = 140

40,000kg = 0 x 0.1 + 250 x 0.6 + 500 x 0.3 = 300

60,000kg = -200 x 0.1 + 400 x 0.6 + 700 x 0.3 = 430

At selling price of Sh 240

No contract = 380 x 0.1 + 160 x 0.3 + 600 x 0.3 + 1,040 x 0.3 = 578
40,000kg = 150 x 0.1 + 60 x 0.3 + 700 x 0.3 + 1,160 x 0.3 = 591

60,000kg = 200 x 0.1 + -100 x 0.3 + 500 x 0.3 + 1,040 x 0.3 = 452

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QUESTION 3b

Q (i) Maximise expected monetary value.

(ii Minimise the harm done to the firm if the worst outcome of each choice was to occur.

(iii) Maximise the score on the above mentioned measure of desirability.
A

Solution


(i) Maximise Expected Monetary Value


The maximum Expected Monetary value (EMV) is achieved when the selling price is Sh 240, and the material purchase quantity is 40,000 kg.

(ii) Minimise the harm done to the firm if the worst outcome of each choice was to occur


In order to minimize the worst possible outcome, the sales price is Sh 150 and with no contract.

(iii) Maximise the score on the above mentioned measure of desirability


Maximize score using desirability measure

Measure = L + 3E

Strategy

Contract
(Kgs)
EMV (E)
Sh 000
Worst Outcome
(L) Sh 000
L+3E
Sh 000
150


240


 None
40,000
60,000
None
40,000
60,000 		140
300
430
578
591
452 		-100
0
-200
160
60
-100 		320
900
1,090
1,894
1,833
1,256


The best choice is sales price of Sh. 240 and no contract for raw materials

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QUESTION 4a

Q The most successful centre. Your report should include commentary on return on investment (ROI), residual income (RI) and economic value added (EVA) as measures of financial performance. Detailed calculations regarding each of the three measures must be included as part of your report.
A

Solution


(i) Using Return on Investment (RO1)


ROI (Operating Profit Total Asset) x 100%

Centre
Western
Eastern
Central		 Operating Profit
396
441
703		 Net Asset / Total Asset Liabilities
1,800 - 80 = 1,720
3,400 - 240 = 3,160
4,300 - 480 = 3,820		 ROI
23%
13.9%
18.4%


ii) Residual Income (RI)


RI = Operating Profit- Return on Capital Employed

Centre

Western
Eastern
Central		 Operating
Profit
396
441
703		 Total
Assets
1,800
3,400
4,300		 Return On Capital Employed
(12% of Total Asset)
12% x 1,800 = 216
12% × 3,400 = 408
12% x 4,300 = 516		 RI

180
33
187


(iii) Economic Valued Added (EVA)


EVA = NOPAT - ROCE
WACC = We Ke + Wd Kd G(1 - T)

Weights
Equity = 9,000 / 10,800
Debt = 1,800 / 10,800		 Proportion
0.83
0.17


WACC (0.83 x 15%) + 0.17 x 10(1 - 0.3) = 13.64%


Centre
western
Eastern
Central		 NOPAT
Profit (1 - t)
396 × 70% = 277.2
441 x 70% = 308.7
703 × 70% = 492.1		 Capital employed
(Asset - liabilities)
1,720
3,160
3,820		 Return on capital employed
(Capital WACC)
1,720 × 13.64% = 234.6
3,160 × 13.64% = 431.0
3,820 × 13.64% = 521.0		 EVA
Sh 000
42.6
-122.3
-28.9


➢ Based on ROI Western division is the most successful
➢ Based on RI, Central division is the most successful
➢ Based on EVA. Western is adding more value hence based on the measures above, western division is the best.

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QUESTION 4b

Q The percentage change in revenue, total cost and net assets during the period that would have been required in order to achieve a target ROI of 20% for Eastern centre.
A

Solution


Let Revenue be x

Revenue
Less: Variable cost ration= (567 ÷ 2,100)
Less: Fixed cost
Operating profit

X
(0.27x)
(1,092)
0.73x - 1092


ROI = Operating / Net Asset Capital x 100% = (0.73x - 1,092) / 3,160 = 0.2

0.73x - 1,092 = 3,160 x 0.2

0.73x = 1,724

x = 2,362

Increase in revenue = 2,362 - 2,100 = 262

%change = 262 / 2,100 x 100% = 12.48%

Let total cost be x
Variable cost
Fixed cost
Total cost		 567
1,092
1,659


ROI = Profit / Asset x 100% = (2100 - x) / 3,160 = 0.2

2,100 - x = 632

x = 1468

Decrease in cost 1,659 - 1,468 = 191

% Change = 191 / 1,659 = 11.51%

Let Net Assets be x

ROI = 441 / x = 0.2

441 = 0.2x

x = 2,205

Decrease in net asset = 3,160 - 2,205 = 955

% Change = 955 / 3,160 x 100% = 30.22%

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QUESTION 4(c)

Q State whether you agree with the statement of the marketing director in note (9) above.
A

Solution


The marketing director is accurate in asserting that the success of the Group hinges on the quality of service provided to clients. However, it's important to note that this isn't the exclusive metric for gauging success. While monitoring the number of complaints from clients is a valuable performance measure, it shouldn't be the sole focus. Success should be evaluated through a comprehensive assessment that considers various aspects beyond just the complaint count, ensuring a more holistic understanding of the business's overall performance.

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QUESTION 5a

Q Based on a transfer price of Sh.45 per electrical component, advise the management of Sang Ltd. on the monthly profit that would be earned as a result of selling product "Yetu".
A

Solution


Division y income statement
Units(X)
1,000
2,000
3,000
4,000
5,000
6,000

 Revenue (X * Price)
120 × 1,000 = 120,000
110 × 2,000 = 220,000
100 × 3,000 = 300,000
90 × 4,000 = 360,000
80 × 5,000 = 400,000
67 × 6,000 = 402,000

 Variable Cost (X * 54)
54,000
108,000
162,000
216,000
270,000
324,000

 Fixed Cost
75,000
75,000
75,000
75,000
75,000
75,000

 Profit
-9,000
37,000
63,000
69,000
55,000
3,000
218,000


Division y will sell 4,000 units of product yetu since it has the highest profit. Therefore it will order 4,000 unit of electronic component from division x

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QUESTION 5b

Q Determine the maximum monthly profit from the sale of product "Yetu" for Sang Ltd.
A

Solution


Units
1,000
2,000
3,000
4,000
5,000
6,000

 Revenue
120,000
220,000
300,000
360,000
400,000
402,000

 Variable Cost (15 + 9)x
24,000
48,000
72,000
96,000
120,000
144,000

 Fixed Cost(50 + 75)
125,000
125,000
125,000
125,000
125,000
125,000

Profit
-29,000
47,000
103,000
139,000
155,000
133,000
548,000


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QUESTION 5(c)

Q Using the marginal cost of electrical component as a transfer price, advise the management of Sang Ltd. on the monthly profit that would be earned as a result of selling product "Yetu" by divisions X and Y and the company as a whole.
A

Solution



Sales External
Internal sales
Less: Inter group sales
Variable cost
Fixed cost
Profit		 Division x

75,000

(75,000)
(50,000)
(50,000)		 Division y
400,000

(75,000)
(45,000)
(75,000)
205,000		 Sang Itd
400,000


(120,000)
(125,000)
155,000

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QUESTION 5(d)

Q (i) Using the above scenario, discuss the problem of setting a transfer price.

(ii) Suggest a transfer pricing policy that would help Sang Ltd. to overcome the transfer pricing problems that it faces.
A

Solution


(i) Problems of setting transfer price


➢ Using marginal cost as the transfer price would fail to incentivize the manager of division X because it wouldn't contribute to covering the division's fixed costs. Nevertheless, this transfer price strategy maximizes the overall profit for the group.

(ii) Overcoming the transfer pricing problem


➢ To address the mentioned issue, an alternative approach could involve implementing dual price transfer pricing or opting for a negotiated transfer price.

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