ADVANCED MANAGEMENT ACCOUNTING NOVEMBER 2018 - CPA SOLUTION|REVISION KITS|KASNEB

QUESTION 1a

Q Stating two examples in each case, distinguish between "internalised environmental costs" and "externalised environmental impacts". (6 marks)

A

Solution

Distinguishing between internalized environmental costs and externalized environmental impact

Internalized environmental cost - means including the external costs of pollution of the environment as part of the producer's costs included in the total costs of the product to make the environment as important as capital, labor, resources, technology, and other factors of production.

Externalized environment impact - is the use of energy technology that is often associated with impacts on human health and the environment. Many impacts include damage to human health, impacts on crop yields, and damage to ecosystems.

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QUESTION 1b

Q (i). Advise the management of ABC Ltd. on the minimum price to quote on this contract. (10 marks)

(ii). Describe why in practice the minimum price is never actually used.(4 marks)

A

Solution

(i). Advise the management of ABC Ltd. on the minimum price to quote on this contract.

i) Determining minimum price quotation
Direct Material (300,000 × 12) Other Material Labour Cost Skilled Workers (30,000 × 30) Unskilled Workers (Irrelevant) Depreciation:- General Irrelevant :- Specific Purpose Machine Total Relevant Cost Markup profit (10% × 6,700,000) Price quotation	3,600,000 2,000,000 900,000 0 0 200,000 6,700,000 670,000 7,370,000

(ii). Describe why in practice the minimum price is never actually used.

• The Minimum price usually does not include additional costs such as fixed costs, so their use will not achieve the goal of maximizing profits.

• Minimum price, only variable and contingent costs are considered; in practice, there are also fixed and unavoidable costs.

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QUESTION 2a

Q Using a decision tree, evaluate whether the variances should be investigated. (10 marks)

A

Solution

EMV investigation

(55,000 × 0.9 × 0.5) - (1,500 + 10,000 × 0.5) = 18,250

EMV no investigation

Decision: They should conduct an investigation

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QUESTION 2b

Q (i) Net profit, (6 marks)

(ii) Return on investment (ROI). (4 marks)

A

Solution

(i) Net profit

Sales volume
Selling price
Total sales (sh 000)
Gross profit margin
Gross profit
Overhead cost
Net profit

1
18,000
900
16,200
40%
6,480
(5,250)
1.230

2
19,800
900
17,820
40%
7,128
(5,250)
1,878

3
21,780
855
18,621.9
38%
7,076.32
(6,000)
1.076.32

4
23,958
855
20,484
38%
7,784
(6,000)
1,784

(ii) Return on investment (ROI).

Assets balance b/d (A)
Depreciation 25%*7,500
N.B.V
Net income(B)
ROI = B/A x 100%

Year 1
7,500
(1,875)
5,625
1,230
16.4%

Year 2
5,625
(1,875)
3,750
1,878
33.39%

Year 3
3,750
(1,875)
1,875
1,076.32
28.7%

Year 4
1,875
(1,875)
0
1,784
95.15%

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QUESTION 3a

Q Describe three roles that are played by a management accountant in environmental management accounting (EMA). (6 marks)

A

Solution

Role of management accountant in Environmental Management Accounting (EMA)

➢ Capital investment decisions - Management accountant evaluates the impact of the environment cost and benefit

➢ Cost determination - It is the role of management accountants to calculate environmental costs and then communicate this information to the appropriate product units.

➢ Provision of information - Important financial information is provided by management accountants for environmental management accounting activities.

➢ Process and product design - Management accountants are tasked with supporting production units in implementing environmentally friendly process and product designs.

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QUESTION 3b

Q (i). A simulation of the company's inventory balances for a period of 10 days. (10 marks)

(ii). The average daily inventory cost. (4 marks)

A

Solution

(i). A simulation of the company's inventory balances for a period of 10 days.

Demand
Demand(Units) 10 14 18 22	Probability 0.22 0.30 0.40 0.08	Cummulative Probability 0.22 0.52 0.92 1.00	Range 00-21 22-51 52-91 92-99

Lead time
Days 2 3 4 5	Probability 0.10 0.30 0.20 0.40	Cummulative Probability 0.10 0.40 0.60 1.00	Range 00-09 10-39 40-59 60-99

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

55
33
19
5
0
0
55
33
19
1

Rn
94
24
42
47
52
70
99
31
74
70

Units
22
14
14
14
18
18
22
14
18
18

33
19
5
0
0
0
33
19
1
0

-
-
Yes
-
-
-
-
-
Yes
-

Rn
56
06
39
95
23
56
16
68
42
00

Days
-
-
3
-
-
-
-
-
4
-

1,650
950
250
-
-
-
1,650
950
50
-

-
-
1,000
-
-
-
-
-
1,000
-

-
-
-
1,800
3,600
3,600
-
-
-
3400

1,650
950
1,250
1,800
3,600
3,600
1,650
950
1,050
3,400
19,900

(ii). The average daily inventory cost.

Average inventory daily cost = Total cost / No.of days
19,900 / 10 = 1,990

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QUESTION 4a

Q Compute the performance indicators that could be used for each of the four perspectives on the balanced scorecard. (8 marks)

A

Solution

Perspective
Financial

Customer

Internal business process

Leaning and growth

Measure
Profit margin

Variety
Demand
Productivity

Percentage of development cost

Product
Existing
New
Existing
New
Existing
New
Both

Computation
(550 - 375) / 550 x 100% = 31.82%
(125 - 70) / 125 x 100% = 44%
25,000
5,000 ➪ Ratio = 25,000 / 5,000 = 5:1
Units / Hours = 25,000 / 5,000 = 5
Units / Hours = 5,000 / 1,250 = 4
47 / (375 + 70) x 100% = 10.6%

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QUESTION 4b

Q (i). Evaluate the lifecycle cost per unit. (8 marks)

(ii). Comment on the target price by the Marketing Director and suggest ways of reducing any cost gap. (4 marks)

A

Solution

Evaluation of the lifecycle cost per unit
Details Research & development Production cost: :- Variable cost :- Fixed cost Marketing cost: :- Variable cost :- Fixed cost Distribution cost: :- Fixed cost Disposal of equipment Total cost Present value factor Present value of cost	1 Jan 2018 850,400 850,400 1 850,400	31 Dec 2018 200,000 200,000,000 500,000 240,000 200,000 120,000 3,260,000 0.89 2,901,400	31 Dec 2019 - 1,600,000 500,000 160,000 150,000 120,000 2,530,000 0.8 2,024,000	31 Dec 2020 1,800,000 500,000 200,000 100,000 120,000 300,000 3,020,000 0.71 2,144,200

Cost per unit = Total cost / Total units

7,920,000 / 60,000 = Ksh. 132

Cost gap Actual cost - Target cost

132 - 120 = sh.12

(ii). Comment on the target price by the Marketing Director and suggest ways of reducing any cost gap.

How to reduce cost gap

➢ Reduce the total life cost

➢ Strategise of increasing production

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QUESTION 5a

Q Explain four shortcomings of the traditional budgeting process. (4 marks)

A

Solution

Shortcomings of the traditional budgeting process

➢ Inefficiency and time consuming - Traditional budgeting uses an excessive amount of management resources and time.

➢ How change responsiveness - Most businesses follow an annual budgeting cycle, and because of this annual focus, the budget is frequently rendered useless shortly after it is produced.

➢ Failure to motivate desirable behaviors - The conventional budgeting approach falls short of encouraging people to act in the best interests of their organization.

➢ Disconnection from strategic plan - Managers frequently overlook the strategic intent of budgeting because they are so fixated on getting the numbers right.

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QUESTION 5b

Q Discuss four factors that could encourage the adoption of activity based costing (ABC) in a large service organisation. (8 marks)

A

Solution

Factors encouraging the adoption of activity based costing (ABC) in the large service organization

• To meet the needs of the Customer

• Expansion of markets

• Modern businesses are expanding their product lines.

• Greater need for strategic diversification

• Increased head-to-head competition

• Increased automation

• Increased cost of information

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QUESTION 5c

Q (i) The learning curve index. (2 marks)

(ii) The unit cost. (6 marks)

A

Solution

(i) The learning curve index

y = ax^{b + 1}

a = 40

x = 30

b = LogT / Log 2

Log 0.8 / Log 2 = -0.322

(ii) The unit cost

y = ax^{b + 1}

b+1 = -0.322 + 1 = 0.678

Total time to make 30 units

y = ax^{b + 1}

40 x 30^0.678 = 401 hrs

Cost analysis
Direct Material 40 × 30
Direct Labour 401 × 6
Variable Overhead 401 × 0.5
Fixed Overhead
Total

1,200.00
2,406.00
200.50
6,000.00
9,806.50

Unit cost = 9,806.5 / 30 = Sh. 327

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CPA
Advanced Leval
Advanced Management Accounting November 2018
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Comments on CPA past papers with answers:

Advanced Public Finance

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Advanced Auditing & Assurance

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CPA Advanced Leval Advanced Management Accounting November 2018 Suggested solutions

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Comments on CPA past papers with answers:

Advanced Public Finance

Advanced Financial Management

Advanced Auditing & Assurance

Advanvced Financial Reporting & Analysis

Advanced taxation

Comments on:

CPA
Advanced Leval
Advanced Management Accounting November 2018
Suggested solutions