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Advanced Management Accounting Revision Kit – Past exam questions and answers for kasneb CPA, CS and CCP courses
This revision kit consists of kasneb past paper questions and their suggested answers to act as a revision guide for those students taking kasneb courses.
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Or through Our Mobile App
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 strategic decision making
• Use financial and non-financial indicators to measure organisational performance
• Apply environmental management accounting concepts in practice.
TOPIC 1
STRATEGIC MANAGEMENT ACCOUNTING INFORMATION
QUESTION 1
December 2023 Question One A and B
(a) With reference to strategic management accounting, evaluate THREE underpinnings of each of the following concepts:
(i) Balanced scorecard model. (3 marks)
(ii) Responsibility accounting. (3 marks)
(b) “Carbon credits” and “carbon credit tax” are increasingly being applied in environmental management accounting (EMA) as transparent measurable and result oriented activities aimed at protecting and preventing environmental degradation by adopting environmental management strategies, policies and compliance requirements. 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 organisations from operating with excessive carbon emission and instead encourage a 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)
ANSWER
- a) Evaluation of the underpinnings
(i) Underpinnings of Balanced score card
This is a strategic management accounting tool that helps to translate entitles strategies into set of performance indicator and measures. It builds on 4 perspectives each representing different aspect of entities performance which include:
- 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.
- Customer perspective – This perspective emphasis the importance of delivering value to customer. Merit in this perspective include, customer satisfaction, market share, customer retentions and new customer acquisition
- Internal business processes perspective – This focuses on process and operations that are critical to delivering value to customers and achieving financial objectives. This includes measurers related to efficiency, quality innovation and cycle time efficiency and effective internal process are essential for meeting customer needs and achieving financial goals
- Learning and growth perspective – This highlights the importance of human capital, technology and organizational culture metrics in this perspective may include employee training, employee satisfaction innovation, adoption to new 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
- Decentralized decision making
- Performing evaluation and control
- Budgeting and planning
- Continuous communication and feedback
- Clear definition of responsibility Centre’s
- b) Benefits that might accrue to an organization as a result of implementing carbon credit strategies
- i) Environmental detection costs
- Compliance –This entails using EMA to support environmental protection through cost efficient compliance with environmental regulation
- Eco-efficiency – This involves the use of EMA to help reduce costs and environmental impact simultaneously via more efficient use of water , energy material etc.
- Cost reduction / saving – implementation of eco-efficiency system enables to identify cost of waste processing and losses from processes of large raw materials
- Better pricing decision
- ii) Environmental / External failure costs
- Risk mitigation – Implementing of carbon credit strategies can help mitigate environmental risk associated with external failures
- Legal and regulatory compliance – Engaging in carbon credit programs often involves adhering to environmental regulation and standards by doing so, organizations reduces the risk of legal action and associated costs resulting from non compliance with environmental laws.
- 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)
(ii) Limiting factor analysis. (3 marks)
ANSWER
Conceptual differences between the following concepts as applied in strategic 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 include:
- Throughput
- Operating expenses
- Investment
- Constraint
- ii) Limiting factor analysis
This is also known as bottleneck analysis or key factor analysis is a management accounting technique that focuses on identifying and managing constraints or limiting factors within a business process. concept of limiting factor analysis include
- Limiting factor
- Optimizing resource utilization
- Contribution margin per limiting factor
- 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.
Explain four actions that the management accounting department might take to enhance the effective use of the above information by the operating managers. (4 marks)
ANSWER
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 of different sources of action. understanding the financial impact of decisions helps operating manager prioritize initiatives that align with organizational goal and deliver the most value
- Integration with strategic planning – Integrate control information into strategic planning process of the organization. Linking financial control information with strategic plans ensures that day to day decisions are aligned with the overall objectives of the organization.
- Customized and relevant reporting – The management accounting department can tailor control information to the specific needs and responsibilities of each operating manager. Providing customized reports ensures that the information presented is directly relevant to the managers roles and enables them to focus on 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
QUESTION 4
April 2022 Question One A
- a) In control theory, a “feedback control” mechanism is the one which supplies information to determine whether corrective action should be taken to re-establish control 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
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 feedback control to compare its actual sales to its budgeted sales and take corrective action if it is not meeting its sales goals. Examples include:
- Variance analysis is a common feedback control mechanism. It compares actual results to budgeted results and identifies the causes of any variances.
- Budgetary slack is a form of feedback control. It is the intentional underestimation of budgeted costs or overestimation of budgeted revenues.
Feedforward control is a control mechanism that takes corrective action before a 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.
QUESTION 5
November 2019 Question One A
Examine three benefits that might accrue to a business organisation as a result of good ethical behaviour by management accountants. (6 marks)
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
- It helps in minimizing the conflicts of interest between professionals and clients
- It helps in boosting public confidence in the word of professionals
- It improves credibility and trust
QUESTION 6
May 2019 Question Four A
Highlight four ethical standards of management accountants. (4 marks)
ANSWER
Ethical standards of Management Accountants
- 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.
- 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.
- 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, avoid activities that would discredit the profession, and place ethics and integrity of the profession above personal interests.
- Credibility. Communicate fairly and objectively, provide all relevant information that could influence a user’s interpretation and understanding of the reports or analyses, 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
Management accountants are required to conduct themselves ethically. A commitment to ethical professional practice requires Observation of principles that express values and standards that guide conduct such as honesty, fairness, objectivity and responsibility.
Required:
With reference to the above statement, summarise six benefits of ethical behaviour by management accountants in business. (6 marks)
ANSWER
Benefits of ethical behavior by management accountant in business
- 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.
(8 marks)
ANSWER
Ethical standards to be adhered to by management accountants
- Integrity – Management accountants are expected to be honest and straight 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
QUESTION 9
May 2015 Question Four A
Examine three desirable factors that need to be considered in order to ensure that management accounting information is used effectively (6 marks)
ANSWER
Factors to consider in order ensuring management accounting information is used effectively
- Timing – The information should be produced in time for it to be used effectively
- 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.
TOPIC 2
COST ESTIMATION AND INTERPRETATION
QUESTION 1
December 2023 Question Two B
Scotts Ltd. has experienced stock outs occasioned by the company’s poor inventory estimation techniques. The company has therefore engaged you to estimate its demand for the year 2024.
The company’s accountant had started using regression analysis and availed the following information to you:
- The demand for the company’s’ product is dependent on disposable income and price of the products.
- The analysis of variances table:
| Source | Degrees of freedom | Sum of squares |
| Model | 3 | 187 |
| Error | 9 | 4 |
| Total | 12 | 191 |
- 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)
(ii) Determine the coefficient of determination. Interpret your result. (4 marks)
(iii) Test the adequacy of the model for prediction (F tables value 11.56). (4 marks)
ANSWER
- i) Regression equation
Where;
- ii) Coefficient of determination (r2)
Interpretation
Coefficient of determination of 0.98 = 98% means that 98% of demand is being 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
Since F calculated 210.375 Ftable = 11.56, reject the null hypothesis, therefore the model is suitable
QUESTION 2
December 2023 Question Four B
Discuss the meaning of the following concepts as used in cost estimation:
(i) Economic plausibility tests. (2 marks)
(ii) Learning curve phenomenon. (2 marks)
ANSWER
Meaning of the following terms
- i) Economic plausibility tests
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 whether the estimated cost associated with a particular project or decision are economically justifiable
- 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.
QUESTION 3
August 2023 Question One B
Motorcar Repairs Ltd is in the process of estimating the fixed cost and variable cost components associated with the company’s repair activity using the cost estimation 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:
- Regression analysis performed using MS Excel in a computer yielded the following results:
Summary of output Regression statistics
| Parameter | Output |
| Multiple R | 0.984523 |
| R square | 0.969285 |
| Adjusted R square | 0.961607 |
| Standard Error | 32.196570 |
| Observations | 6 |
- The analysis of variance (ANOVA) output was as follows:
| 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 error | t-statistic | P-value | Lower
95% |
Upper
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 |
Required:
(i) The linear regression equation in the form Y = a + bx. ( 2 marks)
(ii) Predict the total cost of repair if 14 hours are used. (2 marks)
(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
- i) Linear regression equation
- ii) Cost production
iii) Determination of missing values
- 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
In this model r2 = 0.969285. This means that 96.9285% of the variability in total repair cost (y) is explained by the independent variable (x) level of repair activity)
- v) Explain if the independent variable is economically plausible as a predator model
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
Identify FOUR applications of learning curve model. (4 marks)
ANSWER
Application of learning curve
- Work scheduling
- Setting labour standard
- Performance evaluation
- Project appraisal
- Inventory evaluation
- Pricing decisions
- Profit forecasting
- Training and skill development
PAPER NO. 16 (S3) ADVANCED MANAGEMENT ACCOUNTING
UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply advanced management accounting tools and techniques for decision making in the context of organisational strategy.
CONTENT
1. Strategic management accounting information
• Sources of strategic management accounting information
• Role of strategic management accounting in strategic planning and control
• Governance and control of strategic management accounting information
• Scope and limitations of management accounting
• Ethical standards for management accountants
2. Cost estimation and interpretation
• 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.
• Expected value of perfect information
• Relevant cost analysis
• Application of marginal costing (Non-routine decisions): Limiting factor analysis,
• Throughput accounting, make or buy decision, continue or discontinue/drop decisions, special order decisions and other short term decisions.
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
5. Strategic performance measurement
• Functional and divisionalisedorganisational structures
• Responsibility accounting, responsibility centers and segmental reporting
• Divisional performance measures such as profit margin, asset turnover, return on investment(ROI), return on capital employed(ROCE), residual income(RI), accounting rate of return(ARR) and economic value added(EVA)
• Non-financial performance indicators
• Alternative performance measures such as balanced scorecard, performance pyramid, Fitzgerald and Moon’s building block model.
6. Inventory control decisions
• Applications of certainty inventory models (EOQ and EBQ) in decision making
• Stochastic inventory models with and without stock out cost
• 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)
• Application of learning curve model and ABC in variance analysis
• Investigation models for variances.
8. Environmental management accounting
• Role of accountants in managing and accounting for environmental cost
• 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).