ADVANCED MANAGEMENT ACCOUNTING NOVEMBER 2019 - CPA SOLUTION|REVISION KITS|KASNEB

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 = ax^1+b
Where b = log 0.8/log 2 =-0.322
1+b=1±0.322 = 0.678
a = 12 hours

Thus, Y = 12x^0.678
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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CPA
Advanced Leval
Advanced Management Accounting November 2019
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Advanced Public Finance

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CPA Advanced Leval Advanced Management Accounting November 2019 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 2019
Suggested solutions