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

QUESTION 1a

Q Examine three benefits that might accrue to a business organisation as a result of good ethical behaviour by management accountants, (6 marks)
A

Solution


➢ It supports a higher self-regulatory standard. ➢ It helps in boosting public confidence in the world of professionals

➢ It helps in minimizing the conflicts of interest between professionals and clients

➢ It regulates the behaviour of professional leading to best practice

➢It improves credibility and trust

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QUESTION 1b

Q (b) Justify why in the short term some costs and revenues are not relevant for decision making. (3 marks)
A

Solution


Why some short term cost and revenue are not relevant for decision making

In making short-term decisions, not all cost and revenue data is relevant. The Data on costs relevant to decision-making are designated as relevant costs and what is not useful for decision-making is irrelevant costs.When it comes to revenues, the only relevant revenues are incremental revenues.

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QUESTION 1c(i-ii)

Q (i) Expected value of the average total cost based on the above probability distribution. (2 marks)
(ii) Evaluate the decision that the company's manager is likely to make based on the average total cost in (c) (i) above and the current average delivery cost of Shi 125 per delivery, assuming the manager is:
Risk neutral.
Risk averse.
Risk seeker. (9 marks)
A

Solution


(i) Expected value of the average total cost based on the above probability distribution

(x) Probability (P) Expected value (exp) x = xP δ=√∑(x-x)² Prob
Costs 105
107
110
121
125
126
142
156
158
Total 		0.05
0.10
0.08
0.12
0.14
0.16
0.12
0.18
0.05
1 		5.25
10.7
8.8
14.52
17.5
20.16
17.04
28.08
7.9
130 		(105 - 130)²0.05 = 31.125
(107 - 130)²0.10 = 52.67
(110 - 130)²0.08 = 31.84
(121 - 130)²0.12 = 9.61
(125 -130)²0.14 = 3.43
(126 - 130)²0.16 = 2.50
(142 - 130)²0.12 = 17.42
(156 - 130)²0.18 = 122.15
(158 - 130)²0.05 = 39.34
310


Expected value = 130

(ii) Evaluate the decision that the company's manager is likely to make

Standard deviation = √310 = 17.61
Coefficient of variation (CV)=δ/EV x 100%

17.61/130 x 100% = 13.55%

Decision maker
Risk neutral
Risk averse
Risk taker		 Measure used
Expected value
Std deviation
Std deviation		 Decision taken
Sh. 130
Sh. 126
Sh. 156


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QUESTION 2a

Q Evaluate which ingredient and the quantity of the ingredient to be outsourced if production is increased by:
(i) 50%. (5 marks)
(ii) 75%. (5 marks)
A

Solution


Batches produced currently = 28,000/(6+10+12) = 1,000

Ingredient Total hours required at capacity of:

A
B
C
Total hours required
Hours Available
Shortfall 		100% = 1,000
6 × 1,000 = 6,000
10 × 1,000 = 10,000
12 × 1,000 = 12,000
28,000
28,000
0		 150% = 1,500
6 × 1,500= 9000
10 × 1,500 = 15,000
12 × 1,500 = 18,000
42,000
28,000
14,000 		175% = 1,750
6 × 1,750 = 10,500
10 × 1,750 = 17,500
12 × 1,750 = 21,000
49,000
28,000
21,000


Contribution margin
Product
A
B
C		 External price
290
320
390		 Variable cost
200
220
240		 Contribution margin
290 - 200 = 90
320 - 220 = 100
390 - 240 = 150



Machine hours per unit
CM per machine hour
Rank		 A
6
90/6 = 15
1		 B
10
100/10 = 10
3		 C
12
150/12 = 12.5
2


i) Allocation schedule when allocation increases by 50%
Ranks
1
2
3		 Product
A
C
B		 Maximum Demand
1,500
1,500
1,500		 Hrs per Unit
6
12
10		 Hrs Used
9,000
18,000
1,000		 Units Produced
1,500
1,500
100		 Hrs Bal(28,000)
19,000
1,000
0


ii) Allocation schedule when allocation increases by 75%
Ranks
1
2
3		 Product
A
C
B		 Maximum Demand
1,750
1,750
1,750		 Hrs per Unit
6
12
10		 Hrs Used
10,500
17,500
0		 Units Produced
1,750
1,458
100		 Hrs Bal(28,000)
17,500
0
0


Conclusion
Increase
50%
75%

Ingredient to outsource
B
B
C		 Units to outsource
1,400
292
1,750


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QUESTION 2b

Q (i) Advise the management of Kiawara Ltd, on the amount of safety stock to be maintained, (8 marks)
(ii) Determine the probability of a stock-out. (2 marks)
A

Solution


(i) Inventory control know shortages

Current reorder level (CROL) = 100 × 20 = 2,000

Shortage cost per unit Sh.400

Holding cost per unit Sh. 80

No. of orders 5 times
ROL
1,800
1,900
2,000
2,100
2,200
2,300

 Number of time
34
40
90
20
10
6
200 		Probability
34 ÷ 200 = 0.17
40 ÷ 200 = 0.20
90 ÷ 200 = 0.45
20 ÷ 200 = 0.10
10 ÷ 200 = 0.05
6 ÷ 200 = 0.03



Shortage Cost = Shortage Unit Per Order Cycle Annual Orders Shortage Cost Per Unit

Analysis table
ROL
2,000
2,100
2,200
2,300 		Safety stock
0
100
200
300 		Holding cost
0
8,000
16,000
24,000 		Shortage cost
(100 × 0.1 + 200 × 0.05 + 300 × 0.03) × 5 × 400) = 58,000
(100 × 0.05 + 200 × 0.03) × 5 × 400 = 22,000
(100 × 0.03) × 5 × 400 = 6,000

Total cost
58,000
30,000
22,000
24,000


Safety stock = 200 units

(ii) Determine the probability of a stock-out

Probability of being out of stock 0.03


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QUESTION 3a

Q Evaluate the price quotations for each of the three enquiries outlined above. (9 marks)
A

Solution


Learning curve analysis
Cumulative
bicycle		 Cumulative average
time (Hours) 		Cumulative total
(Hours)		 Incremental time
(Hours)
1
2
4
8 		12
(80%×12) 9.6
(80%×9.6) 7.68
(80%×7.68) 6.144 		12
19.2
30.72
49.152 		12
7.2
11.52
18.432


Alternatively: Use of formulae/model
Y = ax1+b
Where b = log 0.8/log 2 =-0.322
1+b=1±0.322 = 0.678
a = 12 hours

Thus, Y = 12x0.678
Assembly hours for the 2nd bicycle
Y = 12(2)0.678-12(1)0.678 = 7.2 hours
Assembly hours for the 3rd and 4th bicycles
Y = 12(4)0.678 - 12(2)0.678 = 11.52 hours
Assembly hours for 18 units
Y = 12(8)0.678 = 49.152 hours

i) First Quotation (2nd Bicycle)
Materials
Assembly labour (7.2 hours × 300).
Manufacturing overheads (150% × 2,160)
Total cost
Profit mark-up (40% × 11,400)
Selling price 		6,000
2,160
3,240
11,400
4,560
15,960


Where:
Profit Mark-up =Profit/ Total cost x 100

6,000/15,000 x 100 = 40%

ii) Second Quotation (3nd and 4th Bicycles)
Materials (2 × 6,000)
Assembly labour (11.52 × 300)
Manufacturing overheads (150% × 3,456)
Total cost
Profit mark-up (40% × 20,640)
Selling price		 12,000
3,456
5,184
20,640
8,256
28,896


Selling price per bicycle = 28,896/2 = Sh.14,448

iii) Second Quotation (3nd and 4th Bicycles)
Materials (8×6,000)
Assembly labour (49.152 x 300)
Manufacturing overheads (150% × 14,745.6)
Total cost
Profit mark-up (40% × 84,864)
Selling price 		48,000
14,745.6
22,118.4
84,864
33,945.6
118.809.6


Selling price per bicycle 118,809.6/8 = sh. 14,851


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QUESTION 3b(i)

Q (i) Material price variance. (3 marks)
A

Solution


Computation of Material price variance

Material Price Variance (Std price - Actual price) Actual Qualify

Material F Price Variance

= (4 - 4.25)59,800

= 14,950 A

Material G Price Variance

(3 - 2.8)53,500 = 10,700F

Material H Price Variance

(6 - 6.4)33,300 = 13,320 A

Total material price variance

14,950A - 10,700F + 13,320A = 17,570A


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QUESTION 3b(ii)

Q (ii) Material mix variance. (3 marks)
A

Solution


Material mix variance

= (Revised mix - Actual Mix) Std Price

Actual Quantity = 59,800 + 53,800 + 33,300 = 146,600

Revised/Standard mix for actual use

Total Std Usage = 15 + 12 + 8 = 35

F = ( 15/35 x 146,600 - 59,800)4 = 12,114(F)

G = (12/35 x 146,600 - 53,500)3 = 9,711(A)

H = (8/35 x 146,600 - 33,300)6 = 1,251(F)

Total material mix variance

12,114F - 9,711A + 1251F = sh.3,654 (F)

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QUESTION 3b(iii)

Q (iii) Material yield variance. (3 marks)
A

Solution


Material Yield Variance (Std Yield - Actual Yield )Std unit cost

(1/35 x 146,600 - 4,100)144

(4,188 - 4,100)144 = 12,672A

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QUESTION 3b(iv)

Q ( iv) Labour rate variance. (2 marks)
A

Solution


Computation of Labour rate variance = (Std rate - Actual rate) Actual hour

Department P = (10 - 10.6) 20,500 = 12,300 A

Department Q = (6 - 5.6) 9,225 = 3,690F

Total 12,300A - 3,690F = 8,610A

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QUESTION 4a

Q (a) Describe three categories of environmental costs. (6 marks)
A

Solution


Categories of Environment cost
➢ Environmental prevention costs: The costs of activities undertaken to prevent the production of waste and pollution to the environment.

➢ Environmental regulatory costs: Costs incurred to ensure that the organisation complies with regulations and voluntary standards.

➢ Environmental internal failure costs: Costs associated with operations that have produced contaminants and wastes that have not been released into the environment.

➢ Environmental external failure costs: Costs incurred for operations carried out after the discharge of waste into the environment.

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QUESTION 4b

Q (i) Using appropriate computations, justify why neither return on investments (ROI) nor residual income (RI) would motivate Aslop Wafula to invest in the machine with the higher net present value. ( 12 marks)
(ii) Advise on what should be done to assist in reconciling the difference between using accounting based performance measures and using discounted cash flow methods. (2 marks)
A

Solution


Return on investment (ROI)

Depreciation on machine = automatic 9,600/4 = 2,400

Manual 7,800/4 = 1,950

Manual machine

Cost (A)
Depreciation (B)
Net Book Value (A-B)
Cash flows
Less: Depreciation
Net Cash flows (C)
ROI = C/A = 100%
RI = C - (16% x A) 		1
7,800
(1,950)
5,850
3,900
(1,950)
1,950
25%
702		 2
5,850
(1,950)
3,900
3,300
(1950)
1,350
23%
414 		3
3,900
(1,950)
1,950
2,250
(1,950)
300
7.7%
-324 		4
1,950
(1,950)
0
1,500
(1,950)
(450)
-23%
-762


Manual machine

Cost (A)
Depreciation (B)
Net Book Value (A - B)
Cash flows
Less: Depreciation
Net Cash flows (C)
ROI = C/A = 100%
RI = C - (16% x A) 		1
9,600
(2,400)
7,200
3,600
(2,400)
1,200
12.5%
-336		 2
7,200
(2,400)
4,800
3,600
(2,400)
1,200
16.67%
48		 3
4,800
(2,400)
2,400
3,600
(2,400)
1,200
25%
432 		4
2,400
(2,400)
0
3,600
(2,400)
1,200
50%
816


Average ROI = Manual = (25 + 23 + 7.7 + -23) ÷ 4 = 8.175%
Automatic (12.5 + 16.67 + 25 + 50) ÷ 4 = 26%

Average residual income (RF)
Manual (702 + 414 + -324 + -762) ÷ 4 = 7.5
Automatic (-336 + 48 + 432 + 816) ÷ 4 = 240

(ii) Advice
Based on both ROI and RI, Automatic machine should be embrrassed


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QUESTION 5a

Q The lifecycle cost per unit. (8 marks)
A

Solution


The lifecycle cost per unit

Research and development
Product design cost
Marketing cost
Manufacturing cost: Variable
:- Fixed
Distribution cost: Variable
:- Fixed
Selling cost: Variable
:- Fixed
Administrative cost
Total cost		 Year 1 "000"
160,000
800,000
1,200,000






200,000
2,360,000		 Year 2 000"


1,000,000
4,000,000
650,000
400,000
120,000
300,000
180,000
900,000
7,550,000		 Year 3 "000"


1,750,000
8,400,000
1,290,000
900,000
120,000
640,000
180,000
1,500,000
14,780,000


Total lifecycle cost = 24,690,000,000
Cost per unit =Total cost/ Total units = 24,690,000,000/300,000 = 82,300


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QUESTION 5b

Q Discuss three strengths and three weaknesses of the return on investment measure as used by Nilo Ltd. ( 12marks)
A

Solution


Strengths and three weaknesses of the return on investment measure as used by Nilo Ltd

Strengths of ROI

(1) The return on investment model serves as a standardized measure of the financial effectiveness of investment opportunities. As evidenced in Nilo Ltd, they do apply standardized familiar to efficiency measure using ROI

(2) The return on investment also serves as a point of comparison between the divisions of Nilo Ltd. ROI is used to determine department performance and compare trend and cross-sectional analysis.

(3) ROI is more about efficiency than effectiveness. At Nilo Ltd, management tends to focus on departments where performance is improving or deteriorating rather than absolute benchmarks or targets

Weaknesses of ROI

(1) Poor performance - This is an index where the baseline ROI is low on the tool settings and easily achieved. In Nilo Ltd we are told that the minimum return on investment was loosely fixed so it was easy to achieve

(2) ROI does not take into account time value of money

(3) Transfer price is on negotiation basis. This can be used to undermine the long-term gain, congruence as head of division can determine the price which focuses solely on the short-term.

(4) Investments are determined on the basis of book value. In this context, financial information may be manipulated to serve the interests of specific managers and does not represent genuine opinions.

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