ADVANCED MANAGEMENT ACCOUNTING
CPA ADVANCED LEVEL
WEDNESDAY: 24 April 2024. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
(a) Describe THREE non-financial key performance index (KPI) of the following perspectives of a balanced scorecard model:
(i) Customer perspective. (3 marks)
(ii) Internal business perspective. (3 marks)
(b) With reference to linear regression analysis, explain the following cost estimation concepts:
(i) Analysis of variance (ANOVA). (2 marks)
(ii) Goodness of fit tests. (2 marks)
(c) Aerosky Holdings Ltd. manufactures and sells sky drones and their accessories. Aerosky Holdings Ltd. operates two divisions; Camera division and Sky division. Camera division manufactures a component branded “HD Camera” that is used by Sky division. Sky division is a manual assembly and final product division that assembles various components to make a product branded “mid-level drones”.
Both divisions produce one type of output only.
Sky division needs the HD camera component from Camera division for every “drone” produced. Camera division transfers to Sky division all of the HD camera components needed to produce a drone. Camera division also sells HD camera components to the external market. Sky division outsources its other components in the market from an external supplier.
The following budgeted information is available for each division:
Division Camera division Sky division
Sh. Sh.
Market price per HD camera 19,000
Market price per drone 160,000
Production cost per HD camera 10,000
Assembly cost per hour 35,500
Total outsourcing cost of other components 1,686,670,000
Fixed non-manufacturing overheads 10,560,000 33,000,000
External demand 10,000 HD cameras
Production capacity 22,000 HD cameras
Additional information:
1. The production cost per HD camera is 60% variable.
2. Camera division sets a transfer price at 70% of the marginal cost.
3. The fixed manufacturing overheads are absorbed based on the budgeted output.
4. Assembly cost per hour is basically a manual job which is subjected to an 80% learning curve rate. The first drone will take 2 hours to assemble.
5. The learning curve coefficient at 80% level is –0.3219. This will apply to all 12,000 drones assembled.
6. Assume that the learning curve model is in the form of Y = axb
7. The tax rate applicable for both divisions is 30%.
Required:
In columnar format, compute the post-tax net profit generated by Camera division, Sky division and Aerosky Holdings Ltd. as a whole. (10 marks)
(Total: 20 marks)
QUESTION TWO
(a) Joe Mwinzi, the Management Accountant of Vera Enterprise that makes and sells product “Aloe” has made the following estimates:
Sales demand Variable cost per unit
Condition Units Probability Condition Sh. Probability
Worst 45,000 0.30 Worst 350 0.30
Most likely 50,000 0.60 Most likely 400 0.55
Best 55,000 0.10 Best 550 0.15
Additional information:
1. The selling price of Aloe product is Sh.1,000 per unit.
2. Fixed costs attributable to Aloe product is Sh.24,000,000.
3. Vera Enterprise intends to achieve a target profit of Sh.6,000,000.
Required:
(i) Using a probability tree, compute the expected profit of Vera Enterprise. (6 marks)
(ii) Compute the probability that Vera Enterprise will fail to break-even. (2 marks)
(iii) Determine the probability that Vera Enterprise will not achieve the target profit. (2 marks)
(b) The Management Accountant of Lengo Ltd. has noted that the management and control of inventories has become very uncertain. He has contracted you to devise an inventory system that allows for uncertainties to be applied to the current stock item branded “Safi”.
The following are the details of stock item “Safi”:
Daily demand (units) Probability Lead time days Probability
3,000 0.2 20 0.4
5,000 0.5 25 0.6
6,000 0.3
Additional information:
1. The daily demand applies for the whole lead-time.
2. Inventory carrying cost is 12.5% of inventory value.
3. The purchase cost and order cost are Sh.100 per unit and Sh.15,950 per order respectively.
4. The current re-order point is 120,000 units.
5. One year has 300 working days.
Required:
(i) Economic order quantity. (3 marks)
(ii) The relevant inventory cost for the year. (2 marks)
(iii) The current level of safety stock implicit in the current reorder period. (2 marks)
(iv) The probability of stock out. (3 marks)
(Total: 20 marks)
QUESTION THREE
(a) “Management Accounting is an invaluable tool to any organisation at both the operational level and the strategic management level”.
Discuss THREE reasons to support the claim. (6 marks)
(b) Solamax Ltd. makes small assembled solar panels for the domestic local market. The marketing manager believes that in the short run their sales can improve by launching a massive marketing campaign strategy.
The following marketing strategies have been proposed based on the demand for the product:
Strategy A: Advertise locally
Strategy B: Online marketing
Strategy C: Mass media advertisement with the local television media house
The company uses expected value to make this type of decision. The estimated annual profit or (loss) under the three states of market reaction for each market strategy is as follows:
Market reaction (Demand)
Marketing strategy High Medium Low
Sh.“000” Sh.“000” Sh.“000”
Market locally 1,300,000 500,000 350,000
Online marketing 1,500,000 850,000 410,000
Mass media advertisement 1,700,000 905,000 (105,000)
Additional information:
1. Strategy A has low fixed costs and high variable costs; strategy B has average fixed costs and average variable costs while strategy C has high fixed costs and low variable costs.
2. There is a 30% chance that demand will be high, a 40% chance that demand will be medium and a 30% chance that demand will be low.
3. A market research company believes it can provide perfect information at a cost of Sh.100,000,000.
Required:
(i) Calculate the maximum amount payable to acquire perfect information. (5 marks)
(ii) Advise the management of Solamax Ltd. whether it is viable to acquire the perfect information from the market research company. (1 mark)
(c) Olympix Motors Ltd. assembles and sells a single brand of luxurious vehicles branded “Viva”. The following data has been extracted from the current year’s budget:
Contribution per unit Sh.800,000
Total weekly fixed costs Sh.100 million
Weekly profit Sh.220 million
Contribution to sales ratio 40%
Additional information:
1. The company’s production capacity is not being fully utilised in the current year and three possible scenarios are under consideration.
2. Each scenario involves reducing the unit selling price on all units sold with an expected consequential effect on the budgeted volume of sales.
3. Details of each scenario are as follows:
Scenario S1 S2 S3
Reduction in unit weekly selling price 2% 5% 7% Expected increase in sales volume over budget 10% 18% 25%
4. The company operates just-in-time (JIT) system and holds no inventory of finished goods.
Required:
(i) Calculate for the current year, the weekly sales in units. (3 marks)
(ii) Determine (with supporting calculations) which one of the three scenario should be adopted by the company in order to maximise weekly profits. (5 marks) (Total: 20 marks)
QUESTION FOUR
(a) Discuss FOUR performance measures in the service industry. (8 marks)
(b) Baby Com Ltd. compiled the following report for its toy division for the year ended 31 December 2023:
Sh.“000”
Sales 3,200,000
Non-interest bearing current liabilities 64,000
Interest expense 41,000
Interest-bearing current liabilities 55,000
Assets 1,210,000
Net income 98,930
The tax rate is 33% and the company’s cost of capital is 8%. The required rate of return is 9%.
Required:
(i) Calculate the two components of return on investment (ROI) and show how the two components can be used to calculate the ROI. (4 marks)
(ii) Prove your ROI in (b) (i) above using the straight forward approach to calculating ROI. (3 marks)
(iii) Calculate residual income (RI) and interpret your answer. (5 marks)
(Total: 20 marks)
QUESTION FIVE
(a) Explain THREE roles of accountants in environmental management. (6 marks)
(b) Afya Bora Manufacturers adopts absorption costing system in variance analysis and investigation. The following profit reconciliation statement analyses the performance of Afya Bora’s main product “Y” for the month of March 2024.
Adverse Favourable Total
Sh.“000” Sh.“000” Sh.“000”
Budgeted profit 30,000
Sales variances:
Volume variances 6,000
Price variances 3,600
Material cost variances:
Price variances 37,500
Usage variances 4,500
Labour cost variances:
Rate variances 10,200
Efficiency variances 1,200
Variable overhead variances:
Expenditure variances 3,900
Efficiency variances 600
Fixed overhead variances:
Efficiency variances 300
Expenditure variances 1,500
Capacity variance 2,700
Total variances (53,700) 18,300 (35,400)
Actual profit/(loss) (5,400)
Product “Y” is made from a single product mix with a standard cost of Sh.130,000 made up as follows:
Sh.“000”
Direct material (15 kilograms at Sh.5,000 per kilogram 75
Direct labour (5 hours at Sh.6,000 per hour) 30
Variable overheads (5 hours at Sh.3,000 per hour) 15
Fixed overheads (5 hours at Sh.2,000 per hour) 10
Standard cost 130
Standard margin 20
Standard selling price 150
Additional information:
1. The monthly budget projects production and sales of 1,500 units.
2. During the month, the actual number of units produced was 2,100 units.
3. The actual direct material purchased were 37,500 kilograms.
4. The actual selling price per unit was Sh.152,000.
5. The budgeted fixed overhead cost was Sh.15,000,000 while budgeted variable overhead cost was Sh.31,500,000.
Required:
(i) Actual direct material cost. (3 marks)
(ii) Actual quantity of material used. (3 marks)
(iii) Actual labour cost. (3 marks)
(iv) Actual labour hours. (3 marks)
(v) Actual variable overhead cost. (2 marks)
(Total: 20 marks)
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