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CPA
Advanced Leval
Advanced Management Accounting November 2020
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Advanced Management Accounting
Revision Kit

QUESTION 1a

Q (a) Explain three factors to consider before investigating variances in a profit driven organisation. (4 marks)
A

Solution


Factors to consider before investigating variances
• Reliability and accuracy of the figures
Mistakes in calculating budget figures or in recording actual cost and revenues, could head to a variance being reported where no problem actually exist

• Materiality/size
The size of the variance may indicate the scale of the problem and the potential benefits arising from its correction

•Adverse of favourable
Adverse variances tend to attract most attention as they indicate problems. However, there is an argument for investigation of favourable variances so that the business can learn from its success.

• Trends in variance/ pattern
One adverse variances may be caused by random event. A series of adverse variances usually indicates that a process is out of control

• Cost and benefits of correction
If the cost of correcting the problem is likely to be higher than the benefit, then there is little point in investigating variance

• Controlling/ probability of correction
If a cost or revenue is outside the managers control (such as the world market price of a material) then there is little point investigating its cause.

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QUESTION 1b

Q Examine two shortcomings of financial performance measurements. (4 marks)
A

Solution


Shortcoming of financial performance measures

➢ Not consistent with today's business reality-Today's organizational value- Creating activities are not fully captured in the tangible fixed asset of the firm. Instead value rests in the ideas of people, in customers and suppliers relationship.

➢ Driving by rearview mirror - Financial measurers provide an excellent review of past performance and events in the organization. This detailed view has no predictive power for the future.

➢ Manipulation of records-when financial data are manipulated, that means the results of financial performance indicators acts as a measure of short term performance.

Financial performance indicators only focuses on quantitative aspects only there aspects only thereby ignoring qualitative aspect which is very vital for companys success.

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QUESTION 1c(i)

Q Expected monetary value (EMV). (3 marks)
A

Solution



Bad only:
Bed & breakfast:
Full board:		 Sh 000
24,000×0.3+ 48,000×0.5+ 6,000×0.2= 32,400
90,000×0.3 +44000×0.5 +8,000×0.2 = 50,600
16,000×0.3+28,000×0.5+ 18,000×0.2 = 22,400


Best option: Bed and breakfast (highest)


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QUESTION 1c(ii)

Q Expected opportunity loss (EOL).(3 marks)
A

Solution


Loss table Sh"000"
Outcome
Option
 Full booking Moderate Low booking EOL
Bed only
Bed & Breakfast
Full Board
Probabilities		 66,000
0
74,000
0.30		 0
4,000
20,000
0.50		 12,000
10,000
0
0.20		 22,200
4,000
47,200


Best option: Bed and breakfast (Lowest)


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QUESTION 1c(iii)

Q Determine the maximum amount the hotel should pay to the research company(4 marks)
A

Solution


VOI EMV with information - EMV without information

[90,000 x 0.3 + 48,000 x 0.5 + 18,000 x 0.2] - 50,600

= Ksh 4,000,000

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QUESTION 2a(i)

Q (a) (1) Describe four benefits of product life cycle costing. (4 marks)
A

Solution


Benefits of product life cycle costing

1. All costs (production and non production) will be traced to individual products over that complete life cycles and hence individual product profitability can be more accurately measured.

2. The product life cycle costing results in earlier actions to generate revenue or to lower cost than otherwise might be considered.

3. Better decisions follows from a more accurate and realistic assessment of revenues and costs, at least within a particular life cycle stage.

4. Product life cycle thinking can promote long term rewarding in contrast to short term profitability rewarding.

5. It helps management to understand the cost consequences of developing and making a product and to identify areas in which cost reduction efforts are likely to be most effective.

6. More accurate feedback on the success or failure of new products will be available.

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QUESTION 2a(ii)

Q Advise the management of JAES Ltd. whether they should buy the machine. (8 marks)
A

Solution


Cost reduction scheme
Machine life
3
4
5
6
7

No. of Machines
20
50
100
70
10
250		 Probability
0.08
0.20
0.40
0.28
0.04
1		 NPV
(1,010,000)
(330,000)
(290,000)
860,000
1,370,000

ENPV
(80,800)
(66,000)
(116,000)
240,800
54,800
264,800


The management should buy the machine since ENPV is positive


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QUESTION 2b(i)

Q Evaluate the target cost at full capacity assuming profit margin on sales is taken as 25% (4 marks)
A

Solution


Target cost = Market price - desired profit
Total target = Total revenue - desired profit

Cost of full capacity

= 80,000 x 1,000 - (25% x 80,000 x 1,000)

80m - 20m = 60m

Per unit = 60,000,000 / 80,000 = 750

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QUESTION 2b(ii)

Q Ascertain the cost reduction scheme if at present 40% of total cost is variable was the same margin of profd (4 marks)
A

Solution


P = a - bx

1000 = a - 20,000b

900 = a - 40,000b

100 = 20,000b

b = 0.05

a = 1100
P = 1,100 - 0.05x

TR = P x X = (1,100x - 0.005x²)

MR = dTR / dx = 1,100 - 0.01x

At profit maximization MR = MC

MC = Variable cost

= 750 x 40% = 300

1100 - 0.01x = 300

x = 80,000

P = 1100 - (0.005 × 80,000)

P = 700

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QUESTION 3a

Q (i). Throughput accounting. (3 marks)
(ii). Environmental management accounting.(3 marks)
A

Solution


i) Throughput accounting
This can be defined as a simplified accounting system which is based on theory of
constraints.

Throughput accounting (TA) makes growth management and decision making simpler and understandable even for the people not familiar with traditional accounting.
Throughtput accounting offers a simplified way to identify and use the drivers to achieve the goal, assuming the goal is to make money now and in the future

ii) Environmental management accounting (EMA)
This is the identification, collection, analysis and use of financial and non-financial information in order to support internal decision making.

EMA uses standard accounting methods to identify, analyze, manage and reduce these costs in a way it can benefit both the business and the environment

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QUESTION 3b(i)

Q Determine the selling price that the company should adopt to maximise profitability. (10 marks)
A

Solution



Expected fixed cost-415,000×0.2+395,000×0.6+375,000×0.2-395,000

Expected monetary value (EMV)

Node

1 = 155x0.2+320×0.6+594×0.2 = 342

2 = 5×0.2+125x0.6+325x0.2 = 141

3 = 95x0.2+-5x0.6+145x0.2 = 7

4 = 205x0.2+325x0.6+525x-2 = 341

5 = 20×0.2+55x0.6+180×0.2 = 65

6 = 155x0.2+-107x0.6+-27x02 = -100.6

7 = 342×0.3+141x0.5+7×0.2 = 174.5

8 = 341x0.3+65x0.5+-100.6x0.2 = 114.68

Decision: sell the product at sh 65
.
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QUESTION 3b(ii)

Q The probability that the company will at least break even for each of the price increase of Sh.5 and Sh.10 per unit of product "Reno (4 marks)
A

Solution


at BEP, Profit = 0

Increase by Sh 5

Standard deviation δ

δ = √ Σ(x-X̄)² Prob

(342 - 174.5)² x 0.3 = 8,416.875

(141 - 174.5)² x 0.5 = 561.125
(7 - 174.5)² x 0.2 = 5,611.25

√14,589.25
δ = 120.79

Z=(π - π̄)/δπ → CM = (P - V)

δπ = δ x CM

CM = 65 - 51.6 = 13.4

δπ = 120.79 x 13.4 = 1618.586

Z = (0 - 174.5) / 1,618.586 = 0.11

P = 0.5 + 0.0438

P = 0.5438

Increase by Sh 10

Standard deviation δ

δ = √(x-X)²Prob

(341 - 114.68)² x 0.3 = 15,370.3

(65 - 114.68)² x 0.5 = 1,234.05

(-100.6 - 114.68)² x 0.2 = 9,269.1

√25,872

δ = 160.85

Z =(π - π̄)/δπ → CM (PV) = δπ = δ x CM

CM = 70 - 51.6 = 18.4

δπ 160.85 x 18.4 = 2959.64

z = (0 - 114.68) / 2,959.64 = 0.04

P = 0.5 + 0.0160

P = 0.5160

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QUESTION 4a

Q Estimate the total profit or loss for Sawasawa Ltd. for the next 10 days.(10 marks)
A

Solution


Probability distribution
Units
270
280
290
300
310
320		 Probability
0.10
0.15
0.20
0.35
0.15
0.05		 Cumulative Probability
0.10
0.25
0.45
0.80
0.95
1.00		 Range
00-09
10-24
24-44
45-79
80-94
95-99


Production per day is 300 units

Simulation Worksheet

Trials
1
2
3
4
5
6
7
8
9
10
Production
300
300
300
300
300
300
300
300
300
300
Demand
10
99
65
99
95
01
79
11
16
20


Demand
280
320
300
320
320
270
300
280
280
280


Unsold
20




30

20
20
20


Shortage

20

20
20







Revenue
1,400,000
1,500,000
1,500,000
1,500,000
1,500,000
1,350,000
1,500,000
1,400,000
1,400,000
1,400,000

 Production
Cost
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000

 Shortage
Cost
-
10,000
-
10,000
10,000






 Disposal
Cost
30,000




45,000

30,000
30,000
30,000
Profit
170,000
290,000
300,000
290,000
290,000
105,000
300,000
170,000
170,000
170,000
2,255,000


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QUESTION 4b(i)

Q Compute the residual income of the proposed investment. (3 marks)
A

Solution


Year
Cash flows
Depreciation
Operating profit/loss		 1
12.5
(15)
(2.5)		 2
16.5
(15)
(15)		 3
27
(15)
(12)


Total Profit -2.5 + 3.5 + 12 = 13
RI = 13 - (10% × 45) = 8.5


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QUESTION 4b(ii)

Q Comment on the values obtained in reconciling the short term and long term decision views likely to be adopted by divisional management regarding the viability of the proposed investment. (3 marks)
A

Solution


➫ The depreciation of Sh 15m per annum will therefore reduce the cash inflows to get operating profit.
• Reduce the cash inflows to get operating profit.
➫ NPV of 1,937,000 in this case will be only relevant when making long term goals of the company

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QUESTION 4c

Q Using decision tree, advise the management of Blade Ltd. on the maximum amount of cash that the company should be prepared to pay for advertising (4 marks)
A

Solution



EMV
i. 2 x 0.95 + 0.7 x 0.05 = 1.935

ii. 2 x 0.7 + 0.7 × 0.05 = 1.61

ROI = 1.935 - 1.61 = 325,000

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QUESTION 5a

Q a) Determine the standard labour cost for the month of December 2020. (6 marks)
A

Solution


Standard labour cost for the month of December 2020
Learning curve,

Total labour time = y = axb+1

b = Logr / Log 2

b = Log 0.95 / Log 2 = -0.074

b + 1= -0.074 + 1 = 0.926

a = 75min ÷ 60 = 1.25

y = 1.25 x 30000.926

y = 2073.6 hours

Total labour cost 2,073.6 x 3,000 = 6,220,800

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QUESTION 5b

Q Prepare a budget for the month of December 2020 showing the budgeted profit.(4 marks)
A

Solution


Budget
Sales = 3,000 × 17,500
Variable production cost
Direct material 800 × 90% = (720 x 7,500) x 3,000
Direct labour cost
Variable overhead (60% x 6,220,800)
Fixed cost =(60m / 12)
Budget profit		 Sh
52,500,000

(16,200,000)
(6,220,800)
(3,732,480)
(5,000,000)
21,346,720


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QUESTION 5c

Q Reconcile the budget profit in (b) above with the actual profit showing clearly all the operating variances. (10 marks)
A

Solution


Reconciliation statement
Budget profit
Adjustments
Material price variance (7,500 - 7,000) x 2,700
Material usage variance[0.72 x 3,000 - 2,700] x 7,500
Labour rate variance (3,000 - 3,250) x 1,700
Labour efficiency variance (2,073.6 - 1,700) x 3,000
Variable olt expenditure variance (1,700 × 1,800) - 3,400
Variable olt efficiency variance (2,073.6 - 1,700) x 1,800
Fixed olt expenditure variance (5,000 - 5,075)
Sales price variance (17,500 - 18,000) x 3,000
Sales price volume variance (3,000 - 3,000) x 550
Actual profit		 21,346,720

1,350,000
(4,050,000)
(425,000)
1,120,800
(340,000)
672,480
(75,000)
1,500,000
0
21,100,000


Working for VOAR
Variable OH per unit (budgeted) 3,732,480 ÷ 30 = 0.6912
VOAR = 1,244.16 / 0.6912 = 1800 per hour


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