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CPA
Advanced Leval
Advanced Management Accounting November 2017
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Advanced Management Accounting
Revision Kit

QUESTION 1a(i)

Q Construct a pay off table showing all the possible outcomes.
A

Solution


Outcomes
Option
 Good 500,000 Average 35,000 Poor 300,000
500,000
350,000
300,000
Probability		 250,000
160,000
130,000
0.30		 160,000
175,000
145,000
0.46		 130,000
145,000
150,000
0.24


Option
500


350


300


Outcome
Good
Average
Poor
Good
Average
Poor
Good
Average
Poor		 Payoff Revenue - Cost
(500x900) - (500×400)
(350x900) + (150x300) - (500x400)
(300x900) + (200x300) - (500×400)
(350x900) -(350,400)-(150x100)
(350x900) -(350×400)
(350x900) + (50x300) - (350x400)
(300x900) - (300x400) - (200×100)
(300x900) - (300x400) - (50×100)
(300x900) - (300×400)
250,000
160,000
130,000
160,000
175,000
145,000
130,000
145,000
150,000

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QUESTION 1a(ii)

Q Advise the management of Tripa Ltd. on the optimal level of production based on the expected value. maximax and maximin criteria.
A

Solution


500,000 units=250×0.3+160×0.46+130×0.24 = 179,800
350,000 units = 160x0.3+175×0.46+145x0.24 = 163,300
300,000 units 130×0.3+145x0.46+150×0.24 = 141,700
Optimal level is 500,000 units

Maximax Criteria
500,000 units = 250,000 Best of best
350,000 units = 175,000
300,000 units = 150,000

Maximin Criteria
500,000 units= 130,000
350,000 units = 145,000 Best of the worst
300,000 units = 130,000
Optimal level is 350,000 units


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QUESTION 1b

Q The revenue that needs to be generated from product C for Sori Ltd. to achieve the budgeted profit.
A

Solution


Total contribution from product

  • A = 15% x 10 = 1.5M
  • B = 10% x 20 = 2 M
  • C = 25% x x = 0.25x
  • Total contribution = 1.5+2 + 0.25x

Profit Total Contribution - Fixed cost

3.5 + 0.25x - 5.5 = 1

0.25x = 3

x = 12M


To reach the budgeted profit, Sori Ltd. must generate a revenue of 12 million from product C. This calculation is based on the total contribution from products A, B, and C, after subtracting fixed costs.


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QUESTION 2a

Q Other than control, discuss four other purposes of a budget.
A

Solution


  • Planning: Budgets are essential for the planning process. They help organizations set financial goals, allocate resources, and determine the direction and priorities for the upcoming period. A budget always provides a roadmap for the company's financial activities.
  • Resource Allocation: Budgets allocate resources such as funds, manpower, and materials to different departments, projects, or activities within an organization. This allocation ensures that resources are used efficiently and in alignment with the company's objectives.
  • Performance Evaluation: Budgets are used as benchmarks for evaluating actual performance. By comparing budgeted figures to actual results, organizations can assess how well they are meeting their financial and operational goals. This evaluation helps in identifying areas that need improvement or adjustment.
  • Communication and Coordination: Budgets serve as a means of communication within an organization. They convey financial expectations and objectives to different departments and teams. This communication ensures that all parts of the organization are working toward common goals.
  • Motivation: Budgets can motivate employees and teams to achieve their financial targets. When individuals have a clear understanding of their financial goals and how they contribute to the organization's success, they are often more motivated to perform at their best.
  • Risk Management: Budgets help in identifying potential financial risks and uncertainties. By planning for different scenarios and setting aside reserves or contingency funds, organizations can better prepare for unexpected events and economic fluctuations.
  • Decision-Making: Budgets provide data and insights that support decision-making. They help in assessing the financial feasibility of various projects or investments and aid in choosing the most cost-effective options.
  • Financial Control: In addition to operational control, budgets also serve financial control purposes. They help ensure that an organization's financial resources are used efficiently and in compliance with financial policies and regulations.
  • Profitability Analysis: Budgets allow organizations to analyze the potential profitability of different products, services, or business lines. This analysis aids in making informed decisions about resource allocation and product/service development.
  • Cash Flow Management: Budgets help organizations manage their cash flow by projecting when revenues will be received and when expenses will be incurred. This information is crucial for maintaining adequate liquidity and ensuring bills can be paid on time.


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QUESTION 2b(i)

Q High-low.
A

Solution


y = a + bx
Highest 680= a + 48b
Lowest 500 = a +26b
180=22b

b = 8.182
a = 287.264
Fixed Cost = Sh 287,264
Variable Cost = Sh = 8.182


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QUESTION 2b(ii)

Q Least squares regression.
A

Solution


Year/month
July
August
Sept
Oct
Nov
Dec
Jan
Feb
March
April
May
June
Total		 Fuel expenses (y) Sh 000
640
620
620
590
500
530
500
500
530
550
580
680
6,840		 Fuel expenses (y) Sh 000
640
620
620
590
500
530
500
500
530
550
580
680
6.840		 xy
21,760
18,600
21,080
23,010
21,000
16,960
13,000
13,000
16,430
19,250
24,940
32,640
241,670		 x2
1,156
900
1,156
1,521
1,764
1,024
676
676
961
1,225
1,849
2,304
15,212


y= a + bx

b
=
n∑xy-∑x∑y
n∑x² - (∑x)²
+
12 x 241,670 - 420 x 6,840
12 x 15,212-420²
= 4.43


b
=
∑y-b∑x
n
+
6,840 - 4.43 x 420
12
= 414.824


y = 414.824 + 4.42x

Fixed element will be 414,824 and variable element will 4.43.


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QUESTION 2c

Q From the information in (b) above, the coefficient of determination arising is approximately 0.25. Interpret the significance of this information.
A

Solution


r² = 0.25
This means 25% of the fuel expenses is explained by the change in machine hours while 75% is explained by other factors.

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QUESTION 3a

Q With regard to performance measurement in the service industry, identify three key indicators of customer performance measurement.
A

Solution


  • Customer Satisfaction: This is a fundamental indicator that measures how content and pleased customers are with the services they received. It can be assessed through surveys, feedback forms, and online reviews.
  • Net Promoter Score (NPS): NPS measures the likelihood of customers to recommend a company's services to others. It provides insights into customer loyalty and their willingness to promote your services.
  • Customer Retention Rate: This indicator measures the percentage of customers who continue to use your services over time. A high retention rate indicates strong customer performance.
  • Customer Churn Rate: This is the opposite of customer retention and measures the percentage of customers who stop using your services. A lower churn rate is a positive indicator.
  • Customer Lifetime Value (CLV): CLV calculates the total revenue a customer is expected to generate over their entire relationship with your company. Assessing Customer Lifetime Value (CLV) aids in comprehending the long-term worth of clients to a business.
  • Service Quality Metrics: These include measures of service quality such as response times, service availability, and problem resolution times. Metrics like "time to resolution" are particularly relevant for service industries.
  • Service Recovery Performance: This assesses how well your service team handles customer complaints and issues. It includes metrics like complaint resolution time and customer satisfaction after service recovery.
  • Service Level Agreements (SLAs) Compliance: If your service industry uses SLAs, you can measure how well you meet the agreed-upon response and resolution times for customer requests.
  • Service Personalization: Measures the level of personalization and customization you offer to customers. This can include metrics like the number of personalized recommendations or tailored solutions.
  • Customer Effort Score (CES): CES measures how easy or difficult it is for customers to accomplish their goals when using your services. Lower effort scores indicate better performance.
  • Customer Feedback and Complaints: The volume and nature of customer feedback and complaints can be telling indicators. High numbers of complaints may signal issues with your services.


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QUESTION 3b(i)

Q The operating variances.
A

Solution


Total material cost variances = Standard material cost- Actual material cost
800 x 3,600 -2,800,000 = 80,000F


Material Price Variance = (Std price - Actual price) Actual quantity
(32 - 35)80,000 = 240,000 A


Material Usage Variance = (Std quantity - Actual quantity) Std price
(25 x 3,600 - 80,000)32 = 320,000F


Total Labour Cost Variance = Standard labour cost- Actual labour cost
320 x 3,600 - 1,120,000 = 32,000 F


Labour Rate Variance= (Std rate - Actual rate) Actual labour hours
(80 - 70)16,000 = 160,000F


Labour Efficiency Variance = (Standard hours - Actual hours )Std rate
(4 x 3,600 - 16,000)80 = 128,000A


Total Variance O.H Variance = Standard V.O.H - Actual V.O.H
160 x 3,600 - 600,000 = 24,000A


Variable Overhead Efficiency Variance = (Std hours - Actual hours) VOAR
(4 x 3,600 - 16,000)40 = 64,000 A


Variable Overhead Efficiency Variance = (Actual hours VOAR)- Actual variable OH
16,000 x 40 - 600,000 = 40,000 F


Total Fixed Overhead Variance = Standard Fixed OH - Actual Fixed O.H
640 × 3,600 - 1,960,000 = 344,000F


Fixed Overhead Expenditure Variance = Budget Fixed Cost - Actual Fixed Cost
640 x 4,000 - 1,960,000 = 600,000 F


Fixed overhead efficiency variance = (Std hours - Actual hrs) F.0.A.R
(4 x 3,600 - 16,000) 160 = 256,000 A


Total sales variance = Standard contribution - Actual contribution
(280 × 3,200)- 1,488,000 = 592,000F


Sales Price Variance = (Std price - Actual price) Actual sales unit
(2,200 - 2,250)3,200 = 160,000 F


Sales Volume Variance = (Std sales volume- Actual sales volume) std cm per unit
(4,000 - 3,200) 280 = 224,000 A

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QUESTION 3b(ii)

Q A statement reconciling the actual profit and the budgeted profit for Wood Master Ltd.
A

Solution



Budgeted profit 280x4000
Adjustment:
Material price variance
Material usage variance
Labour rate variance
Labour efficiency variance
Variable O.H efficiency variance
Variance O.H expenditure variance
Fixed O.H expenditure variance
Fixed O.H efficiency variance
Sales price variance
Sales volume variance
Actual profit		 "Sh.000"
1,120

(240)
320
160
(128)
(64)
40
600
(256)
160
(224)
1,488

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QUESTION 4a

Q Advise the management of Bipo Ltd. on the optimal selling price per unit for the new product.
A

Solution



EMV
19.3 × 0.4 +7.4 x 0.5+13.1 x 0 x 1 = 8.73M
2 = 11.72 × 0.3 +8.8 x 0.3 +7.42 x 0.4 = 9.124M.
3= Select the highest btwn node 1 and 2

Optimal selling price is sh 350 since it yields the highest profit


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QUESTION 4b(i)

Q Return on capital employed (ROCE).
A

Solution


ROCE = Operating profit / Capital employed x 100%


Zed Ltd = 7,010 / 282,975 x 100% = 8.45%


W Ltd.

Design division = 6,000 / 23,540 x 100% = 25.49%
Gearbox division = 3,875 / 32,320 x 100% = 11.99%

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QUESTION 4b(ii)

Q Asset turnover.
A

Solution


Asset turnover = Sales / Capital employed x 100%


Zed Ltd = 15,560 / 82,975 x 100% = 18.75%


W Ltd

Design division = 14,300 / 23,320 x 100% = 60.75%


Gearbox division = 25,535 / 32,320 x 100% = 79%

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QUESTION 4b(iii)

Q Operating profit margin.
A

Solution


O.P.M = Operating profit / Sales x 100%


Zed Ltd = 7,010 / 15,560 x 100% = 45.5%


W Ltd

Design division = 6,000 / 14,300 x 100% = 41.95%


Gearbox = 3,875 / 25,535 x 100% = 15.18%

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QUESTION 5a

Q With reference to the above statement, highlight four areas for the application of EMA.
A

Solution


Resource Consumption Tracking:

EMA can help track and account for the consumption of resources like water, energy, and raw materials, allowing organizations to identify areas where resource efficiency improvements can be made.


Waste Management:

EMA assists in quantifying and managing waste generation and disposal costs. It can help organizations reduce waste, recycle more efficiently, and manage hazardous waste in compliance with regulations.


Emission Control and Reporting:

EMA is used to measure and report greenhouse gas emissions, air and water pollutants, and other environmental impacts. This data is essential for regulatory compliance and environmental sustainability reporting.


Environmental Compliance Costs:

It helps in tracking and managing the costs associated with complying with environmental regulations and permits. This includes expenses related to obtaining permits and ensuring compliance with environmental laws.


Product Life Cycle Analysis:

EMA can be applied to assess the environmental impact of a product or service throughout its life cycle, from raw material extraction to disposal. This analysis helps in eco-design and improving the sustainability of products.


Environmental Risk Assessment:

EMA can identify and evaluate risks related to environmental issues, such as potential liabilities associated with pollution, contamination, or environmental damage.


Environmental Performance Benchmarking:

EMA allows organizations to benchmark their environmental performance against industry standards and competitors, leading to improvements in sustainability efforts.


Costs of Environmental Projects:

When implementing environmental initiatives or projects, EMA helps in tracking the costs associated with these projects and assessing their financial and environmental benefits.


Cost of Environmental Training and Education:

EMA can allocate costs related to training and educating employees on environmental management and sustainability practices.


Environmental Management Systems (EMS):

EMA supports the cost tracking of implementing and maintaining EMS standards, such as ISO 14001, which guide organizations in environmental management.


Environmental Liabilities:

EMA helps in estimating and accounting for potential environmental liabilities, such as the costs of site remediation, ecological damage, or fines for non-compliance.


Sustainable Supply Chain Management:

EMA can be used to evaluate the environmental performance of suppliers and the associated costs and benefits of selecting more sustainable supply chain partners.


Sustainability Reporting:

EMA contributes to sustainability reporting by providing the financial data necessary to disclose environmental performance, goals, and achievements.


Investment Appraisal:

EMA can be applied to evaluate the financial and environmental benefits of investing in environmentally friendly technologies, renewable energy sources, and energy-efficient equipment.


Carbon Pricing:

EMA helps in assessing the financial implications of carbon pricing mechanisms, such as carbon taxes or cap-and-trade systems.

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QUESTION 5b

Q (i) Advise the management of Trans Ltd. on the amount of safety stock to be maintained.

(ii) Determine the probability of stock-out.
A

Solution


(i) Advising the management on the amount of safety stock to maintain

  • Holding cost 1,000
  • Shortage cost 5,000
  • No of orders=5
  • current reorder level = 850 (ROL)
  • Total ordering cost 5x6,000 30,000

Total shortage cost Shortage per order cycle x No of orders x shortage cost per unit.


New Roll Safety Stock Holding Cost
1,000		 Ordering Cost Storage Cost Total Cost
850 0 0 30,000 (50*0.5+100x0.04+150x0.03+200*0.03+250*0.02)x5x5,000 = 550,000 580,000
900 50 50,000 30,000 (50*0.04+100x0.03+150x0.03+200*0.02)x5x5,000 = 337,500 417,500
950 100 100,000 30,000 (50*0.03+100x0.03+150x0.02)x5x5,000 = 187,500 317,500
1,000 150 150,000 30,000 (50*0.03+100x0.02)x5x5,000 = 87,500 267,500
1,050 200 200,000 30,000 (50x0.02)x5x5,000=25,000 255,000
1,100 250 250,000 30,000 280,000

Keep a safety stock of 200 units, and maintain a reorder level of 1050, as this level minimizes the total cost to 1,050.


(ii) Probability of stock out

Probability = 0.02

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