KASNEB REVISION KIT

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ADVANCED
MANAGEMENT
ACCOUNTING

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REVISION KIT
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SOMEA KENYA
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0707 737 890

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2024
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SOMEAKENYA
 ADVANCED MANAGEMENT ACCOUNTING REVISION KIT

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CPA

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ADVANCED LEVEL

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ADVANCED MANAGEMENT ACCOUNTING

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REVISION KIT
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PAST EXAMINATION PAST PAPERS WITH

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SUGGESTED ANSWERS
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TOPICALLY ARRANGED
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Updated With
DECEMBER 2023
Past Paper with Answers

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COPYRIGHT

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All rights reserved. No part of this learning guide may be reproduced, distributed, or

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transmitted in any form or by any means, including Scanning, photocopying, recording,

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or other electronic or mechanical methods without the prior written permission of
SOMEA KENYA RESOURCES, except in the case of brief quotations embodied in
critical reviews and certain other non-commercial uses permitted by copyright law.

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INTRODUCTION

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Following our continued effort to provide quality study and revision materials at an

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affordable price for the private students who study on their own, full time and part time

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students, we partnered with other team of professionals to make this possible.

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This Revision kit (Questions and Answers) contains kasneb past examination past papers
and their suggested answers as provided by a team of lecturers who are experts in their
area of training. The book is intended to help the learner do enough practice on how to
handle exam questions and this makes it easy to pass kasneb exams.

Special appreciation and recognition to the lecturers who have helped in the development

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of our materials, These are: FA Kegicha William Momanyi (MBA Accounting, CPA,

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CSIA and CCP), Johnmark Mwangi (MSc Finance, CPAK, BCom), FA Bramwel Omogo
([Link]. Actuarial Science, CIFA, CIIA), CPA Dominic Rasungu, CPA Japheth Mutuku

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and CPA Lawrence Ambunya among others.
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PAPER NO. 16 (S3) ADVANCED MANAGEMENT ACCOUNTING

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UNIT DESCRIPTION

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This paper is intended to equip the candidate with knowledge, skills and attitudes that

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will enable him/her to apply advanced management accounting tools and techniques for
decision making in the context of organisational strategy.

LEARNING OUTCOMES
A candidate who passes this paper should be able to:
 Use cost estimation data in decision making
 Apply advanced management accounting techniques to aid in organisational

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strategic decision making

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 Use financial and non-financial indicators to measure organisational performance
 Apply environmental management accounting concepts in practice.

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CONTENT
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1. Strategic management accounting information
 Sources of strategic management accounting information
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 Role of strategic management accounting in strategic planning and control

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 Governance and control of strategic management accounting information

 Scope and limitations of management accounting
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 Ethical standards for management accountants

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2. Cost estimation and interpretation

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 Ordinary least square (OLS) method. Single and multiple predictors; tests of
significance (goodness of fit, ANOVA/P-Value, economic plausibility tests,
significance of independent variable/t-test)
 Specifications/assumptions of OLS (implications of serial correlation, multi-
colinearity)
 Computer output and technical versus managerial interpretation of OLS results
 Learning curve models and their application

3. Planning and decision making techniques

 Cost volume profit analysis (CVP) for single and multiple products under
conditions of uncertainty
 Decision making under environments of uncertainty and risk, using conditional
payoff tables and decision trees.
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 Expected value of perfect information

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 Relevant cost analysis

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 Application of marginal costing (Non-routine decisions): Limiting factor analysis,

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 Throughput accounting, make or buy decision, continue or discontinue/drop

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decisions, special order decisions and other short term decisions.

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4. Pricing decisions
 External pricing methods
 Transfer pricing in divisionalised companies: Domestic and international transfer
pricing
 Product life cycle costing, Target costing and Kaizen costing

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5. Strategic performance measurement

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 Functional and divisionalised organisational structures
 Responsibility accounting, responsibility centers and segmental reporting

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 Divisional performance measures such as profit margin, asset turnover, return on
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investment(ROI), return on capital employed(ROCE), residual income(RI),
accounting rate of return(ARR) and economic value added(EVA)
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 Non-financial performance indicators
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 Alternative performance measures such as balanced scorecard, performance

pyramid, Fitzgerald and Moon‘s building block model.
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6. Inventory control decisions

 Applications of certainty inventory models (EOQ and EBQ) in decision making
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 Stochastic inventory models with and without stock out cost

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 Marginal analysis for perishable stock items

 Application of simulation models in inventory control (with and without
backorders)
 Application of strategic management decisions in inventory control: Just-in-time
purchasing (JIT), ABC analysis and material requirement planning (MRP)

7. Budgetary control techniques

 Applications of budgetary control systems: Top-down, bottom-up, rolling, zero-
based(ZBB), activity-based (ABB), incremental, feedback and feed-forward
controls.
 Use of operational variances in reconciling original budget with actual
performance
 Advanced variance analysis, planning and operational analysis (Ex-post)

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 Application of learning curve model and ABC in variance analysis

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 Investigation models for variances.

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8. Environmental management accounting

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 Role of accountants in managing and accounting for environmental cost

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 Use of management accounting techniques in identification and allocation of
environmental costs (Inflow/Outflow analysis, Flow cost accounting,
Environmental lifecycle costing and Environmental Activity Based Costing).

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TABLE OF CONTENT

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PAGE
Topic 1: Strategic Management accounting Information..…………………….……......9
Topic 2: Cost estimation and Interpretation…………………………………….……..18
Topic 3: Planning and decision making techniques..…………………………….….…61
Topic 4: Pricing decisions………………………………………………………...…..177

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Topic 5: Strategic Performance Measurement…………………………………….….221
Topic 6: Inventory control decisions……………………………………………….…285

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Topic 7: Budgetary control Techniques……………………………………….….…..332
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Topic 8: Environmental management accounting…………………………….…..…..413
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TOPIC 1

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STRATEGIC MANAGEMENT ACCOUNTING

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INFORMATION

QUESTION 1
December 2023 Question One A and B
(a) With reference to strategic management accounting, evaluate THREE underpinnings

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of each of the following concepts:

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(i) Balanced scorecard model. (3 marks)

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(ii) Responsibility accounting. (3 marks)
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(b) ―Carbon credits‖ and ―carbon credit tax‖ are increasingly being applied in
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environmental management accounting (EMA) as transparent measurable and result

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oriented activities aimed at protecting and preventing environmental degradation by

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adopting environmental management strategies, policies and compliance requirements.

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Carbon credit tax (CCT) is aimed at enhancing compliance. CCT is levied on pollution
caused by carbon emission to the environment. One of the aims of the tax is to discharge
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organisations from operating with excessive carbon emission and instead encourage a
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transition to more sustainable alternatives by detecting and preventing external costs of

environmental management.

Required:
With reference to the above statement, identify THREE benefits that might accrue to an
organisation as a result of implementation of carbon credit strategies and policies
towards:
(i) Environmental detection costs. (3 marks)
(ii) Environmental external failure costs. (3 marks)

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ANSWER

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a) Evaluation of the underpinnings

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(i) Underpinnings of Balanced score card

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This is a strategic management accounting tool that helps to translate entitles strategies

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into set of performance indicator and measures. It builds on 4 perspectives each
representing different aspect of entities performance which include:

1. Financial perspective - This focuses on financial outcomes and measures that are
critical to the organizations‘ success. The perspective include traditional financial
merits like revenue growth, profitability return on investment etc.

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2. Customer perspective - This perspective emphasis the importance of delivering

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value to customer. Merit in this perspective include, customer satisfaction, market
share, customer retentions and new customer acquisition

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3. Internal business processes perspective – This focuses on process and
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operations that are critical to delivering value to customers and achieving financial
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objectives. This includes measurers related to efficiency, quality innovation and

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cycle time efficiency and effective internal process are essential for meeting
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customer needs and achieving financial goals

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4. Learning and growth perspective – This highlights the importance of human

capital, technology and organizational culture metrics in this perspective may
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include employee training, employee satisfaction innovation, adoption to new

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technology.

(ii) Responsibility accounting

This is a system accounting that segregates revenues and cost into areas of personal
responsibility in order to monitor and assess the performance for each part of an
organization. The underpinning responsibility accounting are as follows
1. Decentralized decision making
2. Performing evaluation and control
3. Budgeting and planning
4. Continuous communication and feedback
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5. Clear definition of responsibility Centre‘s

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b) Benefits that might accrue to an organization as a result of implementing carbon

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credit strategies

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i) Environmental detection costs

1. Compliance –This entails using EMA to support environmental protection

through cost efficient compliance with environmental regulation
2. Eco-efficiency – This involves the use of EMA to help reduce costs and
environmental impact simultaneously via more efficient use of water , energy

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material etc.

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3. Cost reduction / saving – implementation of eco-efficiency system enables to
identify cost of waste processing and losses from processes of large raw materials
4. Better pricing decision
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ii) Environmental / External failure costs

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1. Risk mitigation – Implementing of carbon credit strategies can help mitigate

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environmental risk associated with external failures

2. Legal and regulatory compliance – Engaging in carbon credit programs often
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involves adhering to environmental regulation and standards by doing so,

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organizations reduces the risk of legal action and associated costs resulting from
non compliance with environmental laws.
3. Reputation protection – Proactively addressing external failure cost through
carbon credit strategies helps protect to organizations reputation

QUESTION 2
December 2022 Question Five A
Explain THREE conceptual differences between the following concepts as applied in
strategic management for short term decision making:
(i) Throughput accounting. (3 marks)

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(ii) Limiting factor analysis. (3 marks)

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ANSWER

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Conceptual differences between the following concepts as applied in strategic

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management

i) Throughout accounting
Throughout accounting is management accounting approach production that focuses on
the flow of products or services through the production process and aims to improve
overall operational efficiency and profitability. Concept of throughout accounting

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include:
1. Throughput

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2. Operating expenses co
3. Investment
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4. Constraint
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ii) Limiting factor analysis

This is also known as bottleneck analysis or key factor analysis is a management
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accounting technique that focuses on identifying and managing constraints or limiting

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factors within a business process. concept of limiting factor analysis include

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1. Limiting factor
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2. Optimizing resource utilization

3. Contribution margin per limiting factor
4. Product mix decision

QUESTION 3
August 2022 Question One A
The effective use of the control information provided by the management accounting
department of an organisation to the operating managers depends on various factors.

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Explain four actions that the management accounting department might take to enhance

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the effective use of the above information by the operating managers. (4 marks)

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ANSWER

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Action that the management accounting department might take to enhance the
effective use of control information by

The operating manager

 Cost benefit analysis support - Offer support in conducting cot benefit analysis
for various projects and initiatives . Provide insights into the financial implications

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of different sources of action. understanding the financial impact of decisions

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helps operating manager prioritize initiatives that align with organizational goal

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and deliver the most value
 Integration with strategic planning - Integrate control information into strategic
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planning process of the organization. Linking financial control information with
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strategic plans ensures that day to day decisions are aligned with the overall
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objectives of the organization.

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 Customized and relevant reporting – The management accounting department

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can tailor control information to the specific needs and responsibilities of each
operating manager. Providing customized reports ensures that the information
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presented is directly relevant to the managers roles and enables them to focus on
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key performances indicator that matters most

 Training and Communication – Conduct training sessions for operating
managers on how to interpret and use control information effectively. Establish
clear communication channels for ongoing support
 Benchmarking and industry comparison –Provide benchmarking data and
industry comparison to help operating managers assess their performance relative
to industry standards

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QUESTION 4

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April 2022 Question One A

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a) In control theory, a "feedback control" mechanism is the one which supplies

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information to determine whether corrective action should be taken to re-establish control

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of a system.

In the context of the above statement, distinguish between "feedforward" and "feedback"
controls giving an example of each as used in management accounting. (4 marks)

ANSWER

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Feedback control is a control mechanism that compares actual results to planned results
and takes corrective action if there is a difference. For example, a company might use

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feedback control to compare its actual sales to its budgeted sales and take corrective
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action if it is not meeting its sales goals. Examples include:
a.
 Variance analysis is a common feedback control mechanism. It compares actual
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results to budgeted results and identifies the causes of any variances.

 Budgetary slack is a form of feedback control. It is the intentional underestimation
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of budgeted costs or overestimation of budgeted revenues.

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Feedforward control is a control mechanism that takes corrective action before a

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problem occurs. For example, a company might use feedforward control to adjust its
production levels in anticipation of an increase in demand. Examples include:

 Forecasting is a common feedforward control mechanism. It predicts future

demand, costs, and other variables.
 Just-in-time (JIT) inventory is a form of feedforward control. It ensures that
inventory levels are only as high as needed to meet demand.

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QUESTION 5

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November 2019 Question One A

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Examine three benefits that might accrue to a business organisation as a result of good

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ethical behaviour by management accountants. (6 marks)

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ANSWER
Benefits that might accrue to a business organization as a result of good ethical
behavior by management accountants are:
 It promotes a higher standard of self regulation
 It regulates the behaviour of professional leading to best practice

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

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 It helps in boosting public confidence in the word of professionals
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 It improves credibility and trust
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QUESTION 6
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May 2019 Question Four A

Highlight four ethical standards of management accountants. (4 marks)
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ANSWER
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Ethical standards of Management Accountants

1. Competence. Enhance knowledge and skills, perform professional duties in
accordance with relevant laws and regulations, make recommendations that are
accurate and timely, and recognize and help manage risk.
2. Confidentiality. Information should be confidential unless disclosure is legally
required or authorized, let relevant people know the importance of confidential
information, and refrain from using confidential information in illegal or unethical
ways.
3. Integrity. Mitigate conflicts of interest or warn of possible conflicts of interest, refrain
from engaging in any conduct that would prevent the ethical performance of duties,

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avoid activities that would discredit the profession, and place ethics and integrity of

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the profession above personal interests.

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4. Credibility. Communicate fairly and objectively, provide all relevant information that

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could influence a user‘s interpretation and understanding of the reports or analyses,

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report any delays or deficiencies in information according to law or the organization‘s
policies, and communicate professional limitations or other constraints that would
affect responsible judgment or successful performance.

QUESTION 7
May 2016 Question One A

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Management accountants are required to conduct themselves ethically. A commitment to
ethical professional practice requires Observation of principles that express values and

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standards that guide conduct such as honesty, fairness, objectivity and responsibility.
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Required:
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With reference to the above statement, summarise six benefits of ethical behaviour by
management accountants in business. (6 marks)
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ANSWER
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Benefits of ethical behavior by management accountant in business

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 It reduces cases of legal litigation

 It regulates the behavior‘s of professional leading to the best practice
 It promotes a higher standard of self regulation
 It helps in minimizing the conflicts of interest between professionals and clients
 It helps in boosting public confidence in the world of professionals
 It improves credibility and trust

QUESTION 8
May 2015 Question Three A
Evaluate four ethical standards to be adhered to by management accountants.

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(8 marks)

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ANSWER

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Ethical standards to be adhered to by management accountants

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 Integrity – Management accountants are expected to be honest and straight

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forward in all their dealings
 Confidentiality – management accountants are not expected to behave in a way
that may put the profession into disrepute
 Objectively – management accountant should avoid conflict of interest while
discharging their duties.
 Competence - Accountant should maintain higher level of professionalism

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QUESTION 9

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May 2015 Question Four A co
Examine three desirable factors that need to be considered in order to ensure that
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management accounting information is used effectively (6 marks)
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ANSWER
Factors to consider in order ensuring management accounting information is used
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effectively
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 Timing – The information should be produced in time for it to be used effectively

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 Accuracy – The information should be sufficiently accurate for the intended

purpose
 Relevance – The information must be relevant for the intended purpose.
 Feasible – the information should be currently reflect the underlying economic
realities.

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TOPIC 2

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COST ESTIMATION AND INTERPRETATION

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QUESTION 1
December 2023 Question Two B
Scotts Ltd. has experienced stock outs occasioned by the company‘s poor inventory

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estimation techniques. The company has therefore engaged you to estimate its demand

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for the year 2024.

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The company‘s accountant had started using regression analysis and availed the
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following information to you:
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1. The demand for the company‘s‘ product is dependent on disposable income and price
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of the products.
2. The analysis of variances table:
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Source Degrees of freedom Sum of squares

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Model 3 187
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Error 9 4
Total 12 191
3. The parameter estimates and their errors:
Variable Estimate Standard error
Constant 1.5 2.000
Price –1.4 0.1934
Income 5 0.2700

Required:
(i) Develop a regression equation that will be used for prediction. (2 marks)

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(ii) Determine the coefficient of determination. Interpret your result. (4 marks)

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(iii) Test the adequacy of the model for prediction (F tables value 11.56). (4 marks)

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ANSWER

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i) Regression equation

Where;

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ii) Coefficient of determination (r2)
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Interpretation
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Coefficient of determination of 0.98 = 98% means that 98% of demand is being

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explained by the independent variables i.e. Price and disposable income

(ii) Testing the adequacy of the model

The F-Statistics measures how will the regression equation explains the variation in the
dependent variable

It‘s determined as follows

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Since F calculated 210.375 Ftable = 11.56, reject the null hypothesis, therefore the model

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is suitable

QUESTION 2
December 2023 Question Four B
Discuss the meaning of the following concepts as used in cost estimation:

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(i) Economic plausibility tests. (2 marks)

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(ii) Learning curve phenomenon. (2 marks)

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ANSWER
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Meaning of the following terms
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i) Economic plausibility tests

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Economic plausibility exists when a test is making economical sense. i.e. its logic and
cause and effect relationship exists. Economic plausibility tests refers to the evaluation of
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whether the estimated cost associated with a particular project or decision are
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economically justifiable
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ii) Learning curve phenomenon

Learning curve phenomenon is a concept that describes the relationship between the
cumulative production of a product or service and the improvement in efficiency or
reduction in cost or time taken as more units are produced due to the experience gain. As
production increases individuals involved in the production process tend to become more
profitable more proficient, heading to time and cost savings. The learning curve is often
represented graphically, showing the declining average cost per unit with increased
cumulative production.

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QUESTION 3

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August 2023 Question One B

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Motorcar Repairs Ltd is in the process of estimating the fixed cost and variable cost

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components associated with the company‘s repair activity using the cost estimation

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equation in the form Y = a + bx, where Y is the total repair cost, a is the fixed
component, b is the variable component and x is the level of repair activity in hours.

Additional information:
1. Regression analysis performed using MS Excel in a computer yielded the following
results:

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Summary of output Regression statistics

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Parameter Output co
Multiple R 0.984523
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R square 0.969285
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Adjusted R square 0.961607

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Standard Error 32.196570

Observations 6
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2. The analysis of variance (ANOVA) output was as follows:

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Predictor df SS MS F Significance F
Regression 1 130,853.5 130853.5 126.2311 0.000357
Residual 4 4,146.476 X
Total 5 135,000

Variable Coefficients Standard t-statistic P-value Lower Upper

error 95% 95%
Intercept 509.9119 45.55789 Y 0.000363 383.4227 636.4011
Variable X 29.40529 2.617232 11.23526 0.000357 22.13867 36.6719

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Required:

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(i) The linear regression equation in the form Y = a + bx. ( 2 marks)

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(ii) Predict the total cost of repair if 14 hours are used. (2 marks)

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(iii) Compute the values of the missing letters X and Y. (4 marks)
(iv) Explain the explanatory power of the model using the coefficient of determination.
(2 marks)
(v) Explain if the independent variable is economically plausible as a predictor variable.
(2 marks)
ANSWER

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i) Linear regression equation

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ii) Cost production
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iii) Determination of missing values

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iv) Explanation of explanatory power

Coefficient of determination is also known as explanatory power. It‘s used to explain
how independent variable explains the dependent variable

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In this model r2 = 0.969285. This means that 96.9285% of the variability in total repair

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cost (y) is explained by the independent variable (x) level of repair activity)

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v) Explain if the independent variable is economically plausible as a predator model

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The P value associated with the variable x is 0.00357 is less than significance level of
0.05 this suggest that the independent variable (level of repair activity) is statistically
significant in explaining the variation in the total repair cost.

QUESTION 3
August 2023 Question Two B

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Identify FOUR applications of learning curve model. (4 marks)

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ANSWER co
Application of learning curve
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1. Work scheduling
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2. Setting labour standard

3. Performance evaluation
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4. Project appraisal
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5. Inventory evaluation
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6. Pricing decisions
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7. Profit forecasting
8. Training and skill development

QUESTION 4
April 2023 Question Five B
Sofaset Ltd. makes and sells executive leather chairs. The production manager is
considering a new design of sofa set chair to launch into the competitive market in which
they operate:

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Additional information:

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1. The production manager has carried out investigation in the market and using target

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costing system, he has targeted a competitive selling price of Sh.120,000 for the chair.

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2. Sofaset Ltd. targets a profit margin on selling price of 20%.

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3. The design frame will be bought for Sh.51,000 per chair and Sofaset Ltd. will beautify
it in leather and assemble it ready for dispatch.
4. Leather costs Sh.10,000 per meter and two metres are needed for a complete chair
although 20% of all leather is wasted in the beautification process.
5. The beautification and assembly process will be subjected to a learning effect as the
workers get used to the new design. Sofaset Ltd. estimates that the first chair will take

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two hours to prepare but this will be subject to learning curve rate of 95%.
6. The learning improvement will stop once 128 chairs have been made and the time for

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the 128th chair will be the time for all subsequent chairs. The production manager
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believes that the target cost will be achieved from 128 chairs.
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7. The cost of labour is Sh.15,000 per direct labour hour.
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8. The learning curve index for 95% is -0.074.

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Required:
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(i) The average cost for the first 128 chairs made and identify any cost gap that may be
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present at that stage. (5 marks)

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(ii) The cost of the 128th chair made and state whether the target cost is being achieved
on the 128th chair. (5 marks)

ANSWER

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89
7
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Time to make 128th Chair

07
07
Total time to make 128 chairs

p
Ap
Cost statement
Material cost – Design frame 51000x128
m 6,528,000
co
Leather frame sh 10,000 × 2 metres × × 128 3,200,000
a.
ny

Labour cost = 178.77 hours × 15,000 2,681,550

Total cost 12,409,550
ke
ea
m
So

ii) Cost of the 128th chair made

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Cost statement

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Direct materials : Design frame 51,000

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Leather: 10,000 × 2 metres × 25,000

07
07
Direct labour cost 1.29 hour × 15,000 19,350
Total cost 95,350

Target cost = Sh 96,000

The target cost was achieved

p
Ap
QUESTION 5
December 2022 Question Three B

m
Maono Ltd. is investigating the financial viability of a new product branded ―Zem‖.
co
Product Zem is a short life product of six months.
a.
ny

The following estimated information is available in respect of product Zem:

ke

1. Sales should be 10,000 units per month in batches of 100 units on a just-in-time
ea

production basis.
2. An average selling price of Sh.120,000 per batch of 100 units is expected for a six-
m

month life cycle.

So

3. An 80% learning curve will apply for the six months‘ life-cycle period.
4. The labour requirement for the first batch in month 1 will be 500 hours at Sh.500 per
hour.
5. Variable overhead will be absorbed at a rate of Sh.200 per labour hour.
6. Direct material input will be Sh.50,000 per batch of product Zem for the first 200
batches. The next 200 batches are expected to cost 90% of the initial batch cost. All
batches thereafter will cost 90% of the batch cost for each of the second 200 batches.
7. Product Zem will incur directly attributable fixed costs of Sh.1,500,000 per month.
8. The initial investment for the new product will be Sh.7,500,000 with no residual value
irrespective of the life of the product.

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9. A target cash flow required over the life of the product must be sufficient to provide

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for a 331/3% target return for a six-month life cycle.

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10. The learning curve formula is Y = axb

07
07
Where:
Y = Cumulative average time per batch
a = time taken to produce initial batch
x = cumulative units of batches
b = learning curve index

p
Ap
Required:
(i) The learning curve index and model. (4 marks)

m
(ii) Compute the cost gap or cost savings in the target cash flow of product Zem over its
co
six-month life cycle. (8 marks)
a.
ny

ANSWER
ke

i) Learning curve index and model

ea

Learning curve index

m
So

ii) Cost gap and cost saving in target cashflows

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7
Cost estimation

73
Direct material Sh

07
07
1st Batch 200 × 500,000 10,000,000
2nd batch 200 × 500,000 9,000,000
3rd batch 200 × 500,000 × 90% × 90% 8,100,000
Direct labour cost 38,243 hrs × 500Sh 19,121,000
Overhead cost 38,243 hrs × 200 sh 7,648,000
Fixed cost 1,500,000 × 6 9,000,000

p
Total cost 62,870,100

Ap
m
co
a.
ny
ke

QUESTION 6
April 2022 Question Two B
ea

Describe three assumptions of the learning curve theory. (3 marks)

m
So

ANSWER
Assumption of learning curve theory
 It assumes there no break so that the skills and technique learned are retained
 It assumes the work is manual and repetitive
 It assumes the labour involved is indirect
 The workers are motivated

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QUESTION 7

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December 2021 Question three A

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Summarise the components of time series. (4 marks)

07
07
ANSWER
Components of time series
 Secular trend- This is a constant changes in set of data
 Seasonal variation – they are short term changes in a set of data that tends to
repeat at least once in year.
 Erratic/Residual variation – This is a random or inconsistence changes in set of

p
Ap
data which is highly unpredictable.
 Cyclical variation- they are long term changes which tends to repeat at least after

m
14 years e.g. El nino co
a.
QUESTION 8
ny

December 2021 Question three B

ke

BZK Ltd. is a manufacturing company based in Africa.

The company has presented the following data relating to its production in the last
ea

two years for each quarter:

m
So

Year Quarter Quarter number Units produced

2019 1 1 2,000
2 2 2,500
3 3 3,000
4 4 6,000
2020 1 5 5,000
2 6 4,000
3 7 6,000
4 8 10,000

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The trend equation for the number of units produced has been estimated as follows:

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07
07
Where; X represents units produced per quarter.
Q represents the quarter number

The company's Management Accountant has established the following relationships

between the quarterly costs and output based on the data collected in the last two years.

p
Ap
Cost item Relationship
Office rent TC = 500,000

m
Office salaries TC = 200,000 + 2x
co
Fuel cost TC = 45,000 + 6x
a.
Transport wages TC = 62,000 + 8x
ny

Sundry costs TC = 29,965 + x

ke

Where; TC represents the total cost per quarter

ea

x represents the number of units produced per quarter

m
So

Required:
(a) Using multiplicative time series model and least squares method for the trend,
forecast the number of units to be produced in each of the quarters of the year 2021.
(10 marks)
(b) Using your answer in (b) (i) above and the cost relationship equations, determine the
expected cost for each item of cost and the total cost to be incurred in the fourth
quarter of the year 2021. (3 marks)
(c) Establish the 95% confidence interval for the total cost obtained in (b) (ii) above
given that the standard error of estimate is Sh.122,599 and t - value is 2.447.(3 marks)

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ANSWER

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a) Time series

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Year Quarter Units Four Centered Estimated Adjusted Deseasonalised

07
A Moving Average Variation Variation Data x

07
Averages (T) A÷T (5) y=A÷5
2019 1 2,000 - - 1.05 1,905 1
2 2,500 - - 0.72 3,472 2
3,375
3 3,000 3,750 0.8 0.82 3,659 3

p
4,125

Ap
4 6,000 4,312.5 1.39 1.41 4,255 4
4,500

m
2020 1 5,000 4,875 1.03 1.05 4,762 5
co
5,250
a.
2 4,000 5,750 0.70 0.72 5,556 6
ny

6,250
ke

3 6,000 0.82 7,317 7

ea

-
4 10,000 - - 1.41 7,092 8
m
So

Adjusted variation
Quarter 1 2 3 4 Total
Year
2019 - - 0.8 1.39
2020 1.03 0.70 - -
Average 1.03 0.70 0.8 1.39 3.92
Adjusted value 0.02 0.02 0.02 0.2 0.08
Adjusted average 1.05 0.72 0.82 1.41 4

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Least ordinary square method

0
89
using calculator

7
73
07
07
p
2021 x y=1,445+734.9x

Ap
Q1 9 1,445+(734.9×9)=8,059

m
Q2 10 1,445+(734.9×10)=8,794
Q3 11
co
1,445+(734.9×11)=9,529
Q4 12 1,445+(734.9×12)10,264
a.
ny

b) Total cost
ke

Rent 500,000
ea

Salaries 200,000(2×10,264) 220,528

Fuel cost 45,000+(6×10,264) 106,584
m

Transport 62,000+8×10264) 144,112

So

Sundry cost 29,965+10,264 40,229

1,010,981

c) Confidence interval

C1= b + t (1- )(n-1)sb

CI=734.9
734.9 + 300,000= (30.734.9, 29650)

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QUESTION 9

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September 2021 Question two A

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I highlight four limitations of the learning curve theory as a tool for cost estimation and

07
forecasting. (4 marks)

07
ANSWER
Limitation of learning curve
1. Learning curve assumes labour involved is indirect while in practice, direct labour is
involved.
2. Learning curve assumes workers are motivated while in practice sometimes they are
demotivated.

p
Ap
3. Learning curve assumes there is no breaks while breaks do exist
4. The stable conditions necessary for learning curve to take place may not be present

m
co
QUESTION 10
a.
May 2021 Question two A
ny

Actross Ltd., a packaging company is preparing its budget for the year to 30 June 2021.
In respect of fuel oil consumption, it is desired to estimate an equation in the form Y = a
ke

+ bx, where Y is the total expense at an activity level x, a is the fixed expense and b is the
ea

variable cost per unit.

m
So

The following data relates to the year ending 30 June 2021:

Month Machine Fuel oil Month Machine Fuel oil
Hours expense hours expense
Sh "000" Sh."000" sh "000" Sh."000"
July 2020 34 640 January 2021 26 500
August 2020 30 620 February 2021 26 500
September 2020 34 620 March 2021 31 530
October 2020 39 590 April 2021 35 550
November 2020 42 500 May 2021 43 580
December 2020 32 530 June 2021 48 680

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The annual total and monthly average figures for the year ending 30 June 2021 were as

7
73
follows:

07
Machine hours Fuel oil expense

07
"000" "000"
Annual total 420 6,840
Monthly average 35 570

Required:
Estimate the cost equation for the company for budgeting purposes using the following

p
Ap
methods:
(i) High low method. (2 marks)

m
(ii) Least squares regression analysis. co (8 marks)
a.
ANSWER
ny

i) High-low method
ke
ea

680= a+48b
m

500= a+26b
So

180= 22b
b= 8.18
“000”
ii) Lease square regression
x y xy x2
34 640 21,760 1,156
30 620 18,600 900
34 620 21,080 1,156
39 590 23,010 1,521
42 500 21,000 1,764

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32 530 16,960 1,024

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26 500 13,000 676

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26 500 13,000 676

07
31 530 16,430 961

07
31 550 19,250 1,225
43 580 24,940 1,849
48 680 32,640 2,304
420 6,840 241670 15,212

p
Ap
m
co
a.
ny
ke
ea

“000”
m

QUESTION 11
So

November 2019 Question Three A

The assembly department of Lenku Race Course Club has designed a new concept in
racing bicycles with the intention of selling them to professional racing teams.

The estimated cost and selling price of the first racing bicycle to be manufactured and
assembled is as follows:
Sh.
Materials 6,000
Assembly labour (12 hours at Sh.300 per hour) 3,600

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Manufacturing overheads (150% of labour cost) 5,400

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Profit mark-up 6,000

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Selling price 21,000

07
07
Additional information:
1. It is expected that material cost per bicycle is to remain constant irrespective of the
number of bicycles manufactured.
2. The management expects the assembly time to gradually improve with experience
and has therefore estimated an 80% learning curve.
3. A racing team has approached the club's assembly department and made enquiries on

p
Ap
the following quotations:
 The price of the second bicycle if the team purchases the first bicycle assembled

m
and immediately places an order for the second bicycle.
co
 The average price of the third and fourth bicycles if the team waits until the first
a.
two bicycles are sold to another team.
ny

 The price per bicycle if the team places an order for the first eight bicycles to be
ke

assembled.
ea

Required:
m

Evaluate the price quotations for each of the three enquiries outlined above. (9 Marks)
So

ANSWER
Evaluation of the price quotations for each of the three enquiries outlined
Learning curve analysis
Cumulative Cumulative average Cumulative total Incremental time
bicycle time (Hours) (Hours) (Hours)
1 12 12 12
2 (80%×12) 19.2 19.2 7.2
4 (80%×9.6) 7.68 30.72 11.52
8 (80%×7.68) 6.144 49.152 18.432

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Alternatively: Use of formulae/model

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07
Where

07
Assembly hours for the 2nd bicycle

p
Assembly hours for the 3nd and 4th bicycles

Ap
Assembly hours for 1st 8th units

m
co
a.

i) First Quotation (2nd Bicycle)

ny

Sh.
ke

Materials 6,000
ea

Assembly labour (7.2 hours × 300) 2,160

Manufacturing overheads (150% × 2,160) 3,240
m

Total cost 11,400

So

Profit mark-up (40% × 11,400) 4,560

Selling price 15,960

Where:

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ii) Second Quotation (3nd and 4th Bicycles)

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Sh.

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Materials (2×6,000) 12,000

07
Assembly labour (11.52 × 300) 3,456

07
Manufacturing overheads (150% × 3,456) 5,184
Total cost 20,640
Profit mark-up (40% × 20,640) 8,256
Selling price 28,896

p
Ap
iii) Second Quotation (3nd and 4th Bicycles)

m
co Sh.
Materials (8×6,000) 48,000
Assembly labour (49.152 × 300) 14,745.6
a.

Manufacturing overheads (150% × 14,745.6) 22,118.4

ny

Total cost 84,864

ke

Profit mark-up (40% × 84,864) 33,945.6

ea

Selling price 118,809.6

m
So

QUESTION 12
November 2018 Question Five C
Zed Ltd. has received an order to supply 30 units of Product Aye. So far, 14 units have
been completed. The first unit required 40 direct labour hours and a total of 240 direct
labour hours have been recorded for the 14 units.

Additional information:
1. The production manager expects an 80% learning effect for this type of work.

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2. The company uses standard absorption costing.

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3. The costs attributable to the centre in which Product Aye is manufactured are as

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follows:

07
Direct materials Sh.30 per unit

07
Direct labour Sh.6 per hour
Variable overheads Sh.0.50 per direct labour hour
Fixed overheads Sh.6,000 per four-week operating period

Required:
(i) The learning curve index. (2 marks)

p
Ap
(ii) The unit cost. (6 marks)

m
ANSWER co
i) The learning curve index
a.
ny
ke
ea
m
So

ii) The unit cost

Total time to make 30 units

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07
Cost analysis

07
Direct Material 40×30 1,200
Direct Labour 401×6 2,406
Variable Overhead 401×0.5 200.5
Fixed Overhead 6,000
Total 9,806.5

p
Ap
m
QUESTION 13
co
May 2018 Question Two B
a.

(a) The following data relates to the weekly amount spent on entertainment by
ny

households, the annual income oldie head of the household and the household size in
ke

terms of number of persons:

ea
m

Annual income of head of household per

So

Amount spent per week per year Household size

Sh. Sh. No.
2,000 600,000 1
1,700 500,000 2
500 1,000,000 1
0 1,400,000 4
300 2,500,000 2
800 1,000,000 5
1,400 2,100,000 1
1,900 1,700,000 1

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3,200 2,900,000 2

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89
1,700 1,400,000 3

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900 700,000 1

07
800 900,000 3

07
400 1,400,000 2
2,000 1,900,000 1
1,000 1,300,000 1
900 1,000,000 2
700 900,000 3
1,400 1,100,000 3

p
Ap
5,900 3,400,000 6
700 1,000,000 2

m
co
A computer output of the above data using a spreadsheet package was provided as
a.
follows:
ny

Regression statistics
Multiple R 0.669191
ke

R square 0.447817
ea

Adjusted R square 0.382855

m

Standard error 10.196161

So

Observations 20

Anova df ss ms F significance F
Regression 2 1432.03 716.0149 6.893453 0.006423
Residual 17 1765.77 103.8688
Total 19 3197.80

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Coefficients Standard t stat P-value Lower 95% Upper 95%

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error

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Intercept -4.099268 5.583689 -0.734151 0.472862 -15.87984 7.681302

07
Income 0.985764 0.313508 3.144306 0.005915 0.32432 1.647208

07
Size 1.762415 1.716065 1.027009 0.318808 -1.858171 5.383002

Required:
(i) The equation of regression line of the data. (2 marks)
(ii) A statistical analysis of the computer results. (6 marks)
(iii) Outline three factors that might hinder the interpretation of your results above.

p
Ap
(6 marks)
Note: Round off your figures to two decimal places.

m
co
ANSWER
a.
i) The equation of regression line of the data
ny
ke
ea

ii) A statistical analysis of the computer results

m

Based on the relationship portrayed by coefficient of determination = 0.4478, we

So

can observe, only 44.76% of income spent on entertainment is determined by annual

income and size of the household
The coefficient can be analysed as follows:
 4.099264 – thus is the increase in the income spent on entertainment due to
other variable not included in the analysis
 0.985764 – is the increase in income spent on entertainment when annual
income increases by one unit.
 1.762415 – is the increase in amount spent on entertainment as size of the
household in increased by one unit

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 Based on F test, we can conclude the model is significant since F calculated is

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greater than F critical.

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07
iii) Factors that might hinder interpretations of the result

07
 Household might have other sources of income
 Social standing of the household might influence expenditure on entertainment
 Huge number of independent variable when there is a big number of independent
variables, it may be difficult and complex to interprete anova results

p
QUESTION 14

Ap
November 2017 Question Two B
Actross Ltd., a subsidiary of Master Pack Ltd., a packaging company is preparing a

m
budget for the year ending 30 June 2018. In respect of fuel consumption, the company
co
desires to estimate an equation in the form of y = a + bx, where "y" is the total expense at
a.
an activity level "x". "a" is the fixed cost and "b" is the variable cost.
ny
ke

The following information relates to the year ended 30 June 2017:

Year and Month Machine hours Fuel expenses
ea

2016 Sh."000" Sh."000"

m

July 34 640
So

August 30 620
September 34 620
October 39 590
November 42 500
December 32 530
2017
January 26 500
February 26 500
March 31 530
April 35 550

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May 43 580

0
89
June 48 680

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07
The annual total and monthly average figures for the year ended 30 June 2017 were as

07
follows:
Machine hours Fuel expenses
Sh."000" Sh."000"
Annual total 420 6,840
Monthly average 35 570

p
Ap
Required:
Estimate the fixed and variable elements of fuel expense from the above data using the

m
following methods: co
(i) High-low. (3 marks)
a.
(ii) Least squares regression. (7 marks)
ny

c) From the information in (b) above, the coefficient of determination arising is

ke

approximately 0.25. Interpret the significance of this information. (2 marks)

ea
m

ANSWER
So

i) Fixed and variable elements of fuel expense from the above data using High low
method

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0
89
7
73
07
07
ii) Fixed and variable elements of fuel expense from the above data using Least
square regression

Year /month Machine hours Fuel expenses

Sh 000 Sh 000

p
July 34 640 21,760 1,156

Ap
August 30 620 18,600 900
Sept 34 620 21,080 1,156

m
Oct 39 co 590 23,010 1,521
Nov 42 500 21,000 1,764
a.
Dec 32 530 16,960 1,024
ny

Jan 26 500 13,000 676

ke

Feb 26 500 13,000 676

March 31 530 16,430 961
ea

April 35 550 19,250 1,225

m

May 43 580 24,940 1,849

So

June 48 680 32,640 2,304

Total 420 6,840 241,670 15,212

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89
7
73
Fixed element will be 414,824 and variable element will 4.43

07
07
c) Interpretation of the significance of coefficient of determination arising at
approximately 0.25

= 0.25

p
This means 25% of the fuel expenses is explained by the change in machine

Ap
hours while 75% is explained by other factors.

m
QUESTION 15 co
May 2017 Question Two B
a.
Jambo Ltd. is a multiproduct firm. The company intends to launch a new product branded
ny

"ZP" in the coming months.

ke

Production will be in batches of 1,000 units throughout the life of the product. It is
ea

expected to achieve a 90% learning curve but the learning would cease after the 64th
m

batch.
So

Other relevant data of product "ZP" is as follows:

Expected life (production) 256,000 units

Sh.
Selling price per unit 123
Direct material cost per unit 36
Total direct labour cost (first batch) 52,500
Variable overhead costs per unit 24
Total specific fixed costs 3,875,000

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0
89
The learning index for a 90% learning curve is -0.152.

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73
07
Required:

07
(i) The expected profit to be earned from the product over its lifetime. (8 marks)
(ii) It has now been established that the learning effect will continue for all of the 256
batches that will be produced.

Required:
The "learning curve" required to achieve a lifetime product profit of Sh.10 million,

p
Ap
assuming that a constant learning rate applies throughout the product's life.
(6 marks)

m
ANSWER co
Learning Curve Analysis
a.
ny

Where;
ke
ea
m
So

Determining total labour cost

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Total labour to make 256 batches

0
89
Cost to make 64 batches 1,785,665

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73
Cost to make remaining 192 (192×23,689) 4,548,288

07
6 ,333,953

07
Profit statement
Sales = 256,000×123 31,488,000
Material cost = 256,000×36 (9,216,000)
Direct labour cost (6,333,953)
Variable overhead cost (256,000×24) (6 ,144,000)

p
Ap
Fixed cost 3,875,000
5,919,047

m
co
ii) To achieve profit of 10,000,000 this means current profit will have to increase by
a.
4,080, 953 and hence labour cost will go down by 4080953.
ny

Target profit 10,000,000

Current profit (5,919,047)
ke

Incremental profit 4,080,953

ea

Current labour cost 6,333,953

m

Less: Increment/profit due to leaning (4,080,953)

So

Target labour cost 2,253,000

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89
7
73
07
07
p
Ap
m
co
a.

QUESTION 16
ny

November 2016 Question Two B

ke

Innovators Ltd. has designed a new model of a manufacturing machine. The cost and
ea

sales price of the first machine to be produced has been estimated as follows:
"Sh.000"
m

Materials 25,000
So

Labour (2,000 hours x Sh. 15,000 per hour) 30,000

Overhead (50% of labour cost) 15,000
70,000
Profit mark-up (25%) 17,500
Selling price 87,500

The company plans to sell all the machines at full cost plus 25%. A 90% learning curve is
expected to apply to the production work. Only one customer has expressed interest in
buying the machine so far, but he views Sh.87,500,000 as too high a price to pay. He
could buy more of the machines in the coming periods.
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Required:

7
73
(i) If the customer above paid Sh.87,500,000 for the first machine, determine the price he

07
would have to pay later for a second machine. (4 marks)

07
(ii) Advise the management of Innovators Ltd. on the price quotation per machine if the
customer above places an order for the third and the fourth machines as a single order.
(4 marks)
ANSWER
i) The price he would have to pay later for a second machine

p
Ap
Learning Curve Analysis

m
co
a.
ny
ke
ea
m
So

Analysis schedule sh 0000

Material cost 25,000
Labour cost (16,000×15,000) 24,000
overhead cost (50%×24,000) 12,000
Total cost 61,000
Markup = (25%×61,000) 15,250
Selling price 76,250

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ii) Price quotation per machine if customer orders third and fourth machine as

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73
single order time to make 3rd& 4th machine

07
07
Analysis table sh 000
Material cost (25,000×2) 50,000

p
Labour cost 43,200

Ap
Overhead (50%×43,200) 21,600
Total cost 114,800

m
Markup (25%×114,800) 28,700
co
Selling price 143,500
a.
ny
ke
ea
m

QUESTION 17
So

May 2016 Question One B

i) The learning phenomenon applies to time and will affect any cost which is a function
of time. Whenever costs are estimated, the potential impact of learning should be
considered.
Required:
Highlight four areas where the learning curve is applied in business. (4 marks)
ii) Describe four limitations of using the learning curve in business. (4 marks)

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ANSWER

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i) Areas where learning curve is applied in business

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73
 Work scheduling

07
 Setting labour standards

07
 Decision making
 Performance evaluation
 Inventory valuation
 Performance measurement
 Project appraisals

p
 Pricing decisions

Ap
ii) Limitations of using learning curve in business

m
 It provides only estimates which cannot be relied upon to represent the true states
co
affair
a.

 Learning curve differs from company to company as well as industry thus limits
ny

comparison
ke

 Any changes in personnel, design or procedure can be expected to alter the

ea

learning curve
 It is based on the time necessary to complete the earlier units, therefore time must
m

be accurate to obtain reliable estimates.

So

QUESTION 18
May 2016 Question One C
Space Corn Ltd. is about to bid on a new radar system. Although the product uses new
technology, Space Com Ltd. believes that a learning rate of 75% is appropriate. The first
unit is expected to consume 700 hours and the contract is for 40 units.

Required:
(i) The total amount of hours required to build the 40 units. (2 marks)
(ii) The average time to build each of the 40 units. (2 marks)
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(iii) Assuming that a worker works 2,080 hours per year, determine the number of

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workers that should be assigned to this contract to complete it in a year. (2 marks)

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73
07
ANSWER

07
i) The total amount of hours required to build the 40 units
Learning curve

p
Ap
m
co
a.
ny
ke
ea

ii) The average time to build each of the 40 units

m

̅
So

iii) No of workers required

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QUESTION 19

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November 2015 Question Five A

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Citing three reasons, explain the purpose of cost estimation. (6 marks)

07
07
ANSWER
Purpose of cost estimation
 Cost estimation is used to predict the quantity, cost and price of the resources
required by the scope of a project or product
 Cost estimation is needed to provide decision makers with the means to make

p
investment decisions, choose between alternative and to set up the budget during the

Ap
front end of projects
 Cost estimate is more than list of costs. It also includes a detailed basis of estimate

m
which is needed to interpret the total project cost. This is also required to
co
communicate the estimate to various parties involved in decision making.
a.
ny

QUESTION 20
ke

September 2015 Pilot Paper Question Four A

Explain the importance of recognising the effects of learning curves when preparing
ea

performance reports. (4 marks)

m
So

ANSWER
Importance of recognizing learning curve effect when preparing performance
report
 It helps in resource allocation
 Control – evaluation on how to control experienced employees in an entity
department.
 It adds in setting of labour standards, time scheduling and table tabling.

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QUESTION 16

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September 2015 Pilot Paper Question Four B

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73
Explain how companies might introduce a cost reduction programme without affecting its

07
customer's perceptions of product values. (4 marks)

07
ANSWER
How companies might introduce cost reduction programme without affecting its
customer‟s perceptions of product value.
 Use of technology – technology aid in cost reduction in longrun and hence can be

p
used as a programme to cut on products cost.

Ap
 Elimination of unnecessary features – some product features are not necessary
which can be eliminated without client noticing

m
 Enhancement of economies of scale – this can be achieved where more unit are
co
produced through shared resources.
a.
ny

QUESTION 17
ke

September 2015 Pilot Paper Question Four C

The finance director of Estimator Solutions Ltd. have availed to you the following data
ea

for a company:
m

The company has one single manufacturing department.

So

The cost data available relate to the last 16 months as follows:

Departmental Direct labour Direct material Number of orders

overhead cost hours Quantity (kgs.) processed
(Sh.'000') (`000') (`000') („000')
25,835 878 970 88
24,451 1,088 934 100
28,611 1,281 667 108
32,361 1,340 1,243 110
28,967 1,090 964 90
24,817 1,067 903 67

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29,975 1,188 876 88

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26,135 928 820 28

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31,361 1,319 984 19

07
26,008 790 933 90

07
27,812 934 966 93
28,612 871 940 87
22,992 781 518 81
31,836 1,236 1,017 236
26,252 902 881 92
26,977 1,140 751 140

p
Ap
A computer program has been used to analyse the above data. The results are as follows:

m
co
Regression Dependent variable Independent Coefficient Standard t-value
a.
variable error
ny

I Overhead Labour hours 8.50 1.93 4.4

Materials 6.95 2.21
ke

Orders 6.59 7.19 0.9

ea

Y intercept (Sh.`000') 12,052 2.286 5,3

Adjusted = 0.76 1,281
m

Standard errors of estimate

So

II Overhead Labour hours 8.88 1.87 4.7

Materials 7.06 2.19 3.2
Y intercept (Sh.`000') 12,190 2.267 5.4
Adjusted = 0.76 1,273
Standard errors of estimate
III Overhead Labour hours 10.98 2.27 4.8
Y intercept (Sh.`000') 16,310 2.421 6.7
Adjusted = 0.60
Standard errors of estimate 1.646
IV Overhead Labour hours 10.68 3.26 3.27

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Y intercept (Sh.`000') 18,277 2.997 8.14

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Adjusted = 0.39 2,027

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Standard errors of estimate

07
07
Coefficient of correlation between variables is as follows:
Overhead Labour Material Orders
Overhead 1.000
Labour 0.7913 1.000
Material 0.6580 0.3489 1.000
Orders 0.3253 0.2420 0.1324 1.000

p
Ap
Required:

m
(i) The most reasonable estimate of recently experienced overhead cost function. Justify
co
your answer. (4 marks)
a.
(ii) Determine if the equation provides a useful prediction of overheads that might be
ny

experienced next month. (5 marks)

(iii) Explain the purpose for which the managers might use the predicted equation.
ke

(3 marks)
ea

ANSWER
m

i) The Most reasonable estimate of recently experienced overhead cost function

So

let;

Then Equation 1,

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Equation II

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89
7
73
07
Equation III

07
Equation IV

p
Explanation

Ap
criteria Prefer Reason
Equation

m
1. No of independent I co Has the highest number of independent
variables variables
a.
2 Multi co linearity I No co linearity
ny

3 Adjusted I Has the highest

ke

4 Standard error ( ) II Has the lowest

ea
m
So

ii) Determining if the equation provides a useful prediction of overheads that might
be experienced next month

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iii) Purpose for which managers might use the predicted equation

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 Used for forecasting overheads

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 Budgeting

07
 Control/performance measurement

07
QUESTION 18
May 2015 Question Two A
GEC Ltd. is evaluating the assembly costs of producing large LED television sets that
target high end customers in the entertainment industry.

p
The company has just received an order for eight new television sets.

Ap
The estimated costs are as follows:
1. The direct material cost per television set is Sh.400,000.

m
2. The direct labour usage for the first television set is estimated at 2,000 hours.
co
3. The direct labour costs amount to Sh. 300 per hour.
a.
4. Indirect manufacturing costs are predicted using two separate cost functions
ny

each with its own cost driver as follows:


ke

Equipment related indirect costs at the rate of Sh. 120 per direct labour
hour.
ea

 Material handling related indirect costs at the rate of 50% of direct

m

material cost.
So

5. A learning effect of 85% is expected to occur.

6. The learning index for an 85% learning curve is -0.2345.
7. GEC Ltd. charges a profit margin of 33 %.

Required:
The invoice price for the eight television sets. (6 marks)

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ANSWER

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The invoice price for the eight television sets

7
73
Learning Curve Problem

07
07
p
Ap
Invoice price

m
Direct material cost (400,000×8) co 3,200,000
Labour cost = (9,836×30) 2,950,800
a.
Indirect cost –Equipment related (9,836×120) 1,180,320
ny

- Material handling (50%×3,200 000) 1,600,000

ke

Total cost 8,931,120

Profit (50%×8,931,120) 4,465,560
ea

Invoice price 13,396,680

m
So

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TOPIC 3

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7
73
07
PLANNING AND DECISION MAKING TECHNIQUES

07
QUESTION 1
December 2023 Question One C
TL Ltd. sells three types of mosquito nets branded Zerofly, Whyfly and Nofly. Product
Whyfly is currently generating profits below target net profit of Sh.750,000.

p
Ap
The following table shows selected data for the three products for the previous year
ended 30 June 2023:

m
Product Zerofly Whyfly Nofly
co Total
Selling price per unit (Sh.) 80 20 30
a.
Contribution margin ratio 20% 10% 60%
ny

Sales demand in units 50,000 150,000 60,000

ke

Net profit (Sh.) 490,000

ea

Additional information:
m

1. The above data is expected to remain unchanged if Tsavo Ltd. continues producing all
So

the three products.

2. The sales manager believes that profits can be increased by dropping Whyfly due to
its low contribution margin ratio and concentrate on the sales of Zerofly and Nofly.
3. The entire workforce used to produce Whyfly will be utilised in the production of
Nofly. The labour mobility is such that 3 units of Whyfly equal 1 unit of Nofly. To
increase demand for Nofly, a 10% price reduction will be allowed next year after
dropping Whyfly.
4. Unit fixed cost is Sh.6.5.
5. TL Ltd. prepares statements on marginal costing basis.

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Required:

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89
(i) Prepare a comparative statement of profit or loss before and after dropping Whyfly.

7
73
(6 marks)

07
(ii) Advise the management of TL Ltd. on whether to continue or drop product Whyfly.

07
(2 marks)
ANSWER
Comparative income statement before and after dropping
Zero fly Why fly Nofly Total
Selling price 80 20 30

p
Variable cost (I- CM ration 64 (18) (12)

Ap
contribution margin 16 2 18
Sales demand (units) 50,000 150,000 60,000

m
Total contribution 800,000 co300,000 1,080,000 2,180,000
Fixed cost (X×6.5) (325,000) (975,000) (390,000) (1,690,000)
a.
Profit 475,000 (675,000) 690,000 490,000
ny
ke

Working:
ea

Variable cost- 100%-Contribution margin ration

m

zerofly=100% -20%=80%
So

Whyfly=100%-10%=90%

No fly=100%-60%=40%

After dropping
The entire workforce used to produce whyfly will be utilized in the production of nofly.
The labour mobility is such that 3 units of whyfly equal 1 unit of nofly

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7
Profit or loss statement

73
Zerofly Nofly Total

07
07
Selling price 80 27
Variable cost (64) (10.8)
Contribution margin 16 16.2
Sales units 50,000 110,000
Total contribution 800,000 1782,000 2,582,000
Fixed cost (325,000) (715,000) (1,040,000)

p
Profit 475,000 1,067,000 1,542,000

Ap
m
ii) Advice to the management co
The management of TL Should drop product why fly as the net profit increases to
a.

1542,000
ny
ke

QUESTION 2
ea

December 2023 Question Two A

m

Chane Ltd. is considering whether to develop and market a new product. The
So

development cost of the new product will be Sh.360,000,000.

Additional information:
1. There is a 75% chance that the product development exercise will be successful.
2. The following matrix relates to the new product:
Market state Probability Profit (Sh.“000”)
Very successful 0.4 1,080,000
Moderately successful 0.3 200,000
Failure 0.3 (800,000)

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3. The development cost of Sh.360,000,000 has been accounted for in the calculation of

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the above profits and losses.

7
73
07
Required:

07
As the Management Accountant of Chane Ltd., advise the management of the company
on whether or not to develop the new product. (10 marks)

ANSWER
This project can evaluated using EMV to determine its viability

p
Ap
m
co
a.
Advice:
ny

Based on computed EMV, they should proceed with development and marketing of new
product. However, it is essential for the company to consider other non financial factors
ke

such as strategic alignment, market conditions, and potential risks, before making a final
ea

decision
m
So

QUESTION 3
August 2023 Question Three B
Oreq Ltd. is a small-scale company selling take-away sandwiches in a metropolitan town.
The company would like to make a decision on the number of sandwiches to sell at the
forthcoming graduation ceremony at County University. The number of sandwiches sold
will depend on three market conditions; poor, fair or good condition.

The table below details the net profit/(loss) that would be earned for each possible
number of the sandwiches sold:

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Net profit/(loss)

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Market conditions Poor Fair Good

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73
Probability of market states 30% 40% 30%

07
Number of sandwiches sold: Sh. Sh. Sh.

07
1,000 100,000 300,000 300,000
2,000 0 600,000 600,000
3,000 (100,000) 700,000 900,000
4,000 (300,000) 600,000 1,200,000

p
Required:

Ap
(i) The number of sandwiches to sell to satisfy maximin criterion. (2 marks)
(ii) The number of sandwiches to sell to satisfy maximax criterion. (2 marks)

m
(iii) The number of sandwiches to sell to maximise the expected monetary value (EMV).
co
(2 marks)
a.
(iv) The maximum amount payable by Oreq Ltd. to acquire perfect information.
ny

(2 marks)
ke

ANSWER
i) Maximum criteria
ea

Options Minimum
m

1000 Maximum
So

2000 0
3000 (100,000)
4000 (300,000)
Select 1000 sandwiches

ii) Maximax criterion

Options Minimum
1000 300,000
2000 600,000

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3000 900,000

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4000 Maximum

7
73
Select 4,000 Sandwiches

07
07
iii) Expected monetary value (EMV)

Options

p
Ap
m
co
a.
ny
ke

Based on EMV, the higher the EMV, the better the option, therefore 3,000 sandwiches
ea

will be better.
m
So

iv) Value of information

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QUESTION 4

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August 2023 Question Four

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73
Green Coaches Ltd. is an electric-bus assembly company. The company has received a

07
special order from Transland Bus Company to supply 15 executive electric buses for bus

07
rapid transport (BRT) project at a target price of Sh.8 million per bus.

Due to the novelty of the project and challenges of learning curve effect, the company
wants to analyse three scenarios available before accepting the special order. These
scenarios are:

p
Ap
Scenario 1:
To work overtime and deliver the 15 buses within stipulated period.

m
co
Scenario 2:
a.
To complete 14 buses using overtime and deliver 1 bus late.
ny
ke

Scenario 3:
To assemble and deliver the 13 buses without overtime and deliver 2 buses late.
ea
m

Additional information:
So

1. The target profit margin is 20% of the target price per bus.
2. The contract allows for 92 working days without overtime for the assembly and
delivery of buses and stipulates a penalty of Sh.1.5 million for each bus delivered late.
3. The time taken to complete the first bus is 10 days.
4. Direct labour cost is Sh.180,000 per day for the normal working days per month and
overtime premium rate is double the normal rate.
5. Overheads will be allocated to the special order at a rate of Sh.30,000 per normal
working day and no overheads will be allocated for overtime working.
6. The management accountant‘s estimate of direct material cost per bus is
Sh.2,500,000.

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7. The learning curve index at 90% learning rate is -0.152.

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8. The learning curve model is in the form of Y = ax-b.

7
73
07
Required:

07
(a) Evaluating each scenario, advise the management on the most economical scenario
using learning curve analysis. (12 marks)
(b) Using target costing approach, compute the cost savings of the most economical
scenario identified in (a) above. (4 marks)
(c) Explain FOUR non-financial factors that may have a bearing on the decision for the
special order by the management of Green Coaches Ltd. (4 marks)

p
Ap
(Total: 20 marks)
ANSWER

m
co
a.
ny
ke
ea
m
So

Scenario 1: To work overtime

Cost estimation
Direct material 2500,000×15 37,500,000

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Direct labour 180,000×92 16560,000

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89
Overtime 7×180,000×2 2520,000

7
73
Overhead 30,000×92 2760,000

07
Total cost 59,340,000

07
Scenario 2: To assemble and deliver buses without overtime and deliver 1 bus late

p
Ap
m
co
a.
ny
ke

Cost estimation
ea

Direct material 2,500,000 × 15 37,500,000

m

Direct labour 180,000 × 92 16,560,000

So

Overtime 180,000 × 2 × 2 720,000

Overhead 30,000 × 92 2,760,000
15th unit overhead 30,000 × 6 180,000
15th unit direct labour 180,000 × 6 1,080,000
Penalty for later delivery 1,500,000 × 1 1,500,000
Total cost 60,300,000

Scenario 3: Assembly 13 buses without overtime and deliver 2 buses

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= 10 × 130.848 = 88days

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Time to make 14th and 15th bus

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07
07
Scenario 3 cost estimate
Direct material 2,500,000 × 15 37,500,000
Direct labour 180,000 × 88 15,840,000
Overhead 30,000 × 88 2,640,000

p
Ap
14th,15th labour cost 11 × 180,000 1,980,000
14th ,15th Overhead 30,000 × 11 330,000

m
Penalty for late delivery 1,500,000 ×2 co 3,000,000
Total cost 61,290,000
a.
ny

Advice: Scenario 1 is the most economical scenario using target costing approach
ke
ea

b) Cost saving of the most economical scenario using target costng approach
m
So

Target cost for 15 buses

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c) Non –financial factor that may have a bearing on special order decisions

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1. Quality and reputation

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2. Employee morale

07
3. Customer relationship

07
4. Regulatory compliance

QUESTION 5
August 2023 Question Five B
Rona Enterprise manufactures three products namely; A, B and C. The current sales, cost
and selling price details and processing time requirements are as follows:

p
Ap
The standard selling price and standard cost per unit for each product for the period

m
ending 31 August 2023 are as follows: co
Product A Product B Product C
a.
Annual sales (units) 6,000 6,000 1,000
ny

Selling price (Sh.) 200 320 400

ke

Unit cost (Sh.) 180 240 300

Processing time required per unit (hours ) 1 1.5 2
ea
m

Additional information:
So

1. The firm is working at full capacity of 17,000 processing hours per year.
2. Fixed costs are absorbed into unit cost by a charge of 200% of variable cost.
3. Processing can be switched from one product line to another.
4. The selling prices are not to be altered.
5. Information in respect to the maximum demand for each product which Rona
Enterprise could alternatively outsource from an independent supplier, for the same
quality, is given below at current selling prices:

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Product Expected maximum demand Quoted price

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(Units) (Sh.)

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A 11,000 175

07
B 8,000 240

07
C 2,000 320

6. In the period commencing 1 September 2022 and ending 31 August 2023, the company
budgeted for production fixed overheads of Sh.2,000,000.

p
Required:

Ap
(i) Compute the shortfall of the limiting factor. (2 marks)
(ii) Determine the optimal production mix indicating the products and quantity to

m
outsource from external supplier. co (5 marks)
(iii) Based on your recommendations in (b) (ii) above, determine the net profit for the
a.
period 31 August 2023. (3 marks)
ny
ke

ANSWER
i) Shortfall of the limiting factor
ea

A = 11000 × 1 11,000
m

B = 8000 × 1.5 12,000

So

C = 2000 × 2 4,000
Total hours required 27,000
Available hours (17,000)
Shortfall 10,000

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ii) Optimal production mix

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A B C

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73
Contribution margin per units W1 25 80 80

07
Limiting factor [processing hours] 1 1.5 2

07
On per limiting factor 25 53.33 40
Rank 3 1 2

Allocation schedule
Rank Product Demand Hours Units hours used Balance (17000 hours)

p
produced

Ap
1 A 8,000 1.5 hours 8,000 12,000 17,000-12,000 = 5000

m
2 B 2,000 2 hours 2,000
co 4,000 5,000 - 4,000 – 1,000
3 C 11,000 1 hours 1,000 1,000 1,000 – 1 000 = 0
1,000 17,000
a.
ny

Working 1
ke
ea
m
So

Optimal production
A = 1,000
B = 8,000
C = 2,000

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iii) Net profit or loss

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A = 1,000 × 25 25,000

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73
B = 8,000 × 80 640,000

07
C = 2,000 × 80 160,000

07
Total contributor 825,000
Less: Fixed cost (2,000,000)
(1,175,0000)

p
QUESTION 6

Ap
April 2023 Question Two B
Wangwana Growers Ltd., is a large-scale maize growing firm in Western region growing

m
maize for both domestic and export market. Fred Juma, the Management Accountant, has
co
established that there is a probability of getting a high, medium or low harvest. Fred Juma
a.
has to decide on the optimum selling price for one bag of maize and three prices are
ny

under consideration.
ke

The selling price per bag of 90 kilograms for different types of customers is as follows:
ea

Sh.
m

Wholesale price 5,000

So

Retail price 5,500

Export price 6,000

The expected number of bags of maize to sell at three price levels for each of the above
states of harvest is as shown below:
Decision alternative
Selling price per bag Sh.5,000 Sh.5,500 Sh.6,000
Conditions Number of bags to be sold
High harvest 13,000 12,500 8,500
Medium harvest 10,000 9,000 8,500

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Low harvest 6,000 6,000 3,500

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Additional information:

07
1. From past experience, there is a 10% probability that the harvest will be low, a 30%

07
probability that the harvest will be medium and a 60 % probability that the harvest
will be high.
2. The estimated variable cost is Sh.3,000 per bag of 90 kilograms of maize.
3. The fixed cost at each selling price level is Sh.15 million.
4. Fred Juma can engage an agricultural expert to carry out a survey on the productivity

p
of the land, which will cost him Sh.1 million.

Ap
Required:

m
(i) A payoff matrix table showing the net profit.
co (8 marks)
(ii) The price to set to maximise the expected monetary value. (2 marks)
a.
(iii) Advise Fred Juma whether it is worthwhile to acquire the perfect information from
ny

the agricultural expert. (4 marks)

ke

ANSWER
ea

Pay off table

m

Outcomes High Harvest Medium harvest Low harvest

So

Option

Sh 5000 11,000,000 5,000,000 (3,000,000)

Sh 5500 16,250,000 7,500,000 0
Sh 6000 10,500,000 10,500,000 (4,500,000)
Probability 0.60 0.30 0.10

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Option

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Selling price

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07
07
p
Ap
m
co
a.
ny

ii) Price to set based on EMV

ke
ea
m
So

Based on EMV, The optimal selling price will be sh 5500 since it has the highest profit

iii) Value of information

Advice

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If is not worthwhile to acquire perfect information from the agricultural expert at

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Sh 1,000,000 since Fred Juma is capable of acquiring perfect information at a cost of Sh

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900,000

07
07
QUESTION 7
April 2023 Question Four B
Fixit Fabricators Ltd. has been facing a lean financial spell for the past two years. The
profit has been declining steadily and the results of the preceding year showed a loss of
Sh.2,000,000. This is the first time the company has reported a loss in its 10-year history.
The chairman and the board of directors have been deliberating on the remedial steps to

p
Ap
implement to arrest the situation. Three competing proposals have been suggested by a
taskforce set up some months back aimed at boosting sales and improving efficiency of

m
operations in the current year. As a member of the taskforce, you have been invited to
co
attend the next board meeting to deliberate on the proposals.
a.
ny

The following information is available:

1. The target profit for the current year is Sh.4,000,000 regardless of the proposal that
ke

will be adopted.
ea

2. The company‘s fixed costs currently amount to Sh.20,000,000 per year.

m

3. The company can sell up to a maximum of 12,000 units of its product in the local
So

market and unlimited quantities in a neighbouring country. For the sales in the local
market, unit variable costs amount to Sh.5,000, while for the sales in the neighbouring
country, an extra Sh.500 per unit is incurred in transportation expenses.
4. The same transfer price of Sh.10,000 normally prevails both in the local market and
neighbouring country.
5. Sales for the past year amounted to 9,000 units, all in the local market.

The main requirements of the three competing proposals are as follows:

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Proposal A: The Company should improve the quality of packaging of its products at a

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cost of Sh.500 per unit.

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Proposal B: The company should spend Sh.2,000,000 on an advertising campaign.

07
Proposal C: The Company should reduce the selling price by Sh.500 per unit.

07
Required:
(i) For proposals A, B, and C, determine the break-even point in the neighbouring
country in order to achieve the target profit. (9 marks)
(ii) Summarise FIVE financial factors to consider for proposal C. (5 marks)

p
Ap
ANSWER
Determining the break even pant in the neighbouring country in order to achieve

m
the target profit co
a.
ny

Unit variable cost when selling to neighbouring country

ke
ea
m
So

Proposal A

Proposal B

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7
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07
07
Proposal C

p
ii) Financial factors to consider for proposal C

Ap
 Behaviour of the fixed cost
 Impact on total revenue
 Competitors position
m
co
 Profit margin
a.

 Cost management
ny

 Demand elasticity
ke
ea

QUESTION 8
m

December 2022 Question Two A

So

Lengo Ltd. is considering marketing a new product. The fixed cost of this product will
amount to Sh.5,000,000. There are three uncertain factors namely; selling price, variable
cost and annual sales volume.

The product has a life of only one year and the various possible levels of these factors
together with estimated probabilities are given below:

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Selling Price Probability Variable cost Probability Annual Sales Probability

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Sh. Sh. volume (units)

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400 0.3 200 0.1 0.4

07
450 0.5 250 0.6 0.5

07
500 0.2 300 0.3 0.1

Additional information:
1. Assume that the three factors are statistically independent.
2. The company uses cost-volume-profit (CVP) analysis to make decisions.

p
3. The following random numbers are provided:

Ap
• Selling price: 8 0 6 1 3 5 1 3 9 1
• Variable costs: 0 4 3 4 6 7 2 8 5 9

m
• Sales volume: 6 3 9 4 0
co 9 7 6 8 5
a.
Required
ny

Using CVP analysis criteria, simulate the problem and determine the average profits.
ke

(10 marks)
ANSWER
ea

CVP analysis simulation analysis

m
So

Monte carlo for variables

Selling price
Amount Probability Cumm prob Range
400 0.3 0.3 0 - 27
450 0.5 0.8 3-7
500 0.2 1.0 8-9

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Variance cost

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Amount Probability Cumm prob Range

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200 0.1 0.1 0-0

07
250 0.6 0.7 1-6

07
300 0.3 1.0 7-9

Annual sales volume

Units Probability Cumm prob Range
40,000 0.4 0.4 0-3

p
50,000 0.5 0.9 4-8

Ap
60,000 0.1 1.0 9-9

m
co
a.

Simulation worksheet
ny

Selling price Variable cost CM Sales volume Total Fixed cost Profit
ke

per contribution
Trial unit
ea

RN Amount Amount RN RN Units

m

1 8 500 0 200 300 6 50,000 15,000,000 5000,000 10,000,000

2 0 400 4 250 150 3 40,000 6,000,000 5000,000 1,000,000
So

3 6 450 3 250 200 9 60,000 12,000,000 5000,000 7,000,000

4 1 400 4 250 150 4 50,000 7,500,000 5000,000 2,500,000
5 3 450 6 250 200 0 40,000 8,000,000 5000,000 3,000,000
6 5 450 7 300 150 9 60,000 9,000,000 5000,000 4,000,000
7 1 400 2 250 150 7 50,000 7500,000 5000,000 2,500,000
8 3 450 8 300 150 6 50,000 7500,000 5000,000 2,500,000
9 9 500 5 250 250 8 50,000 12500,000 5000,000 7,500,000
10 1 400 9 300 100 5 50,000 5000,000 5000,000 0
4,000,000

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QUESTION 9

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August 2022 Question Three B

07
A hotel with 50 single rooms is recording 80% occupancy in normal season (8 months)

07
and 50% occupancy in off- season (4 months) in a year.
The following information is provided:

Annual fixed expenses: Sh.

Staff salaries (excluding room attendants) 7,500,000
Repairs and maintenance 2,600,000

p
Ap
Depreciation on buildings and furniture 2,400,000
Other fixed expenses like dusting and sweeping 3,250,000

m
Total co 15,750,000
a.
Variable expenses (per guest per day): Sh.
ny

Linen and laundry 300

Electricity and other facilities 200
ke

Miscellaneous expenses 250

ea
m

The management wishes to realise a profit of 25% on total cost. Assume a 30 day month
So

in all cases.

Required:
(i) The required tariff rate per room. (4 marks)
(ii) The break-even occupancy in normal season assuming 50% occupancy in off-season.
(3 marks)
(iii) The management is proposing a 20% decrease in tariff to improve occupancy at
100% and 70% in normal season and off-season respectively.

Advise on the appropriateness or otherwise of the above proposal. (3 marks)

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ANSWER

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i) The required tariff rate per room

07
07
Normal season guests

Off season guests

p
Ap
m
co
a.
ny
ke
ea

Profit = Total revenue-total cost

m
So

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ii) Break even occupancy in normal season assuming 5% occupancy in off season

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07
Normal season guest

07
Normal season guest

p
Total number of guests

Ap
m
Total revenue
co
a.
ny

Total variable cost

ke
ea

Annual contribution
m
So

Contribution per unit

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ii) Advice on the proposal

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 Tarrif per room= Sh 2,500

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 20% decrease in tariff per room = 20% × 2,500 = Sh 500

07
07
 New tariff per room = Sh 2,500 - Sh 500=Sh 2,000

Normal season guest at 100% occupancy

Off season guest at 70% occupancy

p
Ap
m
Total number of guest co
a.
ny
ke
ea
m
So

Advice
The management should consider the proposal of a 20% decrease in tariff to improve
occupancy at 100% and 70%

QUESTION 10
April 2022 Question One B and C
(b) Jumbo Ltd. is proposing to introduce to the market a home security appliance system.
It has three different possible models; Micro, Basic and Macro which vary in
sophistication and complexity, but currently the company has capacity to manufacture

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only one model. An analysis of the probable acceptance of the models has been carried

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out and the resulting profit estimated. The results are as follows:

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Profits (Sh."000")

07
Model acceptance Acceptance Probability Micro Basic Macro

07
Excellent 20% 60 100 120
Moderate 50% 40 60 80
Poor 30% 20 0 -40

The Finance Director of Jumbo Ltd. estimates the utilities for various sums of money
from Sh.-40,000 to Sh.120,000 as follows:

p
Ap
Monetary value (Sh. "000") -40 -20 0 20 40 60 80 100 120

m
Utility 0 0.20 0.37 0.52
co 0.65 0.78 0.89 0.96 1.00
a.
Required:
ny

Using scenario analysis, determine which model should be introduced to the market
ke

under:
(i) Maximisation of expected monetary value. (3 marks)
ea

(ii) The criterion of maximisation of expected utility. (3 marks)

m
So

(c) Compute the maximisation value payable to acquire perfect information under (b)
above. (3 marks)

ANSWER
i) Original sales mix

Product D A Total
Sales unit 1,200 600 1,800
Sales mix 0.67 0.33 1

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Expected /Average contribution margin

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Total fixed cost 117,000+39,000 = 156,000

07
07
In shillings

CMR = D = 150 0.3325

A = 90 0.1485

p
Average CMR 0.4835

Ap
m
co
a.
ii) Sales mix of 1:1
ny

Product
ke

Sales volume unit

ea

Sales mix (50%) 0.5 0.5

m
So

Expected contribution

Total fixed cost 117,000 + 39,000 = 156,000

QUESTION 11
April 2022 Question One D

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BB Ltd. sells two types of products branded "D" and "A". The Financial Controller has

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prepared the following information based on the sales forecast for the period:

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Product D A Total

07
Sales volume (units) 1,200 600

07
Sh. Sh. Sh.
Unit selling price 300 200
Unit variable cost 150 110
Unit contribution 150 90
Total sales revenue 360,000 120,000 480,000
Less: Total variable costs 180,000 66,000 246,000

p
Ap
Contribution to direct and common fixed costs 180,000 54,000 234,000
Less: Direct avoidable fixed costs 90,000 27,000 117,000

m
Operating profit co 90,000 27,000 117,000
Less: Common indirect fixed costs 39,000
a.
Operating profit 78,000
ny

The common fixed costs relate to the costs of common facilities and can only be avoided
ke

if neither of the products is sold. The Managing Director is concerned that the sales may
ea

be less than forecast and has requested information relating to the break-even point for
m

the period.
So

Required:
The break-even point of the two products in units and sales value if they are sold in the:
(i) Original sales mix. (4 marks)
(ii) Sales mix of 1:1 (3 marks)

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ANSWER

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i) Original sales mix

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Product D A Total

07
07
Sales unit 1,200 600 1,800
Sales mix 0.67 0.33 1

Expected /Average contribution margin

p
Total fixed cost 117,000+39,000 = 156,000

Ap
m
co
In shillings
a.
CMR = D = 150 0.3325
ny

A = 90 0.1485
ke

Average CMR 0.4835

ea
m
So

ii) Sales mix of 1:1

Product
Sales volume unit
Sales mix (50%) 0.5 0.5

Expected contribution

Total fixed cost 117,000 + 39,000 = 156,000

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QUESTION 12

07
April 2022 Question Two A

07
Zinc Ltd. is a local manufacturer of three products namely; Exe, Wye and Zed.
The management of the company is unhappy with the current production mix and is
seeking advice on the most optimal arrangement. The current production is 10,000 units
of Exe, 5,000 units of Wye and 6,000 units of Zed.

p
The Management Accountant has provided the following information relating to the three

Ap
products:
Product

m
Details Exe Wye Zed
co
Sh. Sh. Sh.
a.
Selling price per unit 1,200 2,000 2,250
ny

Production costs per unit:

ke

Direct materials 300 900 600

Variable overheads 150 400 450
ea
m

Additional information:
So

1. Each type of product passes through three departments in which a different type of
labour is used. The labour requirements in each department are given below:

Department Rate per hour Labour requirements per unit (hours)

Sh. Exe Wye Zed
1 20 3 4 6
2 40 1 2.5 4
3 30 5 7 9

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2. There is a shortage of labour in department 2 and it is not possible to increase labour

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input hours beyond the level currently utilised.

7
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3. Fixed overheads are budgeted at Sh.5,000,000 per annum and are expected to remain

07
constant.

07
4. A recent market survey disclosed that the maximum sales potential for the company is
12,500 units of Exe, 7,500 units of Wye and 8,000 units of Zed.

Required:
Advise the management of Zinc Ltd. on the most profitable production mix and optimal
profit using:

p
Ap
(i) Limiting factor analysis. (8 marks)
(ii) Throughput accounting. (6 marks)

m
co
ANSWER
a.
a) Limiting factor analysis
ny

Product Exe Wye Ted

ke

Selling price 1,200 2,000 2,250

Less: variable cost (450) (1,300) (1,050)
ea

Labour cost (250) (390) (550)

m

contribution margin 500 310 650

So

Limiting factor 1 2.5 4

CM per limiting factor 500 124 162.5
Rank 1 3 2

Allocation schedule
Rank Product Demand Limiting Units Hours Balance 46,500
Factor produced used
1 Exe 12,500 1 12,500 12,500 34,000
2 Zed 8,000 4 8,000 32,000 2,000
3 Wye 7,500 2.5 800 2000 0

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7
Hours available = Exe = 10,000×1 = 10,000

73
WTE = 5,000×2.5 = 12,500

07
07
ZED = 6,000×4 = 24,000
46,500

Optimal production CM per unit(W) Total Contribution

Exe 12,500 units 500 6,250,000
Wye 800 Units 310 248,000

p
Ap
Zed 8,000 units 650 5,200,000
Less fixed cost (5,000,000)

m
co Total profit 6,698,000
a.
Contribution per unit
ny

Exe = 750 - (3×20 + 40×1 + 5×30) = 500

Wye = 700 - (4×20 + 2.5×40 + 7×30) = 310
ke

Zed = 1,200 - (6×20 + 4×140 + 9×30) = 650

ea
m

ii) Throughput accounting

So

Total Factory Cost : Exe10,000 × 250 = 2,500,000

Wye 5,000 × 390 = 1,950,000
Zed 6000 × 550 = 3,300,000
Variable Overhead: Exe 10,000 × 150= 1,500,000
Wye 5,000 × 400 = 2,000,000
Zed 6,000 × 450 = 2,700,000
Fixed Overhead 5,000, 000
18,950,000

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Products Exe Wye Zed

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Selling price 1,200 2,000 2,250

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Less: Material cost (300) (900) (600)

07
Return per unit 900 1100 1650

07
Department 2(Hear/Unit) 1 2.5 4
Return per hour 900 440 412.5
Rank 1 2 3

Allocating 46,500 hours available

p
Rank Product Demand Required hrs Allocated hrs 46,500 Units

Ap
Balance produced

m
1 Exe 12,500 12,500 12,500 34,000 12,500
2 Wye 7,500
co
18,750 18,750 15,250 7,500
3 Zed 8,000 32,000 15,250 0 38,125
a.
ny
ke

Profit statement
Exe 12,500×900 11,250,000
ea

Wye 7,500×1100 8,250,000

m

Zed 3,812.5×1650 6,290,625

So

Less: Other factory cost Other factory cost (18,950,000

Optimal profit 6,840,625

QUESTION 13
December 2021 Question One A
A company expects to sell 1,000 units per month of a newly launched product but there is
uncertainty as to both the unit selling price and the unit variable cost. The company has
set a target minimum profit of Sh.85,000 per month.

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The following estimates of selling price, variable cost and their related probabilities

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are provided:

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Selling price per unit Probability Variable cost per unit Probability

07
Sh. Sh.

07
200 0.25 80 0.20
250 0.40 100 0.50
300 0.35 120 0.30

There are specific fixed costs of Sh.50,000 per month expected for the new product.

p
Ap
Required:
(i) Expected monthly profit from the new product. (2 marks)

m
(ii) Probability of the company achieving its profit target.
co (6 marks)
a.
ANSWER
ny

Expected Profit
ke

Expected selling price

ea
m

i) Expected variable cost

So

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ii) Probability

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07
07
p
√

Ap
m
co
√
a.
ny
ke

̅
ea
m
So

QUESTION 14
December 2021 Question One B
Babycom Ltd. produces and sells four types of dolls for children. The company also
produces and sells a set of dress kit for the dolls.

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The following estimates for the next financial year have been provided:

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Doll type Estimated Standard Standard Estimated sale

07
demand material cost labour cost price per unit

07
Units Sh. Sh. Sh.
A 50,000 20 15 60
B 40,000 25 15 80
C 35,000 32 18 100
D 30,000 50 20 120
Dress kit 200,000 15 5 50

p
Ap
Additional information:

m
1. To encourage the sale of dress kits, a discount of 20% in its price is offered if it were
co
to be purchased along with the doll. It is expected that all the customers buying the
a.
dolls will also buy the dress kit.
ny

2. The company's factory has effective capacity of 200,000 labour hours per annum on
a single shift basis and it provides all the products on that basis.
ke

3. The labour hour rate is Sh.15 while overtime of labour has to be paid at double the
ea

normal rate.
m

4. Variable costs are at 40% of direct labour cost.

So

5. Fixed costs are estimated at Sh.3,000,000.

Required:
(i) Expected contribution from the four types of dolls and the dress kit. (8 marks)
(ii) The net profit for the organisation as a whole. (4 marks)

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ANSWER

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i)

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07
Doll type Revenue Material cost Labour Variable Contribution

07
X × price X × cost cost overhead
A 3,000,000 1,000,000 750,000 300,000 950,000
B 3,200,000 1,000,000 600,000 240,000 1,360,000
C 3,500,000 1,120,000 630,000 252000 1,498,000
D 3,600,000 1,500,000 600,000 240,000 1,260,000
Dress Lit(W1) 8,450,000 300,000 1,000,000 400,000 4,050,000

p
Ap
Hours = 200-50-40-35-30=45

m
Revenue for dress Kit w1
(45,000×50) + (155,000×50×80%)=8,450,000
co
a.

Hours required
ny

A = 1hr×50=50,000
ke

B = 1hrs ×40=40,000
ea

C = 1.125×35=39,375
Dress = 0.33×200=66,667
m
So

ii) Net profit for the organization

Total contribution 9,118,000

Fixed cost (3,000,000)
Profit 6,118,000

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QUESTION 15

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December 2021 Question Two B

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A plastic moulding company recycles plastic waste to produce plastic chairs. The

07
company has received a three-year contract for the supply of a new model of chairs to be

07
sold by Tumani Supermarket Ltd. through a chain of retail shops.

The following data relate to the cost estimates for the new model of chairs.
Sh.
Plastic waste cost per chair 300
Labour cost per hour 200

p
Ap
Fixed overheads per year 1,250,000
Capital investment 1,600,000

m
co
Additional information:
a.
1. The estimated time to produce the first chair is 10 hours.
ny

2. It is estimated that a learning curve effect of 90% on labour to produce the chairs will
be experienced.
ke

3. The contract requires skilled labour that cannot be increased above the currently
ea

available hours. The available hours will produce 5,000 chairs for the first year.
m

4. Assume that equilibrium of labour hours in the first year will be available in both year
So

2 and year 3.
5. The selling price per chair is set at Sh.900.
6. All cash flows occur at the year end while the initial investment is incurred at the start
of year
7. The capital investment has a nil salvage value at the end of the contract period.
8. The company has a cost of capital of 12%.

Required:
i. Using the Net Present Value (NPV) of the contract, advise the management of the
company on whether to accept or reject the contract. (10 marks)

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ii. State four other factors that the management of the company should consider before

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making the decision in (b) (i) above. (4 marks)

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73
07
ANSWER

07
i) Learning curve

p
Ap
m
co
a.
Year 1
ny
ke
ea

Year 2
m
So

[ ]

Year 3

[ ]

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07
Analysis Table

07
Year 1(5000) 2(6323) 3(6941)
Inflows
Revenue (900×X) 4500,000 5690700 6246900
Out flows -
Plastic waste 300 (1,500,000) (1,896,900) 2082,300

p
Labour cost 200 (2,740,000) (2,740,000) (2,740,000)

Ap
Fixed OH (1,250,000) (1,250,000) (1,250,000)
Cash flows (990,000) (1,926200) 1,746,000

m
PV1Fn12%(1+1.12)-n 0.8929 co 0.7972 0.7118
Present value 883,971 156,411 124,277
a.
ny

Total PVCIF (916105)

ke

PVCOF (1,600,000)
NPV 2,516,105
ea
m

ii) Other factors to consider

So

 Effect on staff morale

 Behaviour of the fixed cost
 Resources availability
 Opportunity cost
 Terms and conditions attached

QUESTION 16
September 2021 Question Three
Sori Ltd. is a company engaged solely in the manufacture of jumpers which are bought
mainly for sporting activities. The current sales are direct to retailers, but in recent years

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there has been a steady decline in output because of increased competition. In the last

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trading year (2020), the accounting report indicated that the company reported the lowest

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profit for the last 10 years.

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The forecast for 2021 indicates that the present deterioration in profits is likely to
continue. The company considers that a profit of Sh.8 million should be achieved to
provide an adequate return on capital.

The managing director has asked that a review be made of the present pricing and
marketing policies. The marketing director has completed this review and passes the

p
Ap
proposals to you for evaluation and recommendation, together with the profit and loss
account for the year ended 31 December 2020.

m
co
Sori Ltd. profit and loss account for the year ended 31 December 2020
a.
Sh."000" Sh."000" Sh."000"
ny

Sales revenue (100,000 jumpers at Sh.1.000 per jumper) 100,000

Factory cost of goods sold:
ke

Direct materials 10,000

ea

Direct labour 35,000

m

Variable factory overheads 6,000

So

Fixed factory overheads 22,000 73,000

Administrative overheads 14,000
Selling and distribution overheads:
Sales commission (2% of sales) 2,000
Delivery costs:
Variable 5,000
Fixed 4,000 11,000 (98,000)
Profit 2,000

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The information to be submitted to the managing director includes the following three

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proposals:

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1. To proceed on the basis of analysis of market research studies which indicate that

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demand for the jumpers is such that a 10% reduction in selling price would increase

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demand by 40%.
2. To proceed with an inquiry that the marketing director has had from a mail order
company about the possibility of purchasing 50,000 units annually if the selling price
is right. The mail order company would transport the jumpers from Sori Ltd. to its
own warehouse and no sales commission would be paid on these sales by Sori Ltd.
However, if an acceptable price can be negotiated, Sori Ltd. would be expected to

p
Ap
contribute Sh.6 million per annum towards the cost of producing the mail order
catalogue. It would also be necessary for Sori Ltd. to provide special additional

m
packaging at a cost of Sh.50 per jumper. The marketing director considers that in
co
2021, the sales from existing business would remain unchanged at 100,000 jumpers
a.
based on a selling price of Sh.1,000 per jumper if the mail order contract is
ny

undertaken.
3. To proceed on the basis of a view by the marketing director that a 10% price
ke

reduction, together with national advertising campaign costing Sh.3 million may
ea

increase sales to the maximum capacity of 160,000 jumpers.

m
So

Required:
(a) Determine the break-even sales value based on the 2020 accounts. (4 marks)
(b) A financial evaluation of proposal (I) above and computation of the number of units
Sori Ltd. would require to sell to earn a target profit of Sh.8 million. (6 marks)
(c) Advise the management of Sori Ltd. on the minimum prices that would have to be
quoted to the mail order company to ensure that Sori Ltd. would at least break-even
on the mail order contract. (6 marks)
(d) A financial evaluation of proposal 3. (4 marks)

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ANSWER

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a) Break even sales

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07
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Variable cost per unit

p
Ap
m
co
b) Proposal 1
a.

Proposed selling price = 100×90% = 900

ny

Expected sales unit = 100,000×140% = 140,000 Jampers

ke

Fixed cost = 40,000

ea
m

Profit Statement
So

Sales Revenue 140,000×900 126,000

Direct material cost (10,000÷100)×140 (14,000)
Direct labour cost (35,000÷100)×140 (49,000)
Variable overhead (6,000÷100)×140 (8400)
Fixed factory overhead (22,000)
Administrative overhead (14,000)
Sales commission (2%×126,000) (2,520)
Delivery cost: Variable (5,000÷100)×140 (7,000)
Fixed (4,000)
Profit 5,080
Variables cost per unit 80,920÷140 = 578
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Sales to earn target profit

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c) At breakeven profit is zero
Sh 000
Sales revenue 50,000× X 50x
Factory cost of goods sold
Direct material (10,000÷100)50 (5,000)
Variable overhead (35,000÷100)50 (17,500)

p
Variable overhead (6,000÷100)50 (3,000)

Ap
Mall order cottage cost (6,000)

m
Special packaging 50x50 co (2,500) (34,000)
Profit 0
a.
ny
ke

d) Proposed price = 1,000×90%=900

ea

Profit statement
m

Sh 000
So

Sales revenue 160,000x900 144,000

Factory cost of good sold
Direct material (10,000÷100)160 (16,000)
Direct labour (35000÷100)160 (56,000)
Variable factory overhead (6000÷100)160 (9,600)
Fixed factory overhead (22,000)
Administrative overheads (14,000)
Selling commission (2%x144,000) ( 2,880)
Delivery cost: Variable (5,000÷100)160 (8,000)
fixed (4,000)

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Advertising cost (3,000)

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Profit 8,520

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QUESTION 17

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May 2021 Question Three A
Ulanda Ltd. is a manufacturing company based in the western part of the country. It has
two divisions.

One of the divisions within Ulanda Ltd. is currently negotiating with another supplier
regarding outsourcing Component A that it manufactures.

p
Ap
The division currently manufactures 10,000 units of the component per annum.

m
co
Total cost of producing Unit cost
a.
10,000 components
ny

Sh."000" Sh.
Direct material "Zed" 1,200 120
ke

Direct labour 1,000 100

ea

Variable manufacturing overhead costs 100 10

m

(Power and utilities)

So

Fixed manufacturing overhead costs 800 80

Share of non-manufacturing overheads 500 50
3,600 360
Additional information:
1. The above costs are expected to remain unchanged in the foreseeable future if Ulanda
Ltd.'s division continues to manufacture the components.
2. The supplier has offered to supply 10,000 components per annum at a price of Sh.300
per unit guaranteed for a minimum athree years.

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3. If Ulanda Ltd. outsources Component A, the direct labour force currently employed in

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producing the components will be made redundant. No redundancy costs will be

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incurred.

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4. Direct materials and variable overheads are avoidable if component A is outsourced.

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5. Fixed manufacturing overheads would be reduced by Sh.100,000 per annum but non-
manufacturing costs would remain unchanged..
6. Assume initially that the capacity that is required for component "A has no alternative
use.
Required:
(i) Advise the management of Ulanda Ltd. on whether the component should be bought

p
Ap
or made. (6 marks)
(ii) Assume now that the extra capacity that will be made available from outsourcing

m
Component A can be used to manufacture and sell 10,000 units of Component B at a
co
price of Sh.340 per unit. All of the labour force required to manufacture Component
a.
A will be used to make Component B. The variable manufacturing overheads, fixed
ny

manufacturing overheads and non-manufacturing overheads will be the same as the

costs incurred for manufacturing Component A. Material Zed required to manufacture
ke

Component A would not be required but additional material Wye required for making
ea

Component B would cost Sh. 130 per unit.

m

Required:
So

Assess whether the division of Ulanda Ltd. should outsource Component A. (6 marks)
ANSWER
Relevant cost of making
Direct material 120
Direct labour 100
Variable OH 10
Manufacturing OH 100,000 10
Relevant cost of making 240
Buying price 300
Comment: They should make the product

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QUESTION 18

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November 2020 Question One C

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Blue Beach Hotel is a 5-star hotel based in Naivasha Town, Kenya. In the onset to the

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Kenya Athletic Federation‘s cross - country championship for the year 2020 due to be
held in Naivasha later in the year, the hotel management has reviewed the hotel‘s
operations with a view to streamlining activities so as to take full advantage of the event.

The management has decided to package the booking options into three as follows:
 Bed only

p
Ap
 Bed and breakfast
 Full board

m
co
The management is aware that the outcome could take any of the following possibilities
a.
for each of the booking options above:
ny

 Full booking
ke

 Moderate booking
 Low booking
ea
m

They have worked the likely payoff amounts for the booking options under each possible
So

outcome as per the table given below:

Events Probability Decision alternatives
Bed only Bed and Breakfast Full board
Sh.“000” Sh.“000” Sh.“000”
Full booking 0.30 24,000 90,000 16,000
Moderate booking 0.50 48,000 44,000 28,000
Low booking 0.20 6,000 8,000 18,000

Required:

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Advise the management of the hotel on the best booking option using the following

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decision theory techniques:

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(i) Expected monetary value (EMV). (3 marks)

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(ii) Expected opportunity loss (EOL). (3 marks)

07
(iii) A research company has offered to give more insight to the hotel management on the
likely booking situations that might arise.

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

ANSWER

p
Ap
i) Expected Monetary Value (EMV)
Sh 000

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

Best option: Bed and breakfast (highest)

ke
ea

ii) Expected Opportunity Loss (EOL)

m

Loss Table sh “000”

So

Outcome Full booking Moderate Low booking EOL

Option
Bed only 66,000 0 12,000 22,200
Bed & Breakfast 0 4,000 10,000 4,000
Full Board 74,000 20,000 0 47,200
Probabilities 0.30 0.50 0.20

Best option: Bed and breakfast (Lowest)

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iii) Value of information (VOI)

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QUESTION 19
November 2020 Question Two A
(i) Describe four benefits of product life cycle costing. (4 marks)
(ii) JAES Ltd. is considering the purchase of a new machine for Sh.3,500,000. The

p
company feels quite confident that it could sell the goods produced by the machine so

Ap
as to yield annual cash surplus of Sh.1,000,000. There is however some uncertainty as
to the machines working life.

m
A recently published trade association survey shows that in total the members of the
co
association own 250 of such machines and have found the lives of the machines to, vary
a.
as provided below:
ny

Machine useful life (years) 3 4 5 6 7

ke

Number of machines 20 50 100 70 10

ea

Assuming a discount rate of 10%, the net present value (NPV) for each different machine
m

life is as follows:
So

Machine useful life (years) 3 4 5 6 7

Net Present Value (Sh.) (1,010,000) (330,000) 290,000 860,000 1,370,000

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

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ANSWER

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i) Benefits of product life cycle costing

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1. All costs (production and non production) will be traced to individual products

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over that complete life cycles and hence individual product profitability can be

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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

p
Ap
term profitability rewarding.
5. It helps management to understand the cost consequences of developing and

m
making a product and to identify areas in which cost reduction efforts are likely to
co
be most effective.
a.
6. More accurate feedback on the success or failure of new products will be
ny

available.
ke

ii) Cost Reduction scheme

ea

Machine life Number of machines Probability NPV ENPV

m

3 20 0.08 (1,010,000) (80,800)

So

4 50 0.20 (330,000) (66,000)

5 100 0.40 (290,000) (116,000)
6 70 0.28 860,000 240,800
7 10 0.04 1,370,000 54,800
250 1 264,800

The management should buy the machine since ENPV is positive

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QUESTION 20

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November 2020 Question Three A

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Discuss the following concepts as applied in management accounting:

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(i) Throughput accounting. (3 marks)

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(ii) Environmental management accounting. (3 marks)

ANSWER
i) Throughput accounting
This can be defined as a simplified accounting system which is based on theory of
constraints. Throughput accounting (TA) makes growth driven management and decision

p
Ap
making simpler and understandable even for the people not familiar with traditional
accounting.

m
co
Throughput accounting offers a simplified way to identify and use the drivers to achieve
a.
the goal, assuming the goal is to make money now and in the future
ny
ke

ii) Environmental management accounting (EMA)

This is the identification, collection, analysis and use of financial and non-financial
ea

information in order to support internal decision making.

m
So

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

QUESTION 21
November 2020 Question Three B
ABC Ltd. intends to review the selling price of one of its products branded ―Reno‖. In the
recent past, the monthly average sales of ―Reno‖ has been 50,000 units at a standard
selling price of Sh.60 per unit.

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An analysis of the expected monthly demand with a price increase of either Sh.5 or Sh.10

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per unit of this product is given below:

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Market condition Probability Estimated demand with price increase of:

07
Sh.5 Sh.10
Optimistic 0.30 55,000 40,000
Most likely 0.50 40,000 25,000
Pessimistic 0.20 30,000 16,000

Additional information:

p
Ap
1. The current unit variable cost is Sh.50. However, it is expected to vary in the next
production period as follows:

m
Economic condition Probability
co Sh.
High 0.20 55
a.
Medium 0.60 52
ny

Low 0.20 47
ke

2. The fixed cost of production is currently at Sh.335,000 per month. It is expected to

ea

vary as follows in the next production period:

m

 Increase by Sh.80,000 with a probability of 0.20

So

 Increase by Sh.60,000 with a probability of 0.60

 Increase by Sh.40,000 with a probability of 0.20

Required:
Using a probability tree simulation:
(i) Determine the selling price that the company should adopt to maximise profitability.
(10 marks)
(ii) 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)

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ANSWER

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i) Selling Price that the company should adopt to maximize profitability

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07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

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

Expected monetary value (EMV)
Node
1 = 155×0.2+320×0.6+594×0.2 = 342

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2 = 5×0.2+125×0.6+325×0.2 = 141

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3 = -95×0.2+-5×0.6+145×0.2 = 7

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4 = 205×0.2+325×0.6+525×.2 = 341

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5 = -20×0.2+55×0.6+180×0.2 = 65

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6 = -155×0.2+-107×0.6+-27×02 = -100.6
7 = 342×0.3+141×0.5+7×0.2 = 174.5
8 = 341×0.3+65×0.5+-100.6×0.2 = 114.68

Decision: sell the product at sh 65

p
Ap
ii) Probability to break even

m
Increase by Sh 5 co
Standard deviation
a.

√∑ ̅
ny
ke
ea
m
So

CM = 65 - 51.6 = 13.4

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07
P = 0.5+0.0438

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P = 0.5438

Increase by Sh 10
Standard deviation

√∑ ̅

p
Ap
m
co
a.

√
ny
ke
ea

̅
m
So

CM = 70 - 51.6 = 18.4

P = 0.5+0.0160
P = 0.5160

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QUESTION 22

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November 2020 Question Four A

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Sawasawa Ltd. manufactures 3 units of product ―Zed‖ per day. The sale of this product

07
depends upon demand which has the following distribution:

07
Sales (units) Probability
270 0.10
280 0.15
290 0.20
300 0.35

p
Ap
310 0.15
320 0.05

m
co
Additional information:
a.
1. The production cost and the sales price of each unit are Sh.4,000 and Sh.5,000
ny

respectively.
2. Any unsold unit is to be disposed of at a loss of Sh.1,500 per unit.
ke

3. There is a penalty of Sh.500 per unit if the demand is not met.

ea

4. The following random numbers are given:

m

10, 99, 65, 99, 95 01, 79, 11, 16 and 20.

So

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

ANSWER
Estimation of total profit or loss for Sawasawa Ltd for the next 10 yrs
Probability distribution
Units Probability Cumulative Probability Range
270 0.10 0.10 00-09
280 0.15 0.25 10-24

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290 0.20 0.45 24-44

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300 0.35 0.80 45-79

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310 0.15 0.95 80-94

07
320 0.05 1.00 95-99

07
NB: Production per day is 300 units not 3
Simulation Worksheet
Trials Production Demand unsold Shortage Revenue Production Shortage Disposal profit
cost cost cost

p
1 300 10 280 20 - 1,400,000 1,200,000 - 30,000 170,000

Ap
2 300 99 320 - 20 1,500,000 1,200,000 10,000 - 290,000
3 300 65 300 - - 1,500,000 1,200,000 - - 300,000

m
4 300 99 320 - 20 1,500,000 1,200,000
co 10,000 - 290,000
5 300 95 320 - 20 1,500,000 1,200,000 10,000 - 290,000
a.
6 300 01 270 30 - 1,350,000 1,200,000 - 45000 105,000
ny

7 300 79 300 - - 1,500,000 1,200,000 - - 300,000

ke

8 300 11 280 20 - 1,400,000 1,200,000 - 30,000 170,000

9 300 16 280 20 - 1,400,000 1,200,000 - 30,000 170,000
ea

10 300 20 280 20 - 1,400,000 1,200,000 - 30,000 170,000

m

2,255,000
So

QUESTION 23
November 2020 Question Four C
Blade Ltd. uses decision tree analysis to evaluate potential projects. The Company has
been exploring the launch of a new product which it believes has a 70% probability of
success. The company is however considering undertaking an advertising campaign
costing Sh.500,000 which would increase the probability of success to 95%. If successful,
the product would generate income of Sh.2,000,000 otherwise Sh.700,000 would be
received.

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Required:

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Using decision tree, advise the management of Blade Ltd. on the maximum amount of

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cash that the company should be prepared to pay for advertising. (4 marks)

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ANSWER
Decision tree

p
Ap
m
co
a.
ny
ke
ea
m
So

EMV = 1……………….. 2×0.95+0.7×0.05=1.935

2…………………2×0.7+0.7×0.05=1.61
VOI = 1.935 - 1.61 = 325,000

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QUESTION 24

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November 2019 Question One B

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Justify why in the short term some costs and revenues are not relevant for decision

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making. (3 marks)

07
ANSWER
Why some short term cost and revenue are not relevant for decision making
In making short-run decisions, not all cost and revenue data is relevant. The cost data
relevant for decision-making is referred to as relevant costs and that which is not useful
for decision-making is non-relevant costs. On the revenue side, the only relevant revenue

p
Ap
is the incremental & differential revenue.

m
QUESTION 25 co
November 2019 Question One C
a.
Fairdeal Ltd. uses a third party delivery service to deliver goods to customers. The
ny

current average cost per delivery is Sh.125. Fairdeal Ltd. is considering establishing an
in-house delivery service. A number of factors could affect the average total cost per
ke

delivery for the in-house delivery mode.

ea
m

The table below shows the possible average total cost and the probability of each one
So

occurring for the in-house delivery mode:

Average total cost (Sh.) Probability
105 0.05
107 0.10
110 0.08
121 0.12
125 0.14
126 0.16
142 0.12
156 0.18

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158 0.05

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Required:

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

07
(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 Sh.125 per
delivery, assuming the manager is:
(i) Risk neutral.
(ii) Risk averse.

p
Ap
(iii) Risk seeker. (9 marks)

m
ANSWER co
i) Expected value of the average total cost based on the above probability
a.
distribution
ny

Costs Probability Expected value (exp) =√ Prob

̅
ke

(x) (P)
105 0.05 5.25 (105-130)2 0.05 = 31.25
ea

107 0.10 10.7 (107-130)2 0.10=52.67

m

110 0.08 8.8 (110-130)2 0.08=31.84

So

121 0.12 14.52 (121-130)2 0.12=9.61

125 0.14 17.5 (125-130)2 0.14 = 3.43
126 0.16 20.16 (126-130)2 0.16=2.5
147 0.12 17.04 (147-130)2 0.12 = 17.42
156 0.18 28.08 (156-130)2 0.12=17.42
158 0.05 7.9 (158-130)2 0.05=39.34
Total 1 130 310.12

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

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Standard deviation = √

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Coefficient of variation (CV) = x 100%

07
07
Decision maker Measure used Decision taken
Risk neutral Expected value Sh. 130
Risk averse Std deviation Sh. 126

p
Risk taker Std deviation Sh. 156

Ap
QUESTION 26

m
November 2019 Question Two A co
QHY Ltd. manufactures a product branded "Tamu". To manufacture a unit of Tamu,
a.
three ingredients are required namely; A, B and C. Currently, QHY Ltd. is operating at its
ny

full capacity of 28,000 machine hours. The product is manufactured in batches of 20

ke

litres. The current production data is provided as follows:

Cost per batch
ea

Ingredient Machine hours per batch Variable Fixed Total

m

Sh. Sh. Sh.

So

A 6 200 60 260
B 10 220 70 290
C 12 240 180 420
Cost of assembly 320 130 450

Sh. Sh. Sh.

Total cost per batch 1,420
Profit mark-up 280
Selling price 1,700

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Additional information:

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1. During discussion on the budget for the year ending 31 December 2020, the sales

07
manager estimated that sales volume might grow either by 50% or 75% provided the

07
required machine capacity is available.
2. While assembly capacity could be increased and meet the projected growth in
demand, the machine capacity of 28,000 hours cannot be increased. Therefore, in
order to take advantage of the buoyant market, the management is considering the
purchase of one of the three ingredients.
3. The following quotation has been received from an external supplier:

p
Ap
Ingredient Price per batch (20 litres)

m
[Link]
A 290
a.
B 320
ny

C 390
4. The management of QHY Ltd. has decided to buy only one ingredient in any one
ke

financial period.
ea
m

Required:
So

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)

ANSWER
Evaluate which ingredient and the quantity of the ingredient to be outsourced
Evaluating which ingredient to be outsourced and quantity to be outsourced

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Ingredient Total hours required at capacity of:

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100%=1,000 150%=1,500 175%=1,750

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A 6×1,000= 6,000 6×1,500= 9,000 6×1,750= 10,500

07
B 10×1,000= 10,000 10×1,500= 15,000 10×1,750= 17,500
C 12×1,000= 12,000 12×1,500= 18,000 12×1,750= 21,000
Total hours required 28,000 42,000 49,000
Hours Available 28,000 28,000 28,000
Shortfall 0 14,000 21,000

p
Ap
Determining contribution margin
Product External price Variable cost Contribution margin

m
A 290 co 200 290-200=90
B 320 220 320-220=100
a.
C 390 240 390-240=150
ny
ke

A B C
ea

Machine hours per unit 6 10 12

m

CM per machine hour 90÷6=15 100÷10=10 150÷12=12.5

So

Rank 1 3 2

i) Allocation schedule when allocation increases by 50%

Ranks Product Demand Hours per Hours Units Hours Balances
unit used produced (28,000)
1 A 1,500 6 9,000 1,500 19,000
2 C 1,500 12 18,000 1,500 1,000
3 B 1,500 10 1,000 100 0

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ii) Allocation schedule when allocation increases by 75%

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Ranks Product Maximum Hours Hours Units Hours Balances

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Demand per unit used produced (28,000)

07
1 A 1,750 6 10,500 1,750 17,500

07
2 C 1,750 12 17,500 1,458 0
3 B 1,750 10 0 100 0

Conclusion
Increase Ingredient to outsource Units to outsource
50% B 1,400

p
Ap
75% B 292
C 1,750

m
co
QUESTION 27
a.
May 2019 Question One C
ny

Marima Ltd. is considering introducing two new products in the market.

ke

The company has the following options:

ea
m

Option 1: Introduce both products.

So

Option 2: Introduce either of the products.

Option 3: Introduce none of the products, depending on their performance in the
market.

An analysis of the product's likely performance indicates the probability of a good

performance as 30%, fair performance as 50% and poor performance as 20%. The sales
revenue depending on the state of nature is as shown below:

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State of nature

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Good performance Fair performance Poor performance

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(S1) (S2) (S3)

07
Decision Sh."million" Sh."million" Sh."million"

07
Neither 0 0 0
Product 1 only 30 15.6 7.2
Product 2 only 25.2 14.4 7.2
Both 52.8 8.8 3.2

p
Required:

Ap
(i) For each decision, determine the expected monetary value. (4 marks)

m
(ii) Advise the management of Marima Ltd. on the action to take assuming that Rima Ltd.
co
could supply perfect information at a cost of Sh.5 million. (4 marks)
a.
ny

ANSWER
ke

i) Expected Monetary Value

EMV
ea

Decision EMV (Payoff × Prob)

m

Neither =0
So

Product 1 only 30×0.3 + 15.6× 0.5+7.2×0.2=18.24

Product 2 only 25.2×0.3 +14.4×0.5+7.2 × 0.2 = 16.2
Both 52.8×0.3+8.8×0.5 + 3.2×0.2 =

Decision: Introduce both product

(ii) Advise to management of Marima Ltd. on the action to take assuming that Rima
Ltd. could supply perfect information at a cost of Sh.5 million
Value of instruction (VOI)

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Advice: Mariana ltd should therefore not pay to acquire information since the fees

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charged of 5m is too high as compared with Sh 4.2.

07
07
QUESTION 28
May 2019 Question Four B
Bidii Ltd. operates a single retail outlet which sells directly to the public. The profit
statement for the months of March 2019 and April 2019 are provided as follows:

p
March April

Ap
Sh."000" Sh."000"
Sales 8,000 9,000

m
Cost of sales co(5,000) (5,500)
Gross profit 3,000 3,500
a.
Expenses:
ny

Selling and distribution costs (800) (900)

ke

Administrative costs (1,500) (1,500)

Net profit 700 1 100
ea
m
So

Required:
i) Using the high-low points technique, identify the behaviour of cost of sales, selling
and distribution costs and administrative costs. (6 marks)
ii) Draw a contribution break-even chart and identify the monthly break-even sales value
and area of contribution. (4 marks)
iii) Assuming a margin of safety equal to 30% of the break-even value, calculate Bidii
Ltd.'s annual profits. (2 marks)
iv) Bidii Ltd. is now considering opening another retail outlet selling the same product.
The company plans to use the same profit margins in both outlets and has estimated
that the specific costs of the second outlet will be Sh.10,000,000 per annum. Bidii

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Ltd. also expects that 10% of its annual sales from its existing outlet would transfer to

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this second outlet if it were to be opened.

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73
07
Required:

07
Annual value of sales required from the new outlet in order to achieve the same profit as
previously obtained from the single outlet. (4 marks)

ANSWER
i) Behaviour of cost of sales, selling and distribution costs and administrative costs
using high-low points technique

p
Ap
m
co
a.
ny
ke
ea
m
So

Selling and distribution

Administrative cost

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0
89
7
73
07
07
ii) Contribution break-even chart and identify the monthly break-even sales value
and area of contribution
March April
Sales 8,000 9,000

p
Cost of sales (4,000) (4,500)

Ap
Gross profit 4,000 4,500
Variable cost

m
Selling & distribution (800) (800)
co
Administration costs (0) (0)
a.
Contributions 3,200 3,600
ny

Fixed costs
ke

Cost of sales (1,000) (1,000)

ea

Selling and distribution (1,500) (1,500)

Profit 700 1,100
m
So

iii) Value Bidii Ltd.'s annual profits assuming a margin of safety equal to 30% of
the break-even

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iv) Annual value of sales required from the new outlet in order to achieve the same

07
profit as previously obtained from the single outlet

07
At point of indifference

p
Ap
m
QUESTION 29 co
May 2018 Question One
a.
A company manufacturing roof tiles has been considering the likely demand for the tiles
ny

over the next six years. The demand pattern is estimated as follows:
ke

High demand for six years 0.5

Low demand for six years 0.3
ea

High demand for three years followed by low demand for three years 0.2
m
So

Additional information:
1. There is no probability of a low demand followed by a high demand.
2. Enlargement of capacity will be required and the following options are available:

 Option A: Install a fully automatic facility immediately at a cost of Sh. 10.8

million.
 Option B: Install a semi-automatic facility immediately at a cost of Sh.8 million.

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 Option C: Install a semi-automatic facility immediately as in Option 13 above and

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upgrade to a fully automatic facility at an additional cost of Sh.4 million in three

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years time provided demand has been high for the three years.

07
07
3. The returns expected under the three capacity options and demand levels are
estimated as follows:

Option If demand is high If demand is low

A Sh.3.2 million per annum Sh. 1.2 million per annum

p
B Sh. 1.8 million per annum Sh. 1.6 million per annum

Ap
C Upgrade Sh.2.2 million per annum for three Sh.0.6 million per annum for
years three years

m
No upgrade Sh.1.0 million per annumco Sh.1.6 million per annum for
annum for three years three years
a.
ny

Required:
ke

a) A decision tree representing the above information. (8 marks)

b) Advise the company on which capacity option to take given that the objective is to
ea

maximise expected monetary value (EMV). (12 marks)

m

(Total: 20 marks)
So

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ANSWER

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a) A decision tree representing the above information

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73
07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

Working for payoff

High Demand for 6 years 3.2 × 6 = 19.2M
Option A How Demand for 6 years 1.2 M × 6 = 7.2M
H.D for 3 years & LD for 3 years (3.2 × 3+1.2×3) = 13.2M
HD for 6 years 1.8×6 = 10.8M
Option B
LD for 6 years 1.6 × 6 = 9.6M

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H.D for 3 years & LD for 3 years 1.8×3+1.6×3) = 10.2M

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Option C HD for 3 years provided HD for 3 years 1.8 ×3+2.2×3) = 12M

07
Upgrade HD for 3 years provided HD for 3 years 1.8 ×3+0.6×3) = 7.2M

07
Option C HD for 3 year provided HD for 3 years (1.8 × 3 +1×3) = 8.4
No Upgrade HD for 3 years provided HD for 3 years (1.8×3+1.6×3) = 10.2

b) Advise to the company on which capacity option to take given that the objective is
to maximise expected monetary value (EMV)

p
Expected Monetary Value (EMV)

Ap
Node
1 (19.2×0.5+7.2×0.3+13.2×0.2) - 10.8 = 3.6

m
2 (10.8×0.5+9.6×0.3+10.2×0.2) - 8 co = 2.32
3 (12×0.5+7.2×0.5) - 4 = 5.6
a.
4 (8.4×0.5+10.2×0.5) = 9.3
ny

5 Higher between 3 and 4 (9.3-8) = 1.3

ke

6 Higher between 1,2,3 which is 3.6M

ea

The company should choose option A i.e. install fully automatic facility
m
So

QUESTION 30
May 2018 Question Two A
Explain the following, costs as used in decision making:
(i) Avoidable costs. (2 marks)
(ii) Sunk costs. (2 marks)
(iii) Differential costs. (2 marks)

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ANSWER

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89
Explanation of the following, costs as used in decision making

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73
i) Avoidable cost

07
Is a cost that can be eliminated by not engaging in or no longer performing an activity

07
ii) Sunk cost
They are cost which has already been incurred and therefore cannot be avoided
iii) Differential cost
Is the difference in costs between two alternatives that may be adopted. The cost is
used where there are multiple possible options to pursue and a choice must be made to
select one option only.

p
Ap
QUESTION 32

m
May 2018 Question Three B co
Describe two models that could be used by a management accountant to scan risks in
a.
their operating environment. (4 marks)
ny
ke

ANSWER
Models that could be used by a management accountant to scan risks in their
ea

operating environment
m

 Sensitivity analysis: This involves identifying the key factors which affects the
So

profitability, then subject them to adverse change in isolation to determine their

sensitivity change to the company profit.
 SWOT analysis: This is a model used to analysis strength, weakness,
opportunities and weakness. Business undertakes SWOT analysis to understand its
internal and external environment. Through such analysis strength and weakness
can be matched with opportunities and threats
 PESTEL analysis: This involves determining the factors which exist in the
environment such as political economical, social factors, technology, ecological
and legal factors. This enables the organization to develop policies which will

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enables the organization to develop policies which will enable the organization to

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maximize objective.

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07
QUESTION 33

07
November 2017 Question One A
Tripa Ltd. is a company that specialises in the production of umbrellas. For the year
ending 31 December 2018, the company is planning to produce special promotional
umbrellas branded "Jumbo". Tripa Ltd. wishes to determine the optimal number of
umbrellas that should be produced.

p
Ap
Additional information:
1. If all the umbrellas are sold within the year 2018, they would be sold at Sh.900

m
each. co
2. If the company is unable to sell all the umbrellas within the year 2018, then they
a.
would be sold in the following year at Sh.300 per umbrella.
ny

3. The production cost per umbrella amounts to Sh.400.

4. The demand for the umbrellas depends on the performance of the economy which
ke

is highly unpredictable.
ea
m

The following are the possible states of economy:

So

Economy Probability Demand (Number of umbrellas)

Good 0.30 500,000
Average 0.46 350,000
Poor 0.24 300,000

5. Tripa Ltd has to decide to produce the umbrellas at one of the states of the
economy in order to match forecast demand.
6. The opportunity cost of not selling an umbrella that is demanded is Sh.100.

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Required:

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i) Construct a pay-off table showing all the possible outcomes. (6 marks)

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ii) Advise the management of Tripa Ltd. on the optimal level of production based on the

07
expected value, maximax and maximin criteria. (9 marks)

07
ANSWER
i) Pay-off table showing all the possible outcomes
Outcomes (Good) 500,000 (Average) 35,000 (Poor) 300,000
Options

p
500,000 250,000 160,000 130,000

Ap
350,000 160,000 175,000 145,000
300,000 130,000 145,000 150,000

m
Probability 0.30
co 0.46 0.24
a.
ny

Option Outcome Payoff = Revenue - Cost

ke

500 Good (500×900) - (500×400) = 250,000

Average (350×900) + (150×300) - (500×400) = 160,000
ea

Poor (300×900) + (200×300) - (500×400) = 130,000

m

350 Good (350×900) - (350,400) – (150×100) = 160,000

So

Average (350×900) - (350×400) = 175,000

Poor (350×900) + (50×300) - (350×400) = 145,000
300 Good (300×900) - (300×400) - (200×100) = 130,000
Average (300×900) - (300×400) - (50×100) = 145,000
Poor (300×900) - (300×400) = 150,000

ii) Advise to the management of Tripa Ltd. on the optimal level of production based
on the expected value, maximax and maximin criteria

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Expected Value (EMV)

0
89
7
73
500,000 units = 250×0.3+160×0.46+130×0.24 =

07
350,000 units = 160×0.3+175×0.46+145×0.24 = 163,300

07
300,000 units = 130×0.3+145×0.46+150×0.24 = 141,700
Optimal level is 500,000 units

Maximax Criteria
500,000 units = Best of best

p
350,000 units = 175,000

Ap
300,000 units = 150,000
Optimal level is 500,000 units
Maximin Criteria
m
co
500,000 units = 130,000
a.

350,000 units = Best of the worst

ny

300,000 units = 130,000

ke

Optimal level is 350,000 units

ea

QUESTION 34
m

November 2017 Question One B

So

Sori Ltd. produces and sells three products; A, B and C. Sori Ltd. has contracts to supply
products A and B which will utilise all the specific materials that are available to make
these two products during the next period.

The revenue that these contracts will generate and the contribution to sales (C/S) ratios of
products A and B are as follows:
Product A Product B
Revenue Sh.l0 million Sh.20 million
C/S ratio 15% 10%

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Additional information:

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1. Product C will generate a contribution to sales (C/S) ratio of 25%.

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2. The total fixed costs of Sori Ltd. are Sh.5.5 million during the next period.

07
3. The management have budgeted to earn a profit of Sh.1 million.

07
Required:
The revenue that needs to be generated from product C for Sori Ltd. to achieve the
budgeted profit. (5 marks)

ANSWER

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

m
Revenue to be generated by product c co
Total contribution from product
a.
ny
ke
ea
m
So

QUESTION 35
November 2017 Question Four A
Bipo Ltd. is planning to launch a new product into the market. In order to determine the
introduction selling price of the product, a market research was undertaken. The

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following information has been obtained from the research under two possible selling

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prices; Sh.300 and Sh.350 per unit:

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73
07
Selling price per unit Sh.300 Selling price per unit Sh.350

07
Probability Sales volumes Probability Sales volume
(units) (units)
0.4 120,000 0.3 108,000
0.5 110,000 0.3 100,000
0.1 140,000 0.4 94,000

p
Ap
Additional information:
1. The variable production cost would be Sh.120 per unit for production volumes up to

m
and including 100,000 units each year. However, if production exceeds 100,000 units
co
each year, the variable production cost per unit would fall to Sh.110 for all units
a.
produced.
ny

2. Advertising costs would be Sh.9,000,000 per annum at a selling price of Sh.300 and
Sh.9,700,000 per annum at a selling price of Sh.350.
ke

3. Fixed production costs would be Sh.4,500,000 per annum.

ea
m

Required:
So

Advise the management of Bipo Ltd. on the optimal selling price per unit for the new
product. (11 marks)

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ANSWER

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89
Advise the management of Bipo Ltd. on the optimal selling price per unit for the

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new product.

07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

EMV
Node

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

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QUESTION 36

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May 2017 Question One A

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Furahia Ltd., an events management company is considering whether to advertise an

07
outdoor concert. The sale of tickets is dependent on the weather, as indicated below;

07
 If the weather is poor, it is expected that 5,000 tickets will be sold without
advertising. There is a 70% chance that the weather will be poor.
 If the weather is good, it is expected that 10,000 tickets will be sold without
advertising. There is a 30% chance that the weather will be good.
 If the concert is advertised and the weather is poor, there is a 60% chance that
advertising will stimulate further demand and ticket sales will increase to 7,000.

p
Ap
 If the concert is advertised and the weather is good, there is a 25% chance that
advertising will stimulate further demand and ticket sales will increase to 13.000.

m
co
The profit expected before deducting the cost of advertising at different levels of ticket
a.
sales are as follows:
ny
ke

Number of tickets sold Profit

Sh. "000"
ea

5,000 (20,000)
m

6,000 (5,000)
So

7,000 35,000
8,000 55,000
9.000 70,000
10,000 90,000
11,000 115,000
12,000 130,000
13,000 150,000

The cost of advertising the concert is expected to be Sh.15,000,000.

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Required:

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89
Using a decision tree, advise the management of Furahia Ltd. on whether the outdoor

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concert should be advertised. (12 marks)

07
07
ANSWER
Tree Diagram

p
Ap
m
co
a.
ny
ke
ea
m
So

Node
1. 35×0.6 + -20×0.4 = 13
2. 150×0.25 + 90×0.75 = 105
3. (13×0.7 + 105×0.3) – 15 = 25.6
4. -20×0.7 + 90×0.3 = 13
5. Higher between node 3 and 4

Firelua Ltd should advertise the concert since it has the highest profit of 25.6 as
compared with 13m when the concert is not advertised.
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QUESTION 37

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May 2017 Question One B

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73
Samoa Ltd. has to decide which of the three new mutually exclusive products; X. Y and

07
Z, to launch. The company's directors believe that the demand for the three products will

07
vary depending on competitor's reaction. There is a 30% chance that the competitor's
reaction will be strong, a 20% chance that the competitor's reaction will be normal and a
50% chance that the competitor's reaction will be weak. The company uses expected
value to make this type of decision.
The net present values of the possible outcomes are as follows:
Product X Product Y Product Z

p
Ap
Competitor's reaction Sh. "000" Sh. "000" Sh. "000"
Strong 400 800 1,200

m
Normal 600
co 1,200 800
Weak 1,000 1,600 1,000
a.
A market researcher believes that he could provide perfect information on potential
ny

competitor's reaction in the above market.

ke

Required:
ea

Advise the management of Samoa Ltd. on the maximum amount that should be paid for
m

the information from the market researcher. (8 marks)

So

ANSWER
Maximum amount that should be paid for the information from the market
researcher
Pay off table sh “000”
Outcomes Strong Normal Weak EMV
Options
Product x 400 600 1,000 740
Product y 800 1,200 1,600 1,280
Product z 1,200 800 1,000 1,020
Probability 0.3 0.2 0.5

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EMV

0
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7
73
07
07
p
QUESTION 38

Ap
May 2017 Question Four A
A pizza vendor buys pieces of pizza every morning at Sh.450 each by placing an order

m
one day in advance and sells them at Sh.700 each.
co
a.
Unsold pizza could be sold the following day at Sh.200 per piece and thereafter if still
ny

unsold the pizza is treated as waste.

ke
ea

The pattern of demand of the pizza is given below:

m

Fresh pizza:
So

Daily sale 100 101 102 103 104 105 106 107 108 109 110
Probability 0.01 0.03 0.04 0.07 0.09 0.11 0.15 0.21 0.18 0.09 0.02

One day old pizza:

Daily sale 0 1 2 3
Probability 0.70 0.20 0.08 0.02

Additional information:
1. The vendor adopts the rule that, if there is no stock of pizza at the end of the
previous day, an order of 110 pieces is placed, otherwise an order of 100 or 105

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pieces is placed whichever is nearest to the actual fresh pizza sale on the previous

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day.

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2. Use the following set of random numbers:

07
Fresh pizza 37 73 14 17 24 35 29 37 33 68

07
One day old pizza 17 28 69 38 50 57 82 44 89 60

Required:
Starting with zero stock and a pending order of 105 pieces of pizza, simulate the
transactions for 10 days and determine the vendor's profit or loss. (10 marks)

p
Ap
ANSWER
Monte Carlo (Fresh pizza)

m
co
Daily Sales Probability Cummulative Probability Range
a.
100 0.01 0.01 00-00
ny

101 0.03 0.04 01-03

102 0.04 0.08 04-07
ke

103 0.07 0.15 08-14

ea

104 0.09 0.24 15-23

m

105 0.11 0.35 24-34

So

106 0.15 0.50 35-49

107 0.21 0.71 50-70
108 0.18 0.89 71-88
109 0.09 0.98 89-97
110 0.02 1.00 98-99

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Montecarlo (one day old pizza)

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Daily sales Probability Cummulative probability Range

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0 0.70 0.70 00-69

07
1 0.20 0.90 70-89

07
2 0.08 0.98 90-97
3 0.02 1.00 98-99

Simulation table
Day R/no fresh demand quantity closing order day R/No. sale waste

p
of stock sold stock initiated old old of

Ap
fresh stock pizza old
pizza pizza

m
1 37 105 106 105 0
co 110 0 17 0 0
2 73 110 108 108 0 110 2 28 0 0
a.
3 14 110 103 103 2 105 7 69 0 2
ny

4 17 105 104 104 7 105 1 38 0 7

ke

5 24 105 105 105 1 105 0 50 0 1

6 35 105 106 105 0 110 0 57 0 0
ea

7 29 110 105 105 0 110 5 82 0 0

m

8 37 110 106 106 5 105 4 44 0 5

So

9 33 105 105 105 4 105 0 89 1 3

10 68 105 107 105 0 110 0 60 0 0

Determining profit
Sale of fresh pizza 1,051×700 735,700
Sale one day old pizza 1×200 200
Total sales 735,900
Cost of pizza sold (1,052×450) 473,400
Cost of spoilt pizza =(18×450) (8,100)
Profit 254,400

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0
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QUESTION 39

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May 2017 Question Four B

07
Vesto Ltd. intends to launch a new product into the market. The management of the

07
company is uncertain of some variables namely; selling price, variable cost and the
annual sales volume of the product.

The following information relates to the possible values of the above variables and their
associated probabilities:
Selling price per unit Prob Variable cost per unit Prob Sales volume Prob

p
Ap
Sh. Sh. (Units)
700 0.20 350 0.10 20,000 0.20

m
875 0.50 co 550 0.50 30,000 0.40
900 0.30 600 0.40 40,000 0.40
a.
ny

NB: ‗Prob‘ stands for probability

ke

Additional information:
ea

1. The sales volume is the estimated annual sales.

m

2. The uncertain variables are independent of one another.

So

Required:
Simulate the scenario above to determine the average annual contribution of the product.

Use the following random numbers: 80, 60, 43, 63, 21, 40, 36, 05, 69, 16, 73, 86, 28, 31,
61, 57, 39,96,49, 77, 26, 95, 82, 72. (10 marks)

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ANSWER

0
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Ways of aligning business operations with environmental issues

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 Measuring environmental performance especially for statutory reasons and demand

07
from other organizations

07
 Involving management accountant in a strategic approach to environmental related
management accounting and performance evaluation
 Integrating the environment into capital expenditure decisions eg considering
environmental friendly projects
 Introducing waste minimization scheme

p
Ap
QUESTION 40
November 2016 Question One A

m
Business organisations are required to factor in environmental concerns in their decision
co
making.
a.
ny

Describe four ways of aligning business operations with environmental issues. (8 marks)
ke

ANSWER
ea

Monte carlo
m

Selling price
So

Price Probability Cummulative Probability Range

700 0.20 0.20 00-19
875 0.50 0.70 20-69
900 0.30 1.00 70-99

Variable cost
Cost Probability Cummulative Probability Range
350 0.10 0.10 00-09
550 0.50 0.60 10-59
600 0.40 1.00 60-99

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Sales volume

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Sales volume Probability Cummulative Probability Range

07
20,000 0.20 0.20 00-19

07
30,000 0.40 0.60 20-59
40,000 0.40 1.00 60-99

Simulation table
Trials Selling price Variable Contribution Sales volume Total CM

p
cost margin

Ap
Rn Amount Rn Cost Rn Volume
1 80 900 60 600 300 43 30,000 9,000,000

m
2 63 875 21 550 co 325 40 30,000 9,750,000
3 36 875 05 350 525 69 40,000 21,000,000
a.
4 16 700 73 600 100 86 40,000 4,000,000
ny

5 28 875 31 550 325 61 40,000 13,000,000

ke

6 57 875 39 550 325 96 40,000 13,000,000

7 49 875 77 600 275 26 30,000 8,250,000
ea

8 95 900 82 600 300 72 40,000 12,000,000

m

Total 90,000,000
So

QUESTION 41
November 2016 Question Three
Best deal Ltd. has developed a new product and is currently considering the marketing
and pricing policy that it should employ for the product. Specifically, it is considering
whether the sales price should be set at Sh.150 per unit or at a higher price of Sh.240 per
unit. Sales volume and respective probabilities at these two prices are as follows:

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Sales price of Sh.150 Sales price of Sh.240

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Forecast sales volume Probability Forecast sales volume Probability

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20,000 0.1 18,000 0.1

07
30,000 0.6 16,000 0.3

07
40,000 0.3 20,000 0.3
24,000 0.3
Additional information:
1. Fixed production cost of the venture will be Sh.380,000.
2. The level of advertising and publicity costs will depend on the sales price and the
market aimed for. With a sales price of Sh. 150 per unit, the advertising and

p
Ap
publicity costs will amount to Sh.120,000. With a sales price of Sh.240 per unit,
these costs will amount to Sh.1,220,000.

m
3. Labour and variable overhead costs will amount to Sh.50 per unit produced.
co
4. Each unit produced requires 2 Kgs of raw materials and the basic cost is expected to
a.
be Sh.40 per Kg. However, the suppliers of the raw materials are prepared to lower
ny

the price in return for a firm agreement to purchase a guaranteed minimum quantity.
If Best deal Ltd. contracts to purchase at least 40,000 Kgs, then the price will be
ke

reduced to Sh.37.5 per Kg for all purchases. If Best deal Ltd. contracts to purchase a
ea

minimum of 60,000 Kgs, then the price will be reduced to Sh.35 per Kg for all
m

purchases. It is only if Best deal Ltd. guarantees either of the above minimum levels
So

of purchases in advance that the appropriate reduced prices will be effected.

5. If Best deal Ltd. was to enter into one of the agreements for the supply of the raw
materials and was to find that it did not require to utilise the entire quantity of
materials purchased, then the excess could be sold. The sales price will depend upon
the quantity that is offered for sale. If 16,000 Kgs or more is sold, the sales price
will be Sh.29 per Kg for all sales. If less than 16,000 Kgs are offered, the sales price
will only be Sh.24 per Kg.
6. Irrespective of the amount sold, the costs incurred in selling the excess raw
materials per kg. will be as follows:
Sh.

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Packaging 3.00

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Delivery 4.50

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Insurance 1.50

07
07
7. Best deal Ltd.'s management team feels that losses are undesirable while high
expected monetary values are desirable.
8. Therefore, it is considering the utilisation of a formula that incorporates both aspects
of the outcome to measure the desirability of each strategy. The formula to be used
to measure desirability is:

p
Ap
Desirability = L + 3 E

m
Where; L = The lowest outcome of the strategy.
co
E = The expected monetary value of the strategy.
a.
ny

The higher this measure is, the more desirable the strategy.
ke

The marketing manager seeks your advice, as the management accountant, to assist in
ea

deciding on the appropriate strategy.

m
So

Required:
a) Prepare statements showing the various expected outcomes of each of the choices open
to Best deal Ltd. (14 marks)

b) Advise the management of Best deal Ltd. on the best choice of strategies if the
company's objective is to:

i) Maximise expected monetary value. (2 marks)

ii) Minimise the harm done to the firm if the worst outcome of each choice was to occur.
(2 marks)

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iii) Maximise the score on the above mentioned measure of desirability. (2 marks)

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(Total: 20 marks)

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ANSWER

07
Determining contribution margin for each price

07
Sh 150 Sh 240
No Contract Contract No Contract Contract
Contract 40,000 60,000 Contract 40,000 60,000
Selling price 150 150 150 240 240 240
Material cost (2×40) (80) (75) (70) (80) (75) (70)

p
Labour& variables cost (50) (50) (50) (50) (50) (50)

Ap
CM per unit 20 25 30 110 115 120

m
Realizable value on sale of excess material co
More than Less than
a.
16,000 Kg 16,000 Kg
ny

Selling price 29 24
ke

Less P: selling cost (3+4.4+1.5) (9) (9)

Realisable value 20 15
ea
m

Determining pay offs

So

Selling of price 150 sh

Units 000 Sh 000
No contract 20 20×20 - (380+120) = -100
30 20×30 - 500 = 100
40 20×40 - 500 = 300
40,000 kg 20 25×20 - 500 = 0
30 25×30 - 500 = 250

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40 25×40 - 500 = 500

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60,000kg 20 30×20 – 500 - 20×15 = -200

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30 30×30 - 500 = 400

07
40 30×40 - 500 = 700

07
Selling price of Sh 240
Units 000 Sh 000
No contract 18 110×18 - 1,600 = 380

p
Ap
16 110×16 - 1,600 = 160
20 110×20 - 1,600 = 600

m
24 110×24 - 1,600
co = 1,040
40,000kg 18 115×18 - 1,600 - 90 = 150
a.
16 115×16 - 1,600 - 180 = 60
ny

20 115×20 - 1,600 = 700

24 115×24 - 1,600 = 1,160
ke

60,000kg 18 120×18 - 1,600 – 360 = 200

ea

16 120×16 - 1,600 – 420 = -100

m

20 120×20 - 1,600 - 300 = 500

So

24 120×24 - 1,600 - 240 = 1,040

Payoff table at selling price of sh 150

Outcome
Option 20,000 30,000 40,000
No contract -100 100 300
Contract 40,000 kg 0 250 500
Contract 60,000 kg -200 400 700
Probability 0.1 0.6 0.3

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Pay off table at selling price of Sh 240

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Outcome

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Option 18,000 16,000 20,000 24,000

07
No contract 380 160 600 1,040

07
Contract 40,000 kg 150 60 700 1,160
Contract 60,000 kg 200 -100 500 1,040
Probability 0.1 0.3 0.3 0.3

Expected Monetary Value EMV

p
At selling price of sh 150

Ap
m
co
a.
At selling price of Sh 240
ny
ke
ea
m

b) Advise the management of Best deal Ltd. on the best choice of strategies if the
So

company's objective is to:

i) Maximise Expected Monetary Value

The highest EMV access at the selling price of sh 240 with material purchase quantity of
40,000 kg.
ii) Minimise the harm done to the firm if the worst outcome of each choice was to
occur
In order to minimize the worst possible outcome, the sales price is Sh 150 and with no
contract.

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iii) Maximise the score on the above mentioned measure of desirability

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Maximize score using desirability measure

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07
Measure = L+3E

07
Strategy Contract EMV (E) Worst Outcome L+3E
(Kgs) Sh 000 (L) Sh 000 Sh 000
150 None 140 -100 320
40,000 300 0 900
60,000 430 -200 1,090

p
240 None 578 160 1,894

Ap
40,000 591 60 1,833
60,000 452 -100 1,256

m
co
The best choice is sales price of Sh. 240 and no contract for raw materials
a.
ny

QUESTION 42
ke

May 2016 Question Two

The Raha Resort, which is privately owned, is a world famous luxury hotel and cricket
ea

complex. It has been chosen as the venue to stage "The Ribon Cup-, a cricket tournament
m

which is contested by teams from across the world. The tournament is scheduled to take
So

place during the month of December 2016. The resort will offer accommodation for each
of the five nights that guests would require accommodation.

The following information is available regarding the period of the tournament:

1. Hotel data:
Total number of rooms 2,400
Rooms mix:
 Double rooms 75%
 Single rooms 15%
 Family rooms 10%

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Fees per room per night (Sh.):

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 Double rooms 4,000

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 Single rooms 3,000

07
 Family rooms 6,000

07
Number of guests per room:
 Double rooms 2
 Single rooms 1
 Family rooms 4
Note: When occupied, all rooms will contain the number of guests as above.

p
Costs:

Ap
Variable cost per guest per night Sh. 1,000
Attributable fixed costs for the five-day period:

m
 Double rooms Sh.5,160,000
co
 Single and family rooms (total) Sh.3,000,000
a.

2. Accommodation for guests is provided on an all-inclusive basis (meals, drinks and

ny

entertainment).
ke

3. The hotel management expects all single and family rooms to be "sold out" for each
ea

of the five nights of the tournament.

4. However, they are unsure whether the fee in respect of double rooms should be
m

increased or decreased. At a price of Sh.4,000 per room per night they expect an
So

occupancy rate of 80% of available double rooms. For each Sh.100

increase/decrease, they expect the number of rooms to decrease/increase
respectively by 40.
5. The objective of the hotel management is to maximise profit.

Required:
a) i)The fees that should he charged per double room per night in order to maximise
profits during the tournament. (6 marks)

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ii) The profit that would be earned from staging the tournament as a consequence of

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charging the fee determined in (a)(i) above. (4 marks)

7
73
07
b) The management of the hotel is concerned about the level of variable costs per guest

07
per night to be incurred in respect of the tournament. A recent review of proposed
operational activities has concluded that variable cost per guest per night in all rooms
in the hotel would be reduced by 20% if proposed changes in operational activities
were made.

However, this would result in additional attributable fixed costs amounting to

p
Ap
Sh.2,000,000 in respect of the five-day period.

m
Required: co
Advise the management whether, on purely financial grounds, they should make the
a.
proposed changes in operational activities. (6 marks)
ny

c) Discuss two initiatives that the management might consider in order to further improve
ke

the profit from staging the cricket tournament. (4 marks)

ea

Total: 20 marks)
m

ANSWER
So

a) The fees that should he charged per double room per night in order to maximise
profits during the tournament
Room mix
Category Proportion Number of rooms
Double rooms 75% 75%×2,400 = 1,800
Single rooms 15% 15%×2,400 = 360
Family room 10% 10%×2,400 = 240

At price of Sh. 4,000 per double room, Occupancy rate is

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Since the price and rooms are universally related

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73
07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

ii) Profit to earn

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Revenue

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Category No of rooms Fees per room No of nights Total revenue

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73
Double room 1,120 4,800 5 26,880,000

07
Single 360 3,000 5 5,400,000

07
Family room 240 6,000 5 7,200,000
39,480,000

Cost
Categories Guest × Rooms × Nights × Cost Per Guest Total

p
Double Room 2×1,120×5×1,000 11,200,000

Ap
Single 1×360×5×1,000 1,800,000
Family 4×240×5×1,000 4,800,000

m
17,800,000
co
a.
Profit
ny

Revenue 39,480,000
ke

Variable cost (17,800,000)

ea

Fixed cost (5,160+3,000) (8,160,000)

Net profit 13,520,000
m
So

b) (i) The fees that should he charged per double room per night in order to
maximise profits during the tournament
When variable cost reduces by 20%, the cost of double rooms will be

Thus the price charged will change since room

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ii) The profit that would be earned from staging the tournament as a consequence of

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charging the fee determined

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Profit analysis

07
Category No of rooms Fees per room No of night Total

07
Double rooms 1,200 4,600 5 27,600,000
Single rooms 360 3,000 5 5,400,000
Family rooms 240 6,000 5 7,200,000
40,200,000

p
Cost analysis

Ap
Categories Guest × Rooms × Night × Variable Cost Total
Double Room 2×1200×5×800= 9,600,000

m
Single Room 1×360×5×800= co 1,440,000
Family Room 4×240×5×800= 3,840,000
a.
Fixed Cost (5,160+3,000+2,000) 10,160,000
ny

25,040,000
ke
ea

The management should implement the proposed changes since profit will increase
m

will increase by 1640,000.

So

c) Initiatives that management should consider in order to further improve the

profit from staging the cricket tournament
 Extensive advertising to open areas around the cricket field
 Allowing food and drink vendors into the field areas at a fee
 Marketing the event in advance so as to secure full booking for all room categories
in advance

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QUESTION 43

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May 2016 Question Three A

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Sawasawa Ltd. is a fitness centre serving traders within the Central Business District

07
(CBD). Currently, the centre has 4,000 members with each member paying a subscription

07
fee ofSh.35,000 per annum.

The centre comprises of a gym, a swimming pool and a small exercise area.

A competitor plans to open a new fitness centre within the same locality. This is expected
to cause a decrease in membership numbers for Sawasawa Ltd. unless its facilities are

p
Ap
upgraded.

m
Consequently, Sawasawa Ltd. is considering the following options in a bid to improve its
co
membership numbers:
a.
ny

Option 1
No upgrade. In this case, membership numbers would be expected to fall to 3,250 per
ke

annum for the next four years.

ea

Operational costs would remain unchanged at the current level of Sh.4,500 per member
m

per annum.
So

Option 2
Upgrade the exercise area. The capital cost of this upgrade would be Sh.18,000,000. The
expected effect on membership numbers for the next four years is as follows:

Probability Effect on membership numbers

0.3 Remain at their current level of 4,000 members per annum.
0.7 Increase to 4,800 members per annum.
The effect on operational costs for the next four years is expected to be:

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Probability Effect on operational costs

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0.4 Increase to Sh.6,000 per annum per member.

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0.6 Increase to Sh.8,000 per annum per member.

07
07
Any improvements are expected to last for four years.

Required:
i) Using the expected monetary value (EMV) criterion, recommend the decision that
Sawasawa Ltd. should make. (8 marks)
ii) Advise on the maximum price that Sawasawa Ltd. should pay for perfect information

p
Ap
about the upgrade of the exercise area. (4 marks)

m
ANSWER co
i) Decision, that Sawasawa Ltd. should make based on the Expected Monetary
a.
Value (EMV) criterion
ny
ke
ea
m
So

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Node

7
73
07
07
The management of Sawasawa Ltd should upgrade the facility since it has the maximum

p
EMV

Ap
ii) The maximum price that Sawasawa Ltd. should pay for perfect information

m
about the upgrade of the exercise area co
Value of information
a.
ny
ke

QUESTION 44
ea

November 2015 Question One

m

Zomau Ltd. is in the process of setting a selling price for one of its products.
So

Three prices are under consideration; Sh.40, Sh.43 and Sh.44 per unit.
The following information is also provided about future demand for the product under
different market conditions:

Demand (in units) under the three prices

Market condition Sh.40 Sh.43 Sh.44
Best possible 18,000 16,000 14,500
Most likely 16,000 14,500 14,000
Worst possible 12,000 10,000 8,000

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Fixed costs are estimated to be Sh.240,000 and the variable cost per unit is Sh.20.

7
73
07
Required:

07
Advise the company on the best possible price to set for the product on the basis of the
following decision making criteria:
(a) Maximax decision rule. (4 marks)
(b) Maximin decision rule. (4 marks)
(c) Laplace criterion of rationality. (4 marks)
(d) Minimax criterion. (4 marks)

p
Ap
(e) Advise Zomau Ltd. whether it is worth acquiring perfect information, assuming that
the cost of obtaining the information is Sh.3,167. (4 marks)

m
co
ANSWER
a.
Best possible price to set for the product on the basis of the following decision
ny

making criteria
ke

Outcome Best Possible Most Likely Worst Possible

Option
ea

40 120,000 80,000 0
m

43 128,000 93,500 -10,000

So

44 108,000 96,000 -48,000

Working

40 - B = (40-20)18,000 - 240,000 = 120,000

M = (40-20)16,000 - 240,000 = 80,000
W = (40-20)12,000 - 240,000 = 0

43 - B = (43-20)16,000 - 240,000 = 128,000

M = (43-20)14,500 - 240,000 = 93,500

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W = (43-20)10,000 - 240,000 = -10,000

0
89
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44 B = (44-20)14,500 - 240,000 = 108,000

07
M = (44-20)14,000 - 240,000 = 96,000

07
W = (44-20)8,000 - 240,000 = -48,000

a) Maximum Decision Rule

Options Maximum output
Sh. 40 120,000

p
Sh. 43 Best price sh 43

Ap
Sh. 44 108,000

m
b) Maximum Decision Rule co
Options
a.
Sh. 40 = Best price Sh 43
ny

Sh. 43 = -10,000
ke

Sh. 44 = -48,000
ea

c) Laphase rule / Average rule

m

Options
So

Sh. 40 = (120,000+80,000+0)÷3 = 66,667

Sh. 43 = (128,000+93,500+-10,000)÷3 = Price 43
Sh. 44 = (108,000+96,000+-48,000)÷3 = 52,000

d) Minimax Criterion
Options
Sh. 40 = 120,000
Sh. 43 = 128,000
Sh. 44 = Best price sh 44

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e) Value Information

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7
73
07
EMV with information

07
EMV without information (Laphase)

p
Ap
It is worth acquiring information since cost of obtaining information of Sh. 3,167

m
is lower than value of information of 4,167
co
a.
QUESTION 45
ny

November 2015 Question Three B

ke

Tamu Catering Services seized a market opportunity to supply ready meals to XYZ
Airlines. The meals are served to passengers as part of inflight services under two
ea

categories namely; economy class and business class. An analysis of results for the
m

financial year ended 31 October 2015 for each category are shown below:
So

Economy class Business class

Number of meals (million) 3.5 7
Sh."million" Sh."million"
Sales 350 980
Costs:
Ingredients (variable) 175 560
Labour (fixed) 70 140
Administrative (fixed) 110 220
Total costs 355 920
Profit/(loss) 5 60

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0
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Additional information:

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73
1. The unit costs and prices applicable to this business have been stable and are expected

07
to remain as such for the foreseeable future.

07
2. The cost of ingredients are identifiable directly to each category.
3. Other costs (labour and administrative) are common to both categories and have been
allocated to the two categories in proportion to the total number of meals sold each
year.
4. The business could expand beyond its present volume without incurring any increase
in fixed costs. The fixed costs would also not change if either of the categories was

p
Ap
abandoned.

m
Required: co
(i) The total sales required to break-even. (6 marks)
a.
(ii) The total sales required to earn a revenue of Sh.300 million (4 marks)
ny
ke

ANSWER
i) The optimal safety stock
ea

CVP Analysis
m
So

Contribution margin (M) = Selling price – Variable cost

Total Fixed Cost =70+140+110+220=540

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7
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07
07
p
Ap
a) The total sales required to Breakeven

m
co
a.
ny
ke

b) The total sales required to earn revenue of Sh.300 million

ea

Sales to earn target revenue of Sh.300 million in units

m
So

Sales to earn target revenue of Sh.300 million in shillings

QUESTION 46
September 2015 Pilot Paper Question Three B
The management accountant might use opportunity cost in the following situations:
(i) Non routine decisions such as accept or reject special offer.
(ii) Make or buy decisions.

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(iii) Setting of transfer prices from one division to another.

0
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7
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Required:

07
Discuss giving examples the use of opportunity cost in each of the above cases.(5 marks)

07
ANSWER
The use of opportunity cost
Opportunity cost – refers to be benefit foregone for not considering a green option.

i) Non routine decisions such as accept or reject special offer

p
Ap
Opportunity cost is used to evaluate special pricing in
 Contribution that could be earned if normal price was charged

m
 Effect on staff morale co
 Effect on existing customer goodwill
a.
ii) Make or buy decisions
ny

 To determine effect on staff morale

ke

 Alternative use of the resources that could become idle

ea

iii) Setting of transfer prices from one division to another benefit last for denying to
m

sell to external market.

So

QUESTION 47
September 2015 Pilot Paper Question Five B
The management accountant of Rebitech Ltd. is preparing budgets for the coming period.

The following data is available for last year:

1. Sales Sh.40,000,000
Variable costs 60% of sales
Fixed cost Sh.14,000,000

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2. He is worried that costs will rise next year. The inflation rates and probabilities of

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occurrence are provided as follows:

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07
Average inflation Probability
4% 0.2
6% 0.5
8% 0.3

3. Inflation will affect all variable costs and fixed costs except depreciation which will

p
Ap
remain constant at Sh.300,000 per annum and rent (fixed lease rental) at
sh.3,000,000 per annum.

m
co
4. The sales manager has informed the accountant that it might be difficult to raise the
a.
selling price despite inflation.
ny

He estimates sales demand at current price as follows:

ke

Sales Probability
ea

Sh.
m

Pessimistic 40,000,000 0.3

So

Most likely 44,000,000 0.4

Optimistic 52,000,000 0.3

Required:
(i) Probability of at least breaking even. (3 marks)
(ii) Probability of achieving a profit of at least Sh.4,000,000. (3 marks)

ANSWER
i) Probability of at least breaking even
Working

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 Expected inflation rate

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 Expected sales (x)

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07
 Expected variable cost with inflation

 Fixed cost
(14,000,000-300,000-3,000,000)×1.062] = 11,363,400

p
Add: constant fixed cost (3+0.3) = 3,300,000

Ap
Total fixed cost 14,663,400
 Profit = Revenue – Cost (π)

m
co
 Standard Deviation of sales value
a.

√ ̅
ny
ke

√
ea
m
So

i) Probability to break even

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ii) Probability of achieving a profit of at least Sh.4,000,000

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07
07
QUESTION 48

p
Ap
May 2015 Question One B
If George Oketch is a pineapple trader at Ukulima Market. He buys pineapples at Sh.40

m
each and sells them for Sh.100 each. co
a.
He donates any pineapples not sold at the end of the day to a children's home. He has
ny

approached you to assist him in determining the number of pineapples that he should buy
each day in order to maximise his operating income.
ke
ea

For you to give him informed advice, you requested him to give you the average daily
m

demand which he provided as follows:

So

Daily demand
Number of pineapples Probability
0 0.05
100 0.20
200 0.40
300 0.25
400 0.10
Required:
Advise George Oketch on the following:

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(i) The number of pineapples to buy on a daily basis in order to maximise his operating

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income. (8 marks)

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(ii) The amount of money he should be willing to pay you to give him a perfect prediction

07
concerning the daily demand. (6 marks)

07
ANSWER
i) The number of pineapples to buy on a daily basis in order to maximise his
operating income
Decision making
Workings

p
Ap
Options Outcome Revenue – Cost= Profit
100 0 0×100 - 100×40 = -4,000

m
100 100×100 -100×40 = 6,000
co
200 100×100 -100×40 = 6,000
a.
300 100×100 -100×40 = 6,000
ny

400 100×100 - 100×40 = 6,000

ke

200 0 0×100 - 200×40 = -8,000

100 100×100 - 200×40 = 2,000
ea

200 200×100 - 200×40 = 12,000

m

300 200×100 - 200×40 = 12,000

So

400 200×100 - 200×40 = 12,000

300 0 0×100 - 300×40 = -12,000
100 100×100 - 300×40 = -2,000
200 200×100 - 300×40 = 8,000
300 300×100 - 300×40 = 18,000
400 300×100 - 300×40 = 18,000
400 0 0×100 - 400×40= - 16,000
100 100×100 - 400×40 = -6,000
200 200×100 - 400×40 = 4,000

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300 300×100 - 400×40 = 14,000

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400 400×100 - 400×40 = 24,000

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Payoff Table

07
Outcome 0 100 200 300 400
Option
0 0 0 0 0 0
100 -4,000 6,000 6,000 6,000 6,000
200 -8,000 2,000 12,000 12,000 12,000

p
300 -12,000 -2,000 8,000 18,000 18,000

Ap
400 -16,000 -6,000 4,000 14,000 24,000
Probability 0.05 0.20 0.40 0.25 0.1

m
co
a.
ny

Options
ke

0= =0
100 = -4000×0.05 + 6,000×0.2 + 6,000×0.4 + 6,000×0.25 + (6,000×0.1 = 5,500
ea

200 = -8×0.05 + 2×0.2 + 12×0.4 + 12×0.25 + 12×0.1 = 9,000

m

300 = -12×0.05 + (-2×0.2 + 8×0.4 + 18×0.25 + 18×0.1 = 8,500

So

400 = -16×0.5 + -6×0.2 + 4×0.4 + 14×0.25 + 24×0.1 = 5,500

Comment based on Emv, we select the highest which is 9,000, therefore George
Should by 200 pineapple.

ii) The amount of money he should be willing to pay you to give him a perfect
prediction concerning the daily demand

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QUESTION 49

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May 2015 Question Three B

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You have been appointed to head the management accounting department of XYZ Ltd.

07
The company is in the process of making a decision on pricing of one of its products.

07
Additional information:
During the year 2014, XYZ Ltd. sold 80,000 units at a price of Sh. 10 each. The total cost
per unit was Sh.6 of which Sh. 4 was variable.
For the year ending 31 December 2015, the following cost and demand estimates have
been made:

p
Ap
m
State Probability Variable cost per unit
co Change in total fixed cost
Sh.
a.
Pessimistic 0.2 5.0 Increase by 40%
ny

Most likely 0.3 4.5 Increase by 25%

Optimistic 0.5 4.0 Increase by 10%
ke
ea

Demand estimates
m
So

Demand (units) Demand (units)

State Probability If unit price = Sh. 14 If unit price = Sh. 17
Pessimistic 0.2 42,000 35,000
Most likely 0.3 60,000 55,000
Optimistic 0.5 65,000 62,000

If XYZ Ltd. decides to maintain the current price, the variable and fixed costs are
expected to vary as shown in note (2) above.

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Required:

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(i) Recommend the price that should be adopted by the company on the basis of

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profitability. (8 marks)

07
(ii) Determine the break even number of units at the selling price you have

07
recommended in (b)above. (4 marks)

ANSWER
i) The price that should be adopted by the company on the basis of profitability

CVP analysis

p
Ap
Determining fixed cost

m
co
a.
Expected fixed cost
ny
ke
ea

Price of 14 = (42,000×0.2+60,000×0.3+65,000×0.5) = 58,900

m
So

Price of 17(35,000×0.2+55,000×0.3+62,000×0.5) = 54,500

Price to Adopt
Price Profit =(selling price – variable) units - fixed
Sh 10 (10-4.35) 80,000-192,800 = 259,200
Sh 14 (14-4.5) 58,900-192,800 = 375,585
Sh 17 (17-4.35)54 500-192,800 = 496,625

The entity should sell the product at price of sh. 17 since it yields the highest
profit.

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ii) The break even number of units at the selling price above

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07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

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TOPIC 4

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PRICING DECISIONS

07
QUESTION 1
December 2023 Question Five
Simplex Group Ltd., manufacturers new patented electric motorcycles.

p
The group has two divisions, Robox Division and Safari Division. Robox Division

Ap
manufactures a ―dual electric battery‖ which is the key component for Safari Division.
Safari Division is an assembly and distribution division for electric motorcycles. Robox

m
Division sells the dual electric batteries to Safari Division and to external customers.
co
The following budgeted data is provided for both Robox Division and Safari Division:
a.
ny

Budgeted data: Robox Division Safari Division

ke

Sh. Sh.
Selling price per electricity battery 65,000
ea

Selling price per motorcycle 300,000

m

Variable costs per unit:

So

Manufacturing cost per electric battery 47,000

Assembly cost per motor cycle 105,000
Fixed cost per annum:
Fixed manufacturing cost 750,000,000 1,050,000,000
Units Units
Production capacity 220,000 electric batteries
Internal transfers to Safari Division 120,000 electric batteries
External sales demand 180,000 electric batteries 60,000 motorcycles

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Additional information:

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1. Safari Division uses two electric batteries manufactured by Robox Division to

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assemble one motorcycle and sells motorcycles directly to external customers.

07
2. Internal transfer price is set at opportunity costs.

07
3. Robox Division must satisfy the demand of Safari Division before selling the dual
electric batteries externally.
4. Safari Division is allowed to purchase dual electric batteries from Robox Division or
from external supplies.
5. Safari Division is considering two purchasing options:
Option 1: Buy all the electric batteries it requires from Robox Division

p
Ap
Option 2: Outsource from a cheaper external supplier who has offered to supply all
120,000 electric batteries at a price of Sh.45,000 electric batteries each to

m
Safari Division. co
a.
Required:
ny

(a) In columnar format, prepare operating statement showing the:

(i) Net profit for each division if Option 1 is adopted. (6 marks)
ke

(ii) Net profit for each division and Simplex Group Ltd. as a whole if Option 2 is
ea

adopted. (6 marks)
m
So

(b) Robox Division has received a special order from a new customer for the production
of 40,000 electric batteries. The manager of Robox Division requires an annual target
profit for the division amounting to Sh.6,410,000,000. This order will have no effect
on the divisional fixed costs and no impact on the 180,000 electric batteries Robox
Division sells to its existing customers.

Calculate the minimum transfer price per electric battery to sell the 40,000 electric
batteries to the new customer that would enable the manager of Robox Division to
achieve the target profit. (4 marks)

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(c) Evaluate FOUR non-financial environmental impact overriding factors to consider

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before accepting Option 2. (4 marks)

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07
07
ANSWER
a) Income statement

Robox division Safari division

Sales –External (W1) 6,500,000,000 18,000,000,000
Internal (W2) 7,800,000,000 -

p
Total Sales 14,300,000,000 18,000,000,000

Ap
Less:Variable cost (W3) 10,340,000,000 (6,300,000,000)

m
Transfer price - (7,800,000,000)
Fixed cost
co
750,000,000 (1,050,000,000)
Net profit 3,210,000,000 2,850,000,000
a.
ny
ke

Working:
Sales→External → Robox division = (220-120) × 65,000 = 6,500,000,000
ea

→ Safari division = 60,000 × 300,000 = 18,000,000,000

m

Internal sales → = 120,000 × 65,000 = 7,800,000,000

So

Variable cost → Robox = 220,000 × 47,000 = 10,340,000,000

Variable cost →Safari = 60,000 × 105,000 = 6,300,000,000

ii) Option 2 Net profit

Robox division Safari division Simplex Group
Sales –External (W1) 14,300,000,000 18,000,000,000 32,300,000,000
Less: Variable cost (W2) 10,340,000,000 (6,300,000,000) (16,640,000,000)
External Purchases (W3) - (5,400,000,000) (5,400,000,000)
Fixed cost 750,000,000 (1,050,000,000) (1,800,000,000)
Net profit 3,210,000,000 5,250,000,000 8,460,000,000

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7
Working:

73
07
Sales→ External → Robox division = 220 × 65,000 = 14,300,000,000

07
→ Safari division = 60,000 × 300,000 = 18,000,000,000
Variable cost → Robox = 220,000 × 47,000 = 10,340,000,000
Variable cost → Safari = 60,000 × 105,000 = 6,300,000,000
External Purchases = 120,000 × 45,000 = 5,400,000,000

p
b) Determining minimum transfer price per electric battery

Ap
Target profit 6,410,000,000

m
Add: Fixed cost 750,000,000 co
Target contribution 7,160,000,000
a.
ny
ke
ea
m
So

c) Non financial environmental impact overriding factors to consider before

accepting option 2
1. Strategic partnership
2. Supply chain ethics
3. Reliability of the external supply
4. Environmental sustainability
5. Effect of staff morale

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QUESTION 2

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August 2023 Question Two C

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Aloe Vera Group has two operating divisions; Aloe division and Vera division. Aloe

07
division produces a high quality fabric that is used in making curtains. The budgeted cost

07
per unit of the fabric is made up as follows:

Variable costs: Sh.

Direct labour 33
Direct material 77

p
Marginal cost 110

Ap
Fixed costs:
Production overheads 100

m
Full cost 210 co
a.
Additional information:
ny

1. The budgeted output for Aloe division is 450,000 units each year and the market price
ke

for the fabric is Sh.250 per unit.

2. Vera division makes curtains and uses 1.1 metres of this fabric to make one curtain.
ea

The budgeted output for Vera division is 200,000 units of curtains.

m

3. The management of Aloe Vera Group insists that Aloe division must sell to Vera
So

division as much of the fabric as is required to meet its needs and any surplus output
can then be sold to external customers.
4. The management of Aloe Vera Group also insists that Vera Division must buy all its
requirements for this fabric from Aloe division.
5. Vera division sells its output at Sh.310 per unit. In addition to the cost of fabric, it
incurs fixed costs at the rate of Sh.40 per unit of the budgeted output.

Required:
The budgeted profit for both Aloe division and Vera division, assuming a transfer pricing
policy is based on:

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(i) Marginal costing transfer pricing. (6 marks)

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(ii) Market based transfer pricing. (6 marks)

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07
ANSWER

07
Budgeted profit using marginal costing transfer pricing
Marginal cost means variable cost

Budgeted profit or loss

Aloe Vera
Sale - External (W1) 62,500,000 62,000,000

p
- Internal (W2) 22,000,000 -

Ap
Total sales 84,500,000 (62,000,000)

m
Less: Variable cost (W3) (49,500,000) -
Transfer price
co- (22,000,000)
Fixed cost (W4) (45,000,000) (8,000,000)
a.

(10,000,000) 32,000,000
ny
ke

Working
ea

W1 Sales – External – Aloe = (450,000 - 200,000)=250,000 × 2500 = 62,509,000

m

Vera = 200,000 × 310 = 62,000,000

So

W2 -Internal – Aloe = 200,000 × 110 = 22,000,000

W3 Variable cost = 450,000 × 110 = 49,500,000
W4 Fixed cost = Aloe division = 450,000 × 100 = 45,000,000
Vera division = 200,000 × 40 = 8,000,000

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ii) Market based transfer pricing

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7
Budgeted profit or loss

73
Aloe Vera

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07
Sale – External 62,500,000 62,000,000
Internal (W1) 50,000,000 -
Total sale 112,500,000 62,000,000
Less: Variable cost (49,500,000) -
Transfer price - (50,000,000)
Fixed cost (450,000,000) (8,000,000)

p
Profit 18,000,000 4,000,000

Ap
m
Working co
a.
ny

QUESTION 3
ke

April 2023 Question one A (i)

ea

Explain TWO advantages of each of the following policies as used in management

accounting:
m

(i) Transfer pricing policy. (4 marks)

So

ANSWER
a) Explain two advantages of each of the following policies
i) Transfer pricing policy
Advantages
1. Facilitate goal conveyance- When properly designed, transfer pricing policies align
the goal of individual divisions with the overall objective of the company.
2. Tax planning – Transfer pricing policy enables companies to optimize tax liabilities
by adjusting transfer prices to allocate profits in the tax efficient manner across
different jurisdictions
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3. Enhances autonomy and motivation - Encourages autonomy among divisions as

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they are treated as separate profit centres. This motivates managers to make optimal

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decisions for their units

07
4. Resource allocation - It facilitate better allocation as managers are aware of the

07
cost associated with internal transactions, leading to informed decision making.

QUESTION 4
April 2023 Question Three A
Evaluate THREE objectives of internalised transfer pricing mechanism. (6 marks)

p
Ap
ANSWER
Objective of internal used transfer pricing mechanism

m
1. Goal Congruence – this is where departments operate differently in order to
co
achieve company‘s objective at the whole company i.e. each department should act
a.
in the manner that would lead to the realization of the overall goal.
ny

2. Performance Evaluation- this involves appraising department managers. It mostly

done on the basis of the profit reported by a department
ke

3. Autonomy – This refers to the independence of a department from the others. A

ea

transfer price should ensure that the particular department earns a profit to be
m

autonomous financially and the department manager should have their freedom of
So

determining the transfer price

4. Legal obligation- the transfer price determined should help the firm to comply with
the legal requirement such as taxation and custom duty. It should not be designed in
the manner which will penalize the company.

QUESTION 4
August 2022 Question Three A
Division X is a profit centre which produces four products namely; A, B, C and D. Each
product is also sold in the external market.

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The data for the period ended 30 June 2022 is as follows:

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Product

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A B C D

07
Market price per unit (Sh.) 150 146 140 130

07
Variable cost of production per unit (Sh.) 130 100 90 85
Labour hours required per unit 3 4 2 3

Additional information:
1. Product D can be transferred to Division Y, but the maximum quantity that may be
required for transfer is 2,500 units only.

p
Ap
2. The maximum sales in the external market are as follows:
Units

m
A 2,800 co
B 2,500
a.
C 2,300
ny

D 1,600
3. Division Y can purchase the same product at a price of Sh.125 per unit from external
ke

suppliers instead of receiving transfer of product D from Division X.

ea
m

Required:
So

The transfer price for each of the 2,500 units of product D, if the total labour hours
available in Division X are 20,000 hours. (10 marks)

ANSWER
Minimum transfer price-Variable cost per unit +opportunity cost
Product A B C D
Miximum demand (units) 2,800 2,500 2,300 2,500
Labour per unit 3 4 2 3
Total labour hours required 8,400 10,000 4,600 7,500

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7
Hours Available 20,000

73
Hours required (30500)

07
07
Shortfall hours 10,500

Contribution per limiting factor/per direct labour hours

Product A B C D
Selling price 150 146 140 130

p
Unit cost (130) (100) (90) (85)

Ap
Contribution per unit 20 46 50 45
Labour hours 3 4 2 3

m
Cm per unit 6.67 11.5 co 25 15
Rank 4 3 1 2
a.
ny

Allocation of labour hours

ke

Rank Product Demand Labour Unit Hours Balance

ea

hours produced used

2,000 – 4,600 = 15,400
m

1 C 2,300 2 2,300 4600

So

2 D 2,500 3 2,500 7500 15,400 - 7,500 = 7,900

3 B 2,500 4 =1,975 7900 7,900 - 7,900 = 0

4 A 2,800 3 - - -

Minimum transfer price

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Division Y can purchase the same product at Sh 125 from external supplier i.e

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07
Therefore, the transfer price should be 100 as this would save division Y Sh 62,500

07
QUESTION 5
April 2022 Question Four B
Magunga Ltd. has two divisions, namely; division A and division B. Division A produces
Product X which it sells to external market and also to Division B. Divisions in Magunga

p
Ltd. are treated as profit centres and they are given autonomy to set transfer prices and

Ap
choose their suppliers. The performance of each division is measured on the basis of the
target profit given for each period.

m
co
Division A can produce 100,000 units of Product X at full capacity. Demand for Product
a.

X in the external market is 70,000 units only at a selling price of Sh.250 per unit. To
ny

produce Product X, division A incurs Sh.160 as variable cost per unit and total fixed
ke

overheads of Sh.4,000,000. Division A has employed Sh.12,000,000 as working capital

ea

which is financed by a cash credit facility provided by its lender bank at the rate of 11.5%
per annum. Division A has been given a profit target of Sh.2,500,000 for the year.
m

Division B has found two other suppliers; C Ltd. and H Ltd. who agreed to supply
So

Product X. Division B has requested a quotation for 40,000 units of Product X from
Division A.

Required:
(i) Determine the transfer price per unit of Product X that Division A should quote in
order to meet the target profit for the year. (8 marks)
(ii) Calculate the price that Division A should quote to Division B if Magunga Ltd.'s
policy was to quote transfer prices based on opportunity cost. (6 marks)

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ANSWER

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b) i) Transfer price

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07
07
Quotation for the 40,000 units of product should be such that it meets division A‘s
target profit and interest on working capital

Sh
Target profit for the year 2,500,000
Add: Latest on working capital (11.5%×12,000,000) 1,380,000

p
Required profit 3,880,000

Ap
Add: Fixed cost 4,000,000

m
Target contribution 7,880,000
co
Less: Contribution from external sales(250-160)60,000 5,400,000
contribution required from internal sales 2,480,000
a.
ny
ke
ea
m
So

ii) Transfer price based on opportunity cost

If division A has to quote 40,000 units to division B it has to give up sales of 10,000
units to external market (division A)

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07
07
QUESTION 6
December 2021 Question Two A
Explain the following terms as used in strategic management accounting:
i. Life-cycle costing. (3 marks)
ii. Target costing. (3 marks)

p
Ap
ANSWER

m
i. Life cycle costing co
This is pricing method where all costs that the producer expects to incur over the lifespan
are compiled together. It‘s a process of estimating how much money/ cost will be spent
a.

on the product ever the course of its useful life.

ny
ke

ii. Target costing

ea

This is a costing method where a market research is carried out to determine the price
m

which the customers are willing to buy the item or to pay for the product.
Target cost = Market price – desired profit
So

QUESTION 7
September 2021 Question four A
Explain three differences between "standard costing" and "target costing". (6 marks)

ANSWER
Differences between standard costing and target costing
1. Standard cost is a costing method which takes into account predetermined cost
which based on estimates relating to material, labour or overheads while target

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costing represent the difference between target costing represent the difference

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between target prices and reasonable profits.

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2. Standard costing method is used to control cost to the maximum extent whole

07
target costing accounts as a tool for reducing cost at the existing level

07
3. Target costing ensures costs are kept to a minimum while standard costing ensures
costs are kept within predetermined standard cost.
4. Target costing helps the firm to remain and complete in the market in long run
while standard costing helps to ascertain the cost of a product future.

QUESTION 8

p
Ap
September 2021 Question Five A
PM Ltd. operates two divisions namely X and Y. Division X produces an intermediate

m
product M that has no external market. The product is then transferred to Division Y
co
where it is used as an input in the production of product N.
a.
ny

The following relates to the demand schedule of product N:

ke

Quantity sold (units) Selling price (Sh.)

1,000 150
ea

2,000 140
m

3,000 130
So

4,000 120
5,000 110
6,000 100

Divisional costs are as shown in the table below:

Division
X Y
Sh. Sh.
Variable cost per unit 13 7
Fixed costs attributable to the product 50,000 70,000

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Additional information:

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1. Product N is transferred to Division Y at Sh.25 per unit.

07
2. Assume that production of both M and N is in batches of 1,000 units.

07
Required:
(i) The profit maximising output level for Division X at the current transfer price.
(4 marks)
(ii) The optimal output level for the overall company given that the variable cost of
Division X is Sh.5 per unit. (4 marks)

p
Ap
ANSWER

m
co
Pm
a.
ny

X M Y N
ke

25
ea
m

i) Division x profit statement

So

Units Revenue Variable cost Fixed cost Profit

(25xx) 13xx
1,000 25,000 13,000 50,000 (38,000)
2,000 50,000 26,000 50,000 (26,000)
3,000 75,000 39,000 50,000 (14,000)
4,000 100,000 52,000 50,000 (2,000)
5,000 125,000 65,000 50,000 10,000
6,000 150,0000 78,000 50,000

(48,000)

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Profit maximizing output level = 6000 units

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ii) Overall company (PM)

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07
i) Division x profit statement
Units Revenue Variable cost Fixed cost Profit
x × price (5+7)x
1,000 1,000x150=150,000 12,000 120,000 (18000)
2,000 2,000x140=280,000 24,000 120,000 136000

p
3,000 3,000x130=390,000 36,000 120,000 234000

Ap
4,000 4,000x120=480,000 48,000 120,000 312,000
5,000 5,000x110=550,000 60,000 120,000 370,000

m
6,000x100=600,000 72,000
co 120,000
a.

Optimal output 6,000 Units

ny
ke

QUESTION 9
ea

May 2021 Question Three B

The Digital Electronics Company manufactures cameras and video equipment. It is in the
m

process of introducing the world's smallest and lightest camcorder with 3D, HD and SD
So

recording modes.

The company has undertaken market research to ascertain the customers' perceived value
of the product. The product's special features and a comparison with competitors'
products and market prices have been used to establish a target selling price and projected
life time volume.

In addition, cost estimates have been prepared based on proposed product specification.
The company has set a target profit margin of 30% on the proposed selling price and this
has been deducted from the target selling price to get the target cost.

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The following is a summary of the information that has been presented to the

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management:

07
07
Project lifetime sales volume (units) 300,000
Sh.
Target selling price 8,000
Target profit margin (30%) (2,400)
Target cost 5,600
Projected cost 7,000

p
Ap
Before target costing exercise, the projected cost was estimated as follows:

m
co
Manufacturing costs: Sh. Sh.
a.
Direct materials (bought in parts) 3,900
ny

Direct labour 1,000

Direct machining costs 200
ke

Ordering and receiving 80

ea

Quality assurance 600

m

Rework 150
So

Engineering and design 100 6,030

Non-manufacturing costs:
Marketing 400
Distribution 300
After sales service and warranty costs 270 970
Total cost 7,000

The company then engaged a team to carry out a functional analysis on the product
manufacture. After a careful analysis of the different elements, functions and attributes of

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the camcorder and potential customers interviewed to ascertain the values that may place

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on each of the functions, the following report was given to management.

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07
1. Direct material cost (bought in parts to be reduced by 1/6).

07
2. Direct labour should be reduced to 80%.
3. Machining costs would remain the same as the projection.
4. Ordering and receiving costs to reduce by 75%.
5. Quality assurance to reduce to 5/6 of the orginal estimate.
6. Rework and engineering costs to reduce by Sh.90 and Sh.20 respectively.
7. Marketing, distribution and after sales service and warranty costs to reduce by 37.5%,

p
Ap
331/3 % and by Sh.80 respectively.

m
Required: co
(i) Revised target cost. (7 marks)
a.
(ii) The cost gap. (1 mark)
ny
ke

ANSWER
i) Revised target cost
ea

Direct material 3900×5/6 3,250

m

Direct labour 100×80% 800

So

Direct machine cost 200

Ordering & receiving 80×25% 20
Quality assurance 600×5/6 500
Re-work 150-90 60
Engineering & design 100-20 80
Non-manufacturing cost
Marketing 400×62.5% 250
Distribution 300×66.67% 200
After sale 270-80 190
Target cost 5,550

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(ii) Cost gap – Actual cost- Target cost

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5,600 - 5,550 = 50

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07
QUESTION 10
November 2020 Question Two B
Lenga Ltd. has a production capacity of 80,000 units and currently sells 20,000 units at
Sh.1,000 each. The demand for the company‘s product is sensitive to the selling price and
it has been observed that with every reduction of Sh.100 in the selling price, the demand
is doubled.

p
Ap
Required:
(i) Evaluate the target cost at full capacity assuming profit margin on sales is taken as

m
25%. co (4 marks)
(ii) Ascertain the cost reduction scheme if at present 40% of total cost is variable with
a.
the same margin of profit assumed in (b) (i) above. (4 marks)
ny
ke

ANSWER
i) Target cost at full capacity
ea

Target cost = Market price – desired profit

m

Total target= Total revenue –desired profit

So

Cost of full capacity

ii) Cost reduction scheme

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7
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07
07
MR= =1100 - 0.01x

At profit maximization MR=MC

p
Ap
m
co
QUESTION 11
a.

November 2019 Question Five A

ny

Valleyside Fitness Ltd. specialises in the manufacture of a small range of hi-tech products
ke

for the fitness market.

ea

They are currently considering the development of a new type of fitness monitor, which
would be the first of its kind in the market. It would take one year to develop, with sales
m

then commencing at the beginning of the second year. The product is expected to have a
So

life cycle of two years, before it is replaced with a technologically superior product.

The following cost estimates have been made:

Year 1 Year 2 Year 3
Units manufactured and sold - 100,000 200,000
Sh. Sh. Sh.
Research and development costs 160,000,000 -
Products design costs 800,000,000 - -
Marketing costs 1,200,000,000 1,000,000,000 1,750,000,000

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Manufacturing costs:

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 Variable cost per unit - 40,000 42,000

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 Total fixed production costs - 650,000,000 1,290,000,000

07
Distribution costs:

07
 Variable cost per unit - 4,000 4,500
 Total fixed distribution costs - 120,000,000 120,000,000
Selling costs:
 Variable cost per unit - 3,000 3,200
 Total fixed selling costs 180,000,000 180,000,000

p
 Administrative costs 200,000,000 900,000,000 1,500,000,000

Ap
Note: Ignore the time value of money.

Required:
m
co
The lifecycle cost per unit. (8 marks)
a.
ny

ANSWER
ke

The lifecycle cost per unit

ea

Year 1 “000” Year 2 000” Year 3 “000”

Research and development 160,000
m

Product design cost 800,000

So

Marketing cost 1,200,000 100,000 1,750,000

Manufacturing cost : Variable - 400,000 8,400,000
Fixed - 650,000 1,290,000
Distribution cost : Variable - 400,000 900,000
Fixed - 120,000 120,000
Selling cost : Variable - 300,000 640,000
Fixed - 180,000 180,000
Administrative cost 200,000 900,000 1,500,000
Total cost 2,360,000 7,550,000 14,780,000

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Total lifecycle cost = 24,690,000,000

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07
07
QUESTION 12
May 2019 Question Three
Kitchen Masters Ltd. specialises in the manufacture and sale of firewood ovens.

Each oven consists of a main unit plus a set of oven fittings. The company has two

p
Ap
divisions; A and B. Division A manufactures the oven while Division B manufactures the
sets of oven fittings.

m
co
Currently, all of Division A's sales are made externally. However, Division B sells to
Division A as well as to external customers. Both divisions are profit centres.
a.
ny

The following data is available for both divisions:

ke

Division A Sh.
ea

Current selling price for each oven 450

m

Costs per oven:

 Fittings from division B
So

75
 Other materials from external suppliers 200
 Labour costs 45
Annual fixed overheads 7,440,000
Annual production and sales of ovens (units) 80,000
Maximum annual market demand for ovens (units) 80,000

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Division B Sh.

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Current external selling price per set of fittings 80

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07
Current price for sales to Division A 75

07
Costs per set of fittings:
 Materials 5
 Labour costs 15
Annual fixed overheads 4,400,000
Units
Maximum annual production and sale of sets of

p
200,000
Fittings(including internal and external sales)

Ap
Maximum annual external demand for sets of fittings 180,000

m
Maximum annual internal demand for sets of fittings
co 80,000

Additional information:
a.

1. The transfer price charged by Division B to Division A was negotiated some years
ny

ago between the previous divisional managers, who have now both been replaced by
ke

new managers.
ea

2. Head office only allows Division A to purchase its fittings from Division B, although
m

the new manager of Division A believes that he could obtain fittings of the same
So

quality and appearance for Sh.65 per set, if he was given the autonomy to purchase
from outside the company.
3. Division B makes no cost savings from supplying internally to Division A rather than
selling externally.

Required:
a) Under the current transfer pricing system, prepare a profit statement showing the
profit for each of the divisions and for Kitchen Masters Ltd. as a whole. Your sales
and cost figures should be split into external sales and inter-divisional transfers, where
appropriate. (6 marks)

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b) Head office is considering changing the transfer pricing policy to ensure

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maximisation of company's profits without demotivating either of the divisional

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managers. Division A will be given autonomy to buy from external suppliers and

07
Division B to supply external customers in priority to supplying Division A.

07
Evaluate the maximum profit that could be earned by Kitchen Masters Ltd. if transfer
pricing is optimised. (8 marks)

c) Discuss the issues of encouraging divisional managers to take decisions in the interest
of the company as a whole, where transfer pricing is used. Provide a reasoned

p
Ap
recommendation of a policy that Kitchen Masters Ltd. should adopt. (6 marks)
(Total: 20 marks)

m
ANSWER co
a) Profit statement
a.
B Division A division Kitchen Master Ltd
ny

Sh 000 Sh 000 Sh 000

Sales – External
ke

(120×80) 9,600 (80×450) 36,000 45,600

Internal (80×75) 6,000 - -
ea

Total Sales 15,600 36,000 45,600

m

Variable Cost (20×200) (4,000) (245×80) (19,600) (23,600)

So

Transfer Cost - (80×75) (6,000) -

Fixed Cost (4,400) (7,440) (11,840)
Profit 7,200 2,960 10,160

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b) Maximum profit that could be earned by Kitchen Masters Ltd. if transfer pricing

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is optimised

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B division A division Kitchen master ltd

07
Sh 000 Sh 000 Sh 000

07
Sales – External (180×80) 14,400 (80×450) 36,000 50,400
Internal (20×65) 1,300 - -
Total sales 15,700 36,000 50,400
Variable cost (20×200) (4,000) (245+65)60 (18,600) (22,600)
Internal transfer cost - (20×65) (1,300) (1,300)

p
Fixed cost (4,400) (7,440) (11,840)

Ap
Profit 7,300 8,660 15,960

m
co
a.
c) Issues of encouraging divisional managers to take decisions in the interest of the
ny

company as a whole, where transfer pricing is used

ke

Goal congluence
This is where department / division operate differently in order to achieve company
ea

objective of the whole company i.e each division should act in a manner that would lead
m

to realization of overall goal.

So

Legal obligation
Transfer price determined should help the firm to comply with the legal requirement such
as taxation and custom duty. It should not be designed in a manner which will penalize
the company.
Recommendation: The kitchen master should adopt cost plus method. These methods
encourages the divisional manager in achieving the overall company objectives

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QUESTION 13

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November 2018 Question One B

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ABC Ltd. is a firm that is engaged in the repair and maintenance of property, plant and

07
equipment. The firm has received an order from XYZ Ltd. to repair its property, plant

07
and equipment.

The management accountant of ABC Ltd. has provided the following information:
Note Sh."000"
Direct materials:
100,000 welding rods at Sh.10 per rod 1. 1,000

p
Ap
300,000 welding rods at Sh.12 per rod 3,600
Other materials 2. 2,000

m
Labour cost: co
Skilled: 30,000 hours at Sh.30 per hour 3. 900
a.
Unskilled: 20,000 hours at Sh.15 per hour 4. 300
ny

Depreciation: General purpose machines 5. 100

Specific purpose machines 6. 200
ke

Total cost 8,100

ea

Profit 810
m

Suggested price 8,910

So

Additional information:
1. The repair contract requires 400,000 welding rods of which 100,000 rods are
already in inventory. These types of rods are about to be phased out of the market
and hence if they are not used, they will have to be discarded.
If ABC Ltd. is awarded the contract, it will have to purchase an extra 300,000
welding rods of the new model at a cost of Sh.12 per rod.
2. Other materials will have to be bought at the above price if the contract is to be
undertaken.
3. Skilled workers will have to be hired at the cost provided.

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4. ABC Ltd. has five unskilled workers who are currently idle. The cost shown above

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is the guaranteed salary payable to the five workers.

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5. The depreciation given is for the general purpose machines which are normally used

07
to do other jobs including the special one if allocated.

07
6. The depreciation given is for machines which will be bought specifically for this
contract. After the contract is complete, the machines will be scrapped without any
alternative use.
7. ABC Ltd. aims to earn a profit mark up of 10% on cost on all work undertaken.

Required:

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

m
(ii) Describe why in practice the minimum price is never actually used.
co (4 marks)
a.
ANSWER
ny

i) Determining minimum price quotation

ke

Sh.
Direct Material ( 300,000×12) 3,600,000
ea

Other Material 2,000,000

m

Labour Cost
So

Skilled Workers (30,000×30) 900,000

Unskilled Workers (Irrelevant) 0
Depreciation : General Irrelevant 0
: Specific Purpose Machine 200,000
Total Relevant Cost 6,700,000
Markup profit = (10%×6,700,00) 670,000
Price quotation 7,370,000

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ii) Why minimum price is never used

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 Minimum price usually does not consider irrelevant cost such as fixed cost and

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hence when used, the entity objective of profit maximization on might not be

07
achieved.

07
 Minimum price only considers variable and relevant cost, which in practice fixed
and unavoidable cost do exist

QUESTION 14
November 2018 Question Four B

p
AZK Ltd., a manufacturing company, is planning to launch a new product model whose

Ap
lifecycle is three years.

m
The following estimated data has been provided:
co
a.
Details 1 Jan 2018 31 Dec 2018 31 Dec 2019 31 Dec 2020
ny

Research and development cost (Sh.) 850,400 200,000 - -

ke

Production cost:
Variable cost per unit (Sh.) - 100 80 90
ea

Total fixed cost (Sh.) - 500,000 500,000 500,000

m

Marketing cost:
So

Variable cost per unit (Sh.) - 12 8 10

Total fixed cast (Sh.) - 200,000 150,000 100,000
Distribution cost:
Total fixed cost (Sh.) - 120,000 120,000 120,000
Disposal of special - - - 300,000
equipment (Sh.)
Present value factor 1 0.89 0.80 0.71
Production (units) - 20,000 20,000 20,000

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The Marketing Director believes that customers could only pay Sh.120 per unit but the

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Finance Director believes this will not cover all projected costs throughout the product's

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lifecycle.

07
Required:

07
(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)

ANSWER
i) Evaluation of the lifecycle cost per unit

p
Ap
Details 1 Jan 2018 31 Dec 2018 31 Dec 2019 31 Dec 2020
Research & development 850,400 200,000 - -

m
Production cost: co
Variable cost 200,000,000 1,600,000 1,800,000
a.
Fixed cost 500,000 500,000 500,000
ny

Marketing cost :
ke

Variable cost 240,000 160,000 200,000

Fixed cost 200,000 150,000 100,000
ea

Distribution cost:
m

Fixed cost 120,000 120,000 120,000

So

Disposal of equipment _______ ________ ________ 300,000

Total cost 850,400 3,260,000 2,530,000 3,020,000
Present value factor 1 0.89 0.8 0.7
Present value of cost 850,400 2,901,400 2,024,000 2,144,200

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How to reduce cost gap

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 Reduce the total life cost

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 Strategise of increasing production

07
07
QUESTION 15
May 2018 Question Five B
Techsavy Ltd. has several independent divisions. The company's Tube division
manufactures a picture tube used in television sets. The Tube division's income statement
for the year ended 31 March 2018 in which 8,000 tubes were sold is given below:

p
Ap
Total Per unit
Sh."000" Sh.

m
Sales co 13,600 1,700
Cost of goods sold (8,400) (1,050)
a.
Gross margin 5,200 650
ny

Salaries and administrative expenses (3,900) (487.5)

ke

Divisional net income 1,300 162.5

ea

The above cost of Sh.1,050 to produce a single tube consists of the following costs:
m

Sh.
So

Direct materials 380

Direct labour 270
Manufacturing overheads (75% fixed) 400
Total cost per tube 1,050

The Tube division has fixed selling and administrative expenses of Sh.3,500,000 per
year.

Techsavy Ltd. has just established a new division called TV Division that will produce a
television set that requires high resolution picture tubes. The Tube division has been

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tasked to manufacture 2,500 of these tubes each year and sell them to the TV division. As

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part of determining the price that should be charged to the TV division, the Tube division

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has estimated the following costs for each of the new high resolution tubes.

07
Sh.

07
Direct materials 600
Direct labour 490
Manufacturing overheads (2/3 fixed) 540
Total cost per tube 1,630

To manufacture the new tubes, the Tube division would have to reduce production of its

p
Ap
regular tubes by 3,000 units per year. There would be no variable selling and
administrative expenses on the intercompany business and total fixed overhead costs

m
would not change. Assume direct labour is a variable cost.
co
a.
Required:
ny

(i) Advise on the lowest acceptable transfer price from the perspective of the Tube
division for each of the new high resolution tubes. (8 marks)
ke
ea

(ii) Assume that the TV division has identified an external supplier that could provide the
m

high resolution tubes for only Sh.2,000 each, and the Tube division is willing to pay
So

this price.

Evaluate the effect of this decision on the profits of the company as a whole.
(6 marks)
ANSWER
The lowest acceptable transfer price from the perspective of the Tube division for
each of the new high resolution tubes

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Determining opportunity cost (lost contribution

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Selling price 1,700

07
Less: Material cost (380)

07
Direct labour cost (270)
Manufacturing overhead (400×25%) (100)
Gross contribution 950
Less: Charitable selling & admin cost (W1) (50)
900

p
Ap
Workings:
W1

m
Variable selling cost per unit co
a.
ny
ke
ea

Total contribution cost for units reduced

m

900×3,000 units = 2,700,000

So

Attribute per unit to transfer

Variable production cost of new resolution tubes

Direct material 600
Direct labour 490

Manufacturing overhead ( ) 180

Variable production cost 1,270

Add: opportunity cost 1,080
Minimum transfer price 2,350

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ii) Effect of the transfer price of Sh 2000

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Current transfer of 2,359 Profit

07
Sales – External 5,000×1,700 8,500,000

07
Internal 2,500×2,350 5,875,000
Total sales 14,375,000
Variable cost
External 5,000×(380+270+100) (3,750,000)
Internal 2,500×1270 (3,175,000)

p
Selling & admin cost – (50×5,000) (250,000)

Ap
Total contribution 7,200,000

m
Transfer price of Sh 2000
co
Sales – External 5,000×1,700 8,500,000
a.
Internal 2,500×2,000 5,000,000
ny

Total Sales 13,500,000

ke

Variable Expenses
ea

External (5,000×750) (3,750,000)

Internal (2,500×1270) (3,175,000)
m

Selling & Distribution (50×5,000) (250,000)

So

Total Contribution 6,325,000

Profit decline = 7,200,000 – 6,325,000= Sh. 875,000

QUESTION 16
May 2017 Question Five B
Reka Ltd. has two manufacturing divisions namely; A and B. Division A manufactures a
single product branded "RR".

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Two-thirds of the output of "RR" is sold externally while the balance is transferred to

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division B where it is used as raw material in the manufacture of a product branded "TT".

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07
The unit costs of product "RR" are as follows:

07
Sh.
Direct material 12
Direct labour 6
Direct expenses 6
Variable manufacturing overheads 6
Fixed manufacturing overheads 12

p
Ap
Selling and packaging expense (variable) 2
44

m
co
Additional information:
a.
1. Annually, 10,000 units of product "RR" are sold externally at the standard price of
ny

Sh.90 per unit while 5,000 units are transferred to division B at an internal transfer
charge of Sh.87 per unit.
ke

2. The selling and packaging expense is not incurred for internal transfers.
ea

3. The unit costs of product "TT" are as follows:

m

Sh.
So

Transferred-in item ("RR") 87

Added direct materials 69
Direct labour 9
Variable overheads 36
Fixed overheads 36
Selling and packaging expense (variable) 3
240
4. A recent study of the demand and sales relationship of the company's products by
the sales division produced the following results:

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 Division A

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89
Selling price (Sh.) 60 90 120

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Demand (units) 15,000 10,000 5,000

07
07
 Division B
Selling price (Sh.) 240 270 300
Demand (units) 7,200 5,000 2,800

5. The manager of division B has proposed that transfers from division A should be

p
made at Sh.36 per unit which represents the variable costs plus a minimum mark-up.

Ap
Required:

m
Advise the management of Reka Ltd. on the following:
co
(i) The current effect of the transfer pricing system on the company's profits. (10 marks)
a.
(ii) The effect on profit of adopting the above proposal from the manager of division B.
ny

(6 marks)
ke

ANSWER
i) The current effect of the transfer pricing system on the company's profits
ea

Profit for division A

m

Variable cost = 44-12-32

So

Sh Sh Sh
Selling price 60 90 120
Variable cost (32) (32) (32)
Contribution margin 28 58 88
Demand (units) 15,000 10,000 5,000
Total contribution 420,000 58,000 440,000
The optimal selling price is Sh. 90 and optimal output of 10,000 units

Variable cost = 240 – 36 = 204

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Profit with transfer of sh. 87 for division B

0
89
Sh Sh Sh

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73
Selling price 240 270 300

07
Variable cost (204) (204) (204)

07
Contribution margin 36 66 96
Demand (units) 7,200 5,000 2,800
Total contribution 259,000 330,000 268,800

Optimal selling price will be Sh 270 and optimal output of 5000 units

p
Ap
ii) The effect on profit of adopting the above proposal from the manager of division B
Profit with transfer price of Sh. 36

m
co
a.
ny

Sh Sh Sh
ke

Selling price 240 270 300

Variable cost (153) (153) (153)
ea

Contribution margin 87 117 147

m

Demand (units) 7,200 5,000 2,800

So

Total contribution 626,000 585,000 411,600

Optimal output is 7,200 at a selling price of sh 240

QUESTION 17
November 2015 Question Three A
i) In the context of management accounting, explain the term "life cycle costing".
(2 marks)
ii) Kipevu Ltd. is considering launching a new product branded "KV". The product is
estimated to have a life of three years.

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The following costs are estimated to be incurred at different phases of the product's

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lifecycle:

07
Sh."000" Sh."000"

07
Research and development 1,500
Product design 600
Operating costs: Year 1 360
Year 2 420
Year 3 432 1,212

p
Disposal cost (at the end of year 3) 60

Ap
Additional information:

m
co
1. The company's target revenues for the three years are as follows:
a.

Year Revenue (Sh."000")

ny

1 900
ke

2 1,800
ea

3 2,400
m
So

2. The present value factors are estimated as follows:

Year Present Value Factor

1 0.9100
2 0.8300
3 0.7500

Required:
Advise the management of Kipevu Ltd. on whether the product should be launched.
(8 marks)

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ANSWER

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a) Explain term life cycle costing

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This is a method of pricing where all cost that the producers expect to Incur over the

07
lifetime for the product are completed together. it covers all cost to be incurred from the

07
time the product is purchase or produced to the time of disposed or scrap.

ii) Advise the management of Kipevu Ltd. on whether the product should be
launched
Analysis

p
Sh. 000

Ap
1 2 3
Revenue 900 1,800 2,400

m
Operating cost (360) (420) (432)
co
Cash flows 540 1,380 1,968
a.
PVIF 0.9100 0.8300 0.7500
ny

Present value 491 1,145 1,476

ke
ea
m

Total present value = 491+1,145+1,476=3,112

So

Present value of outflows Sh 000

Research and development cost 1,500
Product design 600
Disposal cost (60×0.7500) 45
2145

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NPV

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Present value of inflows 3,112

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Present value of outflow (2,145)

07
Net present value 976

07
The product should be launched

QUESTION 18
November 2015 Question Four A
Transfer prices are of critical importance in evaluating performance because they

p
Ap
influence both revenues of the selling division and costs of the buying division.

m
In reference to the above statement, explain five transfer pricing policies that could be
co
adopted and their implications. (10 marks)
a.
ny

ANSWER
ke

Transfer pricing policies that could be adopted and their implications.

 Market price method: This is where the transfer price which is based on the
ea

existing market price if the intermediate terms have audited the external market.
m

There should be existence of a perfect market structure when this method is used.
So

 Marginal cost policy: This is where the marginal cost (variable cost) of the
supplying department forms the transfer price. This method is said to be most
optimal.
 Full cost method: in this method the transfer price will be equal to the full cost if
items in this method supplying manager does not make profit but he is able to
recover all his cost.
 Cost plus method: This is where the transfer price would be determined on the
basis of full cost price plus profit mark up

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 Negotiation method: This is where the supplying manager and the receiving

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manager negotiate on the best transfer price. This method is said to promote goal

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congruence, cooperation and reduction on cost.

07
07
QUESTION 19
November 2015 Question Four B
The following data relate to the operations of division X of Pendo Ltd.:
Sh.
Selling price per unit 90

p
Variable cost per unit 54

Ap
Fixed costs per year 900,000
Investments 2,700,000

m
co
Additional information:
a.
(i) Y Ltd. has placed a special order for 10,000 units per year from Pendo Ltd. The firm
ny

has requested for a special price.

ke

(ii) The current volume of production is 43,000 units.

(iii) Accepting the special order will increase fixed costs by Sh.90,000 and investment
ea

by Sh.240,000.
m
So

Required:
(i) The number of units to be sold to achieve a return on investment of 25% without the
special order. (2 marks)
(ii) The return on investment without the special order. (2 marks)
(iii) The lowest price at which Pendo Ltd. could sell the additional 10,000 units without
reducing the return on investment in (b) (ii) above. (6 marks)

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ANSWER

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i) Number of units to be sold to achieve a return on investment of 25% without the

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special order

07
07
p
Ap
ii) Return on investment without the special order

m
co
a.
ny
ke
ea
m

iii) Lowest price at which Pendo Ltd. could sell the additional 10,000 units without
So

reducing the return on investment above

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QUESTION 20

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September 2015 Pilot Paper Question Five A

07
Delcom Ltd. is planning to introduce a new product. Market research information

07
suggests that the product should sell100,000 units over its life cycle at a price of Sh.420
per unit. The company seeks to make a mark-up of 40% of product cost. Life cycle costs
of the product will be as follows:

Sh. Sh.
Design and development costs 10,000,000

p
Ap
Marketing and distribution costs 5,000,000
Manufacturing costs per unit

m
Direct materials co50
Direct labour 60
a.
Variable production overheads 60
ny

Fixed production overheads 30 200

End of life costs 4,000,000
ke
ea

Required:
m

(i) The lifecycle cost per unit. (3 marks)

So

(ii) The product's cost gap. (2 marks)

(iii) The management accountant estimates that if the company spends additional
Sh.1,000,000 on design, manufacturing cost per unit could be reduced. Compute the
maximum manufacturing cost per unit that will be tolerated if the company was to
earn the required mark-up. (5 marks)
(iv) To manage cost effectively the company should emphasis on cost management at the
planning, and design stage.
Explain decisions that can be made at the planning and design stage which can affect
the cost of product and reduce the cost gap. (4 marks)

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ANSWER

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i) Life cycle cost per unit

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Design and development cost 10,000,000

07
Marketing & distribution 5,000,000

07
End of life cost 4,000,000
Manufacturing cost (200×100,000) 20,000,000
Total cost 39,000,000

p
Ap
m
co
ii) Product cost gap= Actual cost – target cost
a.
ny

( )
ke
ea
m
So

Analysis of cost
Sales = 420×100,000 42,000,000
Less: Cost
Design & Development cost (10+1) (11,000,000)
Marketing & distribution (5,000,000)
End of life cost (4,000,000)
Manufacturing cost (100,000×x) (100,000x)
Target profit (120×100,000) 12,000,000

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07
iv) Decisions which can be made of planning and design stage which could affect the

07
cost of product and reduce cost gap.
 Through research – the entity should conduct an extensive business
scientific research.
 Elimination of unnecessary features on the product
 Feasibility study.

p
Ap
m
co
a.
ny
ke
ea
m
So

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TOPIC 5

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07
STRATEGIC PERFORMANCE MEASUREMENT

07
QUESTION 1
December 2023 Question Four C
Alumax Ltd. produces a single product branded ―Salfa‖. The machine used to make Salfa

p
is obsolete and Alumax Ltd. is contemplating replacing it.

Ap
Additional information:

m
1. The replacement cost of a new machine is Sh.1 million with expected useful life of five
co
years.
a.
2. The machine will have no salvage value after decommissioning it.
ny

3. It is expected that 20,000 units of Salfa will be produced and sold at a transfer price of
ke

Sh.300 per unit over the five year period as follows:

Year 1 2 3 4 5
ea

Units sold (―000‖) 6 5 4 3 2

m
So

4. Variable costs are expected to be Sh.165 per unit produced and sold.
5. The incremental fixed costs, mainly the wages of a maintenance engineer are expected
to be Sh.200,000 per year.
6. Alumax Ltd. uses an imputed interest cost of capital of 13% for the investment
appraisal purposes.
7. Depreciation on this machine is calculated on initial cost of the investment at the start
of the year.

Required:
(i) The residual income (RI) for each of the five years. (6 marks)

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(ii) The return on investment (ROI) for each of the five years. (6 marks)

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ANSWER

07
i) Residual income

07
Sh 000
Year 1 2 3 4 5
Banning cost 100 800 600 400 200

p
Ap
Less: Depreciation (200) (200) (200) (200) (200)
Net book value 800 600 400 200 0

m
co
Operating income Sh 000
a.
1 2 3 4 5
ny

Units 6,000 5,000 4,000 3,000 2,000

ke

Sales 1800 1500 1200 900 600

Variable cost (990) (825) (660) (495) (330)
ea

Fixed cost (200) (200) (200) (200) (200)

m

EBD 610 475 340 205 70

So

Operating profit 410 275 140 5 (130)

Residual income
Year R1= Operating income - Cost of capital
1 410,000 - 13% × 1000,000 = Sh 280,000
2 275,000 - 13% × 800,000 = Sh 171,000
3 140,000 - 13% × 600,000 = Sh 62,000
4 5000 - 13% × 400,000 = Sh -47000
5 -130,000 - 13% × 200,000 = Sh -156,000

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7
ii) Return on investment ROI

73
07
07
Year

p
Ap
2

m
3
co
a.
ny

4
ke
ea

5
m
So

QUESTION 2
April 2023 Question one A (ii)
(ii) Economic value added (EVA). (4 marks)

ANSWER
ii) Economic value added (EVA)
Advantages of EVA
1. It‘s a true indicator of the actual wealth created for shareholders
2. It‘s a good measure of performance evaluation

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3. EVA is consistent with the object of maximizing shareholders wealth

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4. It uses cash flows and hence not easy to be manipulated

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07
QUESTION 3

07
April 2023 Question one B
The following information applies to the planned operations of Venus Division of Planet
Group for the next financial year:

Sh. “000”

p
Sales revenue (100,000 units at Sh.120) 12,000

Ap
Variable costs (100,000 units at Sh.80) (8,000)
Contribution 4,000

m
Fixed costs including depreciation co (2,500)
Net operating profit 1,500
a.
Venus Division investment (at initial cost) 5,000
ny
ke

Additional information:
1. The target rate of return on investment is expected to be 20% per year on written down
ea

values (WDVs).
m

2. Planet Group is organised into profit centres and each centre manager is delegated
So

substantial autonomy to review its operations.

3. As part of planned review operations, two scenarios are being considered for Venus
division as follows:

Scenario A:
Venus Division to accept a special order of 20,000 units at Sh.100 from Simba Ltd, an
external customer. Variable costs per unit will be the same as budgeted, but to enable
capacity to increase by 20,000 units, additional investment inform of an extra special
purpose equipment will be acquired at a cost of Sh.800,000. The equipment will have a

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four-year life and the Planet Group depreciates assets on a straight-line basis. No extra

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fixed cost will be incurred.

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07
Scenario B:

07
Included in the current plan of operations of Venus Division is the sale of 20,000 units to
Pluto Division of Planet Group. A competitor of Venus Division from external market
has offered to supply Pluto Division at Sh.110 per unit. Venus Division intends to adopt a
strategy of matching the price quoted from outside Planet Group in order to retain the
order.

p
Ap
Required:
Calculate the annual residual income of Venus Division based on:

m
(i) The original planned operation. co (4 marks)
(ii) Only scenario A added to the original plan. (4 marks)
a.
(iii) Only scenario B added to the original plan. (4 marks)
ny
ke

ANSWER
i) Residual incomed based on original planned operation
ea
m
So

ii) Residual income based on scenario A

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Total asset value

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Venus division investment 5,000,000

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Special equipment 800,000

07
Total investment value 5,800,000

07
Income statement
Sales revenue 12,000,000
Special order revenue 2,000,000
Total revenue 14,000,000

p
Less: Variable cost (8,000,000)

Ap
Special order variable cost (16,000,000)

m
Contribution 4,400,000
co
Less: Fixed cost (2,500,000)
Depreciation of special equipment (200,000)
a.

Net operating profit

ny

1,700,000
ke
ea
m

iii) Residual income based on scenario B

So

Pluto division sales revenue

Pluto Division variable cost

Income statement
Sales revenue 12,000,000
Pluto division 2,200,000

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14,200,000

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Less: Variable cost (8000,000)

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Special order variable cost (16,000,000)

07
Contribution 4,600,000

07
Less: Fixed cost (2500,000)
Net operating (2,100,000)

p
Ap
QUESTION 4
April 2023 Question Four A

m
Explain how each of the following objectives of a balanced scorecard could be measured:
co
(i) Competitive performance. (2 marks)
a.
(ii) Flexibility. (2 marks)
ny

(iii) Innovation. (2 marks)

ke

ANSWER
ea

Explain how each of the following objectives of a balanced scorecard could be

m

measured
So

i) Competitive performance
1. Market Share – Market share is a key indicator of how well a company is performing
relative to its competitors in the industry. It reflects the portion of the total market that the
organization controls. The key performance indicators (KPI)

Include:
 Overall market share percentage
 Market share growth rate over time.
2. Customer Satisfaction – The key performance indicator include:
 Net promoter score or customer satisfaction survey
 Customer retention rates
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3. Product /Service quality

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ii) Flexibility

73
 Response time to market changes

07
07
 Employees cross training
 Process adaptability

iii) Innovation
 Number of new products /services
 Research and development investment

p
 Employee ideas and suggestions

Ap
m
QUESTION 5 co
December 2022 Question Two B
Jikaze Ltd. is organised into divisions. Divisional managers are rewarded through a
a.

remuneration package which is linked to accounting rate of return (ARR) performance

ny

measures. Venus Division of Jikaze Ltd. is currently investigating two mutually exclusive
ke

investment proposals namely MX and JX. If the proposals are viable, Venus Division
ea

wishes to assign priority in the event that funds may not be available to cover both
m

proposals.
So

Details of the two mutually exclusive proposals are:

Investment proposal
MX JX
Sh. “000” Sh. “000”
Initial cash outlay on non-current assets 192,000 192,000
Net cash inflow:
Year 1 67,200 32,000
Year 2 67,200 64,000
Year 3 67,200 96,000
Year 4 67,200 128,000

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Additional information:

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1. The management assesses the cost of capital to the company at 16%.

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2. The Accounting Rate of Return (ARR) calculation is based on the accounting profit

07
which is computed by adding back depreciation to net cash inflow of each year.

07
3. Depreciation is on straight-line basis over the assets‘ useful life.
4. Net present value (NPV) method is used to estimate the most viable project when
using project life cycle costing.
5. Ignore tax and residual value.
6. The present value interest factor (PVIF) of the proposal is as follows:
Year 1 2 3 4

p
Ap
Present value at 16% 0.8621 0.7432 0.6407 0.5523

m
Required: co
Advise the management of Jikaze Ltd. on the most viable investment proposal using the
a.
following performance appraisal measures:
ny

(i) Product life cycle costing. (5 marks)

(ii) Accounting rate of return (ARR). (5 marks)
ke
ea

ANSWER
m

i) Product life cycle costing [NPV]

So

NPV=PVCIF - PVCOF Project max

Year Net cashflows Discounting factor Present value
@ 16% Sh 000
1 67,200 0.8621 57,933.12
2 67,200 0.7432 49,943.04
3 67,200 0.6407 43,055.04
4 67,200 0.5523 37,114.56
Total present value 188,045.76

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Sh 000

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PVCIF 188,045.76

07
PVIOF (192,000)

07
NPV (3,954.24)

Project JX Sh 000
Year Net cashflows PVIF162 Present Value
1 32,000 0.8621 27,587.2

p
2 64,000 0.7342 47,564.8

Ap
3 96,000 0.6407 61,507.2

m
4 128,000 0.5523 co 70,694.4
207,353.6
a.
ny

Sh 000
ke

PVCIF 207,335.6
PVIOF (192,000)
ea

NPV (15,353.6)
m
So

Advice
Undertake project JX since it has a positive NPV

ii) Accounting Rate of Return (ARR)

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Year 1 2 3 4

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Sh 000 Sh 000 Sh 000 sh 000

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Net cash flows 67,200 67,200 67,200 67,200

07
48,000 48,000 48,000 48,000

07
115,200 115,200 115,200 115,200

p
Ap
Project JX Sh 000

m
1 2 co 3 4
Net cash flows 32,000 64,000 96,000 128,000
a.
Add back: depreciation 48,000 48,000 48,000 48,000
ny

Accounting prefix 80,000 112,000 144,000 176,000

ke
ea
m
So

Advice: undertake project JX since it has a Higher IRR

QUESTION 6
December 2022 Question Three A
The complex environment in which most businesses operate today makes it virtually
impossible for most firms to be controlled centrally. This is because it is not possible for

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central management to have all the relevant information and time to determine the

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detailed plans for all the organisation. Some degree of decentralisation is essential for all

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but the smallest firms. Organisations decentralise by creating responsibility centres.

07
07
Required:
In the context of the above statement, identify FOUR responsibility centres. (8 marks)

ANSWER
Responsibility centres

p
Ap
1. Cost centre
This is where responsibility is judged on the amount of cost

m
This is done by computing production cost variances
co
a.
2. Revenue Centre
ny

This is where the manager is held responsible for the revenue generated only. This is
done using sales variances
ke
ea

3. Profit centre
This is where the manager is held responsible for the profit earned profit rations are used
m

as measure of performance
So

4. Investment centre
This is where the manager is held responsible on the basis of success or failure of capital
budgeting decisions. This is headed by senior most manager in the Firm.

QUESTION 7
August 2022 Question One C and D
(c) Many key business performance measures are not effective for most not-for-profit
organisations (NPOs). For instance, the ―bottom line‖ measurement of profit or loss

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indicates how effective a business is at achieving its goals of generating profit for the

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owners.

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07
However, generating profit is not a goal for NPOs. These organisations have no owners,

07
often provide goods and services to constituents free of charge and typically seek
resources from people and organisations that do not expect economic benefit in return.
Thus, the bottom line does not work for NPOs.

Required:
In the context of the above statement, evaluate four factors that make planning for NPOs

p
Ap
complex. (8 marks)

m
(d) Explain the following measures of divisional performance:
co
(i) Return on capital employed. (1 mark)
a.
(ii) Residual income. (1 mark)
ny
ke

ANSWER
(c) Factors that make planning for non profit organization (NPO‟S ) complex
ea

1. Volunteer-based workforce – Many not for profit rely volunteers along side paid
m

staff, managing and coordinating a mix of paid and unpaid labour introduces
So

additional challenges, including varying skills set availability.

2. Mission driven nature –NPO‘s are driven by a mission to serve a particular cause
rather than maximizing profit balancing financial sustainability with the pursuit of a
mission adds complexity to the planning process
3. Dependancy on donations and funding – NPO‘s often rely heavily on donations
and funding efforts. The unpredictable nature of funding services can make it
challenging to create stable and long term financial plans
4. Regulatory compliance – NPO‘s are subject to specify regulatory requirements and
reporting standard. Ensuring compliance with these regulations, such as tax exempt
status and financial transparency, adds complexity to the planning process.

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5. Long term sustainability challenges – Achieving long term financial sustainability

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can be challenging for NPOS. The and competition for limited resources contribute

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to the complexity of planning for the future

07
(d) Explain the following measures of divisional performance

07
i) Return on capital employed is a financial metric that measures the profitability and
efficiency of a division or business unit by expressing the operating profit as a percentage
of the capital in that division

p
Ap
ii) Residual income (RI)
Residual income is the excess profit over cost of capital employed. Residual income is

m
preferred for managerial performance but it is not suitable for comparison of dissimilar
co
divisions since it‘s an absolute measure.
a.
ny
ke

QUESTION 8
ea

August 2022 Question Two A

m

The Diamond division of a retailing group has five years remaining on a lease for
So

premises in which it sells self- assembly furniture. The management is considering the
investment of Sh.600,000 on immediate improvements to the interior of the premises in
order to stimulate sales by creating a more fascinating selling environment.

The following information is available:

1. The forecast of the increase in sales revenue per annum from the premises is as
follows:

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Year Sales revenue

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Sh.“000”

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2022 700

07
2023 600

07
2024 500
2025 400
2026 300
2. The average contribution to sales ratio is expected to be 40%.
3. The cost of capital is 16% on the net book values of the investment at the beginning of
the year.

p
Ap
4. At the end of the five-year period, the premises improvements will have nil residual
value.

m
5. Depreciation is charged on straight line basis.
co
6. The Diamond division has a target return on capital employed of 20%.
a.
ny

Required:
Prepare summary performance statement for the years 2022 to 2026 showing:
ke

(i) Residual income (RI). (7 marks)

ea

(ii) Return on investment (ROI). (7 marks)

m
So

ANSWER
i) Residual income

Year 2022 2023 2024 2025 2026

Beginning cost 600 480 360 240 120
Depreciation (120) (120) (120) (120) (120)
Net book value 480 360 240 120 0

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Determining operating profit Sh 000

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2022 2023 2024 2025 2026

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73
Sales 700 600 50 400 300

07
Contributions 40% 280 240 200 160 130

07
Less: Depreciation (120) (120) (120) (120) (120)
Operating income 160 120 80 40 0

Year RI = Operating income- cost of capital

1 160,000 – (16% × 600,000) = Sh 64,000

p
2 120,000 – (16% × 480,000) = 43,200

Ap
3 80,000 – (16% × 360,000) = 22,400

m
4 40,000 – (16% × 240,000) = 1,600
co
5 0 – (16% × 120,000) = 19,200
a.
ny

ii) Return on investment (RO1)

ke
ea
m

Year RI
So

2022 160 ÷ 600 × 100% = 26.67%

2023 120 ÷ 480 × 100% = 25%
2024 80 ÷ 360 × 100% = 22.22%
2025 40 ÷ 240 × 100% = 16.67%
2026 0 ÷ 120 × 100% = 0%

QUESTION 9
August 2022 Question Five A
The table below shows Safaris Airline Ltd.‘s framework to lay out its balanced scorecard
model:
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Balanced Objectives Measurements Target Initiative

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scorecard

07
perspective

07
S1  Profitability M1 30% profit margin J
 More customers Seat revenue
 Fewer planes Plane lease cost 20% customer
retention
5% drop in cost

p
S2  Flight is on time Arrival on time Best ranked Quality

Ap
 Lowest prices M2 management
customer

m
co loyalty
programme
a.
S3  Fast ground On ground time 30 minutes K
ny

turnaround On time
ke

departure
S4  Ground crew % Ground crew Year 1: 70% -ESOPS
ea

alignment trained Year 2: 90% -Ground crew

m

Year 5: 100% training

So

Required:
(i) Identify the balanced scorecard perspectives S1, S2, S3 and S4 above. (4 marks)
(ii) For the mentioned perspectives, state one performance measure labelled M1 and M2.
(2 marks)
(iii) Explain initiatives J and K that Safaris Airlines Ltd. should excel in, in order to meet
objectives and create value. (2 marks)

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ANSWER

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i) Identification of the balance score card perspective

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S1=Financial perspective

07
07
S22=Customer perspective
S3-Internal business process perspective
S4-Learning and growth perspective

ii) State performance measure labeled M1and M2

p
M1- Return on capital employed

Ap
M2- Bench mark cost versus competitors costs

m
co
iii) Explanation of the initiatives J and K that safaris airlines Ltd should excel
a.
Initiative J: Implement a strategy to attract more customers possibly through targeted
ny

marketing, loyalty programs and customer satisfaction initiatives

ke

Initiative K: Invest in improving ground operations efficiency by streamlining process

ea

and optimizing resources. This could involve better coordination between ground crew
m

members using advance technology for faster check-ins.

So

QUESTION 10
April 2022 Question Three A
Majimbo Ltd. has two Divisions; A and B whose respective performance is under review.
Division A is currently earning a profit of Sh.35 million and has net assets of Sh.150
million. Division B currently earns a profit of Sh.70 million with net assets of Sh.325
million. Majimbo Ltd. has a current cost of capital of 15%.

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Required:

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(i) Using the information above, calculate the return on investment and residual income

7
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for each of the two divisions under review and comment on your results. (8 marks)

07
(ii) State which method of performance evaluation (Return on investment or Residual

07
income) would be more useful when comparing divisional performance and why.
(2 marks)
ANSWER

p
Ap
m
co
a.
ny
ke
ea
m

Comment
So

Division A as a higher R01 but lower residual income which is vice versa to division B

ii) Return on investment would be more better when comparing divisions as it is a

relative measure as opposed to residual income which is an absolute measure therefore
has size of division problem

QUESTION 11
April 2022 Question Five A
Kitchen Masters Ltd. (KML) is a grocery and general merchandise retail group. KML has
supermarkets located in most towns and cities in its home country. Over the last few

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years, profits have fallen and KML has recognised that it has paid insufficient attention to

0
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customer care.

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73
07
KML has now realised the importance of the customer experience at its supermarkets. In

07
an attempt to earn the loyalty of its customers, KML has introduced a loyalty card
scheme that rewards customers with discount vouchers based on their spending and
buying patterns at supermarkets.

The management of KML is considering the introduction of a balanced scorecard

approach to manage the performance of its stores.

p
Ap
Required:

m
Recommend an objective and suitable performance measure for each of the three non-
co
financial perspectives of a balanced score card that KML could use to support its new
a.
strategy of improving customer experience.
ny

Note: In your answer, you should state the three perspectives and then recommend with
ke

reasons, an objective and a performance measure for each one of the three perspectives.
ea

(9 marks)
m

ANSWER
So

Non- financial perspectives of a balance scorecard

Perspective Objective Measure
Customer perspective  To increase customer loyalty  Number of customer
 To increase customer satisfaction adopting cards
Internal Business  To reduce customers queing time  Waiting time in the
Process perspective during payment at the teller queue
Learning and growth  To have qualified staffs who can  Number of staff
perspective address customers needs training days
adequately

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QUESTION 12

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September 2021 One A

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Explain the term "responsibility accounting". (2 marks)

07
07
ANSWER
Responsibility accounting
This is a technique in management accounting where responsibility is assigned for the
control of either the revenue or cost and the person in charge will be held responsible for
what happens in that responsibility centre.

p
Ap
QUESTION 13
September 2021 0ne B

m
Examine four advantages of responsibility accounting.
co (8 marks)
a.
ANSWER
ny

Advantages of responsibility accounting

1. It helps in performance improvement – Assigning of task to person responsible
ke

makes him to be motivated thereby improving performance.

ea

2. Helps in cost reduction and planning- in responsibility accounting , data or

m

information is collected about cost and revenue. This information is very helpful in
So

planning the future.

3. It helps in delegation and control. This system enables management to delegate
authority while referring overall control
4. Helps in decision making – The information collected under this system is helpful to
the management in planning future actions
5. It helps in assigning of responsibilities – Each individual in the organization is
assigned some responsibility and they are accountable for their work.

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QUESTION 14

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September 2021 One C

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The divisional managers of Lenga Juu Ltd., a medium-sized company are usually

07
evaluated and those with outstanding performance rewarded on an annual basis. The

07
divisional manager of KT division is faced with the following mutually exclusive
investments:
Project A Project B
Sh. Sh.
Initial capital outlay 8,000,000 8,120,000
Net cash flows:

p
Ap
Year
2022 3,620,000 4,260,000

m
2023 3,620,000 co 3,580.000
2024 3,620,000 2,640,000
a.
2025 3,620,000 2,100.000
ny

Additional information:
1. The initial capital outlay is to be amortised evenly over the projects' lives.
ke

2. The initial outlay is to be made on 1 January 2022.

ea

3. The company's required rate of return is 18%.

m

4. All cash flows accrue evenly throughout the year.

So

5. Assets are valued at the net book value at the beginning ()leach year in determining
the divisional returns.
6. Both projects A and B are expected to have nil residual value.
7. Ignore taxation.

Required:
(i) Using the average residual income method of project evaluation, advise the
management on the project to select. (5 marks)
(ii) Determining the average return on investment, advise the management on which
project to select. (5 marks)

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ANSWER

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Project A

07
Amortization = 8000÷4=2000

07
2022 2023 2024 2025
Asset value costs (A)) 8,000 6,000 4,000 2,000
Amortization (2,000) (2,000) (2,000) (2,000)
Net book value 6,000 4,000 2,000 0
Net cash flows (B) 3,620 3,620 3,620 3,620

p
Ap
RI = Operating profit – cost of capital
RI = B - (18%×A)

m
2022 2023 co 2024 2025
R1 2180 2540 2900 3260
a.
ny

Average RI= (2180+2540+2900+3260)÷4=2720

ke

Project B
ea

2022 2023 2024 2025

m

Asset cost 8,120 6,090 4,060 2,030

So

amortization (2030) (2030) (2030) (2030)

NBV 6,090 4,060 2,039 0
Net cash flow 4,260 3,580 2,640 2,100
RI = B - (18%×A) 2,798 2,964 1,909 1,735

Average R1= (2798.4)+2964+1909+1735)÷4=2352

Conclusion
Undertake project
A since it has a higher RI

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Return on investment (R01)

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07
07
2022 2023 2024 2025
A B A B A B A B
A Net cash flow 3,620 4,260 3,620 3,580 3,620 2,640 3,620 2,100
B Net book value 8,000 8,120 6,000 6,090 4,000 4,060 2,000 2,030
ROI=A/Bx100% 45.2% 52.46% 60.3% 58.8% 90.5% 65% 181% 103.4%

p
Ap
Average ROI = Project A = 94.26%
Project B = 69.67%

m
Undertake project A co
a.
QUESTION 15
ny

May 2021 Question One A

Non-financial performance measurement is deemed to be more important than financial
ke

performance measurement
ea

Discuss the position you would take with regard to the above assertion (8 Marks)
m
So

ANSWER
Non-financial measures
These are non-monetary measures and mostly relates to customer relationship,
employers, operations quality, product cycle, confidence. They can be analyzed using
perspectives of balance score card.

i) Customer perspective
 Conversion rate
 Retention rate
 Customer satisfaction

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 Customer complains

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 Customers referrers

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07
ii) Internal processes

07
 Customer support tickets
 Product defect rates
 On time delivery
 Efficiency
 Number of machine breakdown

p
Ap
iii) Learning and growth
 Employee productivity rates
 Turnover rates
m
co
 Learning rate
a.

 Internal Promotion rates

ny
ke

QUESTION 16
ea

May 2021 Question One B

Klepotmine Ltd. manufactures a single product K20 whose standard cost is Sh.7,500
m

made up as follows:
So

Sh.
Direct material (20 square metres at Sh.200 per metre) 4,000
Direct labour (5 hours at Sh.400 per hour) 2,000
Variable overheads (5 hours at Sh.200 per hour) 1,000
Fixed overheads (5 hours at Sh.100 per direct labour hour) 500
7,500
Additional information:
1. The standard unit selling price of product K20 is Sh.9,800.
2. Monthly budget production and sales is set at 1,000 units.
3. The following figures relate to the month of October 2020:
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Sales 150 units at Sh.10,400

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Production 1,200 units (there was no opening stock)

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Direct material 18,800 square metres at Sh.400 per square metre

07
Direct wages 5,800 hours at Sh.500 per hour.

07
Total variable overheads Sh. 942,000
Total fixed overheads Sh. 600,000

Required:
(i) Actual profit or loss statement. (4 marks)
(ii) Flexible profit or loss statement. (4 marks)

p
Ap
(iii) A reconciliation statement for the reported variances. (4 marks)

m
ANSWER co
Determining expected selling price
a.
ny
ke
ea
m
So

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0
89
7
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Profit statement of transfer price of sh 2250

07
Sale –External sales 140,000 ×4,750 665,000,000

07
- Internal sales 60,000 × 2,250 135,000,000
Total sales 800,000,000
Less: variable cost 200,000 × 100 (200,000,000)
Fixed cost (400,000,000)
Expected profit (200,000,000)

p
Ap
Expected profit with reduced investment
Sales 140,000x4750 665,000,000

m
Cost savings in selling and adm cost 40,000,000
co
Less: variable cost 140,000x100 (140,000,000)
a.
:fixed cost (400,000,000)
ny

Opportunity cost=25%x(80+120) (50,000,000)

ke

Expected profit 115,000,000

ea

Comment: They should accept the transfer price of Shs 2250

m
So

QUESTION 17
November 2020 Question One B
Examine two shortcomings of financial performance measurements. (4 marks)

ANSWER
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.

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 Driving by rearview mirror - Financial measurers provide an excellent review of

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past performance and events in the organization. This detailed view has no

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predictive power for the future.

07
 Manipulation of records – when financial data are manipulated, that means the

07
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.

p
Ap
QUESTION 18
November 2020 Question Four B

m
Beta Division, which is part of Mega Group, is considering an investment opportunity
co
with the following information:
a.
1. An initial investment of Sh.45 million in equipment at the beginning of year 1 which
ny

will be depreciated on a straight line basis over a three year period with a nil residual
ke

value at the end of year 3.

2. Net operating cash inflows in each of years 1-3 will be Sh.12.5 million, Sh.18.5
ea

million and Sh.27 million respectively. :

m

3. The management accountant of Beta Division has estimated that the net present
So

value (NPV) of the investment would be Sh.1,937,000 using a cost of capital of 10%.
4. A bonus scheme which is based on short-term performance evaluation is in
operation in all divisions within the Mega Group.

Required:
(i) Compute the residual income of the proposed investment. (3 marks)
(ii) 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)

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ANSWER

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i) Residual income

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73
07
07
Year 1 2 3
Cash flows 12.5 16.5 27
Depreciation (15) (15) (15)

p
operating profit/loss (2.5) (15) (12)

Ap
m
co
ii) Depreciation is used to determine the operating profit and for taxation purposes
a.
only.
ny

 The depreciation of Sh 15m per annum will therefore reduce the cash inflows to
ke

get operating profit.

 Reduce the cash inflows to get operating profit.
ea

 NPV of 1937,000 in this case will be only relevant when making long term goals
m

of the company
So

QUESTION 19
November 2019 Question Four B
Bedaline Ltd. is a manufacturing division of a large industrial company. AslopWafula,
the divisional manager is about to purchase a new plant to manufacture a new product.
Aslop could either purchase an automatic plant or a manual plant each of which has the
same capacity and expected useful life of four years. The two machines however differ in
their expected capital cost and cash flows as shown below:

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Automatic plant Manual plant

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Sh. Sh.

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Initial capital investment 9,600,000 7,800,000

07
Net cash flows before tax:

07
Year: 1 3,600,000 3,900,000
2 3,600,000 3,300,000
3 3,600,000 2,250,000
4 3,600,000 1,500.000
Net present value at 16% 473,451 284,422

p
Ap
Additional information:
1. In the above calculation, it is assumed that the plant will be installed and paid for at

m
the beginning of year 1 and that the net cash flows occur at the end of each year.
co
2. Neither of the plant is expected to have a residual value.
a.
3. Like all other divisional managers in the company, AslopWafula is expected to
ny

generate before tax return on his divisional investment in excess of 16% per annum
which he is currently just managing to achieve.
ke

Anything less than 16% returns would make him ineligible for a performance bonus
ea

and might reduce his pension benefit when he retires early in Year 3.
m

4. In calculating divisional returns, divisional assets are valued at net book value at the
So

beginning of the year.

Depreciation is charged on a straight line basis.

Required:
(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.

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(2 marks)

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89
ANSWER

7
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i) Justification of why neither Return on Investments (ROI) nor Residual Income

07
(RI) would motivate Aslop Wafula to invest in the machine with the higher net

07
present value
Return on investment (ROI)
Depreciation on machine = automatic 9,600÷4 = 2,400
Manual 7,800÷4=1,950
Manual machine

p
1 2 3 4

Ap
Cost (A) 7,800 5,850 3,900 1,950
Depreciation (B) (1,950) (1,950) (1,950) (1,950)

m
Net Book Value (A-B) 5,850 co 3,900 1,950 0
Cash flows 3,900 3,300 2,250 1,500
a.
Less: Depreciation (1,950) (1950) (1,950) (1,950)
ny

Net Cash flows (C) 1,950 1,350 300 450

ke

ROI = C/A = 100% 25% 23% 7.7% -23%

RI = C-(16% × A) 702 414 -324 -762
ea
m

Automatic machine
So

1 2 3 4
Best A 9,600 7,200 4,800 2,400
Depreciation (B) (2,400) (2,400) (2,400) (2,400)
NBV A-B) 7,200 4,800 2,400 0
Cash flow 3,600 3,600 3,600 3,600
Depreciation (2,400) (2,400) (2,400) (2,400)
Net cash flow(C ) 1,200 1,200 1,200 1,200
ROI = C/A = 100% 12.5% 16.67% 25% 50%
RI=C-(16%×A) -336 48 432 816

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Average ROI = Manual = (25+23+7.7+- 23) ÷ 4 = 8.175%

0
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Automatic = (12.5+16.67+25+50) ÷ 4 = 26%

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07
Average residual income (RF)

07
Manual = (702 + 414+ -324+-762) ÷ 4=30
Automatic = (-336+48+432+816) ÷ 240

Based on both ROI and RI , Automatic machine should be embarrassed

QUESTION 20

p
Ap
November 2019 Question Five B
Nilo Ltd. is one of the largest and most diversified textile firms in the country. The

m
company manufactures and sells its products through 25 individual divisions that operate
co
more or less like autonomous companies.
a.
ny

Each division of the company has its own manufacturing plants for making the division's
products, a sales team and administrative staff to provide financial assistance and control.
ke

Broad policy and financial guidance as well as technical assistance is provided from the
ea

head office of the company. Nilo Ltd. uses several measures to determine divisional
m

performance.
So

However, the most widely used measure is the return on investment (ROI) of each
division.

The following information relates to determination of the ROI of all the divisions:

1. The returns of each investment of a division is determined using the following

formula:
Divisional revenues Direct
Return Allocated central
= (sales to outsiders and - divisional -
corporate costs
insiders) costs

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0
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2. The investment of a division is determined as follows:

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Investment = Book value of assets

07
3. Book value of assets is the aggregate of the accounts receivable net of accounts

07
payable, inventories including raw materials, work in-progress and finished goods
and long term assets net of accumulated depreciation.
4. The actual ROI is calculated monthly for each division and the formula is uniform
across all divisions as it is centrally determined.
5. In undertaking performance evaluation, emphasis is laid on trends rather than
absolute goals and standards.

p
Ap
6. The management also lays emphasis on divisions whose performance is improving
or deteriorating and has set a minimum expected ROI below which the manager is

m
required to face disciplinary action. This minimum ROI is however loosely set
co
hence easily achievable.
a.
7. The minimum ROI is determined by applying different weights to the three
ny

investment components as follows; 20% of depreciable assets, 12% for inventories

and 6% for account receivables.
ke

8. Transfer prices between divisions are negotiated between themselves.

ea
m

Required:
So

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

ANSWER
Strengths and three weaknesses of the return on investment measure as used by Nilo
Ltd
Strengths of ROI
1) ROI model serves as standardized metric of measuring the financial efficiency of
investment opportunity. As evidenced in Nilo Ltd, they do apply standardized
familiar to efficiency measure using ROI

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2) ROI as well serves as a paint of comparison between division in Nilo Ltd, ROI is

0
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used to determine and compare the divisions performance i.e. trend and cross

7
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section analysis.

07
3) ROI is more focused on efficiency rather than effectiveness. In Nilo ltd, the

07
management lag emphasis on divisions whose performance is improving or
deteriorating and do not focus more on standards nor absolute goals

Weaknesses of ROI
1) Performance slack – this is a situation where benchmark ROI is set tool low which
is easily to achieve. In Nilo Ltd, we are told that the minimal ROI is loosely set

p
Ap
hence easily achievable
2) The determination of investment is based on accounting book values. With regard to

m
this, financial information may be manipulated to fit specific manager‘s interest
co
which does not represent true stand.
a.
3) Transfer price is on negotiation basis. This can be used to undermine goal
ny

congruence as division head may determine price which only focuses on short term
gain.
ke

4) ROI does not take into account time value of money

ea
m

QUESTION 21
So

May 2019 Question Two A

Discuss five challenges associated with the return on investment (ROI) approach in
financial performance measurement. (10 marks)

ANSWER
Challenges associated with the return on investment (ROI) approach in financial
performance measurement
 It ignores the time value of money
 It ignores different useful lives of different projects
 It ignores the external factors

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 It does not recognize the effect of qualitative factor

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 It does not recognize inflation

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07
QUESTION 22

07
May 2019 Question Five A
Global Chain Ltd. has supermarkets located in most towns and cities across the East
African region. Over the last few years, profits have fallen prompting the top
management to seek technical advice from CP Ltd., a consulting firm that specialises in
business turn-around.

p
Ap
CP Ltd. has managed to obtain relevant information from the management of the
company and has organised it as follows:

m
co 2016 2017 2018
Percentage of staff promoted Actual 6% 5% 8%
Budget 30% 30% 30%
a.
Average lead time for re-stocking Actual 3 days 3.25 days 4.1 days
ny

Target 3 days 3 days 3 days

Sales/Turnover (Sh. billion) Actual 200 192 169
ke

Target 208 210 215

Loyalty points awarded to customers Actual 1.4% 1.3% 1.2%
ea

(percentage of sales value) Target 1.5% 1.5% 1.5%

Total number of staff grievances lodged in Actual 47 101 123
m

a year Target Nil Nil Nil

Operating expenses (Sh. billion) Actual 190 196 199
So

Target 180 182 185

Customer satisfaction index Actual 78% 63% 59%
Target 95% 95% 95%
Processing time for goods returned on Actual 2 weeks 3 weeks 3 weeks
warranties(Replacements) Target 1 weeks 1 week 1 week

Required:
Explaining the current status of Global Chain Ltd., prepare a balanced scorecard report
covering the four perspectives, using the above information. (12 marks)
ANSWER
Balanced scorecard report covering the four perspectives

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Perspective Measure Comment

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Financial Sales Poor

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Expenses Poor

07
Customer Loyalty Good

07
Satisfaction index Dangerous
Internal business Processes Lead time Good
Processing time Poor
Leaning & Development Staff promotion Good
Staff grievances‘ Poor

p
Ap
QUESTION 23
November 2018 Question Two B

m
STM Ltd. intends to open a new outlet in the northern part of the country.
co
The following information relates to the outlet over the next four years:
a.
1. The budgeted sales volume in the first year of operation is 18,000 units. This sales
ny

volume is expected to grow at the rate of 10% for years one, two and three but no
ke

further growth is expected from year four.

2. The selling price will be set at Sh.900 per unit for the first two years but then reduce
ea

by 5% per annum for each of the next two years.

m

3. Gross profit is expected to be 40% of sales in the first year, but will reduce as the
So

sale price reduces. The purchase price on goods for resale will remain constant for
the four years.
4. The overheads including depreciation are budgeted at Sh.5,250,000 for the first two
years rising to Sh.6,000,000 in years three and four.
5. The new outlet requires an investment of Sh.7,500,000 at the start of its first year of
trading.
6. STM Ltd. depreciates its non-current assets at the rate of 25% on cost with nil
residual value expected.
Required:
For each of the four years, compute the following:

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(i) Net profit. (6 marks)

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

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07
ANSWER

07
i) Determining net profit
1 2 3 4
Sales volume 18,000 19,800 21,780 23,958
Selling price 900 900 855 855
Total sales (sh 000) 16,200 17,820 18,621.9 20,484

p
Gross profit margin 40% 40% 38% 38%

Ap
Gross profit 6,480 7,128 7,076.32 7,784
Overhead cost (5,250) (5,250) (6,000) (6,000)

m
Net profit 1,230 1,878
co 1,076.32 1,784
a.
ii) Return on investment (ROI)
ny
ke

Year 1 Year 2 Year 3 Year 4

ea

Assets balance b/d (A) 7,500 5,625 3,750 1,875

m

Depreciation 25%×7,500) (1,875) (1,875) (1,875) (1,875)

So

N.B.V 5,625 3,750 1,875 0

Net income(B) 1,230 1,878 1,076.32 1,784

ROI = × 100% 16.4% 33.39% 28.7% 95.15%

QUESTION 24
November 2018 Question Four A
MWL Ltd. has in the past produced just one fairly successful product. However, a new
version of this product has recently been launched. In the meantime, development works
continue with the aim of adding a related product to the portfolio of products.

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Given below are some details of the activities carried out during the month of October

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2018:

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Units produced: Existing product 25,000

07
New product 5,000

07
Production cost (Sh.): Existing product 375,000
New product 70,000
Sales revenue (Sh.): Existing product 550,000
New product 125,000
Hours worked: Existing product 5,000
New product 1,250

p
Ap
Development cost (Sh.) 47,000

m
Required: co
Compute the performance indicators that could be used for each of the four perspectives
a.
on the balanced scorecard. (8 marks)
ny
ke

ANSWER
Performance indicators that could be used for each of the four perspectives on the
ea

balanced scorecard
m

Perspective Measure Product Computation

So

Profit margin Existing ×100% = 31.82%

Financial
New ×100% = 44%

Variety Existing 25,000

Customer
Demand New 5,000 Ratio 5:1

Existing
Internal business Productivity = 5

process
New = 4

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0
Percentage of

89
Leaning and growth Both × 100% = 10.6%
development cost

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73
07
07
QUESTION 25
May 2018 Question Five A
Ace Ltd. has two divisions namely; Bee and Cee each under a divisional manager. The
two divisions plan to acquire some investments in the month of August 2018.

Additional information:

p
1. The cost of capital for both divisions is 13%.

Ap
2. The current return on investment of each division is 15%.
3. The divisions' planned investments have the following features:

m
Bee Cee
co
Capital required for investment (Sh.) 800,000 400,000
a.
Revenue generated by investment (Sh.) 450,000 210,000
ny

Net profit margin (%) 30 35

ke
ea

Required:
For each of the two divisions, compute:
m

(i) Return on investment (ROI). (3 marks)

So

(ii) Residual income. (3 marks)

ANSWER
i ) Return on investment ROI

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Bee Cee

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= ×100% =16.875%

07
ROI ×100% = 18.3%

07
ii) Residual income

p
Ap
QUESTION 26

m
November 2017 Question Three A
co
Measuring customer performance in the context of a firm encompasses using generic
measures to assess the impact of various strategies on customers.
a.
ny

Required:
ke

With regard to performance measurement in the service industry, identify three key
ea

indicators of customer performance measurement. (6 marks)

m

ANSWER
So

Key indicators of customer performance measurement

 Customer retention ratio: If the customer is satisfied by the quality of the
service, they are likely to stick around and do more business with that specific
organization.
 Customers feedback and complain rate: Sometime when the customer is happy
for a given service offered to him/her, they end up expressing by giving feedback.
Interns of complain if the number is complain more, this indicates otherwise.
 Referrals: When customers are satisfied with your services they tend to go and
refer their friend, relatives or even associate to your organization

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QUESTION 27

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November 2017 Question Four B

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The Lofters group comprises two companies namely; W Ltd. and Zed Ltd. W Ltd. is a

07
trading company with two divisions; the Design division which designs wind turbines

07
and supplies the designs to customers under license and the Gearbox division, which
manufactures gearboxes for the car industry.

Zed Ltd. manufactures components for gearboxes. It sells the components globally and
also supplies W Ltd. with components for its Gearbox division.

p
Ap
The financial results for the two companies for the year ended 31 December 2017 are as
follows:

m
co W Ltd. Zed Ltd.
Design Division Gearbox Division
a.
Sh."000" Sh."000" Sh."000"
ny

External sales 14,300 25,535 8,010

Sales to Gearbox division 7 550
ke

15,560
ea

Cost of sales (4,900) (16,200) (5,280)

m

Administrative costs (3,400) (4,200) (2,600)

So

Distribution costs - (1,260) (670)

Operating profit 6,000 3,875 7,010
Capital employed 23,540 32,320 82,975

The cost of sales in the Gearbox division includes the cost of components purchased from
Zed Ltd.

Required:
Evaluate the performance of Zed Ltd. and each division of W Ltd. using the following
performance measures:

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(i) Return on capital employed (ROCE). (3 marks)

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(ii) Asset turnover. (3 marks)

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(iii) Operating profit margin. (3 marks)

07
07
ANSWER
Evaluate the performance of Zed Ltd. and each division of W Ltd. using
i) Return on capital employed (ROCE)

p
Ap
m
co
a.
ny

ii) Asset turnover

ke
ea
m
So

iii) Operating profit margin

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89
7
73
07
07
QUESTION 28
May 2017 Question Three B

p
Discuss the three approaches of evaluating performance. (6 marks)

Ap
ANSWER

m
Approaches of evaluating performance co
 Return on investment (ROI): This shows the amount of return generated by a
a.
given investment amount over a defined period of time. ROI is preferred for
ny

managerial performance but it is not suitable for comparison of dissimilar

ke

divisions. since it‘s an absolute measure

 Residue Income: This is the excess of profit over the return on capital employed.
ea

It is preferred for managerial performance but it is not suitable for comparison of

m

dissimilar divisions. Since it‘s an absolute measure.

So

 Economic value added (EVA): This is the difference between net operating
profit after tax and return on capital employed. it is applied to determine whether
divisions are adding or destroying value.

QUESTION 29
November 2016 Question Four
Everlast Ltd. operates three health and fitness centres in the country. Each centre offers
dietary plans and fitness facilities or programmes to clients under the supervision of
dieticians and fitness trainers.

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Residential accommodation is also available at each centre. The centres are located in the

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Western, Eastern and Central parts of the country.

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73
07
The following information is available:

07
1. Summary of financial data for Everlast Ltd. for the financial year ended 30 June 2016:
Western Eastern Central Total
Sh. "000" Sh. "000" Sh. "000" Sh. "000"
Revenue:
Fees received 1,800 2,100 4,500 8,400
Variable cost (468) (567) (1,395) (2,430)
Contribution 1,332 1,533 3,105 5,970

p
Fixed cost (936) (1,092) (2,402) (4,430)

Ap
Operating profit 396 441 703 1,540
Interest cost on long-term debt at 10% (180)

m
Profit before tax co 1,360
Income tax for the year (408)
Profit for the year 952
a.
Average book values for 2016:
ny

Assets:
Non-current assets 1,000 2,500 3,300 6,800
ke

Current assets 800 900 1,000 2,700

ea

Total assets 1,800 3,400 4,300 9,500

m

Equity:
Share capital 2,500
So

Retained earnings 4,400

Non-current liability:
Long-term borrowing 1,800

Current liabilities 80 240 480 800

Total equity and liabilities 9,500

2. Everlast Ltd. defines residual income (RI) for each centre as operating profit
minus required rate of return of 12% of the total assets of each centre.
3. At present, Everlast Ltd. does not allocate long-term borrowings of the group to
the three separate centres.

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4. Each centre faces similar risk.

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5. Tax is payable at the rate of 30%.

7
73
6. The market value of the equity capital of Everlast Ltd. is Sh.9 million and the cost

07
of equity is 15%.

07
7. The market value of long-term borrowing is equal to its book value.
8. The directors are concerned about the return on investment (ROI) generated by
Eastern centre and are considering using sensitivity analysis in order to show how
target ROI of 20% might be achieved.
9. The marketing director stated at a recent board meeting that "The Group's success
depends on the quality of service to our clients. In my opinion, we need only to

p
Ap
concern ourselves with the number of complaints received from clients during
each period as this is the most important performance measure of our business.

m
The number of complaints received from clients is a perfect performance measure.
co
As long as the number of complaints received from customers is not increasing
a.
from period to period, then we can be confident about our future prospects".
ny
ke

Required:
The directors of Everlast Ltd. have requested you as the management accountant to
ea

prepare a report providing them with explanations as to the following:

m
So

a) The most successful centre. Your report should include commentary on return on
investment (R0I), residual income (RI) and economic value added (EVA) as measures
of financial performance. Detailed calculations regarding each of the three measures
must be included as part of your report. (12 marks)
b) The percentage change in revenue, total cost and net assets during the period that
would have been required in order to achieve a target ROI of 20% for Eastern centre.
(6 marks)
c) State whether you agree with the statement of the marketing director in note (9)
above. (2 marks)
(Total: 20 marks)

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ANSWER

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Determining most successful centre

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i) Using Return on Investment (RO1)

07
07
Centre Operating Profit Net Asset/Total Asset - Liabilities ROI
Western 396 1,800 – 80 = 1,720 23%
Eastern 441 3,400 – 240 = 3,160 14%
Central 703 4,300 – 480 = 3,820 18.4%

p
ii) Residual Income (RI)

Ap
Centre Operating Total Return On Capital Employed RI

m
Profit Assets (12% × Total Asset)
co
Western 396 1,800 12%×1,800=216 180
a.
Eastern 441 3,400 12%×3,400=408 33
ny

Central 703 4,300 12%×4,300=516 187

ke

iii) Economic Valued Added (EVA)

ea
m
So

Weights Proportion
Equity = 9000= 0.83

Debt = = 0.17

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7
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Centre NOPAT Capital employed Return on capital EVA

07
Profit (1-t) (Asset-liabilities) employed sh 000

07
(Capital × WACC)
western 396×70% = 277.2 1,720 1,720×13.64% = 234.6 42.6
Eastern 441×70% = 308.7 3,160 3,160×13.64% = 431 -122.3
Central 703×70% = 492.1 3,820 3,820×13.64% = 521 -28.9

p
Summary

Ap
 Based on ROI Western division is the most successful
 Based on RI, Central division is the most successful

m
 Based on EVA. Western is adding more value hence based on the measures
co
above, western division is the best.
a.
ny

b) Percentage change in revenue, total cost and not assets for eastern centre
ke

i) Revenue (let it be x)
Revenue x
ea

Less: Variable cost ration= (567÷2,100) (0.27x)

m

Less: Fixed cost (1,092)

So

Operating profit 0.73x – 1092

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ii) Total cost (let it be x)

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Variable cost 567

07
Fixed cost 1,092

07
Total cost 1,659

p
Ap
m
co
iii) Net Asset (let it be x)
a.
ny
ke
ea
m
So

c) The statement of the marketing director

The marketing director is correct that quality & performance depends on level of service
quality but on the other hand, this is not the only measure of success.

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QUESTION 30

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November 2016 Question Five

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73
Sang Ltd. has two divisions namely; X and Y. Division X manufactures electrical

07
components which it sells to division Y and external customers.

07
Division Y has designed a new product branded "Yetu" and has requested division X to
supply the electrical component which is required in the manufacture of the new product.
Each unit of product "Yetu" will require one electrical component. This component will
no longer be sold by division X to external customers. Division X has quoted a transfer
price to division Y of Sh.45 for each unit of the electrical component.

p
Ap
It is the policy of Sang Ltd. to reward managers based on their individual division's return

m
on capital employed. co
a.
The details of the monthly production for each division arc as follows:
ny
ke

Division X
Output The electrical component will be produced in batches of 1,000 units.
ea

The maximum capacity is 6,000 components per month.

m

Variable cost Sh.15 per component.

So

Fixed cost Sh.50,000 (these arc incurred specifically to manufacture the electrical
component

Division Y
Output Product "Yetu" will be produced in batches of 1,000 units. The maximum
customer demand is 6,000 units of product "Yetu" per month.

Variable cost Sh.9 per unit plus the cost of electrical component.

Fixed cost Sh.75,000 (these are incurred specifically to manufacture product "Yetu").

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The relationship between the monthly customer demand and the selling price of product

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"Yetu" is as follows:

7
73
07
Demand (units) Selling price per unit (Sh.)

07
1,000 120
2,000 110
3,000 100
4,000 90
5,000 80
6,000 67

p
Ap
Required:

m
a) Based on a transfer price of Sh.45 per electrical component, advise the management
co
of Sang Ltd. on the monthly profit that would be earned as a result of selling product
a.
"Yetu". (6 marks)
ny

b) Determine the maximum monthly profit from the sale of product "Yetu" for Sang Ltd.
(4 marks)
ke

c) Using the marginal cost of electrical component as a transfer price, advise the
ea

management of Sang Ltd. on the monthly profit that would be earned as a result of
m

selling product "Yetu" by divisions X and Y and the company as a whole. (6 marks)
So

d) i) Using the above scenario, discuss the problem of setting a transfer price
(2 marks)
ii) Suggest a transfer pricing policy that would help Sang Ltd. to overcome the transfer
pricing problems that it faces. (2 marks)
(Total: 20 marks)

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ANSWER

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a) Profit realized for selling product “yetu”

7
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Division y income statement

07
Units Revenue (x×Price) Variable Cost Fixed Cost Profit

07
(x× 54)
1,000 120×1,000 = 120,000 54,000 75,000 -9,000
2,000 110×2,000 = 220,000 108,000 75,000 37,000
3,000 100×3,000 = 300,000 162,000 75,000 63,000
4,000 90×4,000 = 360,000 216,000 75,000 69,000

p
5,000 80×5,000 = 400,000 270,000 75,000 55,000

Ap
6,000 67×6,000 = 402,000 324,000 75,000 3,000
218,000

m
co
Division y will sell 4,000 units of product yetu since it has the highest profit. Therefore it
a.
will order 4,000 unit of electronic component from division x
ny
ke

b) Maximum profit by sand ltd for selling product yetu sang ltd
Units Revenue Variable Cost Fixed Cost Profit
ea

(15+9)x (50+75)
m

1,000 120,000 24,000 125,000 -29,000

So

2,000 220,000 48,000 125,000 47,000

3,000 300,000 72,000 125,000 103,000
4,000 360,000 96,000 125,000 139,000
5,000 400,000 120,000 125,000 155,000
6,000 402,000 144,000 125,000 133,000
548,000

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The profit maximizing out by sang ltd is 5,000 unit with profit of sh 155,000

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Division x Division y Sang ltd

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73
Sales – External - 400,000 400,000

07
Internal sales 75,000 - -

07
Less: Inter group sales (75,000) -
Variable cost (75,000) (45,000) (120,000)
Fixed cost (50,000) (75,000) (125,000)
Profit (50,000) 205,000 155,000

p
d) i) Problems of setting transfer price

Ap
If marginal cost is used as the transfer price, the manager of division x will not be
motivated since there will be no contribution towards meeting the divisions fixed cost.

m
This transfer price however maximizes the group‘s profit
co
a.
ii) Overcoming the transfer pricing problem
ny

The above problem could be tackled using, dual price transfer pricing or negotiated
ke

transfer price.
ea

QUESTION 31
m

May 2016 Question Five A

So

Discuss the application of the Fitzgerald and Moons building block model in performance
measurement with particular focus to service organisations. (10 marks)

ANSWER
Application of the Fitzgeneral and moons building block model in performance
measurement
The model developed an approach to performance measurement in business services that
are based on three blocks of dimension, standard and rewards.

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7
73
07
07
p
Ap
m
co
a.
Explanation
 Competitiveness – this is how a business stands in comparison to its competitors
ny

 Dimension – this refers to the scope of issues to be included in the performance

ke

measurement
ea

 Scope may include: financial performance, innovation on organization state of

m

affairs in fare monetary terms.

So

 Quality performance – is the ability to deliver goods and services that meet
customers expectation
 Flexibility – is the responsiveness to change in the factor influencing business
performance.
 Resource utilization – this looks at the extent to which an organization can
optimize the use of its limited resources
 Innovation – ability of the business to device new product and new ways of doing
things.
 Standards – these are rules that employees of a company must follow in order to
achieve the long term objectives of the organization

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 Ownership – performance measure should be acceptable to everyone. Employees

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should be involved in setting the measure rather than it be imposed on them.

7
73
 Achievable – performance measure should be equally challenging for all parts of

07
the business.

07
 Rewards – managers expect to be rewarded not just for doing their job, but for
doing it right to be effective, rewards should have, charity, motivation and
controllability.
 Clarity – reward scheme should be clearly communicated to employees in
advance

p
 Motivation – reward scheme should be set in a manner which motives employees

Ap
to achieve the business goals.
 Controllability – employees should only be rewarded or penalized on the results

m
over which they have some control or influence
co
a.
QUESTION 32
ny

May 2016 Question Five B

ke

The following information relates to investment opportunities available to Tumaini Ltd:

ea

Investment Annual Cost of

m

opportunity profit investment

So

Sh. Sh.
A 300,000 900,000
B 300,000 1,600,000
C 240,000 1,200,000
D 280,000 800,000
E 260,000 1,000,000

Additional information:
1. The company currently has profits of Sh.1,250,000 and investments of Sh.5,000,000.
2. The minimum required rate of return of the company is 20%.

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3. The company will only invest in projects that will improve on the current

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performance.

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73
07
Required:

07
(i) The return on investment (ROI) and the residual income (RI) for each of the
investment opportunities. (5 marks)

(ii) Based on the performance measures above, rank the investment opportunities in their
order of preference.
Comment on the project (s) that the company should invest in. (5 marks)

p
Ap
(Hint: Select the project (s) that will maximise the final profitability).

m
ANSWER co
i) The return on investment (ROI) and the residual income (RI) for each of the
a.
investment opportunities
ny
ke
ea

Project RO1= x100% Rank R1=Income-cost of capital Rank

m

A ×100% = 33.33% 2 300-20%×900=120 2

So

B ×100% = 18.75% 5 300-20%×1,600=-20 5

C ×100% = 20% 4 240-20%×1,200=0 4

D ×100% = 35% 1 280-20%×800=120 1

E ×100% = 26% 3 260-20%×1,000=60 3

ii) Ranking
 Based on RO1, undertake project D,A and E since their RO1 is greater than 25%
(for the company)

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 Based on residual income, undertake project D,A& E since R1 is positive and

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greater than 20%.

7
73
07
QUESTION 33

07
September 2015 Question One A
Langa Langa Ltd. was privatised three years ago. The board of directors are trying to
enhance performance for the benefit of shareholders. The board has introduced the use of
economic valued added (EVA) as a key performance indicator.

p
The following financial information is available for the year ended 30 June 2015.

Ap
1. Income statement

m
Sh. "million"
co
Sales 575
a.
Operating costs (460)
ny

Operating profit 115

ke

Finance costs (38)

Profit before tax 77
ea

Corporate tax at 30% (23.1)

m

Profit after tax 53.9

So

2. Statement of financial position indicates capital employed as at 1 July 2014 as

Sh.1,060 million.
3. Operating costs include:
Sh. "million"
Research and development costs 20
Depreciation 98
Goodwill amortised 11.5
Advertising costs 3.5

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4. Goodwill written off in the previous years amounted to Sh.34.5 million.

0
89
5. Economic depreciation is approximately Sh.114 million.

7
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6. Cost of capital is as follows:

07
Equity 18%

07
Debt 10%
Debt to equity ratio 60%

Required:
Calculate the company's performance using EVA. (10 marks)

p
Ap
ANSWER
Calculate the company's performance using EVA

m
co
a.
ny
ke

EVA Statement
ea

P.A.T 53.9
m

Adjustment
So

Research & development 20

Depreciation 98
Goodwill amortized 11.5
Advertising cost 3.5
Finance cost 38(1-0.3) 26.6
Less: Economic depreciation (114)
NOPAT 99.5
Capital employed 1,060
Add: Goodwill (34.4+11.5) 46
Revised capital 1,106

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This indicates that langa langa ltd is destroying value

07
07
QUESTION 34
September 2015 Question One B
The executive director of Theta Ltd. attended a seminar on performance measurement
organised by a management consulting firm. He identified the following areas to be
assessed:

p
1. Financial return to shareholders.

Ap
2. Maintain high market share.
3. Increase productivity annually.

m
4. Offer up to date product range of high quality.
co
5. To be known as responsible employer.
a.
6. To acknowledge sound responsibility.
ny

7. To grow and survive autonomously.

ke

Required:
ea

i) Suitable measures of performance for each of the stated goals. (7 marks)

m

ii) Explain one goal that could be considered to be sufficient to incorporate all others.
So

(3 marks)
ANSWER
i) Suitable measures of performance for each of the stated goals
Area Measure
1. Financial return to shareholders Dividends, NPV, Residual income, Return on
investment (ROI) & Eva
2. Maintain high market annually Sales, sales trend, competition new
customers.
3. Increase productivity annually Training, technological adoption, reward,
recognition

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4. Offer up to date product New product, rejection rate, research and

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Range of high quality development

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5. To be known as responsible employer Turnover rate, participation in welfare

07
employees morale

07
6 To acknowledge social responsibility Communication, evaluations, communication
7 To grow and service autonomously Sales, profit, customer shares new branches

ii) i) One goal that could be considered to be sufficient to incorporate all others.
Financial return to shareholders – this will be mainly determined by profit and dividend

p
& asset base

Ap
QUESTION 35

m
May 2015 Question Four B co
The following is the income statement of MN Ltd. for the month ended 31 March 2015:
a.
ny

Sh. Sh.
ke

Sales 1,300,000
Cost of goods (1,010,000)
ea

Gross profit 290,000

m

Selling expenses 105,000

So

Administrative expenses 72,000 (177,000)

Net profit 113,000

Additional information:
1. MN Ltd. manufactures three products for sale in the domestic and foreign markets.
2. Data relating to the two markets for the three products is as follows:
Product
A B C
Sh. Sh. Sh.
Sales:
Domestic 400,000 300,000 300,000

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Foreign 100,000 100,000 100,000

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Total sales 500,000 400,000 400,000

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Variable production costs (percentage of sales) 60% 70% 60%

07
Variable selling costs (percentage of sales) 3% 2% 2%

07
3. Product A is manufactured in factory F 1 at Axed costs of Sh.48, 000 per month
which included in the cost of goods sold.
2. Products B and C are manufactured in factory F2. The fixed production costs in
factory F: are Sh.142,000 per month.
2. Fixed selling expenses are joint for the three products but Sh.36,000 is direct to the

p
domestic market and Sh.38,000 to the foreign market.

Ap
3. All administrative expenses are fixed: about Sh.25,000 is traceable to the foreign
market and Sh.35,000 to the domestic market.

m
co
Required:
a.

(i) Performance reports for the domestic and foreign markets. Assume separate
ny

managers are responsible for each market. (7 marks)

ke

(ii) Performance reports for the three products. Assume separate managers are
ea

responsible for each product. (7 marks)

m

ANSWER
So

i) Performance reports for the domestic and foreign markets ASSUMIN separate
managers are responsible for each market
Workings
Variable manufacturing cost
Product Rate Domestic Foreign Total
A 60% 240,000 60,000 300,000
B 70% 210,000 70,000 280,000
C 60% 180,000 60,000 240,000
Total 630,000 190,000 820,000

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Variable selling cost

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Product Rate Domestic Foreign Total

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A 3% 12,000 3,000 15,000

07
B 2% 6,000 2,000 8,000

07
C 2% 6,000 2,000 8,000
Total 24,000 7,000 31,000

Performance report for domestic and foreign market

Domestic Foreign Total

p
Sales 1,000,000 300,000 1,300,000

Ap
Variable cost of sale (W1) (630,000) (190,000) (820,000)
Variable selling cost (W2) (24,000) (7,000) (31,000)

m
Gross profit 346,000 103,000 449,000
co
Direct fixed cost - Selling (36,000) (38,000) (74,000)
a.
-Administrative (25,000) (35,000) (60,000)
ny

Net profit for market 285,000 30,000 315,000

ke

Common Indirect Cost

ea

Fixed manufacturing (48+142) (190,000)

Fixed Administration cost (72-25- (12,000)
m

35)
So

Net profit 113,000

ii) Performance reports for the three products. Assume separate managers are
responsible for each product

A B C Total
Sales 500,000 400,000 400,000 1,300,000
Variable cost – Manufacturing 300,000 280,000 240,000 820,000
- Selling 15,000 8,000 8,000 31,000

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Gross profit 185,000 112,000 152,000 449,000

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Direct fixed cost 48,000 - - 48,000

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Product profit 137,000 401,000

07
Common Fixed Cost

07
Selling cost (36+38) 74,000
Administrative cost 72,000
Fixed manufacturing 142,000
Profit 113,000

p
QUESTION 36

Ap
May 2015 Question Five B
The summary of financial information for Great Group Ltd is as follows:

m
2013 2014
co
Sh. "Million" Sh. "Million"
a.
Revenue 400 450
ny

Profit before tax 96 117

ke

Income tax (29) (35)

Profit for the period 67 82
ea

Dividends (23) (27)

m

Retained earnings 44 55
So

2013 2014
Sh. "Million" Sh. "Million"
Non-current assets 160 180
Current assets 180 215
Total assets 340 395
Financed by:
Total equity 270 325
Long term debt 70 70
Capital employed 340 395

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0
89
Additional information:

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73
1. The capital employed at the end of year 2012 amounted to Sh.279 million.

07
2. Great Group Ltd. had non-capitalised leases valued at Sh. 16 million in each of the

07
years 2012 to 2014 which were not subject to amortisation.
3. Amortisation of goodwill amounted to Sh. 5 million per year in both years 2013 and
2014.
The amount of goodwill written off against reserves on acquisition in years prior
to2013 amounted to Sh. 45 million.
4. Great Group Ltd.'s pre-tax cost of debt was estimated to be 10% for both years 2013

p
Ap
and 2014
5. The group cost of equity was estimated to be 16% in 2013 and 18% in 2014.

m
6. The target capital structure is 50% equity and 50% debt.
co
7. The rate of taxation was 30% in both year 2013 and 2014.
a.
8. The economic depreciation amounted to Sh.40 million in year 2013 and Sh.45 million
ny

in year 2014. The amounts were equal to the depreciation used for tax purposes and
depreciation charged in the income statements.
ke

9. Interest payable amounted to Sh.6 million per year in both years 2013 and 2014.
ea

10. Other non-cash expenses amounted to Sh. 12 million per year in both years 2013 and
m

2014.
So

Required:
For both years 2013 and 2014, estimate the economic value added (EVA). (10 marks)

ANSWER
Economic Value Added (EVA)

Where;
NOPAT = Net operating profit after tax

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0
89
7
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2013 = 0.5×16% + 0.5×1010% (1-0.3) = 11.5%

07
2014 = 0.5×18% + 0.5×10% (1-0.3) = 12.5%

07
Great Group Eva Statement for the year
2013 2014
P.A.T 67 82
Adjustment

p
Add: Interest net of tax 4.2 4.2

Ap
Amortization 5 5
Non – Cash expenses 12 12

m
Less: Economic depreciation co (40) 45
NOPAT 48.2 58.2
a.
Capital employed balance b/d 279 340
ny

Add: Leases 16 16
ke

Goodwill 50 55
ea

Revised capital 345 411

m

EVA
So

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TOPIC 6

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7
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INVENTORY CONTROL DECISIONS

07
QUESTION 1
December 2023 Question Three A
Evaluate THREE advantages of using simulation analysis in inventory control.
(6 marks)

p
ANSWER

Ap
Advantages of simulation analysis
1. It‘s the most suitable method for analyzing longterm project where other techniques

m
are not applicable co
2. It enables the decision maker to evaluate possible combination through the use of
a.
random numbers
ny

3. Each key variable factor can be analysed independently each at a time

ke

4. Cost benefit analysis - Simulation provides a platform for conducting cost – benefit
analysis of different inventory controls strategies
ea

5. Identification of optimal policies - Through simulation, business can identify optimal

m

inventory policies that balance service levels cost and other performance metrics
So

QUESTION 2
August 2023 Question Two A
Summarise FOUR limitations of the Just-In-Time (JIT) inventory system. (4 marks)

ANSWER
Limitation of JIT
1. It pouses high risk of stock out
2. Demand forecasting challenges
3. it might trigger production interruptions

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4. It brings about supplier dependence

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5. Can only be applicable where the infrastructure is well developed

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6. Can only be applicable if the supplier is reliable

07
07
QUESTION 3
August 2023 Question Five A
Sanitiza Ltd. sells sanitiser bottles. The company finds that it runs out of stock on
occasions and thus loses the contribution on missed sales. Sanitiza Ltd. works a five-day
week for 48 weeks a year. The demand figures have been analysed for the last 20 weeks.

p
Ap
Additional information:
1. The estimated demand is 60,000 bottles per year.

m
2. The opportunity cost of running out of stock is Sh.55.
co
3. The lead-time is 5 days guaranteed.
a.
4. The cost of holding a bottle is Sh.50 per year.
ny

5. The number of orders per annum are 10 orders.

6. The demand figures for the last 20 weeks are as follows:
ke

Sanitiser bottles sold Number of days the level of sales occurred

ea

150 7
m

200 14
So

250 35
300 35
350 28
400 14
450 7

7. At present, Sanitiza Ltd. uses a re-order level of 250 sanitiser bottles and does not
carry any safety stock because of the guaranteed delivery time.

Required:

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(i) The optimal safety stock in units. (8 marks)

0
89
(ii) The probability of being out of stock. (2 marks)

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07
ANSWER

07
i) Optimal safety stock
Shortage cost per unit Sh 55
Holding cost per unit Sh 50
No of annual orders 10 orders
Current reorder level 250

p
Ap
Demand during lead time Probability

m
150 7÷140 = 0.05
200 14÷140 = 0.10
co
35÷140 = 0.25
a.
ny

300 35÷140 = 0.25

350 28÷140 = 0.20
ke

400 14÷140 = 0.10

ea

450 7÷140 = 0.05

m

140
So

New Safety Holding cost Shortage per x no of annual x shortage cost

Rol Stock per unit
250 0 0 (50×0.25+100×0.1+200×0.05)10×55=31,625 31,625
300 50 50×50 = 2500 (50×0.2+100×0.1+150×0.05)10×55=15,125 17,625
350 100 100×50 = 5000 50×0.1+100×0.05)20×10×55=5500 10,500
400 150 150×50 = 7500 (50×0.05)×10×55=1375 8,875
450 200 20×50 = 10,000 0 10,000

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07
ii) Probability of being out of stock 0.05

07
QUESTION 4
April 2023 Question Three B
Rapsy Stores Ltd. is open 300 days each year. The store outsources and sells a single
product branded ―Sola‖. There is variability in lead time of each new order placed with

p
the manufacturer, which sometimes lead to stock outs.

Ap
The following data about Sola is available:
1. Annual demand is 15,000 pairs of Sola.
m
co
2. The cost price of Sola averages Sh.200 per pair.
a.

3. The fixed ordering cost of requisition is estimated to be Sh.80.

ny

4. For each pair of Sola, annual inventory holding opportunity cost of capital is 13.33%
ke

of its cost price.

ea

5. The management has determined economic order quantity based on data given above
which should be used as reorder quantity.
m

6. The initial inventory available is 180 pairs of Sola while the reorder level is set at 50
So

pairs of Sola.
7. The out of stock costs amount to Sh.100 per pair of Sola units that are out of stock.
8. The customer demand is unknown. However, the total usage of Sola over the four days
lead time is expected to be as follows:
Annual demand Probability Lead time Probability
(Pairs of Sola) (days)
30 0.2 1 0.15
60 0.3 2 0.30
90 0.4 3 0.45

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120 0.1 4 0.10

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9. The random numbers generated by the computer software are as follows:

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73
Annual demand: 4 8 6 1 7 1 9 0 3 8

07
Lead time: 28 10 56

07
Required:
(i) The economic order quantity (EOQ). (2 marks)
(ii) Simulate the inventory operation for a period of 10 days. (10 marks)
(iii) Using the information in (b) (ii) above, estimate the average daily stockholding costs.

p
(2 marks)

Ap
ANSWER
I) Economic Order Quantity

m
co
√ √
a.
ny

h = holding cost =13.33%×200 = 26.66

ke

D = Annual demand
ea

S = Ordering cost
m
So

ii) Simulation analysis

Monte Carlo

Demand
Demand Probability Accumulated Prob Range
30 0.2 0.2 0-1
60 0.3 0.5 2-4
90 0.4 0.9 5-8
120 0.1 1.0 9-9

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Local time

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Days Probability Accumulated Prob Range

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1 0.15 0.15 00 - 14

07
2 0.30 0.45 15 - 44

07
3 0.45 0.90 45 - 89
4 0.10 1.00 90 - 99

Simulation worksheet
Trial Opening Demand Closing Make Lead time Holding Ordering Shortage Total

p
stock RN Unit Stock order? RN Days cost cost cost cost

Ap
s 26.66 80 100

m
1 180 4 60 120 No - - 3,199 - - 3,199
2 120 8 90 30 No
co - 800 - - 800
3 30 6 90 0 Yes 28 2 0 80 6,000 6,080
a.

4 0+30 1 30 270 - - 7,198 - - 7,198

ny

5 270 7 90 180 No - 4,799 - - 4,799

ke

6 180 1 30 150 No - 3,999 - - 3,999

ea

7 150 9 120 30 No - 800 - - 800

m

8 30 0 30 0 Yes 10 1 0 80 0 80
So

9 0+30 3 60 240 No - - 6,398 - - 6,398

0 240 8 90 150 No - - 3,999 - - 3,999
Total 37,352
cost

iii)

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QUESTION 5

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December 2022 Question Four

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73
Huruma Ltd. is a client of ABX National Bank. The Managing Director of Huruma Ltd.

07
visited the bank‘s offices to seek for an additional line of credit. In the ensuing

07
discussions, the bank credit officer noticed that Huruma Ltd. could save a substantial
amount of money by improving on its inventory management.
The credit officer invited the Management Accountant of the company for further
consultation. From the conversation, it emerged that the company holds a substantial
quantity of a particular raw material in its warehouse. The Management Accountant
provided the following information on the raw material:

p
Ap
Invoice cost per unit Sh.1,200

m
Shipping charges co Sh.25 per unit plus Sh.140,000 per
shipment
a.
Inventory insurance Sh.10 per unit per year
ny

Annual handling and inspection cost of the raw

ke

material:
Warehouse utilities Sh.26 per unit plus Sh.150,000 per year
ea

Warehouse rental Sh.9,800 per month

m

Unloading costs for units received (paid to shipper) Sh.115,000 per month
So

Receiving supervisor‟s salary:

Processing invoices and other purchase documents Sh.8 per unit
Sh.176,000 per month
Sh.1,860 per order.

The company‘s policy is to order 5,000 units each time and maintain a safety stock of
3,000 units. The annual demand for the raw material is 45,000 units. The lead time for an
order is 10 working days.

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The Management Accountant has also indicated that if there is a stock-out, it would be

0
89
necessary to obtain the raw material by a special courier service at an additional cost of

7
73
Sh.81,000 per stock-out.

07
07
The probabilities of a stock-out at various safety stock levels were given as follows:
Safety stock (units) Probability for stock-out
500 0.25
1,000 0.08
1,500 0.02
2,000 0.01

p
Ap
Additional information:

m
1. The company‘s cost of capital is 10%. co
2. You are advised that there are 250 working days in a year.
a.
3. The raw material is ordered in multiples of 250 units.
ny

4. For analysis purposes, a stock-out probability of 0.02 would be reasonable for order
cost determination in an optimal inventory policy.
ke
ea

Required:
m

(a) The annual cost of the company‘s present inventory policy. (5 marks)
So

(b) Recommend an optimal order quantity for the company based on the information
provided. (5 marks)
(c) Recommend an optimal safety stock level. (5 marks)
(d) Advise the management of the firm on the savings to be realised from the optimal
order quantity and optimal safety stock level in (b) and (c) above. (3 marks)
(e) The reorder level for the company. (2 marks)
(Total: 20 marks)

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ANSWER

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89
Annual cost of the inventory

7
73
07
07
Holiday cost Sh
Insurance cost 10
Handling and inspection 26
Interest foregone 10% [1200+25+8] 123.3
Total holding cost 159.3

p
Ap
Ordering cost per order Sh

m
Shipping charges co 140,000
Processing invoice 1,860
141,860
a.
ny
ke

Annual holding cost

ea

( )
m

( )
So

Annual ordering cost

Annual inventory cost

Annual holding cost 876,150
Annual ordering cost 1,276,740
2,152,890

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b) Optimal order Quantity

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89
7
73
√ √

07
07
NB:
8,957 unit annual be ordered as units are ordered in multiples of 250 therefore calculate
total cost for order sizes 9,000 units and 9,250 units respectively

p
Order size 9,000 units

Ap
m
( ) ( co )
a.

Order size 9,250 units

ny

( ) ( )
ke
ea
m
So

c) Oprtimal safety stock

Safety stock Holding cost Shortage cost Yetu cost

500 500×159.3 = 79,650 ×0.25×8,100 = 10,125 89,775

1,000 1,000×159.3 = 159,300 ×0.08×8,100 = 3,240 162,540

1,500 1,500×159.3 = 238,950 ×0.02×8,100 = 810 239,760

2,000 2,000×159.3 = 318,600 ×0.01×8,100 = 405 319,005

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Optimal safety stock = 500 units since it has the lowest cost

0
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7
d) Savings to be realised

73
07
07
[ ] [ ]

p
Ap
e) The reorder level of the company

m
co
a.
[ ]
ny

QUESTION 6
ke

August 2022 Question Four B

ea

Mwamba County water-treatment plant purchases 100 kgs of lime bags for use in the
m

water treatment process. The number of bags used per day varies on the basis of water
So

consumption. Examination of past records discloses the following data:

Usage during past re-order period

Number of bags Number of times this quantity was used
225 9
300 15
375 20
450 3
525 2
600 1

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The economic order quantity (EOQ) has been established at 2,500 units with an average

7
73
daily usage of 25 bags and a lead time of 15 days for its single product X.

07
07
Additional information:
1. Stock-out cost is Sh.300 per bag.
2. The optimum number of orders based on the EOQ model is 6 times per annum.
3. The normal carrying cost is Sh.50 per bag.

Required:

p
Ap
Advise the management accountant of Mwamba County on the desired level of safety
stock in order to minimise the total inventory cost. (6 marks)

m
co
ANSWER
a.
Advice on the desired safety stock
ny

Stock out cost Sh 300

ke

No of annual orders 6 times

Holiday cost per bag Sh 50
ea
m
So

Demand during reorder period Probability

225 9÷50=0.18
300 15÷50=0.30
375 20÷50=0.40
450 3÷50=0.06
525 2÷50=0.04
600 ÷50=

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Analysis Schedule

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New Safety Holiday cost Shortage –Shortage per order cycle x No of orders x Total

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ROI Stock Shortage cost per unit cost

07
375 0 0 [75×0.06+150×0.04+005×0.2]6×300 = 27,000 27,000

07
450 75 75×50=3,750 [75×0.04+150×0.2)×6×300 = 10,800 14,550
525 150 150×50=7,500 (75×0.02)×6×300 = 2700 10,200
600 225 225×50=11,250 - 11,250

p
Ap
m
QUESTION 7
April 2022 Question Two C
co
Explain three characteristics of the Just-in-Time (JIT) inventory system. (3 marks)
a.
ny

ANSWER
ke

Characteristics of Just in Time (JIT)

ea

 Smaller deliveries received more often – these can be daily or even hourly as
m

needed to keep the production or sales process and keeping up with demand
 Higher supplier quality – since you do not have time to inspect goods every
So

time they arrive JIT suppliers are usually certified for quality
 Unique work arrangement – JIT production areas need to be more flexible than
normal production

QUESTION 8
December 2021 Four A
Discuss the following types of inventory models:
i. Deterministic models. (3 marks)
ii. Stochastic models. (3 marks)

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89
ANSWER

7
73
Inventory control medals

07
i) Deterministic model

07
This is an inventory control model which is applied where all inventory related cost are
certain and remains unchanged over the analysis period.
 Its applied where all inventory related cost are well known in advance and
constant over the analysis period.

p
ii) Stochastic model

Ap
This model is applied where all factors affecting inventory related cost are random and
they keep changing

m
This uncertainty gives rise to shortage cost co
a.
QUESTION 9
ny

December 2021 Four B

ke

A wholesaler is worried about the uncertainty of demand and lead time of the following
stock items:
ea

1. Stock item X
m

The weekly demand for the item is 200 units, with a normally distributed demand
So

with a standard deviation of 30 units and a lead time of 16 weeks.

2. Stock item Y
It has a daily demand of 50 units with a lead time that is normally distributed with
a mean of 20 days and a standard deviation of 2 days. The re-order level of the
stock item has been set at 1,100 units.
3. Stock item Z
The item is ordered every 6 months. The lead time is 3 months and demand is
normally distributed with a mean of 1,000 units per month and a standard
deviation of 80 units. The cost of stock-out is Sh.80 and the cost of holding one
unit of buffer stock is Sh.20 per annum.

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Required:

7
73
i. The re-order level of stock item X that would restrict the probability of a stock out

07
at 5% during a single re-order period. (4 marks)

07
ii. The probability of a stock out of item Y during a single re-order period. (4 marks)
iii. The total annual cost of holding safety stock and stock out cost if re-order level is
set at 3,600 units. (6 marks)

ANSWER

p
Ap
m
co
a.
ny
ke
ea

ROL = weekly demand x lead time

m

200×16 = 3,200
So

Standard deviation 30×16 = 480

̅

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ii) Probability of stock out

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7
73
07
07
p
Ap
m
co
a.
ny
ke

iii) No of annual orders 2

ea
m
So

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7
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07
07
QUESTION 10
September 2021 Question Two B
Safi Ltd. manufactures and markets automatic dish-washing machines. Among the
components which it purchases each year from external suppliers for assembly into
finished article are new window units, of which it uses 20,000 units per annum. It is
considering buying in bulk in order to claim quantity discounts. This will lower the

p
Ap
number of orders placed but raise the administrative and other costs of placing and
receiving orders. The details of actual and expected ordering costs and carrying costs are

m
given below: co
Actual Proposed
a.
Ordering costs per order (0) Sh.31.25 Sh.120
ny

Purchase cost per item (P) Sh.6.25 Sh.6.0

Annual Inventory holding cost
ke

as a percentage of purchase cost (I) 20% 20%

ea
m

Additional information:
So

1. To implement the new arrangements. re-organisation will be required of which

estimated costs amount to Sh.10,000.
2. These costs can be wholly claimed as a business expense for tax purposes in the
year before the system comes into operation.
3. The corporate tax rate is 30%.

Required:
i. Determine the change in the economic order quantity (EOQ) caused by the new
system. (6 marks)
ii. Calculate the payback period for the proposal and comment on your results.

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(8 marks)

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89
iii. Outline any two limitations of the payback period method applied in (b) (ii) above.

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73
(2 marks)

07
ANSWER

07
i)

p
Ap
m
co
√ √
a.
ny
ke

√ √
ea
m
So

Payable period
Total cost of proposed strategy

Total cost 122,400

Add: restructuring cost 10,000
132,400
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Total cost of Actual/ Current Policy

07
07
They should not accept the discount i.e they should not adopt the proposed strategy

(iii) Limitation of payback period

1. It does not take into time value of money
2. It uses accounting information which can be manipulated

p
Ap
QUESTION 11

m
May 2021 Question Two B co
A company has determined that the Economic Order Quantity for its only raw material is
2,000 units every 30 days. The company knows with certainty that a four-day lead time is
a.

required for ordering.

ny
ke

The following is the probability distribution of estimated usage of raw materials for the
ea

month of September 2020:

m
So

Usage in units 1,800 1,900 2,000 2,100 2,200 2,300 2,400 2,500
Probability 0.06 0.14 0.30 0.16 0.13 0.10 0.07 0,04

Stock outs will cost the company Sh.10 per unit and monthly holding cost is Sh.10 per
unit.

Required:
(i) The optimal safety stock. (8 marks)
(ii) The probability of being out of stock. (2 marks)

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ANSWER

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EOQ = 2000

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No of orders = 12

07
Shortage cost per unit = 10

07
Holding cost per unit=10x12=120

Prob

p
(1800÷30)×4 = 240 0.06

Ap
(1900÷30)×4 = 253 0.14
(2000÷30)×4 = 0.30
(2100÷30)×4 = 280 0.16
m
co
(2200÷30)×4 = 293 0.13
a.

(2300÷30)×4 = 307 1.10

ny

(2400÷30)×4 = 320 0.07

ke

(2500÷30)×4 = 333 0.04

ea
m

Analysis Tale
So

ROL Safety Holding Shortage cost = Shortage x shortage x No of Total

stock cost unit cost per unit orders cost
267 0 0×120=0 13×0.16+26×0.13+40×0.1+53×0.07+66×0.04)12×10 1,897.2
=1897.2
280 13 13×120=1560 (13×0.13+27x0.1+40×0.07+53×0.09)×12×10 2,677.2
=1117.2
293 26 3,120 (14×0.1+27×0.07+40×0.04) 12×10 3,706.8
=586.8
307 40 4,800 (13×0.0726×0.04)12×10 5,034
=234

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320 53 6,360 (13×0.04)×12×10 6,422.4

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=62.4

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333 66 7,920 0 7,920

07
07
Optimal safety stock 0 units

ii) Probability of stock out =1-0.06=0.94

p
QUESTION 12

Ap
May 2021 Question five B
The following information has been provided relating to the performance of XYZ

m
Ltd. co
Division Head Office Total
a.
X Y Z
ny

" Sh. Sh. Sh. Sh. Sh.

ke

"million" "million" "million" "million" "million"

Sales 610 330 1,125 - 2,065
ea

Profit before tax and interest 32 24 25 (9) 72

m

Total assets less

140.5 121.5 118.5 12 392.5
So

current liabilities

Additional information:
1. Head office liabilities and net assets are to be shared equally between all the
divisions.
2. Division X spent Sh.8,200,000 on research and development.
3. Advertising expenditure amounting to Sh.9,250,000 was spent by Division Y.
4. Goodwill amounting to Sh.65,000,000 and Sh.97,500,000 was amortised during the
year from Division Y and Division Z reserves respectively.
5. Cost of capital of XYZ Ltd. is 14%.

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6. A summary of the borrowings, interest received and interest paid on borrowings is as

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follows:

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Division Head Office Total

07
X Y Z

07
" Sh. Sh. Sh. Sh. Sh.
"million" "million" "million" "million" "million"
Sales - 37 38 7.5 82.5
Profit before tax and interest 1.5 - - - 1.5
Total assets less
- 2.25 4.3 3.1 9.6
current liabilities

Required:

p
Ap
Evaluate the divisional performance of XYZ Ltd. using the Economic Value Added
(EVA) approach. (10 marks)

m
co
ANSWER
a.
Eva = Nopat-Roce
ny

Eva statement
ke

x y z H.O Total
ea

EBIT 32 24 25 (9) 72
m

Adjustments
So

H.O less (2.66) (1.44) (5) 9 0

Research cost 8.2 - - - 8.2

Advertising expense - 9.25 - - 9.25
Amortization - 65 97.5 - 162.5
Interest received (1.5) - - - (1.5)
Adjusted Income(a) 36.04 96.81 117.5 - 250.45
Capital employed 140.5 121.5 118.5 12 392.5
H.O Net asset 4 4 4 (12) -
Borrowings - 37 38 7.5 82.5

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Research cost 8.2 - - - 8.2

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Advertising cost - 9.25 - - 9.25

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Adjusted capital (B) 152.7 171.75 160.5 - 492.45

07
07
EVA=A-(14%xB)
x=36.04- 14% × 152.7= 14.662
y=96.81- 14% ×171.75= 72.765
z=117.5- 14% × 160.5= 95.03

p
All the divisions are adding value.

Ap
QUESTION 13

m
November 2019 Question Two B co
Kiawara Ltd. maintains a perpetual inventory system. The Economic Order Quantity
a.
(EOQ) model has established an economic order quantity of 3,000 units with an average
ny

daily usage of 100 units and a lead-time of 20 days for its single input product branded
ke

"Zed".
ea

The following information relates to the usage of product Zed during the re-order period:
m

Usage during the re- Number of times the

So

order period (units) quantity is used

1,800 34
1,900 40
2,000 90
2,100 20
2,200 10
2,300 6

Additional information:
1. Stock-out cost amount to Sh.400 per unit.

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2. The optimum number of orders based on the EOQ model is 5 times per annum.

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3. The annual carrying cost is Sh.80 per unit.

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73
07
Required:

07
(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)

ANSWER
i) Advise the management of Kiawara Ltd. on the amount of safety stock to be

p
Ap
maintained
Inventory control know shortages

m
Current reorder level (CROL) = 100×20 = 2,000
co
Shortage cost per unit Sh.400
a.
Holding cost per unit Sh. 80
ny
ke

No of annual orders 5 times

ROL Number of time Probability
ea

1,800 34 (34÷200)2 =0.17

m

1,900 40 (40÷200)2= 0.20

So

2,000 90 (90÷200)2= 0.45

2,100 20 (20÷200)2= 0.10
2,200 10 (10÷200)2= 0.05
2,300 6 (6÷200)2= 0.03
200

= × ×Shortage Cost Per

Unit

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Analysis table

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ROL Safety Holding Shortage cost Total

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stock cost cost

07
2,000 0 0 (100×0.01+200×0.5+300×0.03)×5×400) = 58,000 58,000

07
2,100 100 8,000 (100×0.05+200×0.03) ×5×400 = 22,000 30,000
2,200 200 16,000 (100×0.03) ×5×400 =6,000

2,300 300 24,000 - - 24,000

p
ii) Determine the probability of a stock-out

Ap
Probability of being out of stock 0.03

QUESTION 14
m
co
May 2019 Question Two B
a.

Faidika Ltd. buys and sells a single product branded "NN". The demand and lead time of
ny

product NN is not constant. The following probability distribution has been provided:
ke
ea

Demand (units) Probability

2 0.02
m

3 0.08
So

4 0 .22
5 0.34
6 0.18
7 0.09
8 0.07

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Lead time (Weeks) Probability

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1 0.23

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2 0.45

07
3 0.17

07
4 0.09
5 0.06

Additional information:
1. The re-order point and the re-order quantity has been set at 40 units and 30 units
respectively.

p
Ap
2. The holding cost per unit per week is Sh.35.
3. The cost of placing an order is Sh.350.

m
4. If the company runs out of stock, a contribution of Sh.120 per unit is lost.
co
5. The opening inventory at the beginning of the first week was 60 units.
a.
ny

Required
Using simulation of the above problem for 10 weeks, determine the average weekly cost
ke

using the following random numbers:

ea
m

50 68 52 08 59 90 81 85 95 15 89 28 60 03
So

(10 marks)
ANSWER
Average Weekly Cost
Montecarlo analysis for Dentland
Demand Probability Cummulative Range
(unit) probability
2 0.02 0.02 00-01
3 0.08 0.10 02-09
4 0.22 0.32 10-31
5 0.34 0.66 32-65

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6 0.18 0.84 66-83

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7 0.09 0.93 84-92

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8 0.07 1.00 93-99

07
07
Monte Carlo for head time
Weeks Probability Cummulative probability Range
1 0.23 0.23 00-22
2 0.45 0.68 23-67
3 0.17 0.85 68-84

p
4 0.09 0.94 85-93

Ap
5 0.06 1.00 94-99

m
Simulation table
co
Weeks Opening Demand Closing Make Lead Time Holding Ordering Shortage Total
a.
Stock Stock Order? Cost Cost Cost
ny

Rn Units Rn weeks
ke

1 60 50 5 55 - - - 1,925 - - 1,925
ea

2 55 68 6 49 - - - 1,715 - - 1,715
3 49 52 5 44 - - - 1,540 - - 1,540
m

4 44 08 3 41 - - - 1,435 - - 1,435
So

5 41 59 5 36 yes 90 4 1,260 350 - 1,610

6 36 81 6 30 - - - 1,050 - - 1,050
7 30 85 7 23 - - - 805 - - 805
8 23 95 8 15 - - - 525 - - 525
9 15 15 4 11 - - - 385 - - 385
10 41 89 7 34 yes 28 2 1,190 350 - 1,540
Total cost 12,530

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QUESTION 15

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November 2018 Question Three B

07
Vitabu Ltd. stocks books for sale. The company is concerned about high inventory cost

07
and is therefore considering reviewing its current inventory management system.

Additional information:
1. Daily demand is probabilistic and follows the following distribution:

Demand Probability

p
Ap
(Units)
10 0.22

m
14 0.30 co
18 0.40
a.
22 0.08
ny

2. Lead time is also probabilistic and follows the following distribution:

ke

Lead time Probability

ea

(Days)
m

2 0.1
So

3 0.3
4 0.2
5 0.4
3. Ordering cost is Sh.1,000 per order.
4. Holding cost is Sh.50 per day while stock out cost is Sh.200 per unit.
5. The policy of the company is to order 55 books whenever stocks fall below 15 books.
6. The opening inventory on the first day was 55 books.
7. The following random numbers are provided:

94562406423947955223705699163168744270003

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0
89
Required:

7
73
(i) A simulation of the company's inventory balances for a period of 10 days. (10 marks)

07
(ii) The average daily inventory cost. (4 marks)

07
ANSWER
Simulation of the company's inventory balances for a period of 10 days
Monte Carlo Demand
Demand (units) Probability Cummulative Probability Range

p
10 0.22 0.22 00-21

Ap
14 0.30 0.52 22-51
18 0.40 0.92 52-91

m
22 0.08 1.00
co 92-99
a.
Lead time
ny

Days Probability Cummulative Probability Range

ke

2 0.10 0.10 00-09

3 0.30 0.40 10-39
ea

4 0.20 0.60 40-59

m

5 0.40 1.00 60-99

So

Simulation table
Day Opening Demand Closing Make Lead time Holding Orderin Shortag Total
Stock Stock order g e
Rn Units Rn Days
1 55 94 22 33 - 56 - 1,650 - - 1,650
2 33 24 14 19 - 06 - 950 - - 950
3 19 42 14 5 Yes 39 3 250 1,000 - 1,250
4 5 47 14 0 - 95 - - - 1,800 1,800

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5 0 52 18 0 - 23 - - - 3,600 3,600

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89
6 0 70 18 0 - 56 - - - 3,600 3,600

7
73
7 55 99 22 33 - 16 - 1,650 - - 1,650

07
8 33 31 14 19 - 68 - 950 - - 950

07
9 19 74 18 1 Yes 42 4 50 1,000 - 1,050
10 1 70 18 0 - 00 - - - 3,400 3,400
19,900

p
Ap
QUESTION 16

m
May 2018 Question Three C co
Mambo Leo Limited buys and sells a single product branded "Zee".
a.
The demand and lead time of the product are uncertain.
ny

The following probability distribution has been provided:

ke

Demand (units) Probability

3 0.02
ea

4 0.08
m

5 0.11
So

6 0.16
7 0.19
8 0.13
9 0.10
10 0.08
11 0.07
12 0.06
Lead time (days) Probability
2 0.20
3 0.30

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4 0.35

0
89
5 0.15

7
73
07
Additional information:

07
1. The ordering cost per order is Sh.80.
2. The holding cost per unit per day is estimated at Sh.2 while the unit shortage cost is
Sh.20 per unit per day.
3. The re-order quantity is 40 units and the re-order level is 20 units with a beginning
inventory balance of 30 units.

p
Ap
Required:
Using simulation of the above problem for 10 days, determine the average daily cost

m
using the following random numbers: co
a.
Demand 68 13 09 20 73 07 92 99 93 18
ny

Lead time 30 22 17 13 08 39 35 24 12 34
ke

(12 marks)
ea

ANSWER
m

Determine the average daily cost using Simulation

So

Demand Monte Carlo analysis

Units Probability Cumulative probability Range
3 0.02 0.02 00-01
4 0.08 0.10 02-09
5 0.11 0.21 10-20
6 0.16 0.37 21-36
7 0.19 0.56 37-55
8 0.13 0.69 56-68
9 0.10 0.79 69-78
10 0.08 0.87 79-86

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11 0.07 0.94 87-93

0
89
12 0.06 1.00 94-99

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07
Lead Time Montecarlo

07
Lead time (delays) Probability Cumulative probability Range
2 0.20 0.20 00-19
3 0.30 0.50 20-49
4 0.35 0.85 50-84
5 0.15 1.00 85-99

p
Ap
Simulation table
Da Openin Demand Closin Mak Lead Holdin Orderin Shortag Tota

m
y g g e time g g e l
co
Stock R unit Stock order R Day
a.
n s n s
ny

1 30 68 8 22 - 30 - 44 - - 44
ke

2 22 13 5 17 - 22 - 34 - - 34
ea

3 17 09 4 13 yes 17 2 26 80 - 106
4 13 20 5 8 - 13 - 16 - - 16
m

5 8+40 73 9 39 - 08 - 78 - - 78
So

6 39 07 4 35 - 39 - 70 - - 70
7 35 92 11 24 - 35 - 48 - - 48
8 24 99 12 12 - 24 - 24 - - 24
9 12 93 11 1 yes 12 2 2 80 - 82
10 1 18 5 0 - 34 - 0 0 80 80
582

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QUESTION 17

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November 2017 Question Five B

7
73
Trans Ltd. supplies a product branded "BBG". Although the annual demand for BBG is

07
high, it varies considerably.

07
The demand during lead time and the associated probabilities are as follows:

Demand during lead time Probability

600 0.25
650 0.23

p
700 0.12

Ap
750 0.10
800 0.08

m
850 0.05
co
900 0.05
a.
950 0.04
ny

1,000 0.03
ke

1,050 0.03
1,100 0.02
ea
m

Additional information:
So

1. Trans Ltd. places 5 orders annually.

2. The ordering cost per order amounts to Sh.6,000.
3. The carrying cost amounts to Sh.1,000 per unit.
4. The estimated stock-out cost is Sh.5,000 per unit.
5. The re-order point is 850 units.
6. The lead time is 12 working days.

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

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(ii) Determine the probability of stock-out. (2 marks)

0
89
7
73
ANSWER

07
i) Advising the management on the amount of safety stock to maintain

07
- Holding cost = 1,000
- Shortage cost = 5,000
- No of orders = 5
- current reorder level = 850 (ROL)
- Total ordering cost = 5×6,000 = 30,000

p
Ap
Analysis Table

m
New Safety Holding cost Ordering co Shortage cost Total
Roll stock cost cost
a.
850 0 0 30,000 (50×0.5+100×0.04+150×0.03+200×0.03+ 580,000
ny

250×0.02)×5×5,000 = 550,000
ke

900 50 50×100 30,000 (50×0.04+100×0.03+150×0.03+200×0.02) 417,500

=50,000 ×5×5,000 = 337,500
ea

950 100 100×1000 30,000 (50×0.03+100×0.03+150×0.02)×5×5,000 317,500

m

=100,000 =187,500
So

1,000 150 150,000 30,000 (50×0.03+100×0.02)×5×5,000 = 87,500 267,500

1,050 200 200,000 30,000 (50×0.02)×5×5,000 = 25,000 255,000
1,100 250 250,000 30,000 - 280,000

Maintain safety stock of 200 units and reorder level of 1050 since that‘s where we have
minimum total cost of 1,050 since that‘s where we have minimum total cost

ii) Probability of stock out

Probability = 0.02

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QUESTION 18

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November 2016 Question Two A

7
73
SL Ltd. manufactures and stocks component Q which is used as an input material in

07
another department within the organisation. The past data on component Q is as follows:

07
 Average demand per day is 130 units.
 Average production lead time is 5 days.
The frequency distribution of actual demand during lead time is given below:
Actual demand (units) Frequency
300-399 0

p
400-499 16

Ap
500-599 20
600-699 25

m
700-799 14
co
800-899 8
a.
900-999 3
ny
ke

The company targets an 85% service level during lead time.

ea

Required:
m

(i) The re-order level. (9 marks)

So

(ii) The safety stock level. (3 marks)

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ANSWER

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i) The re-order level

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73
07
07
p
Ap
̅

m
co
Analysis table
a.
Demand (x) Prob (p) ̅=xp =√
ny

(300+399)÷2=350 0÷86=0 35×0 (350-626)² 0=0

ke

(400+499)÷2=450 16÷86=0.19 85.5 (450-626)² 0.19=5,885

ea

(500+599)÷2=550 20÷86=0.23 126.5 (550-626)² 0.23 = 1,328

(600+699)÷2=650 25÷86=0.29 188.5 (650-626)² 0.29=167
m

(700+799)÷2=750 14÷86=0.16 120 (750-626)² 0.16=2,460

So

(800+899)÷2=850 8÷86=0.09 76.5 (850-626)² 0.09=4,516

(900+999)÷2=950 3÷86=0.03 28.5 (950-626)² 0.03=3,149
626 √

√
̅

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ii) Safety Stock Level

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73
̅

07
07
QUESTION 19
May 2016 Question Three B
James Makali prides himself as the largest sausage supplier in the city. Small, freshly
baked sausages are the speciality of his shop. He has sought help in determining the

p
number of sausages he should make each day so as to maximise his long run profitability.

Ap
From an analysis of past demand, he estimates the demand for sausages as follows:

m
co
Demand (packets) Probability of demand
a.
1,800 0.05
ny

2,000 0.10
ke

2,200 0.20
2,400 0.30
ea

2,600 0.20
m

2,800 0.10
So

3,000 0.05

Additional information:
1. The selling price per packet amounts to Sh.90.
2. The cost per packet which includes handling and transportation amounts to Sh.65.
3. Sausages that are not sold at the end of the day are sold as day-old merchandise the
following day at Sh.30 per packet.

Required:

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Using continuous analysis of probability distribution of demand, advise on the optimal

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production quantity (in packets) for the sausages. (8 marks)

7
73
07
ANSWER

07
Advise on the optimal production quantity (in packets) for the sausages Using
continuous analysis of probability distribution of demand

p
Ap
m
co
a.

Demand Probability More than cumulative probability

ny

1,800 0.05 1.00

ke

2,000 0.10 0.95

ea

2,200 0.20 0.85

2,400 0.30
m
So

2,600 0.20 0.35

2,800 0.10 0.15
3,000 0.05 0.05

QUESTION 20
November 2015 Question Two B
The following data relate to Mambo Leo Ltd's estimated usage of raw materials for the
month of December 2015.

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Usage (units) Probability

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89
1,440 0.06

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1,520 0.14

07
1,600 0.30

07
1,680 0.16
1,760 0.13
1,840 0.10
1,920 0.07
2,000 0.04

p
Ap
Additional information:
1. Stock outs will cost the company Sh.80 per unit.

m
2. Average monthly holding cost is estimated at Sh.10 per unit.
co
3. A lead time of four days is required for ordering raw materials.
a.
4. The economic order quantity for the raw materials is 1,600 units every 30 days.
ny
ke

Required:
(i) The optimal safety stock. (10 marks)
ea

(ii) The probability of being out of stock. (2 marks)

m
So

ANSWER
Inventory controls (known shortages)

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0
89
7
73
Probability

07
1,440
/30×4 = 192 0.06

07
1,520
/30×4 = 203 0.14
1,600
/30×4 = 213 0.30
1,680
/30×4 = 224 0.16
1,760
/30×4 = 235 0.13
1,840
/30×4 = 246 0.10
1,920

p
/30×4 = 256 0.07

Ap
2,000
/30×4 = 267 0.04

m
co
Analysis Table
a.
New Safety Holding Total
ny

stock cost cost

ke

213 0 0 (11×0.16+22×0.13+33×0.1+43×0.07+54×0.04)×12×80 12,566

ea

=12,566
m

224 11 11×120 (11×0.13+22×0.1+32×0.07+43×0.04)12×80

So

=1,320 = 7,286 8,606

235 22 22×120 (11×0.1+21×0.07+32×0.04)×12×80
=2,640 =3,696 6,336
246 33 33×120 (10×0.07+21×0.04)×12×80
=3,960 =1,478

256 43 43×120 (11×0.0.04)×12×80

=5,160 =422 5,582
267 54 54×120 0
=6,480 6,480

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7
73
ii) Probability of being out of stock

07
07
QUESTION 21
September 2015 Question Two A
"Just in Time (JIT) manufacturing enables purchasing, production and sales to occur in
quick succession with inventory being maintained at minimum level.

p
Ap
Required:
With reference to the above statement, explain three problems associated with adoption

m
of JIT system. co (3 marks)
a.
ANSWER
ny

Problem associated with just in time (JIT) system.

 Lack of good medium of communication and infrastructure
ke

 It can cause idle time

ea

 It can cause shortage

m
So

QUESTION 22
September 2015 Question Two B
Katibu Ltd. holds regular stocks of sports equipment. For one of the stock item, they have
decided to use economic order quantity with no stock out model.

Additional information:
1. The equipment have eratic demand but on average they sell 400 items per week, with
the standard deviation of 125 units per week.
2. The items are supplied by a foreign supplier at Sh.800 per item. Lead time is 3 weeks.
3. The predicted annual stock holding cost is 15% of inventory value.

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4. Delivery and order processing is approximately 12 man hours with wages being

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Sh.25,600 per week for a 40 hours week.

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5. Assume normal distribution on demand.

07
07
Required:
(i) Calculate the economic order quantity (EOQ). (3 marks)
(ii) Suppose the company is incorrect in its predicted delivery and order processing costs
but correct in all other predictions. If the actual cost is Sh.12,000, compute the
maximum amount that the company should pay to discover true incremental costs.
(6 marks)

p
Ap
(iii) Determine the re-order point and the buffer stock held if there is to be no more than
1% chance of stock-out during the re-order period. (4 marks)

m
co
(iv) If managers set re-order level at 1,500 units, what is the probability of stock-out on
a.
any given order cycle. (3 marks)
ny

(v) How many times would you expect stock-out during the year. (2 marks)
ke

ANSWER
ea

i) Economic Order Quantity (EOQ)

m
So

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ii) Maximum amount that the company should pay to discover true incremental

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costs

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73
07
07
p
Ap
m
co
√
a.
ny
ke
ea
m
So

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iii) The re-order point and the buffer stock held if there is to be no more than 1%

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chance of stock-out during the re-order period

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73
07
07
p
Ap
m
co ̅
a.

Where;
ny

̅
ke
ea
m
So

iv) The probability of stock-out on any given order cycle, if managers set re-order
level at 1,500 units

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7
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07
07
̅

p
Ap
m
co
a.

v) No. of times to expect stock out during the year

ny
ke
ea

QUESTION 23
m

May 2015 Question Five A

So

Kikao Ltd. is reviewing the purchasing policy of one of its raw materials as a result of a
reduction in production requirements. The material which is used evenly throughout the
year is used in only one of the company's products, the production of which is currently
12,000 units per annum. Each finished unit of the product requires 0.4 Kg of the material
of which 20% of the material is lost in the production process. Purchases can be made in
multiples of 500 Kgs with minimum purchase order quantity being 1,000 Kgs.

The cost of the raw material depends upon the purchase order quantity as follows:

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Order quantity Cost per Kg

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Kgs Sh.

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1,000 100

07
1,500 98

07
2,000 96.5
2,500 95
3,000and above 94 94

Additional information:
1. The cost of placing and handling each order is Sh.90 of which Sh.40 is an

p
Ap
apportionment of costs which are not expected to be affected in the short term by the
number of orders placed.

m
2. The annual holding cost of stock is Sh.90 per unit of average stock of which only
co
Sh.40 is expected to be affected in the short term by the amount of the stock held.
a.
3. The lead time for the raw material is one month.
ny

4. Safety stock of 250 Kgs is required.

ke

Required:
ea

Advise the management of Kikao Ltd. on the purchase order quantity of the material that
m

will minimise the total costs. (10 marks)

So

ANSWER
Advise the management of Kikao Ltd. on the purchase order quantity of the
material that will minimise the total costs

Inventory Analysis Table

Purchase Cost Ordering Cost Holding Cost Total Cost

EOQ ( )

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630,300

0
( )40=30,000

89
1,000 6,000×100 =600,000 ×50=300

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628,200
×50=200 ( )40=40,000

07
1,500 600×98 = 588,000

07
629,150
2,000 600×96.5 = 579,000 ×50 = 150 ( )

630,120
( )

p
2,500 600×95 = 570,000 ×50 = 120

Ap
634,100
( )40 = 70,000

m
3,000 600×94 = 564,000 ×50 = 100
co
a.
Comment: EOQ = 1,500 As it has the minimum total cost
ny

Working
ke
ea
m
So

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TOPIC 7

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07
BUDGETARY CONTROL TECHNIQUES

07
QUESTION 1
December 2023 Question Three B
Kaza Joy is a small manufacturing enterprise that makes only three products X, Y and Z.
Data for the month ended 30 November 2023 is as follows:

p
X Y Z

Ap
Units produced and sold 12,000 16,000 8,000
Sh. Sh. Sh.

m
Sales price per unit 50 70 60
co
Direct material cost per unit 16 24 20
a.
Direct labour cost per unit 8 12 8
ny
ke

Product overhead costs Total Cost drivers

ea

Sh.
Machining costs 102,000 Machine hours
m

Production scheduling 84,000 Number of production runs

So

Set up costs 54,000 Number of production runs

Quality control 49,200 Number of production runs
Receiving materials 64,800 Number of components receipts
Packaging materials 36,000 Number of customer orders

Information on the cost drivers is given as follows:

X Y Z
Direct labour hours per unit 1 1.5 1
Machine hours per unit 0.5 1 1.5

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Number of components per unit 3 5 8

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Number of component receipts 18 80 64

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Number of customers orders 6 20 10

07
Number of production runs 6 16 8

07
Required:
Using activity based budgeting (ABB), compute the cost and gross profit per unit for
each products during the month. (14 marks)

p
ANSWER

Ap
b) ABB Budgeting

m
co
a.
ny
ke
ea
m
So

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7
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07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

ABB Length
X Y Z
Selling price 50 70 60
Direct material cost (16) (24) (20)
Direct labour cost (8) (12) (8)
Gross profit 26 34 32

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Production overhead:

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Machine cost (1.5) (3) (4.5)

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Production scheduling (1.4) (2.8) (2.8)

07
Set up cost (0.9) (1.8) (1.8)

07
Quantity control (0.82) (1.64) (1.64)
Receiving materials (0.6) (2) (3.2)
Packaging materials (0.5) (1.25) (1.25)
Net profit 20.28 21.51 16.81
Total cost per unit 29.72 45.49 43.19

p
Ap
QUESTION 2

m
August 2023 Question Three A co
Zeta Ltd. manufactures one standard product branded ―Boma‖ and operates a system of
variance analysis using a fixed budget. As the assistant management accountant, you are
a.

responsible for preparing the monthly operating statements.

ny
ke

The budgeted information of product ―Boma‖ for the month ended 31 July 2023 was as
ea

follows:
m

Sh.
So

Selling price per unit 880

Cost per unit:
Direct material: A (2 kgs at Sh.100 per kg) 200
B (1 litre at Sh.150 per litre) 150
Direct labour (3 hours at Sh.90 per hour) 270
Variable overhead (3 hours at Sh.20 per direct labour hour) 60

Additional information:
1. Zeta Ltd. budgeted sales and production for the month of July 2023 was 10,000 units.
2. Annual budgeted fixed overheads were Sh.14,400,000 which are assumed to be
incurred evenly throughout the year.
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3. The company uses marginal costing system for internal profit measurement purposes.

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4. The actual data for the month of July 2023 were as follows:

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Actual production and units sold 9,000 units.

07
Selling price Sh.900

07
Direct materials consumed:
A: 19,000 kgs consumed at a cost of Sh.2,090,000
B: 10,100 litres consumed at a cost of Sh.1,414,000
Direct labour incurred 28,500 hours at a cost of Sh.2,736,000
Variable overheads incurred Sh.520,000
Fixed overheads incurred Sh.1,160,000

p
Ap
Required:

m
(i) A budgeted profit statement. co (2 marks)
(ii) Actual profit statement. (2 marks)
a.
(iii) A reconciliation statement of actual profit and budgeted profit. (Show all planning
ny

and operating variances). (8 marks)

ke

ANSWER
ea

i) Budgeted profit statement

m

Sales 10,000×880 8,800,000

So

Less: Direct material A 200×10,000 (2,000,000)

B 150×10,000 (1,500,000)
Direct labour 270×10,000 (2,700,000)
variable OH 60×10×10,000 (600,00)
Fixed cost 14,400,000 ÷ 12 (1,200,000)
Net profit 800,000

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Actual profit statement

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Sales 9000×900 8,100,000

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73
Less: Direct material A (2,090,000)

07
B (1,414,000)

07
Direct labour (2,736,000)
Variable off (520,000)
Fixed cost (1,160,000)
Net profit 180,000

p
iii) Reconciliation statement

Ap
Sh

m
Budgeted profit co 800,00
Adjustment
Materials price variance A (190,000)
a.

B 101,000
ny

Material usage variance A (100,000)

ke

B (165,000)
ea

Labour rate variance (171,000)

m

Labour efficiency variance (135,000)

So

Variable OH efficiency variance (30,000)

Variable OH expenditure variance 50,000
Fixed OH expenditure 40,000
Sales price variance 180,000
Sales volume variance (200,000)
Actual profit 180,000

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Working

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Material price variance

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= (Standard Price – Actual Price) Actual Quantity

07
07
Material usage variance

p
= (Standard Quantity – Actual Quantity) Standard Price

Ap
M.U .V= (S.Q – AQ) SP

m
co
a.
ny

Labour rate variances

ke

=(Standard rate - Actual rate) Actual labour hours

ea
m
So

Labour Efficiency variance

Variable OH efficiency variance

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Variable elf expenditure variance

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07
07
Fixed OH expenditure variance

Sales price variance

p
Ap
m
co
Scales volume variance
a.
ny
ke

Standard contribution = SP –Variance cost

ea
m
So

QUESTION 3
April 2023 Question Five A
Orion Ltd. manufactures three products namely; P, Q and R using broadly the same
production methods. A conventional product costing system is used at present to allocate
all overhead costs using total direct labour hours, although an activity-based budgeting
(ABB) system is being considered.

1. Details of the three products for the period is as follows:

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Product P Q R

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Annual output (units) 2,000 1,600 400

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Annual direct labour hours 200,000 220,000 80,000

07
Selling price per unit (Sh.) 4,000 6,000 8,000

07
Raw material cost per unit (Sh.) 400 600 900

2. The annual cost driver volumes relating to each activity and for each type of product
are as follows:

p
Product Number of deliveries to Number of set-ups Number of

Ap
retailers purchase orders
P 100 35 400

m
Q 80 co 40 300
R 70 25 100
a.
250 100 800
ny
ke

3. The annual costs relating to these activities and their cost drivers are as follows:
ea

Sh. Cost driver

Deliveries to retailers 2,400,000 Number of deliveries to retailers
m

Set-up costs 6,000,000 Number of set-ups

So

Purchase orders 3,600,000 Number of orders

4. All direct labour is paid at a rate of Sh.5 per hour. The company operates on a just in
time (JIT) production policy.

Required:
(i) Prepare activity based budget statement for the period. (6 marks)
(ii) Compute the profit or loss per unit for each product. (4 marks)

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ANSWER

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Activity based budget statement for the period

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ABB Statement

07
P Q R

07
Sh Sh Sh
Sales (W1) 8,000,000 9,600,000 3,200,000
Less: Prime cost
Raw material (W2) (800,000) (960,000) (360,000)
Direct labour (W3) (1,000,000) (1,100,000) (400,000)

p
Gross profit 6,200,000 7,540,000 2,440,000

Ap
Less: Overhead
Delivery cost (W4) (960,000) (768,000) (672,000)

m
Set up cost (2,100,000) (2,400,000) (1,500,000)
co
Purchase order cost (1,800,000) (1,350,000) (450,000)
a.
Net profit/loss 1,340,000 3,022,000 (182,000)
ny
ke

ii) Profit/loss per unit

ea
m
So

Working
Sales

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Raw Material Cost

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73
07
07
Direct Labour Cost

p
Ap
Deliveries to retailers

m
co
a.
ny
ke
ea
m
So

Set up cost

Purchase order cost

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7
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07
07
QUESTION 4
December 2022 Question One B

p
Trans Ltd. has provided the following operating statement, which represents an attempt to

Ap
compare the actual performance for the quarter which has just ended with the budget:

m
coBudget Actual Variance
Number of units sold (―000‖) 640 720 80
a.

Sh.“000” Sh.“000” Sh.“000”

ny

Sales 1,024 1,071 47

ke

Cost of sales: Direct materials 168 144 24

ea

Direct labour 240 288 (48)

Overheads 32 36 (4)
m

440 468 (28)

So

Fixed labour cost 100 94 6

Selling and distributin cost: Fixed 72 83 (11)
Variables 144 153 (9)
Administrative cost: Fixed 184 176 8
Variables 48 54 (6)
548 560 (12)
Net profit margin 36 43 (12)

Required:

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(i) Using flexible budgeting approach, redraft the operating statements so as to provide a

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more realistic indication of the variances. (8 marks)

7
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(ii) Discuss TWO problems associated with the forecasting of figures which are to be

07
used in flexible budgeting. (4 marks)

07
ANSWER
Flexible budget

Flexing base= = =1.125

Sh 000

p
Ap
Flexible budget Actual Variance
Number of units 720,000 720,000
Sale 1,024×1.125
m 1,152 1,071 81 A
co
Cost of sale: Direct material 168×1.125 189 144 45 F
a.

Direct labour 240×1.125 270 288 18 A

ny

Overhead 32×1.125 36 36 -
ke

Fixed labour cost 100 94 6F

ea

Selling & Distribution:

Fixed 72 83 11A
m

Variable 144×1.125 162 153 9F

So

Administrative costs:
Fixed 184 176 8A
Variable 48×1.125 54 54 -
Net profit 85 43 42 A

ii) Problem associated with the forecasting of figures which are to be used in
flexilble budgeting

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1. Market uncertainties: Change in market conditions, including shifts in demand

0
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consumer preferences and economic conditions, can significantly impact sales

7
73
forecasts, unpredictable market fluctuations can make it difficult to accurately

07
estimate future revenues

07
2. External factors: External factors such as changes in government regulations,
political instability, and global economic conditions can influence business
operations
3. Technological changes: Rapid advancement in technology can introduce new
product, alter production processes or even disrupt existing business model.
4. Competitive dynamics: Actions taken by competitors, such as price changes

p
Ap
product launches or strategic shifts can impact market share and pricing strategies

m
QUESTION 5 co
December 2022 Question Five B
a.
Timiza Ltd. makes spectacles for a variety of customers. The spectacles pass through
ny

several production processes. The first process is fitting and the standard costs for fitting
lenses on spectacles are as follows:
ke

Standard cost per unit Sh.

ea

Direct material Q 7 kilograms at Sh.70 per kilogram 490

m

Direct labour 5 hours at Sh.50 per hour 250

So

Overheads (fixed and variable) 5 hours at Sh.66 per hour 330

1,070

Additional information:
1. The overhead allocation rate is based on direct labour hours and comprises an
allowance for both fixed and variable overhead costs.
2. With the aid of regression analysis, the fixed element of overhead cost has been
estimated at Sh.90,000 per week and the variable overhead costs have been estimated
at Sh.6 per direct labour hour.

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3. The fitting department comprises its own premises, and all of the department‘s

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overhead costs can be regarded as being the responsibility of divisional managers.

7
73
4. In week 5, the division casted 294 spectacles and actual costs incurred were:

07
Sh.

07
Direct material Q (2,030 kilogram used) 141,250
Direct labour (1,520 hours worked) 78,540
Overhead expenditure 102,000

5. The 1,520 hours worked by direct labour included 40 hours overtime, which is paid at
a rate of 50% above the normal pay rates.

p
Ap
Required:

m
A reconciliation statement of actual cost and the standard cost. (Show all planning and
co
operating variances). (14 marks)
a.
ny

ANSWER
ke

A reconciliation statement of actual and standard cost

ea

Working
Material price variance
m
So

Material usage variance

Labour rate variance

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7
73
07
07
Actual hours at std rate

p
Ap
Direct labour efficiency variance

m
co
a.
ny
ke
ea
m
So

Total overhaul expenditure variance

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0
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7
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07
Reconciliation statement

07
Material price variance 850
Material usage variance 1,960
Labour rate variance (1,540)
Labour efficiency variance (3,500)
Total olt expenditure variance (4,980)

p
Total variance (7,210)

Ap
m
QUESTION 6 co
August 2022 Question One B
Describe three negative side effects which might arise from the imposition of budgets by
a.

senior management and propose ways to deal with them. (6 marks)

ny
ke

ANSWER
ea

Negatives side effects which might arise from the imposition of budget by senior
m

management and propose way to deal with them

1. Rigid decision making – Strict adherence to budget may hinder flexibility in
So

responding to unexpected changes in the business environment

Solution: Implement a flexible budgeting approach that allows for adjustments
when circumstances change provide managers with the authority to make
necessary meditation with predefined limits.
2. Demotivation and low morale – Continuous pressure to meet stringent budget
targets can lead to demotivation and low morale and employees
Solution: Recognize and reward effort that contributes to achieving budget goals.
Provide regular feedback and support to employees, emphasizing a collaborative
approach to reaching targets.

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3. Short term focus – Managers may prioritize short term gains to meet budget

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targets, neglecting long term strategic objectives

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73
Solution: Align budgeting with the organizations long term strategy or target and

07
long term objectives are considered.

07
4. Conflict and tension – The imposition of budgets without adequate
communication and collaboration may lead to conflict between senior
management and lower level managers.
Solution – Foster a culture of collaboration and open communication involve low
level managers in the budgeting process, seek their impact and provide a platform
for discussing concerns and challenges.

p
Ap
QUESTION 7

m
August 2022 Question Two B co
A manufacturing company produces Ball Pens that are printed with logos of various
a.
companies. Each pen is priced at Sh.50. Production costs are as follows:
ny
ke

Cost driver Variable cost per unit Level of cost driver

Sh.
ea

Units sold 25 -
m

Set ups 225 40

So

Engineering hours 10 250

Other data:
Total fixed costs (conventional costing) Sh.48,000
Total fixed costs (activity based costing) Sh.36,500

Required:
Compute the break-even point using Activity Based Analysis. (6 marks)

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ANSWER

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The break even point many activity based analysis

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07
07
Workings
OAR

Set ups OAR

p
Ap
m
Engineering hour OAR co
a.
ny
ke
ea
m
So

QUESTION 8
August 2022 Question Four C
Ukunda Ltd. operates a standard marginal cost accounting system. Information relating to
product Jipe, which is made in one of the company‘s departments, is given below:
Product Jipe Standard marginal cost per unit Sh.
Direct materials: 6 kgs at Sh.40 per kg 240
Direct labour: 1 hour at Sh.70 per hour 70
Variable production overhead 30 340

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Additional information:

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1. Variable production overheads vary with units produced.

7
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2. Budgeted fixed production overhead per month amount to Sh.1,000,000.

07
3. The budgeted production for product Jipe amounted to 20,000 units per month.

07
4. Actual production and costs for the month of June 2022 were as follows:

Number of units of product Jipe produced 18,500

Sh.
Direct materials purchased and used (113,500 kgs) 4,426,500
Direct labour (17,800 hours) 1,299,400

p
Ap
Variable production overheads incurred 588,000
Fixed production overhead incurred 1,040,000

m
Actual production cost co 7,353,900
a.
Required:
ny

Prepare in columnar form a statement showing:

(i) Original budget by element of cost. (2 marks)
ke

(ii) Flexed budget by element of cost. (2 marks)

ea

(iii) Actual production statement by element of cost. (2 marks)

m

(iv) A reconciliation of the actual production cost with the budgeted production cost.
So

(5 marks)
ANSWER
Statement showing Original budget by element of cost

Original budget by element of cost Sh

Direct material cost 240 × 20,000 4,800,000
Direct labour cost 70 × 20,000 1,400,000
Variable production OH 30 × 20,000 600,000
Fixed production OH 1,000,000
7,800,000

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ii) Flexed budget by element of cost

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07
07
Flexible budget
Direct material cost 4800,000×0.925 4,440,000
Direct labour cost 1400,000×0.925 1,295,000
Variable production OH 600,000×0.925 555,000
Fixed production OH 1,000,000
7,290,000

p
Ap
Actual production statement by cost element

m
Direct material cost 4,426,500
co
Direct labour cost 1,299,400
a.

Variable production OH 588,000

ny

Fixed production OH 1,040,000

ke

7,353,900
ea
m

A reconciliation of the actual production cost with the budgeted production cost
So

Fixed budget Actual sh Variance

Direct material 4,440,000 4,426,500 13,500 F
Direct labour 1,295,000 1,299,400 4,400 A
Variable production OH 555,000 588,000 33,000 A
fixed production OH 1,000,000 1,049,000 40,000 A
7,290,000 7,353,900 63,900 A

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Reconciliation statement

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89
Sh

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Fixed budget cost 7,290,000

07
Adjustments

07
direct material cost variance (13,500)
Labour cost variance 4,400
Variable OH variance 33,000
Fixed production cost 40,000
Actual production 7,353,900

p
Ap
NB: For cost variance, add adverse then less favourable

m
co
QUESTION 9
a.
August 2022 Question Five B
ny

Moran Ltd. has established the following standard mix of producing 9 litres of product
―MRN‖:
ke

Sh.
ea

5 litres of material M at Sh.7 per litre 35

m

3 litres of material R at Sh.5 per litre 15

So

2 litres of material N at Sh.2 per litre 4

Actual input was as follows:

Sh.
53,000 litres of material M at Sh.7 per litre 371,000
28,000 litres of material R at Sh.5.30 per litre 148,400
19,000 litres of material N at Sh.2.20 per litre 41,800

Additional information:
1. A standard loss of 10% of the input is expected to occur.

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2. Actual output for the period was 92,700 litres of product MRN.

0
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7
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Required:

07
Compute and interpret the following variances:

07
(i) Material price variance. (3 marks)
(ii) Material mix variance. (3 marks)
(iii) Material yield variance. (3 marks)
(iv) Material usage variance. (3 marks)

ANSWER

p
Ap
i) Material price variance

Computing variances

m
co
Material price variance = (Standard price- Actual price ] Actual quantity material
a.
ny
ke
ea
m

Total material price variance

So

ii) Material mix variance

[ ] [ ]

Or

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Actual usage in actual mix at standard price

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7
Material Sh

73
M 371,000

07
07
R 140,000
N 38,000
549,000

Actual usage of standard mix at standard price

p
Ap
m
co
a.
Sh
ny

M 350,000
ke

R 150,000
ea

N 40,000
m
So

540,000

Material mix variance = Sh 549,000 - 540,000 = Sh 9,000 Adverse

iii) Material yield variance

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Actual usage at standard mix at standard price

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73
Actual usage = 53,000+28,000+19,000 = 100,000litres

07
07
Sh
M 350,000

R 150,000

N 40,000

p
540,000

Ap
m
Standard in usage for the inputs in standard mix
co
1litre of input products 100% - 10% = 90% of output . Therefore, to produce 92,700 litre
a.

of product MRN
ny
ke
ea

Sh
M 360,500
m
So

R 154,000

N 41,200

556,200

iv) Material usage variance

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Sh

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89
M 10,500 A
[ ]

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73
07
R 14,500 F
[ ]

07
N 3,200 F
[ ]

7,200

p
QUESTION 10

Ap
April 2022 Question Three B
Dominion Beverages Ltd. makes and sells two beverage products branded "Bingo" and

m
"Boost". co
a.
The budgeted sales and profits for the year 2021 were as follows:
ny
ke

Product Sales quantity(Units) Revenue (Sh.) Costs (Sh.) Profit (Sh.)

Bingo 400 8,000 6,000 2,000
ea

Boost 300 12,000 11,100 900

m

2,900
So

Actual sales were as follows:

Bingo 280 units with a profit of Sh.5.30 per unit.

Boost 630 units with a profit of Sh.2.80 per unit.

The company management is able to control the relative sales of each product through the
allocation of sales effort, advertising and sales promotion expenses.

Required:

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Calculate and interpret the following variances:

0
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(i) Sales margin price variance. (2 marks)

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(ii) Sales margin volume variance. (2 marks)

07
(iii) Sales margin mix variance. (2 marks)

07
(iv) Sales margin quantity variance. (2 marks)
(v) Sales margin total variance. (2 marks)
(Total: 20 marks)
ANSWER
Variance profit margin per unit

p
Bingo 2,000

Ap
Boost 900

m
i) Sales margin price variance
co
a.
ny

Bingo (5.3-5)280 = 84(F)

Boost (2.8-3)630 = 126A
ke

42(A)
ea
m

ii) Sales Margin mix variances

So

Bingo (280 – 400)5 = 600(A)

Boost (630 - 300)3 = 990(F)
390(F)

iii) Sales Margin mix variances

Bingo (280 – 520)5 = 1,200(A)

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Boost (630 - 300)3 = 720(F)

0
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910 910 480(F)

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73
07
07
iv) Sales Margin quantity variance

Bingo (520 – 400)5 = 600(F)

Boost (390 - 300)3 = 270(F)
870(F)

p
Ap
v) Sales Margin Total variance

m
co
Bingo =(280x5.3)-(400x5)= 516(A)
a.
Boost=(630x2.8)-(300x3)= 864(F)
ny

348(F)
ke
ea

QUESTION 11
m

April 2022 Question Five B

So

Rigid Ltd. prepared fixed and flexible budgets for the financial year 2020/2021 as
provided below:
Fixed budget Flexible budget
For full capacity For 75% level
Sh. Sh.
Sales 1,350,000 1,012,500
Direct materials 425,000 318,750
Direct labour 185,000 138,750
Variable overheads 215,000 161,250
Semi variable overheads 365,000 323,750

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Profit 160,000 70,000

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7
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After the closing of the financial year 2020/2021, the total actual sales stood at

07
Sh.1,107,000 and there was a favourable sales price variance of Sh. 27,000.

07
Required:
Prepare a flexible budget for the actual level of sales. (11 marks)

ANSWER

p
Flexible budget for the actual level of sales

Ap
Actual size 1,107,000

m
Less: Sales price variance (favourable) (27,000)
Actual sales at budgeted level
co 1,080,000
a.
ny
ke
ea
m
So

Determination of fixed overheads

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7
Flexible budget at 80% level of activity Sh

73
Sales 1,350,000×80% 1,080,000

07
07
Direct material 4,250,000×80% (340,000)
Direct labour 185,000×80% (148,000)
Variable OH 215,000×80% (172,000)
Semi variable: Variabe OH 165,000×80% (132,000)
Fixed OH (200,000)
Profit 88,000

p
Ap
QUESTION 12

m
December 2021 Question Five B co
You are the management accountant of Zeta Ltd.
a.
The following computer printout shows details relating to budgeted and actual production
ny

for the month of July 2021:

Actual Budgeted
ke

Sales volume (units) 4,900 5,000

ea

Selling price per unit (Sh.) 150 140

m

Production volume (units) 5,400 5,000

So

Direct materials (kilograms) 10,600 10,000

Direct materials price per kilogram(Sh.) 6 5
Direct labour hours per unit 5.5 5.0
Direct labour rate per hour (Sh.) 11.4 12
Fixed production overheads (Sh.) 103,000 100,000
Variable production overheads at Sh.8 per direct labour hour (Sh.) 215,000 200,000

Additional information:
1. Zeta Ltd. uses a standard absorption costing system.
2. There was no opening or closing work in progress.

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89
Required:

7
73
Prepare a statement which reconciles the budgeted profit with actual profit for the month

07
of July 2021. (12 marks)

07
ANSWER
Reconciliation statement

Budgeted profit (140-10-40-60)5000-000 50,000

Adjustments

p
Ap
Material price variance (5-6) 10,600 (10,600)

Material usage variance * + 1,000

Labour rate variance (12-11.4)5.5×5400

m 17,820
co
Labour efficiency variance[(5×5,400)-5.5×5,400]12 (32,400)
a.

Variable Olt expenditure variance (8×5.5×5,400-215,000) 22,600

ny

Variable Olt efficiency variance [5×5400-5.5×5,400]8 21,600

ke

Fixed olt expenditure variance 100,000-103,000 (3,000)

ea

Sales price variance (140-150)4,900 49,000

Sales volume variance (5,000-4,900)30 (3,000)
m

Actual profit 69,820

So

QUESTION 13
September 2021 Four C
The following details show the direct labour requirements for the first six batches of a
new product that were manufactured in the month of August 2021:
Budget Actual
Output (batches) 6 6
Labour hours 2,400 1,950
Total labour cost (Sh.) 1,680,000 1,365,000

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The management accountant reported the following variances.

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Total labour cost variance - Sh.315,000

7
73
Labour rate variance - Nil

07
Labour efficiency variance - Sh.315.000

07
The production manager has now said that he forgot to inform the management
accountant that he expected a 90% learning curve to apply for at least the first 10 batches.
Required:
The planning and operational variances that analyse the actual performance taking into
account the anticipated learning effect. (Learning index for 90% learning curve is —

p
Ap
0.1520). (8 marks)

m
ANSWER co
Learning curve
a.
ny
ke

Using total approach

ea
m
So

Variances
Planning variance = original std – revised std value
Efficiency variance = revised std value – actual value
Conventional variance = planning + efficiency
Labour cost

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07
Labour efficiency

07
p
QUESTION 14

Ap
September 2021 Five B
The standard cost of a certain chemical mixture is:

m
40% material A at Sh.20 per kg.
co
60% material B at Sh.30 per kg.
a.
ny

Standard loss of 10% is expected during production.

ke

During the month of July 2021, the actual data was as follows:
Materials used:
ea

Material A: 90 kgs at a cost of Sh.18 per kg.

m

Material B: 110 kgs at a cost of Sh.34 per kg.

So

The weight produced was 182 kgs of good production.

Required:
Compute:
i. Material price variance. (3 marks)
ii. Material mix variance. (3 marks)
iii. Material yield variance. (3 marks)
iv. Material cost variance. (3 marks)

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ANSWER

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i) Material price variance

7
73
MPR = (Standard price – Actual price) Actual quantity

07
07
A= (20-18)90 = 180F
B= (30-34)110=440A
260A

ii) Material mix variance

MMV = (Standard mix – Actual mix) Standard price

p
Ap
90+110=200
A= [(0.4×200)-90]20 = 200A

m
B= [(0.6×200)-110]30= 300F co
100F
a.
ny

iii) Material yield variance

= (Standard yield-Actual yield) std unit cost
ke

Standard unit cost

ea
m
So

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iv) Material cost variance

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MCV= Std material cost – Actual material cost

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07
A=20×90-90×18 = 180F

07
B=30×110-110 × 34 =440A
260A

QUESTION 15
May 2021 Question Four A
Picky Ltd. is a large public company in the telecommunications sector. One of its main

p
Ap
planning and control tools is the preparation and use of traditional annual budgets.

m
Whilst this might be appropriate for the sales and manufacturing divisions, it draws
co
criticisms from the directors of divisions such as Training and Education, Advertising
a.
and Publicity, and Research and Development who are responsible for large amounts of
ny

discretionary expenditure.
ke

These directors have submitted a joint report to the Finance Director which suggests that
ea

Zero-Based Budgeting (ZBB) should be used for their respective divisions.

m
So

The Finance Director has agreed to use the Research and Development Division as a pilot
for ZBB for the next financial year.

Required:
(i) Explain the meaning of the term "Zero-Based Budgeting (ZBB)". (2 marks)
(ii) Discuss the main stages that would need to be undertaken to introduce ZBB into the
Research and Development Division. (6 marks)

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ANSWER

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(i) Define ZBB

7
73
This is a type of budget where everything is set from scratch (zero). The existence and

07
the benefit of every item in this budget must be justified.

07
ii) Stages in 2BB
1. Definition of the decision package (start)
2. Evaluate – Evaluate every cost area, eliminate and reduce unnecessary activities or
services.
3. Justify – Account for all components of the budget.

p
Ap
4. Streamline-Determine what activities should be performed and how
5. Execute – Roll out comprehensive planning and execution processes

m
co
QUESTION 16
a.
May 2021 Question Four B
ny

Klepotmine Ltd. manufactures a single product K20 whose standard cost is Sh.7,500
made up as follows:
ke

Sh.
ea

Direct material (20 square metres at Sh.200 per metre) 4,000

m

Direct labour (5 hours at Sh.400 per hour) 2,000

So

Variable overheads (5 hours at Sh.200 per hour) 1,000

Fixed overheads (5 hours at Sh.100 per direct labour hour) 500
7,500
Additional information:
The standard unit selling price of product K20 is Sh.9,800.
2. Monthly budget production and sales is set at 1,000 units.
3. The following figures relate to the month of October 2020:
Sales 150 units at Sh.10,400
Production 1,200 units (there was no opening stock)
Direct material 18,800 square metres at Sh.400 per square metre

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Direct wages 5,800 hours at Sh.500 per hour.

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Total variable overheads Sh. 942,000

7
73
Total fixed overheads Sh. 600,000

07
07
Required:
(i) Actual profit or loss statement. (4 marks)
(ii) Flexible profit or loss statement. (4 marks)
(iii) A reconciliation statement for the reported variances. (4 marks)

ANSWER

p
Ap
i) Actual profit statement
Sales 150×10,400 1560,000

m
Material cost 18,800×400 (7520,000)
co
direct labour cost 5,800×500 2900,000
a.
Variable overhead (942000)
ny

Fixed overhead (600,000)

Less (10,402,000)
ke
ea

Flexible budget statement

m

1000-100%
So

1200-x
x=120% 1.2 flexing base

ii) Profit statement

Sales (100×9800)×1.2 11,760,000
Material cost (4000×1000)×1.2 (4,800,000)
direct labour cost (2000×1000)1.2 (2,400,000)
Variable overhead (1000×1000)×1.2 (1,200,000)
Fixed overhead 500×1000 (500,000)
Profit 2860,000

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iii) Reconciliation statement

7
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Budgeted profit (9,800-7,500)1,000 2300,000

07
Adjustment

07
Total material cost variance (400×1,200)-7,520,000 (2720,000)
Total labour cost variance (2000×1200) - 2,900,000 (500,000)
Total variable OH cost variance (1000×1.200) - 942,000 258000
fixed overhead cost variance (500×1000)-600,000 (100,000)
Sales price variance (9.800-10,400)150 90,000

p
Sales volume variance (1000-150)2,300 1955000

Ap
Actual profit/loss 10,402,000

m
co
QUESTION 17
a.
November 2020 Question One A
ny

Explain three factors to consider before investigating variances in a profit driven

ke

organisation. (6 marks)
ea

ANSWER
m

Factors to consider before investigating variances

So

 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.

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 Trends in variance / pattern

7
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One adverse variances may be caused by random event. A series of adverse

07
variances usually indicates that a process is out of control

07
 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

p
price of a material) then there is little point investigating its cause.

Ap
QUESTION 18

m
November 2020 Question Five co
Hi-Tech Ltd. intends to launch a locally manufactured printer in the coming month of
a.
December 2020. The research and development department of the company has provided
ny

the following information relating to the production of the printer:

ke

Sh. Sh.
Selling price per printer 17,500
ea

Variable production cost:

m

Direct materials (800 grams at Sh.7,500 per kg) 6,000

So

Direct labour (75 minutes at Sh.3,000 per hour) 3,750

Variable overheads (60% of direct labour) 2,250 (12,000)
Contribution per printer 5,500

Additional information:
1. Production of the printer is scheduled to commence on 1 December 2020.
2. The company plans to produce and sell 3,000 printers per month.
3. A direct material loss of 10% is expected with no resale value.
4. The annual fixed cost attributable to the production of the printers is Sh.60 million.
This cost accrues evenly throughout the year.

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5. A learning curve effect of 95% is expected.

0
89
7
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Required:

07
(a) Determine the standard labour cost for the month of December 2020. (6 marks)

07
(b) Prepare a budget for the month of December 2020 showing the budgeted profit.
(4 marks)
(c) Assume the actual results for the month of December 2020 for the production level of
3,000 printers are as follows:
Sh“000”
Sales (3,000 at Sh.18,000 each) 54,000

p
Ap
Direct materials (2,700 kgs at Sh.7,000 per kg ) 18,900
Direct labour (1,700 hours at Sh.3,250 per hour) 5,525

m
Variable overheads co 3,400
Fixed costs 5,075
a.
21,100
ny
ke

Required:
Reconcile the budget profit in (b) above with the actual profit showing clearly all the
ea

operating variances. (10 marks)

m

(Total: 20 marks)
So

ANSWER
a) Standard labour cost for the month of December 2020

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07
b) Budget for the month of December 2020

07
Budget Sh
Sales = 3,000×17,500 52,500,00
Variable production cost
Direct material 800×90% = (720g×7,500)3,000 (16,200,000)
Direct labour cost (6,220,800)

p
Variable overhead (60%×6,220,800) (3,732,480)

Ap
Fixed cost = (60 (5,000,000)
Budget profit 21,346,720

m
co
a.
c) Budget reconciliation with the actual profit
ny

Reconciliation statement
ke

Budget profit 21,346,720

Adjustments
ea

Material price variance (7,500-7,000) 2,700 1,350,000

m

Material usage variance[0.72×3,000-2,700] 7,500 (4,050,000)

So

Labour rate variance (3,000-3,250)1,700 (425,000)

Labour efficiency variance (2,073.6-1,700)3,000 1,120,800
Variable OH expenditure variance (1,700×1,800)-3,400 (340,000)
Variable OH efficiency variance (2,073.6-1,700)1,800 672,480
Fixed OH expenditure variance (5,000-5,075) (75,000)
Sales price variance (17,500-18,000) 3,000 1,500,000
Sales price volume variance (3,000-3,000)550 0
Actual profit 21,100,000

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Working for VOAR

0
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7
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07
07
QUESTION 19
November 2019 Question Three B
Dawa Chemical Ltd. manufactures a single product branded "XP". The following
information for the financial year2018 relates to the product:
1. Standard cost per unit of product XP:

p
Material Kgs Price per Kg Total

Ap
Sh. Sh

m
F 15 co 4 60
G 12 3 36
H 8 6 48
a.

144
ny
ke

Labour Hours Rate per hour

ea

Sh.
m

Department P 4 10 40
So

Department Q 2 6 12
196

2. Budgeted sales for the period amount to 4,500 units at Sh.260 per unit.
3. There were no budgeted opening and closing inventories of product XP.
4. The actual materials and labour used were as follows:

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Materials Kgs Price per Kg Total

0
89
Sh. Sh.

7
73
F 59,800 4.25 254,150

07
G 53,500 2.80 149,800

07
H 33,300 6.40 213,120

Labour Hours Rate per hour

Department
Sh. Sh.

p
Ap
P 20,500 10.60 217,300
Q 9,225 5.60 51,660

m
5. During the period, 4,100 units of product XP were produced and sold for
co
Sh.1,158,000.
a.
ny

Required:
Compute the following variances:
ke

(i) Material price variance. (3 marks)

ea

(ii) Material mix variance. (3 marks)

m

(iii) Material yield variance. (3 marks)

So

(iv) Labour rate variance. (2 marks)

ANSWER
Computation of Material price variance

Material F Price Variance

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Material G Price Variance

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73
07
Material H Price Variance

07
Total material price variance

p
ii) Computation of Material mix variance

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

m
Revised/Standard mix for actual use co
Total Std Usage = 15+12+ 8 = 35
a.
Kgs
ny

( )
ke

( )
ea
m

( )
So

Total material mix variance = 12,114F + 9,711A + 1251F = sh.3,653(F)

iii) Computation of Material Yield variance

( )

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iv) Computation of Labour rate variance

0
89
7
73
07
07
Total = 12,300A+3,690F=8,610A

QUESTION 20
May 2019 Question One B

p
The following details show the direct labour requirements for the first six batches of a

Ap
new product that were manufactured during the month of March 2019 by Tengeneza Ltd.:

m
Budget
co Actual
Output (batches) 6 6
a.
Labour hours 2,400 1,950
ny

Total labour cost (Sh.) 1,680,000 1,365,000

ke

The Management Accountant reported the following variances:

ea
m

Total labour cost variance Sh.315,000 (favourable)

So

Labour rate variance Nil

Labour efficiency variance Sh. 315,000 (favourable)

The production manager has now revealed that he forgot to inform the Management
Accountant that he expected a 90% learning curve to apply for at least 10 batches.

Required:
Compute the planning and operational variances that analyse the actual performance
taking into account the anticipated learning effect. (8 marks)

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Note: The learning index for a 90% learning curve is -0.1520.

0
89
7
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ANSWER

07
Computation of the planning and operational variances that analyse the actual

07
performance taking into account the anticipated learning effect
Learning curve
̅

Using total approach

p
Ap
m
co
a.
ny

Variances
ke
ea
m
So

Labour cost

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7
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07
07
QUESTION 21
May 2019 Question Five B
Hazina Ltd. is a cosmetics company that produces perfumes. The perfume market is very
competitive and subject to frequent changes. The finance team at Hazina Ltd. prepare
monthly rolling budgets as part of their planning and management control process.

p
Ap
The data for the forthcoming new budget period are as follows:

m
co
1. The variable cost of producing a bottle of perfume is Sh.210.
a.
2. The planned selling price of a bottle of perfume is Sh.450 and at this selling price,
ny

demand for the perfume is expected to be 125,000 bottles.

3. Information from the marketing division at Hazina Ltd. suggests that for every
ke

Sh.30 increase in the selling price, the customer demand would reduce by 10,000
ea

bottles and that for every Sh.30 decrease in the selling price, the customer demand
m

would increase by 10,000 bottles.

So

Required:
i) Advise on the revenue that Hazina Ltd. would earn if the selling price of a bottle of
perfume was set in such a way that profits would be maximised for the forthcoming
budget period. (6 marks)
ii) Explain the use of rolling budgets in planning and management control process at
Hazina Ltd. (2 marks)

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ANSWER

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89
Revenue that Hazina Ltd. would earn if the selling price of a bottle of perfume was

7
73
set in such a way that profits would be maximised for the forthcoming budget

07
period

07
p
Ap
m
co
At profit maximamization MR = MC
a.
ny
ke
ea
m
So

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QUESTION 22

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November 2018 Question Two A

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Nion Ltd. wishes to determine whether it should be investigating its variances or not.

07
07
The following information is relevant for the decision to be undertaken:
1. There is a 90% probability that the production processes will remain in control.
2. The benefit of investigating variances is Sh.55,000.
3. It will cost Sh.1,500 to inspect the process at the investigation point.
4. If a correctable cause is discovered, it will cost Sh.10,000 to make the necessary
adjustments.

p
Ap
Required:

m
Using a decision tree, evaluate whether the variances should be investigated.
co
(10 marks)
a.
ANSWER
ny

Variance investigation
ke
ea
m
So

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EMV investigation

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

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07
07
EMV no investigation
Decision: They should conduct an investigation

QUESTION 23
November 2018 Question Five A
Explain four shortcomings of the traditional budgeting process. (4 marks)

p
Ap
ANSWER

m
Shortcomings of the traditional budgeting process
co
 Inefficiency and time consuming. Traditional budgeting consumes too much time
a.
and too many management resources
ny

 How change responsiveness – most business have an annual budgeting cycle and
ke

this annual focus often makes the budget obsolete soon after it has been created.
 Failure to motivate desirable behaviors the traditional budgeting system fads to
ea

motivate people to act in their company‘s interest

m

 Disconnection from strategic plan

So

 As managers are so obsessed with hitting the numbers right, they often miss the
strategic purpose of budgeting

QUESTION 24
November 2018 Question Five B
Discuss four factors that could encourage the adoption of activity based costing (ABC) in
a large service organisation. (8 marks)

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ANSWER

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

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service organization

07
 Modern companies becoming multi-product

07
 Increased need for diversification strategic
 Increased neck to neck competition
 Increased automation
 Emergency of how cost production counties

p
QUESTION 25

Ap
May 2018 Question Four A
Explain the following budget setting styles.

m
(i) Imposed style. (2 marks)
co
(ii) Participatory style. (2 marks)
a.
(iii) Negotiated style. (2 marks)
ny
ke

ANSWER
Explanation of the following budget setting styles
ea

i) Imposed style: This is a way of budget making where the top management makes all
m

draft and proposal without engaging other employees.

So

ii) Participating style: This is a budget making technique where all stakeholders are
involved in the budget making process

iii) Negotiated style: This is a budget making style where the consultation done by both
top and operational managers on what seems unreasonable and unrealistic in imposed
budget. They are prepared by operational managers through a process of negotiation.

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QUESTION 26

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May 2018 Question Four B

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Smart Furniture Ltd. makes and sells three types of sofa sets namely; American, Butterfly

07
and Comfy.

07
The management accountant of Smart Furniture Ltd. has provided the following budgeted
information for the coming period:
Type of sofa set
American Butterfly Comfy
Production and sales (units) 900 800 1,000

p
Ap
Selling price per unit (Sh.) 40,000 20,000 30,000
Price cost per unit (Sh.) 35,000 16,000 24,000

m
co
Additional information:
a.
1. The company's budgeted overhead costs for the coming period are:
ny

Sh.
Processing services 3,480,000
ke

Assembly services 2,562,000

ea

Quality control 1,930,500

m

Selling and administration 3,007,500

So

10,98000
2. The overheads are currently absorbed to products based on assembly labour hours.
3. Production of each type of sofa set takes place in batches of 50 units.
4. The company has also provided the following estimates for the coming period:

Type of sofa set

American Butterfly Comfy
Machine hours per unit 4 3 6
Direct labour hours per unit 7 5 8
Number of customer orders 30 40 50

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5. The management accountant has just learnt of activity based costing (ABC)

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and would be willing to apply it.

07
07
Required:
A budgeted profit statement using:
(i) Conventional absorption costing using assembly labour hourly rate. (6 marks)
(ii) Activity based costing (ABC). (8 marks)

ANSWER

p
Ap
i) Conventional absorption costing using assembly labour hourly rate

m
co
a.
ny
ke

Profit statement
ea

American Butterfly Comfy

Selling price 40,000 20,000 30,000
m

Prime cost (35,000) (16,000) (24,000)

So

Contribution margin 5,000 4,000 6,000

Sales unit 900 800 1,000
Total contribution 4,500,000 3,200,000 6,000,000
Less overhead (W1) (3,780,000) (2,400,000) (4,800,000)
Net profit 720,000 800,000 1,200,000

Overhead

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iii) Activity Based Costing (ABC)

07
Profit statement

07
American Butterfly Comfy
Selling price 40,000 20,000 30,000
Prime cost (35,000) (16,000) (24,000)
Contribution margin 5,000 4,000 6,000
Sales units 900 800 1,000

p
Total contribution overheads 4,500,000 3,200,000 6,000,000

Ap
Processing cost (W1) 1,044,000 696,000 1,740,000
Assembly services(W2) 882,000 560,000 1,120,000

m
Quality control(W3) 643,500 572,000 715,000
co
Selling & Administration(W4) 751,875 1,002,500 1,253,125
a.
Net profit 1,178,625 369,500 1,171,875
ny
ke

Working
ea
m

W1
So

Processing services

American= 290×4×900 = 1,044,000

Butterfly = 290×3×800 = 696,000
Comfy = 290×6×1,000 = 1,740,000

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W2

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Assembly services

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07
07
American = 140×7×900 = 882,000
Butterfly = 140×5×800 = 560,000
Comfy =140×8×1,000 = 1,120,000

W3

p
Ap
Quality control

m
co
Number of run/set up
a.
ny
ke
ea
m

W4
So

Selling and administration (number of customer order)

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QUESTION 27

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November 2017 Question Two A

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One of the major purposes of a budget is operational control. Through budgeting,

07
management tries to match actual results to outcomes.

07
Required:
Other than control, discuss four other purposes of a budget. (8 marks)

ANSWER
Purposes of a budget

p
Ap
 Communication – it provided a means of communicating management problems to
an organization

m
 Planning tool – budget forces the managers to thinks and plan about the future. This
co
will aid in uncovering future shortcomes and hence avoid surprises.
a.
 It provides a mean for resource allocation – the budgeting process provide a
ny

mean of allocating the resources in an efficient way. This is usually done through
ke

prioritizing process of budgeting

 Performance evaluation – budget will be used as a tool when determining
ea

performance evaluation the actual outcome will be compared with budget variance
m

determined
So

 Coordination tool – budget coordinates the activities of the organization by

integrity various part of the organization.

QUESTION 28
November 2017 Question Three B
Wood Master Ltd. makes quality wooden benches both for indoor and outdoor use.
Results have been disappointing in recent years and a new managing director has been
appointed in order to boost the production volumes.

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After an initial assessment, the director has noted that the budgets had been set at easily

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achievable levels for employees. He argues that employees would be better motivated by

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setting budgets that challenged them more in terms of higher expected output other than

07
changing the overall budgeted output. The director has not yet altered the standard cost

07
card. The budgeted output and sales for the month of October 2017 was 4,000 benches.

The standard cost card at this output level is provided below:

Sh.
Wood (25 kgs at Sh.32 per kg) 800
Labour (4 hours at Sh.80 per hour) 320

p
Ap
Variable overheads (4 hours at Sh.40 per hour) 160
Fixed overheads (4 hours at Sh.160 per hour) 640

m
Total standard cost co 1,920
Selling price 2,200
a.
Standard profit 280
ny
ke

Additional information:
1. Overheads are absorbed on the basis of labour hours and the company uses an
ea

absorption costing system.

m

2. Stocks are valued at standard cost. There were no stocks at the beginning of the month
So

of October 2017.
3. Actual results for the month of October 2017 were as follows:
Sh."000"
Wood (80,000 kgs at Sh.35 per kg) 2,800
Labour (16,000 hours at Sh.70 per hour) 1,120
Variable overheads 600
Fixed overheads 1,960
Total production cost (3,600 benches) 6,480
Closing stock (400 benches at Sh.1,920 each) (768)
Cost of sales 5,712

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Sales (3,200 benches) 7,200

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Actual profit 1,488

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07
4. The average monthly production and sales for some years prior to October 2017 had

07
been 3,400 units and budgets had previously been set at this level. Very few operating
variances had historically been generated by the standard cost used.
5. The finance director suggested that an absorption costing system is misleading and
that marginal costing system should be considered at some stage in the future to guide
decision making.

p
Ap
Required:
(i) The operating variances. (10 marks)

m
(ii) A statement reconciling the actual profit and the budgeted profit for Wood Master
co
Ltd.
a.
(4 marks)
ny

ANSWER
ke

i) The operating variance

ea
m
So

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0
89
7
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07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

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ii) A statement reconciling the actual profit and the budgeted profit for Wood

07
Master Ltd

07
Reconciliation statement
Sh 000
Budgeted profit 280x4000 1,120
Adjustment:
Material price variance (240)

p
Material usage variance 320

Ap
Labour rate variance 160
Labour efficiency variance (128)

m
Variable Oct efficiency variance co (64)
Variance Oct expenditure variance 40
a.
Fixed Oct expenditure variance 600
ny

Fixed Oct efficiency variance (256)

ke

Sales price variance 160

Sales volume variance (224)
ea

Actual profit 1,488

m
So

QUESTION 29
May 2017 Question Three A
Explain the term "incremental budgeting", citing one of its major limitations as a
budgeting technique. (4 marks)

ANSWER
Explaining incremental budgeting and its major limitation
Incremental budgeting is an approach to budgetary which is concerned with the
increments in costs and revenue which will occur in the coming periods.

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Its major disadvantage is that if the current operations are not efficient and effective,

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those inefficiencies may be perpetuated to the future.

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07
QUESTION 30

07
May 2017 Question Three C
You have been provided with the following operating statement which represents an
attempt by a firm to compare the actual performance with the budget for the quarter
which has just ended:
Budget Actual Variance
Number of units sold 640,000 720,000 80,000

p
Ap
Sh. "000" Sh. "000" Sh. "000"
Sales 1,024 1,071 47

m
Cost of sales (all variable): co
Materials 168 144
a.
Labour 240 288
ny

Overheads 32 36
Total variable costs 440 468 (28)
ke

Fixed labour cost 100 94 6

ea

Selling and distribution costs:

m

Fixed 72 83 (11)
So

Variable 144 153 (9)

Administrative costs:
Fixed 184 176 8
Variable 48 54 (6)
548 560 (12)
Net profit 36 43 7

Required:

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(i) Using a flexible budgeting approach, redraft the operating statement so as to provide a

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more realistic indication of the variances. (8 marks)

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(ii) Explain why the original operating statement was of little use to the management.

07
(2 marks)

07
ANSWER
Flexible Budget
Determining flexing base

p
Ap
Flexible Budget Statement

m
Flexible budget
co Actual budget Variance
Sh 000 Sh 000 Sh 000
a.
Sales (1,024×1.125 1,152 1,071 (81)
ny

Cost of sales
Material (168×1.125) 189 144 45
ke

Labour (240×1.125) 270 288 (18)

ea

Overhead (32×1.125 36 36 0
m

Fixed labour cost 100 94 6

So

Selling & distribution cost

Fixed 72 83 (11)
Variable (144×1.125) 162 153 9
Administrative costs
Fixed 184 176 8
Variables (48×1.125) 54 54 0
Net profit 85 43 (42)

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ii) Why original budget was of little use to the management

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It was of little use because it was of no use comparing performance at different level of

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activity i.e. (like and dislike)

07
07
QUESTION 31
May 2017 Question Five A
Summarise four factors that should be taken into consideration in establishing the length
of a proposed budget period. (4 marks)

ANSWER

p
Ap
Factors to consider when determining the length of proposed budget
 The economic situation

m
 Stability of the market for the product co
 Type of budget e.g. revenue, budget, capital (expenditure)
a.
 Probability of change in product mix
ny
ke

QUESTION 32
November 2016 Question One B
ea

The following information relates to night shift operations at Waki Ltd., a manufacturing
m

company.
So

1. The night shift workers normally consist of 30 skilled men, 15 semi-skilled men
and 10 unskilled men, who are paid at standard hourly rates of Sh.80, Sh.60 and
Sh.40 respectively.
2. A normal working week consists of 40 hours.
3. The weekly output for night shift workers is expected to be 2,000 units.
4. In the second week of the month of October 2016, the night shift workers
consisted of 40 skilled men, 10 semi-skilled men and 5 unskilled men, who were
paid at Sh.70, Sh.65 and Sh.30 respectively. During that week, 4 hours were lost
due to abnormal idle time and 1,600 units were produced.

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Required:

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Compute for the second week of October 2016:

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(i) Labour cost variance. (2 marks)

07
(ii) Labour rate variance. (2 marks)

07
(iii) Labour efficiency variance. (3 marks)
(iv) Labour mix variance. (3 marks)
(v) Idle time variance. (2 marks)

ANSWER
Computation for the second week of October 2016 for:

p
Ap
Variance Evaluation
Workings

m
Standard analysis co
Group Numbers Rate Amount
a.
Skilled 30 80 2,400
ny

semiskilled 15 60 900
ke

Unskilled 10 40 400
3,700
ea
m
So

Actual cost analysis

Group Number Rate Hours Amount
Skilled 40 70 40 112,000
Semi skilled 10 65 40 26,000
Unskilled 5 30 40 6,000
144,000

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Actual hours

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Skilled 40×40=1,600

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Semi skilled 10×440=400

07
Unskilled 5×40=200

07
Standard hours for actual production
Group Number Weekly loan Total hours required
Skilled 30 32 960
Semiskilled 15 32 480

p
10 32 320

Ap
m
co
a.
ny

i) Labour cost variance

ke
ea
m
So

ii) Labour rate variance

Skilled = (80-70)1,600 =16,000F

Semiskilled = (60-65)400 =2,000A
Unskilled = (40-30)200 = 2,000F
16,000F
iii) Labour Efficiency Variance

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Skilled = (960-1,600) 80 =51,200A

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Semiskilled = (480-400)60 =4,800F

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Unskilled = (320-200)40 = 4,800F

07
41,600A

07
iv) Labour Mix Variance

Workings
Skilled: Std mix = 1,980× = 1,080×80 = 86,400

p
Actual mix = 40×36=1,440×80 = 115,200

Ap
Semi – Skilled = Std mix =1,980× = 540×60 = 32,400

m
Actual 10×36=360×60
co = 21,600
a.
Unskilled = Std mix =1,980× = 360×40 =14,400
ny

Actual mix 5×36 = 180×40 = 7,200

ke
ea

Skilled = 86,400-115,200 =28,800

m

Semiskilled =32,400-21,600 =10,800F

So

Unskilled = 14,400-7,200 =7,200F

10,800A

v) Idle time variance

Skilled =(40×4) 80 = 12,800 A

Semi skilled =(10×4) 60 = 2,400 A
Un skilled =(5×4) 40 =800 A
16,000A

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QUESTION 33

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May 2016 Question Four B

07
Ujuzi Ltd. operates a standard marginal cost accounting system. The information relating

07
to product "Exa" which is manufactured in one of the company's department is given
below:
Standard marginal cost per unit
Sh.
Direct materials: 6 kgs at Sh.40 per kg. 240
Direct labour: 1 hour at Sh.70 per hour 70

p
Ap
Variable production overhead 30
340

m
Additional information: co
1. Variable production overheads vary with units produced.
a.
2. Budgeted fixed production overheads per month amount to Sh.1,000,000.
ny

3. Budgeted production for product Exa amounted to 20,000 units per month.
4. Budgeted selling price per unit amounted to Sh.440.
ke

5. The actual results for the month of April 2016 were as follows:
ea

Units of Exa produced 18,500

m

Sh.
So

Direct materials purchased and used (113,500 kgs.) 4,426,500

Direct labour (1 7,800 hours) 1,299,400
Variable production overheads incurred 588,000
Fixed production overheads incurred 1,040,000
7,353,900
Actual selling price per unit Sh.480

Required:
(i) Prepare in columnar format, the original budget, flexed budget and actual profit
statement. (6 marks)

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(ii) Statement reconciling the original budgeted profit and the actual profit.

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(Show all operating variances). (8 marks)

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07
ANSWER

07
i) The original budget, flexed budget and actual profit statement.
Original Actual Flexible Budget
Budget Budget Sh 000
Sh 000 Sh 000
Units 20,000 18,500

p
Sales (440×20) 8,800 8,880 (8,800×0.925)= 8,140

Ap
Cost
Direct Material (240×20) (4,800) (4,426.5) 4,800×0.925= (4,440)

m
Direct Labour (70×20) (1,400)
co (1,299.4) 1,400×0.925= (1,295)
Variable Overhead(30×20) (600) (588) 600×0.925= (555)
a.
Fixed Overhead (1,000) (1,040) (1,000)
ny

Profit 1,000 1,526.1 850

ke

Working
ea
m
So

ii) Statement reconciling the original budgeted profit and the actual profit.
Reconciliation statement
Sh. 000
Budgeted Profit (440-340)20,000-1,000,000 1,000
Adjustments
Material Price Variance (40-39)113,500 113.5
Material Usage 6×18,500-113,500)40 (100)

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Labour Rate Variance (70-73)17,800 (53.4)

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Labour Efficiency Variance (1×18,500-17,800)70 49

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Variable Off Expenditure Variance (30×17,800)-588,000 (54)

07
Variable Off Efficiency Variance (1×185,000 - 17,800)30 21

07
Fixed Off Expenditure Variance (1,000 - 1,040) (40)
Sales Price Variance (440 - 480)18,500 740
Sales Volume Variance (20,000 – 18,500)100 (150)
Actual Profit 1,526.1

p
QUESTION 34

Ap
November 2015 Question Two A
Describe four advantages of activity based budgeting (ABB). (8 marks)

m
co
ANSWER
a.
Advantages of Activity based budgeting
ny

 It is cost effective
ke

 Increased traceability and transparency that allows balancing capacity

 Integration of budget with other management initiatives
ea

 It enhances better resources allocation to support priorities

m

 Its flexible
So

b) Inventory controls (known shortages)

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07
Probability

07
1,440
/30×4 = 192 0.06
1,520
/30×4 = 203 0.14
1,600
/30×4 = 213 0.30
1,680
/30×4 = 224 0.16
1,760
/30×4 = 235 0.13
1,840

p
/30×4 = 246 0.10

Ap
1,920
/30×4 = 256 0.07
2,000
/30×4 = 267 0.04

m
co
Analysis Table
a.
New Safety Holding Total
ny

stock cost cost

ke

213 0 0 (11×0.16+22×0.13+33×0.1+43×0.07+54×0.04)×12×80 12,566

ea

=12,566
m

224 11 11×120 (11×0.13+22×0.1+32×0.07+43×0.04)12×80

So

=1,320 = 7,286 8,606

235 22 22×120 (11×0.1+21×0.07+32×0.04)×12×80
=2,640 =3,696 6,336
246 33 33×120 (10×0.07+21×0.04)×12×80
=3,960 =1,478

256 43 43×120 (11×0.0.04)×12×80

=5,160 =422 5,582
267 54 54×120 0
=6,480 6,480

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07
ii) Probability of being out of stock

07
QUESTION 35
November 2015 Question Five B
Wood Ltd. makes quality wooden benches for both indoor and outdoor use. Results have

p
been disappointing in recent years and a new managing director, Mr. P. Rono was

Ap
appointed to raise production volumes.

m
After an initial assessment, Mr. P. Rono considered that budgets had been set at low
co
levels which were easily achieved by employees. He argued that employees would be
a.
better motivated by setting budgets which challenge them more interms of higher
ny

expected output.
ke

Other than changing the overall budgeted output, Mr. P. Rono has not altered any part of
ea

the standard cost card. Thus, the budgeted output and sales for the month of October
m

2015 was 4,000 benches. The standard cost card below was prepared on this basis.
So

Sh.
Wood: 25 kilogrammes at Sh.3.20 per kilogramme 80
Labour: 4 hours at Sh.8 per hour 32
Variable overheads: 4 hours at Sh.4 per hour 16
Fixed overheads: 4 hours at Sh.16 per hour 64
Total cost 192
Standard profit 28
Standard selling price 220

Additional information:

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1. Overheads are absorbed on the basis of labour hours. The company uses absorption

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costing system.

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2. There were no stocks at the beginning of October 2015.

07
3. Stocks are valued at standard cost.

07
4. Actual results for the month of October 2015 were as follows:
Sh.
Wood: 80,000 kilogrammes at Sh.3.50 per kilogramme 280,000
Labour: 16,000 hours at Sh.7 per hour 112,000
Variable overheads 60,000
Fixed overheads 196,000

p
Ap
Total production cost (3,600 benches) 648,000

m
co Sh.
Closing stock (400 benches at Sh.192 each) (76,800)
a.
Cost of sales 571,200
ny

Sales (3,200 benches at Sh.225 each) 720,000

Actual profit 148,800
ke

5. The average monthly production and sales prior to October 2015 had been 3,400
ea

units and budgets had previously been set at this level. Very few variances had
m

historically been generated by the standard costs used.

So

6. Mr. P. Rono has made some significant changes to the operations of the company.
However, the other directors are now concerned that Mr. P. Rono, has been too
ambitious in raising production targets.

Required:
Prepare an operating statement for the month of October 2015 showing all operating
variances and reconciling budgeted and actual profits. (14 marks)

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ANSWER

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89
Preparation of operating statement for the month of October 2015 showing all

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operating variances and reconciling budgeted and actual profits

07
Operating variances

07
 Total material cost variances

 Material price variance

p
Ap
 Material usage variance

m
co
a.
 Total labour cost variance
ny
ke

 Labour rate variance

ea
m
So

 Labour effieciency variance

 Total variable overhead variance

 Variable overhead expenditure variance

 Variable overhead efficiency variance

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 Total fixed overhead variance

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 Fixed OH expenditure variance

 Fixed OH efficiency variance

p
Ap
 Total sales variance

m
co
a.

 Sales price variance

ny
ke
ea

 Sales volume variance

m
So

Reconciliation statement
Sh
Budget Profit 112,000
Adjustment
Material Price Variance (24,000)
Material Usage Variance 32,000
Labour Rate Variance 16,000

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Labour Efficiency Variance (12,800)

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Variable Off Expenditure 4,000

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Variable Off Efficiency Variance (6,400)

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Fixed Off Expenditure Variance 60,000

07
Fixed Off Efficiency Variance (25,600)
Sales Price Variance 16,000
Sales Volume Variance (22,400)
Actual Profit 148,800

QUESTION 36

p
Ap
September 2015 Pilot Paper Question Three A
Identify four factors to be considered before deciding whether to investigate variances.

m
co (4 marks)
ANSWER
a.
Factors to be considered before deciding whether to investigate variances
ny

 Nature of variances i.e. either favorable or adverse

 Cost of investigation
ke

 Size of variance
ea

 Past patter
m

 Reliability of figures
So

QUESTION 37
September 2015 Pilot Paper Question Three C
Sally manufacturing Ltd. manufactures a product using three types of raw materials;
"Exe". "Wye" and "Zed". Themanaging director is concerned that material costs have
been increasing over time.

The management accountant has suggested the use of statistical quarterly control (SQC)
charts to monitor the variance movements.

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Additional information:

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4. The production capacity is 10,000 units and the company is operating at full capacity.

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The usage per unit of output is 2.5 kgs of each raw material.

07
5. Cost records shows the following monthly usage of the raw materials:

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Month Exe (kgs) Wye (kgs) (kgs)
January 24,250 26,000 25,750
February 26,000 23,500 24,000
March 27,750 24,250 23,500
April 26,000 25,250 26,750

p
May 30,500 26,250 23,000

Ap
June 29,500 26,750 28,250
July 31,500 27,750 24,750

m
August 28,500 28,000 26,500
co
September 29,250 28,750 25,250
a.

October 30,750 29,750 23,250

ny

November 29,750 30,000 24,500

ke

December 31,000 30,500 26,000

6. The standard
ea

usage is 25,000 kgs per month with a standard deviation of 2,500 kgs per month.
m

7. The management accountant is suggesting investigation of any usage greater or less

So

than two deviations from the expected ( ).

Required:
(i) Indicate the variance investigation decisions. (3 marks)
(ii) Present the SQC charts for material usage for the period and make the necessary
conclusions. (8 marks)

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ANSWER

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i) Variance Investigation Decisions

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73
̅

07
07
p
Ap
m
co
Investigate the variance if usage is less than 20,000 kg or more than 30,000 kgs.
a.
ny
ke
ea
m
So

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ii) SQC charts for material usage for the period

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07
07
p
Ap
m
co
a.
ny
ke
ea
m
So

UCL – Upper Control Limit

CL – Control Limit
LCL – Upper Control Limit

Conclusion:
Exe – Investigation need to be conducted

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Wye - Investigation need to be conducted

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Zed – it‘s within the control hence no investigations needed

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07
QUESTION 38

07
May 2015 Question Two B
Tripple C Ltd. manufactures a single product branded "ZL". Product ""ZL" requires three
types of raw materials namely: F, G and H.

The standard cost for one unit of "ZL" is as follows:

Material Quantity (Kgs) Price per Kg (Sh.) Total cost (Sh.)

p
Ap
F 15 400 6,000
G 12 300 3,600

m
H 8 co 600 4,800
Standard loss (3)
a.
Standard yield 32
ny

Hours Rate per hour (Sh.) Total cost (Sh.)

ke

Labour
Department : X 4 1,000 4,000
ea

Y 2 600 1,200
m
So

Additional information:
1. During the month of April 2015, the budgeted production and sales were 4,096 Kgs
of product "ZL" at Sh. 1,600 per Kg.
2. The actual quantities of materials and labour used in the month of April 2015 for
120 batches of product "ZL" were as follows:

Material Quantity (Kgs) Price per Kg (Sh.) Total cost (Sh.)

F 1,680 425 714,000
G 1,650 280 462,000
H 870 640 556,800

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Labour Hours Rate per hour (Sh.) Total cost (Sh.)

07
Department: X 600 1,060 636,000

07
Y 270 560 151,200

3. The actual yield was 3,648 Kgs.

Required:
i) Materials price variance. (3 marks)

p
Ap
ii) Materials usage variance. (3 marks)
iii) Materials mix variance. (3 marks)

m
iv) Materials yield variance. co (3 marks)
v) Labour cost variance. (2 marks)
a.
ny

ANSWER
ke

Variances
i) Material price variance
ea
m
So

F = (400 - 425) 1,680 = 42,000A

G = (300 - 280) 1,650 = 33,000F
H = (6,000 - 640) 870 = 34,800A
43,800A

ii) Material Usage Variance

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0
( )

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( )

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07
( )

iii) Material Mix Variance

( )

p
Ap
( )

m
( ) co
̅̅̅̅̅̅̅̅̅̅̅
a.
ny
ke

iv) Material Yield Variance

ea
m

( )
So

v) Labour Cost Variance

x = (1,000×600) – 636,000 = 36,000A

y = (600×270)-151,200 = 10,800F
25,200A

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TOPIC 8

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07
ENVIRONMENTAL MANAGEMENT ACCOUNTING

07
QUESTION 1
December 2023 Question Four A
Highlight FOUR roles of a management accountant in accounting for environmental

p
costs. (4 marks)

Ap
ANSWER

m
Role of management accountant in accounting for environmental cost
co
1. Capital Investment decisions – Management accountant evaluate the impact of
a.
environment cost on projects viability and implementation. They will then advice the
ny

management whether the project are feasible in the right cost and benefit
ke

2. Cost determination – Management accountant have responsibility of quantifying

environmental cost and then disseminating this information to the relevant production
ea

unit
m

3. Performance evaluation – Management accountant are responsible for setting

So

budget and detailing budgeting environmental cost. The budgeted environmental cost
are then compared with the actual cost incurred in order to evaluate the performance
4. Provision of information – Management accountant provides important monetary
data needed for environmental management accounting activities

QUESTION 2
August 2023 Question One A
Explain TWO benefits of each of the following concepts as used in environmental
management accounting:
(i) Environment life cycle costing. (4 marks)

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(ii) Environmental activity-based costing (EABC). (4 marks)

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ANSWER

07
Benefits of the following concept as used in EMA

07
i) Environmental life cycle costing (ELCC)
1. Enhanced environmental reporting – ELCC supports the preparation of detailed
and accurate environmental reports, providing stakeholders with a transparent view
of an organization‘s commitment to sustainability and responsible resource
management.
2. Product and process improvement – Through the identification of environmental

p
Ap
costs. ELCC facilitates continuous improvement in product and process.
3. Informed decision making – by considering environmental costs at every life cycle

m
stage, ELCC provides management with valuable information to make informed
co
decisions.
a.
4. Identification of cost savings - ELCC enables organizations to identify
ny

opportunities for cost savings by optimizing resources and minimizing waste

generation.
ke
ea

ii) Environmental activity- Based costing (EABC)

m

EABC is a concept within environmental management accounting that extends the

So

principles of traditional activity based costing (ABL) to include the environmental cost
associated with various activities in an organization benefits include:
1. Accurate cost attribution – EABL allows for the accurate attribution of
environmental costs to specific activities or processes
2. Resource efficiency optimization - By understanding the environmental cost
associated with various activities. EABC facilitates the optimization of resource
use.
3. Performance measurement – EABC provides a framework for measuring the
environmental performance of different departments or processes within an
organization. This allows for benchmarking, setting targets and progress tracking.

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QUESTION 3

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April 2023 Question Two A

07
The Management Accountant of Floratec Ltd. has attended a brainstorming seminar on

07
Environmental Management Accounting (EMA) organised to sensitise the management
team on strategic goals and policies to put in place to address various environmental
costs.

Required:
For each of the environmental costs below, identify THREE costs to be addressed by the

p
Ap
management team:
(i) Environmental internal failure costs. (3 marks)

m
(ii) Environmental external failure costs. co (3 marks)
a.
ANSWER
ny

For each of the environmental cost below, identify cost to be addressed by the
ke

management team:
i) Environmental internal failure costs
ea

Environmental internal failure costs refers to costs incurred by a company due to

m

environmental issues that are detected and addressed internally before reaching
So

external stakeholders or regulators. The management team should focus on

identifying and managing the following three types of internal failure costs:
1. Waster disposal cost
2. Emission control cost
3. Contamination cleanup costs
ii) Environmental external failure cost

Environmental external failure costs are incurred when environmental issues and the
associated costs become visible to external stakeholders, regulators or the public types
of external failure costs

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1. Regulatory fines and penalties

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2. Litigation costs

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3. Reputation damage cost

07
07
QUESTION 4
December 2022 Question One A
In the context of environmental management accounting, explain FOUR types of
environmental costs. (8 marks)

ANSWER

p
Ap
Types of environmental costs
Environmental cost refers to the cost associated with an organizations, impact on the

m
environment. Environmental cost include: co
1. Reputational costs - They are cost associated with failing to address
a.
environmental issues e.g. loss of sale
ny

2. Environmental/prevention and management costs- This covers the annual cost

incurred in preventing waste and emission, design and operations process, training
ke

and recycling products

ea

3. Environmental appraisal costs – This include inspection of product processes

m

4. Processing cost – This comprises labour hours, depreciation of machinery and

So

operating material. They will be added up to environmental cost scheme based on

the respective production cot pro data charges

QUESTION 5
August 2022 Question Four A
Explain three areas where environmental management accounting (EMA) might be
applied. (3 marks)

ANSWER
Areas where environmental management accounting might be applied

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Cost identification and analysis

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1. Product and process costing

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2. Life cycle assessment

07
3. Budgeting and performance measurement

07
4. Regulatory compliance and reporting
5. Risk management

QUESTION 6
April 2022 Question Four A
Evaluate three benefits of life cycle costing. (6 marks)

p
Ap
ANSWER

m
Benefits of life cycle costing co
 Prices can be determined with better knowledge of the times costs
a.
 Overall profit generated by a product in its entire life is easily established
ny

 Better appraisal of product success or failure can be done since even research and
ke

development cost are included

 The visibility of all costs in increased, rather than costs relating to one period. this
ea

facilitates decision making

m
So

QUESTION 7
December 2021 Question Five A
Business organisations especially the manufacturing firms are required to factor in
environmental concerns in their decision making.

Required:
Analyse four ways of aligning business operations with environmental issues. (8 marks)

ANSWER
Ways of aligning business operations with environmental issues

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 Cost reduction – Companies that have an effective environmental costing system

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are more likely to have and take advantage of cost reduction and other improved

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opportunities.

07
 Assisting on improving methods for re-allocating internal environmental cost and

07
specific products and activities in day to day operations
 Developing or seeking capital investment and appraisals tools that are more
efficient which helps to resolve conflict between environmental management and
traditional financial management system.
 Compliance – This entails using EMA to support environmental protection

p
through cost efficient compliance with environmental

Ap
QUESTION 8

m
September 2021 Question Four B co
Describe three challenges encountered in environmental management accounting.
a.
(6 marks)
ny

ANSWER
ke

Challenges encountered in (EMA)

1. EMA requires collaboration and actions of different functions such as financial
ea

management and environmental management. But there is a lack of logical

m

relationship and support.

So

2. Managers are unwilling to adopt EMA fully as they are not willing to hold
responsible for significant environmental costs.
3. Lack of sufficient knowledge by the management and management accountant in
environmental knowledge and experience.
4. Lack of coordination among functional areas
5. Lack of sufficient framework and inadequate guidelines and compulsion to adopt
guidelines.

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QUESTION 9

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May 2021 Question Five A

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Discuss the scope and breadth of environmental management accounting. (10 marks)

07
07
ANSWER
EMA is a systematic approach which involves identification, collection, estimation,
analysis, internal reporting and use of material and energy flow information.
Environmental management accounting is a systematic approach to finding practical way
of saving water, energy, material and reducing negative environmental impact.

p
Ap
The broader scope of environmental management include
 To identify the environmental problem and to find its solution

m
 To restrict and regulate the exploitation and utilization of natural resources
co
 To reduce the impact of extreme events events and natural disaster.
a.
 To make optimum utilization of natural resources
ny
ke

QUESTION 10
November 2019 Question Four A
ea

Describe three categories of environmental costs. (6 marks)

m
So

ANSWER
Categories of Environment cost
 Environmental prevention costs: The costs of activities undertaken to prevent
the production of waste.
 Environmental Appraisal costs: Costs incurred to ensure that the organisation
complies with regulations and voluntary standards.
 Environmental internal failure costs: Costs incurred from performing activities
that have produced contaminants and waste that have not been discharged into the
environment.

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 Environmental external failure costs: Costs incurred on activities performed

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after discharging waste into the environment.

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07
QUESTION 11

07
May 2019 Question One A
Highlight four fields in which the use of environmental management accounting (EMA)
is applied. (4 marks)

ANSWER
Fields in which the use of environmental management accounting (EMA) is applied

p
Ap
 Monitor, measure and cost control
 Strategy formulation

m
 Manage management information system to give accurate output
co
 Financial budgeting
a.
 Project implementation
ny

 Investment appraisals and product pricing

ke

QUESTION 12
ea

November 2018 Question One A

m

Stating two examples in each case, distinguish between "internalised environmental

So

costs" and "externalised environmental impacts". (6 marks)

ANSWER
Distinguishing between internalized environmental costs and externalized
environmental impact
Internalized environmental cost – means taking the external costs of pollination of the
environment as part of the producer cost included in the total cost of the product to make
the environment as important as capital, labor, resources, technology and other factors of
production.

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Externalized environment impact – is the use of energy technology which is often

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associated with impact on human health and environment. The quantified impact include

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damages on human health, impact on crop yield damages on ecosystems.

07
07
QUESTION 13
November 2018 Question Three A
Describe three roles that are played by a management accountant in environmental
management accounting (EMA). (6 marks)

ANSWER

p
Ap
Role of management accountant in Environmental Management Accounting (EMA)
 Capital investment decisions: Management accountant evaluates the impact of

m
the environment cost and benefit co
 Cost determination: Management accountant have a responsibility of quantifying
a.
environmental cost and then disseminating this information to the relevant product
ny

units
 Process and product design: Management accountant have a responsibility of
ke

assisting production departments implement process and product designs that are
ea

environmentally friendlier
m

 Provision of information: Management accountant provides important monetary

So

data needed for environmental management accounting activities

QUESTION 14
May 2018 Question Three A
Outline four costs that should be reported in an environmental cost report. (4 marks)

ANSWER
Cost that should be reported in an environmental cost report
 Environmental prevention costs: The costs of activities undertaken to prevent
the production of waste.

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 Environmental Appraisal costs: Costs incurred to ensure that the organisation

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complies with regulations and voluntary standards.

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 Environmental internal failure costs: Costs incurred from performing activities

07
that have produced contaminants and waste that have not been discharged into the

07
environment.
 Environmental external failure costs: Costs incurred on activities performed
after discharging waste into the environment.

QUESTION 15

p
November 2017 Question Five A

Ap
Environmental management accounting (EMA) is complementary to the conventional
financial management accounting approach with the aim of developing appropriate

m
mechanisms that assist in identification and allocation of environmental related costs.
co
a.
With reference to the above statement, highlight four areas for the application of EMA.
ny

(4 marks)
ke

ANSWER
Areas where Environmental management accounting (EMA) is applied
ea

 Budgeting
m

 Investment appraisal
So

 Product pricing
 Cost determination
 Corporate social responsibility

QUESTION 16
May 2017 Question Two A
Evaluate three benefits that might accrue to an organisation that adopts Environmental
Management Accounting (EMA). (6 marks)

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ANSWER

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Benefits to an organization that adopts EMA

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 Strategic position – this relates how EMA could support the assessment and

07
implementation of environmentally sensitive and cost effective programmes

07
 Eco – efficiency – this involves the use of EMA to help reduce costs and
environment impact simultaneously via more efficient use of water, energy and
waste
 Compliance: This entails using EMA to support environmental protection through
cost efficient compliance with environmental regulations.

p
Ap
QUESTION 17
May 2016 Question Four A

m
Environmental Management Accounting (EMA) is broadly defined as the identification,
co
collection, analysis and use of two types of information for internal decision making
a.
namely:
ny

1. Physical information on the use and flow of energy, water and materials including
ke

waste.
2. Monetary information on environmental related costs, earnings and savings.
ea

The management accountant possesses important cost data and information regarding the
m

environment.
So

Required:
With regard to the above statement, evaluate the role of management accountants in
Environmental Management Accounting (EMA). (6 marks)

ANSWER
Role of management accountant in EMA
 Capital investment decision: Management accountant (MA) evaluates the impact
of environmental cost on projects viability and implementation. They will then
advice the management whether the projects on feasible in right cost and benefit.

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 Cost determination: Ma have a responsibility of qualifying environmental cost

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and then disseminating this information to the relevant production unit.

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 Performance evaluation: Management Accounts are responsible for setting

07
budgets and detailing budgeted environmental cost. The budgeted environmental

07
costs are then compared with the actual cost incurred in order to evaluate the
performance.

QUESTION 18
May 2015 Question One A

p
Explain the role of management accountants in environmental management accounting.

Ap
(6 marks)
ANSWER

m
Role of management accountant in environmental management accounting
co
1. Capital investment decision: Management accountants evaluate the impact of
a.
environmental cost of projects viability and implementation. They will then advice
ny

the management whether the projects are feasible in the right cost and benefit
ke

2. Cost determination: Management accountant have a responsibility of quantifying

environment cost and them disseminating this information to the relevant production
ea

unit
m

3. Performance evaluation: Management accountant are responsible for setting

So

budgets and detailing budgeted environmental cost. the budgeted environment costs
are then compared with the actual cost incurred in order to evaluate performance
4. Provision of information: Management accountant provides important monetary
data needed for environmental management accounting activities

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