MANAGEMENT ACCOUNTING INTERVENTION

BY TARGET 0507380935
ACTIVITY BASED COSTING
QUESTION 1
The following budgeted information relates to Brunti plc for the forthcoming period
XYI YZT ABW
Sales and production units 50,000 40,000 30,000
¢ ¢ ¢
Selling price (per unit) 32 84 65
Hours hours hours
Machine department
(machine hours per unit) 2 5 4
Assembly department
( direct labour hours per unit) 7 3 2

Overheads allocated and apportioned to production departments (including ser- vice cost centre costs) were to
be recovered in product costs as follows:
Machine department at
¢1.20 per machine hour Assembly
department at
¢0.825 per direct labour hour
You ascertain that the above overheads could be re-analysed into ‘cost pools’ as follows:
Quantity for the
Cost pool ¢000 Cost driver Period
Machining services 357 Machine hours 420 000
Assembly services 318 Direct labour hours 530 000
Set-up costs 26 Set-ups 520
Order processing 156 Customer orders 32 000
Purchasing 84 Suppliers orders 11 200
941

You have also been provided with the following estimates for the period:
Products

XY YZT ABW
I
Number of set-ups 120 200 200
Customer orders 800 8000 16 000
Suppliers’ orders 3000 4000 4 200
0
Required:
(a) Prepare and present profit statements using:
(i) conventional absorption costing; (2 marks)
(ii) activity-based costing; (7 marks)
(b) Comment on why activity-based costing is considered to present a fairer valuation of the product cost
per unit. (5 marks)

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 QUESTION 2
A full absorption costing system would involve the assignment of both variable and fixed overhead costs to
products. A traditional full absorption costing system typically uses a single volume related allocation base (or
cost driver) to assign overheads to products. An activity based costing (ABC) system would use multiple
allocation bases (or cost drivers), taking account of different categories of activities and related overhead costs
such as unit, batch, product sustaining and facility sustaining.
Required:
(a) Describe the likely stages involved in the design and operation of an ABC system.
(4 marks)
(b) Explain and discuss volume related allocation bases (or cost drivers), giving an example of one within a
traditional costing system. Contrast this with the multiple allocation bases (or cost drivers) of an ABC
system. (6 marks)
(c) Briefly elaborate on the different categories of activities and related overhead costs, such as unit, batch,
product sustaining and facility sustaining, which may be used in an ABC system. (4 marks)
(Total 20 marks)
QUESTION 3
The following information provides details of the costs, volume and cost drivers for a particular
period in respect of ABC plc, a hypothetical company:
Product X Product Y Product Z
1. Production and sales (units) 30 000 20 000 8 000

2. Raw material usage (units) 5 5 11

3. Direct material cost ¢25 ¢20 ¢11

4. Direct labour hours 11/3 2 1

5. Machine hours 11/3 1 2

6. Direct labour cost ¢8 ¢12 ¢6

7. Number of production runs 3 7 20

8. Number of deliveries 9 3 20
9. Number of receipts 15 35 220
10. Number of production orders 15 10 25
11. Overhead costs: GH¢
Set-up 30 000
Machines 760 000
Receiving 435 000
Packing 250 000
Engineering 373 000
1 848 000

In the past the company has allocated overheads to products on the basis of direct labour hours.
However, the majority of overheads are more closely related to machine hours than direct labour hours.
The company has recently redesigned its cost system by recovering overheads using two volume-related bases:
machine hours and a materials handling overhead rate for recovering overheads of the receiving department.
Both the current and the previous cost system reported low profit margins for product X, which is the company’s
highest-selling product. The management accountant has recently attended a conference on activity-based
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costing, and the overhead costs for the last period have been analysed by the major activities in order to compute
activity-based costs.
From the above information you are required to:
a) Compute the product costs using a traditional volume-related costing system based on the assumptions
that:
i) all overheads are recovered on the basis of direct labour hours (i.e. the company’s past product
costing system);
ii) the overheads of the receiving department are recovered by a materials handling overhead rate and
the remaining overheads are recovered using a machine hour rate (i.e. the company’s current costing
system).
b) Compute product costs using an activity-based costing system.
c) Briefly explain the differences between the product cost computations in (a) and (b).

QUESTION 4
Man. Acc. Question Day2
TG makes several products including Product Z. TG is considering adopting an activity based costing approach
for setting its budget. The company’s production activities, budgeted activity costs and cost drivers for the next
year are given below.
Activity GHS Cost driver No. of cost driver
set ups 200,000 Set up cost 800
Inspection/ quality control 120,000 No. of quality test 400

Machines are reset after each batch. Quality tests are carried out every second batch
The budgeted data for Product Z for the next year are: Direct materials GHS 2.50 per unit
Direct labour 108 seconds per unit @GHS 18 per hour
Batch size 150 units
Budgeted production 15,000 units

Required
Calculate, using activity based costing, the budgeted total production cost per unit for Product Z

QUESTION 5
MAN. ACC. Question Day 07
TarGet Plc manufactures two products, P and Q which the following information is
available:

P Q
Budgeted production (units)
1,000 4,000

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 Labour hours per unit 8 10

Number of production runs 13 15

Number of inspection during production 5 3

Overheads GHS
Total production set-up costs 140,000

Total inspection costs 80,000

Other overhead costs (which relate to labour) 96,000

Required

a) Calculate the overheads cost per unit using

i) Traditional absorption (absorbing overheads by labour hours basis)
ii) Activity based costing
iii) Comments on the differences
b) Discuss the strength of traditional absorption costing and activity based costing in today’s
manufacturing environment.
c) If the prime cost per unit is GHS 40 and profit is 25% margin calculate the selling price using
i) Traditional costing
ii) Activity based costing

THROUGH PUT ACCOUNTING

QUESTION 6
a) Briefly explain the concept and the theories of throughput put accounting.
b) Explain how through put accounting is important in today’s manufacturing environment.
c) Describe the challenges posed by through put accounting and suggest a possible ways of resolving the
challenge.
d) Explain the term through put accounting ratio TPR
e) Explain the relationship between through put accounting and limiting factors

QUESTION 7
KYC Ltd makes three products Hand Chew (HC), Yogurt Swallow (YS) and Canned Lick (CL). All three
products are sold as a package and so are offered for sale each month in order to be able to provide a complete
market service. The products are fragile and their quality deteriorates rapidly once they are manufactured. The
products are produced on two types of machine and worked on by a single grade of direct labour. Five direct

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employees are paid GH¢8 per hour for a guaranteed minimum of 160 hours each per month. All of the products
are first moulded on machine type 1 and then finished and sealed on machine type 2. The machine hour
requirements for each of the products are as follows:

Product Product Product

HC YS CL
Hours/Unit Hours/Unit Hours/Unit
Machine type 1 1.5 4.5 3
Machine type 2 1 2.5 2

The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month
respectively. Details of the selling prices, unit costs and monthly demand for the three
products are as follows:

Product Product Product

HC YS CL
GH¢/Unit GH¢/Unit GH¢/Unit
Selling price 91 174 140
+Component cost 22 19 16
Other direct material cost 23 11 14
Direct labour cost at GH¢8 per hour 6 48 36
Overheads 24 62 52
Profit 16 34 22

Maximum monthly demand (units) 120 70 60

Although KYC Ltd uses marginal costing and contribution analysis as the basis for its
decision making activities, profits are reported in the monthly management accounts using
the absorption costing basis. Finished goods (inventories) are valued in the monthly
management accounts at full absorption cost.

Required:
i) Calculate the machine utilisation rate per month for each machine and explain which of
the machines is the bottleneck/limiting factor. (4
marks)
ii) ii) Using the current system of marginal costing and contribution analysis, calculate the
profit maximising monthly output of the three products.
(5 marks)
iii) Explain why throughput accounting might provide more relevant information in KYC’s
circumstances. (4
marks)
iv) Using a throughput approach, calculate the throughput-maximising monthly output of
the three products. (5
marks)
(Total: 25 marks)
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QUESTION 8
After manufacture, each heater has to go through three processes: 'Assembly', 'Quality Control' and 'Packaging'.
The following information is available for the three heaters:

Alpha Beta Gamma

GHS GHS GHS
Sales price per unit 2.00 2.25 1.175
Direct materials cost per unit 0.5 0.81 0.35
Direct labour cost per unit 0.3 0.6 0.5
Machine time per unit: Minutes Minutes Minutes
Assembly (in minutes) 2 3 2.5
Quality Control (in minutes) 3 4 2
Packaging (in minutes) 4 5 3
units units units
Weekly sales demand 1,000 1,500 850

Operating expenses, including labour, are $4,000. The maximum hours available for the machines are 150
hours (Assembly), 170 hours (Quality Control) and 250 hours (Packaging).

Required
a) How many units of 'Beta' should be produced each week to maximise profit?

In order to be able to meet increased demand, CBF Co bought another assembly machine, so doubling capacity.
The quality control and packaging machines were also modified, so increasing their capacity by 70% and 40%
respectively. The per unit factors of sales price, material cost and machine time remain unaltered.

The economy thrived and the maximum demand for each product rose to 1,500 Alpha, 2,750 Beta and 900
Gamma. Operating expenses increased by 30% and the packaging machine became the bottleneck. Weekly
profit maximising output has been calculated as 1,500 Alpha, 2,460 Beta and 900 Gamma giving a weekly
profit of GHS1852.40

b) What is the throughput accounting ratio at this profit maximising level of output, to two decimal places?

c) Which of the variable would increase CBF Co's throughput accounting ratio?

QUESTION 9
WR Co manufactures three products, A, B and C. Product details are as follows.

Product A Product B Product C

GHS GHS GHS
Sales price 2.80 1.60 2.40

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 Materials cost 1.20 0.6 1.20
Direct labour cost 1.00 0.80 0.80
Weekly sales demand 4,000 units 4,000 units 5,000 units
Machine hours per unit 0.5 hours 0.2 hours 0.3 hours

Machine time is a bottleneck resource and maximum capacity is 4,000 machine hours per week. Operating
costs including direct labour costs are GHS 10,880 per week. Direct labour workers are not paid overtime and
work a standard 38-hour week.

Required
Determine the optimum production plan for WR Co and calculate the weekly profit that would arise from the
plan.

QUESTION 10
Solar Systems Co (S Co) makes two types of solar panels at its manufacturing plant: large panels for commercial
customers and small panels for domestic customers. All panels are produced using the same materials, machinery
and a skilled labour force. Production takes place for five days per week, from 7 am until 8 pm (13 hours), 50
weeks of the year. Each panel has to be cut, moulded and then assembled using a cutting machine (Machine C),
a moulding machine (Machine M) and an assembly machine (Machine A).

As part of a government scheme to increase renewable energy sources, S Co has guaranteed not to increase the
price of small or large panels for the next three years. It has also agreed to supply a minimum of 1,000 small
panels each year to domestic customers for this three-year period.
Due to poor productivity levels, late orders and declining profits over recent years, the finance director has
suggested the introduction of throughput accounting within the organisation, together with a ‘Just in Time’
system of production. Material costs and selling prices for each type of panel are shown below.

Large panels Small

panels
GHS GHS
Selling price per unit 12,600 3,800
Material costs per unit 4,300 1,160
Total factory costs, which include the cost of labour and all factory overheads, are GHS 12 million each year at
the plant.
Out of the 13 hours available for production each day, workers take a one hour lunch break. For the remaining
12 hours, Machine C is utilised 85% of the time and Machines M and A are utilised 90% of the time. The
unproductive time arises either as a result of routine maintenance or because of staff absenteeism, as each
machine needs to be manned by skilled workers in order for the machine to run. The skilled workers are
currently only trained to work on one type of machine each. Maintenance work is carried out by external
contractors who provide a round the clock service (that is, they are available 24 hours a day, seven days a
week), should it be required.
The following information is available for Machine M, which has been identified as the bottleneck resource:
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 Large panels Small panels
Hours per unit Hours per unit
Machine M 1·4 0·6
There is currently plenty of spare capacity on Machines C and A. Maximum annual demand for large panels
and small panels is 1,800 units and 1,700 units respectively.

Required:

(a) Calculate the throughput accounting ratio for large panels and for small panels and explain
what they indicate to S Co about production of large and small panels. (9 marks )

(b) Assume that your calculations in part (a) have shown that large panels have a higher throughput
accounting ratio than small panels.

Required:

Using throughput accounting, prepare calculations to determine the optimum production mix
and maximum profit of S Co for the next year. (5 marks )

(c) Suggest and discuss THREE ways in which S Co could try to increase its production capacity
and hence increase throughput in the next year without making any additional investment in
machinery. (6 marks )

(20 marks )
QUESTION 11
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts and treatments at
the salon are carried out by one of the salon’s three senior stylists. The salon also has two salon assistants and
two junior stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair; next, by a senior
stylist, who cuts or treats the hair depending on which service the customer wants; then finally, a junior stylist
who dries their hair. The average length of time spent with each member of staff is as follows:

Cut Treatment
Hours Hours
Assistant 0·1 0·3
Senior stylist 1 1·5
Junior stylist 0·5 0·5
The salon is open for eight hours each day for six days per week. It is only closed for two weeks each year.
Staff salaries are GHS40,000 each year for senior stylists, GHS28,000 each year for junior stylists and $12,000
each year for the assistants. The cost of cleaning products applied when washing the hair is $0·60 per client.
The cost of all additional products applied during a ‘treatment’ is $7·40 per client. Other salon costs (excluding
labour and raw materials) amount to GHS106,400 each year.

Glam Co charges GHS 60 for each cut and GHS 110 for each treatment.

The senior stylists’ time has been correctly identified as the bottleneck activity.
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 Required:

(a) Briefly explain why the senior stylists’ time has been described as the ‘bottleneck activity’,
supporting your answer with calculations. (4 marks )

(b) Calculate the throughput accounting ratio (TPAR) for ‘cuts’ and the TPAR for ‘treatments’
assuming the bottleneck activity is fully utilised. (6 marks )

(10 marks )
QUESTION 12
MAN. ACC. Question Day 08 08/08
Hot Oven makes three types of cake: brownies, muffins and cupcakes. The costs, revenues and demand for
each of the three cakes are as follows
Brownies Muffins Cupcakes
Batch size (units) 40 30 20

Selling price (¢ per unit) 1.50 1.4 2.00

Material costs (¢ per unit) 0.25 0.15 0.25
Labour cost (¢ per unit) 0.40 0.45 0.50
Overhead (¢ per unit) 0.15 0.20 0.30
Minimum daily demand units 30 20 10
Maximum daily demand units 160 90 100

The minimum daily demand is required for a long-term contact with a local café and must be met.
The cakes are made in batches using three sequential processes; weighing, mixing and baking. The products
must be produce in their batch sizes but are sold as individual units.
Each batch of cakes requires the following amount of time for each process:

Brownies Muffins Cupcakes

Weighing (minutes) 15 15 20
Mixing (minutes) 20 16 12

Baking (minutes) 120 110 120

The baking stage of the process is done in three ovens which can each be used for 8 hours a day. Ovens have
capacity of one batch per bake, regardless of product type
Hot Oven uses throughput accounting and considers all costs, other than material, to be 'factory costs' which
do not vary with production.
On Monday, in addition to the baking ovens Hot Oven has the following process resources available:
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 Process Minutes available
Weighing 240
Mixing 180

a) Which of the three processes, if any, is a bottleneck activity?

b) On Wednesday, the mixing process is identified as the bottleneck process. On this day, only 120
minutes in the mixing process are available.
Assuming that Hot Oven wants to maximise profit, what is the optimal production plan for
Wednesday?

c) Hot Oven has done a detailed review of its products, costs and processes. Calculate the
throughput accounting ratio and state TWO ways of l improving the throughput accounting
ratio.

d) On Friday, due to a local food festival at the weekend, Hot Oven is considering increasing its
production of cupcakes. These cupcakes can be sold at the festival at the existing selling price.
The company has unlimited capacity for weighing and mixing on Friday but its existing three ovens
are already fully utilised, therefore in order to supply cupcakes to the festival, Hot Oven will need to
hire another identical oven at a cost of GHS 45 for the day.
How much will profit increase by if the company hires the new oven and produces as many cupcakes
as possible?

e) In a previous week, the weighing process was the bottleneck and the resulting throughput
ratio (TPAR) for the bakery was 1.45.

State the causes of the changes in TPAR for the previous week.
(25 marks)
SHORT TERM DECISION MAKING TECHNIQUES
 CVP analysis
 Limiting factors
 Make or buy
 shutdown

CVP analysis
FORMULAS TO BE NOTED!!!
For single product
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
Breakeven Point (Units)= 𝑂𝑅 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Breakeven point (sales value) = 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠 × 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑂𝑅

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
=
𝐶/𝑆 𝑟𝑎𝑡𝑖𝑜

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 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡
Level of output to generate a target profit =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Margin of safety (units) = 𝑏𝑢𝑑𝑔𝑒𝑡𝑑 𝑢𝑛𝑖𝑡𝑠 − 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠

(sales value) = 𝑚𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑒𝑦(𝑢𝑛𝑖𝑡𝑠) × 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑂𝑅

𝑝𝑟𝑜𝑓𝑖𝑡
(sales value) =
𝐶/𝑆 𝑟𝑎𝑡𝑖𝑜

𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠−𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠

(as a percentage= 𝑂𝑅
𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠

𝑏𝑢𝑑𝑔.𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒−𝐵𝐸 𝑣𝑎𝑙.

=
𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒

𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
Contribution to sale (C/S) ratio = × 100 OR
𝑠𝑎𝑙𝑒𝑠

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑓𝑖𝑡
Contribution to sale (C/S) ratio = × 100
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒
For multi-products
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
Breakeven Point (Units) = 𝑊𝑎𝑖𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Breakeven point (sales value) = 𝑡𝑜𝑡𝑎𝑙 𝑜𝑓 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠 × 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑓𝑜𝑟 𝑒𝑎𝑐ℎ 𝑝𝑟𝑜𝑑𝑢𝑐𝑡

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

Breakeven point (sales value)=
𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝐶/𝑆 𝑟𝑎𝑡𝑖𝑜

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡

Level of output to generate a target profit =
𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Margin of safety (units) = 𝑏𝑢𝑑𝑔𝑒𝑡𝑑 𝑢𝑛𝑖𝑡𝑠 − 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠 for each product
(sales value) = 𝑚𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑒𝑦(𝑢𝑛𝑖𝑡𝑠) × 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑂𝑅

𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
(sales value) =
𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣. 𝐶/𝑆 𝑟𝑎𝑡𝑖𝑜

𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠−𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑢𝑛𝑖𝑡𝑠 𝑏𝑢𝑑𝑔.𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒−𝐵𝐸 𝑣𝑎𝑙.

(as a percentage) = 𝑂𝑅
𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒

𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
Weighted average contribution=
𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑣𝑎𝑙𝑢𝑒

QUESTION 13
a) Explain the concept of CVP analysis.
11
 b) Discuss the main objectives of CVP analysis.
c) Briefly discuss the importance (uses) and limitations of CVP analysis.

QUESTION 14
Cardio Co manufactures three types of fitness equipment: treadmills (T), cross trainers (C) and rowing machines (R).
The budgeted sales prices and volumes for the next year are as follows:
T C R
Selling price $1,600 $1,800 $1,400
Units 420 400 380
The standard cost card for each product is shown below.
T C R
$ $ $
Material 430 500 360
Labour 220 240 190
Variable overheads 110 120 95
Labour costs are 60% fixed and 40% variable. General fixed overheads excluding any fixed labour costs are expected to
be $55,000 for the next year.

Required:
(a) Calculate the weighted average contribution to sales ratio for Cardio Co. (4 marks)

(b) Calculate the margin of safety in $ revenue for Cardio Co. (3 marks)

(c) Using the graph paper provided and assuming that the products are sold in a CONSTANT MIX, draw a
multi-product breakeven chart for Cardio Co. Label fully both axes, any lines drawn on the graph and the
breakeven point. (6 marks)

(d) Explain what would happen to the breakeven point if the products were sold in order of the most profitable
products first.
Note: You are NOT required to demonstrate this on the graph drawn in part (c). (2 marks)

(15 marks)
QUESTION 15
MAN. ACC Question Day 11
Target plc. manufactures and sells three types of fitness equipment: treadmills (T),
cross trainers (C) and rowing machines (R).
The budgeted sales prices and volumes for the next year are as follows:
T C R
Selling price ¢1,600 ¢1,800 ¢1,400
Units 420 400 380
The budgeted revenues and costs for each product are shown below.
T C R
¢ ¢ ¢
Sales revenues 672,000 720,000 532,000
Variable costs 263,760 286,400 201,780
Fixed costs 73,940 78,100 59,320
Target plc.’s Finance Director is considering various possibilities, including aiming

12
 for a contribution/sales ratio of 65%. He is also looking at a scenario where the
contribution/sales ratio was 60%, with sales revenues falling to ¢1,600,000 and fixed
costs to ¢175,000.
Required
a) Calculate the weighted average contribution to sales ratio for Target plc. to the
nearest 0.01%.
b) Calculate the breakeven sales revenue at a Contribution/Sales ratio of 65%, to the nearest
¢000.
c) Calculate the margin of safety at a contribution/sales ratio of 60%, with sales
revenues having fallen to ¢1,600,000 and fixed overheads to ¢175,000, to the
nearest 0.1%.
d) Target plc.’s production department currently has problems meeting demand for
these products, although this will be addressed in the medium-term by a large
investment in manufacturing facilities. For now, Target plc.’s Chief Executive
has instructed the Production Department to prioritise manufacture of products by
the contribution per unit that they make.
Determine the effect of the above statement on Target plc. Production plan.

e) Once Target plc.’s new manufacturing facilities are open, the company intends to introduce a
new, mobile, cross-trainer. This will be supported by a large advertising and promotion
campaign to encourage demand. The intention is initially to charge a high price for this
product, although it may fall over time.
State TWO reasons why Target plc. may wish to charge a high price initially for the
mobile cross-trainer?

QUESTION 16
Hair Co manufactures three types of electrical goods for hair: curlers (C), straightening irons (S) and dryers
(D.) The budgeted sales prices and volumes for the next year are as follows:

C S D
Selling price GH¢110 GH¢160 GH¢120
Units 20,000 22,000 26,000
Each product is made using a different mix of the same materials and labour. Product S also uses new
revolutionary technology for which the company obtained a ten-year patent two years ago. The budgeted sales
volumes for all the products have been calculated by adding 10% to last year’s sales.
The standard cost card for each product is shown below.

C S D
GH¢ GH¢ GH¢
Material 1 12 28 16
Material 2 8 22 26
Skilled labour 16 34 22
Unskilled labour 14 20 28
Both skilled and unskilled labour costs are variable.
The general fixed overheads are expected to be GH¢640,000 for the next year.

Required:
13
 (a) Calculate the weighted average contribution to sales ratio for Hair Co.
Note: round all workings to 2 decimal places. (6 marks)
(b) Calculate the total break-even sales revenue for the next year for Hair Co.
Note: round all workings to 2 decimal places. (2 marks)
(c) Using the graph paper provided, draw a multi-product profit-volume (PV) chart showing clearly the
profit/loss lines assuming:
(i) you are able to sell the products in order of the ones with the highest ranking contribution to sales
ratios first; and
(ii) you sell the products in a constant mix.

Note: only one graph is required. (9 marks)

d) Briefly comment on your findings in (c). (3 marks)

QUESTION 17
MAN ACC. Question Day 09
A company produces and sells two products with the following costs:
Product X Product Y

Variable costs( per ¢ of sales ) ¢ 0.45 ¢0.6

Fixed costs per period ¢ 1 212 000 ¢ 1 212 000

Total sales revenue is currently generated by the two products in the following proportions:
Product X 70%
Product Y 30 %
The budgeted sales level for the company is expected to be 3,600,000 units.
Required
a) Calculate the margin of safety of safety for the organization in terms of
i) Units
ii) Value
iii) As a percentage
b) Determine the level of sales revenue to achieve a profit of ¢145,000
c) If the company reduces its selling price by 12.5% and spending additional ¢420,000 on advertising,
How many units of products the company should produce and sale to earned a desired profit of ¢
500,000

14
QUESTION 18
MAN. ACC Question Day 10
M Ltd manufactures three products which have the following revenue and costs (¢per unit).

Product 1 2 3
Selling price 2.92 1.35 2.83

Variable costs 1.61 0.72 0.96

Fixed costs: Product-
specific 0.49 0.35 0.62

General 0.46 0.46 0.46

Unit fixed costs are based upon the following annual sales and production volumes ( thousand units ):
Product 1 2 3
98.2 42.1 111

Required

15
Calculate:
(i)the break-even point sales (to the nearest ¢ hundred) of M Ltd based on the current
product mix; (9 marks )
(ii) the number of units of Product 2 (to the nearest hundred) at the breakeven point
determined in (i) above; (3 marks )
(b) Comment upon the viability of Product 2. (8 marks

QUESTION 19
(a) Explain the term „limiting factor‟ in a production strategy and give four (4) examples.
(2 marks)
(b) Xexe Ltd produces 4 products and is planning its production mix for the next period.
Estimated cost, sales and production data are shown below:
A B C D

Selling price/unit GHC 50 70 80 100

Materials @ GHC4/kg 12 36 20 24
Direct labour @ GHC2/hr 6 4 14 10
Maximum demand (Units) 3,000 3,000 3,000 3,000

Required:

a) Assuming labour hours is a limiting factor in the period, advise management on the most
appropriate mix if labour hours is limited to 45,000 hours. (5 marks)

b) Assuming, materials is a limiting factor in the period, advise management on the most
appropriate mix if materials is limited to 55,000 kgs in the period. (7 marks)

c) State and explain four (4) factors which should be considered when designing incentive
schemes.
(6 marks)

QUESTION 20
TarGet plc has four divisions. The income statement for the year ended 2018 was presented by the
Financial Accountant
Division A B C D Total
GHS GHS GHS GHS GHS
Sales revenue 86,000 92,000 102,000 110,000 390,000
Cost of sales 64,000 72,000 80,000 94,000 310,000
Gross Profit 22,000 20,000 22,000 16,000 80,000
Selling & Administrative 8,000 6,000 12,000 18,000 44,000
Cost
Net income 14,000 14,000 10,000 (2,000) 36,000

Notes to the accounts

i) Specific cost of sales are A GHS 9,000, B GHS 12,000, C GHS 11,000 and D GHS 13,000
 ii) Variable cost of sales is 50% of sales revenue

iii) Variable selling and Administrative cost is 5% of sales revenue

Management is proposing to close division D on the basis of poor performance. It is believe that when
Division D is close the resources could be used to increase the revenue of Division C by 40%. when
sales in a Division increases more than 25%, specific fixed cost will increase by 20%.
Required
a) Based on quantitative factors advice management whether to retain or close.
b) Identify four (4) qualitative factors that should be considered in taking such decisions.
QUESTION 21
(a) A company manufactures three products, Pawns, Rooks and Bishops. The present
net annual income from these is as follows:

Pawns Rooks Bishops Total

¢ ¢ ¢ ¢
Sales 50,000 40,000 60,000 150,000
Less variable costs 30,000 25,000 35,000 90,000
Contribution 20,000 15,000 25,000 60,000
Less fixed costs 17,000 18,000 20,000 55,000
Profit/loss 3,000 (3,000) 5,000 5,000
The company is considering whether or not to cease selling Rooks. It is felt that
selling prices cannot be raised or lowered without adversely affecting net
income. ¢5,000 of the fixed costs of Rooks are direct fixed costs which would
be saved if production ceased. All other fixed costs would remain the same.
(b) Suppose, however, that it were possible to use the resources released by stopping
production of Rooks to produce a new item, Crowners, which would sell for
¢50,000 and incur variable costs of ¢30,000 and extra direct fixed costs of
¢6,000.
REQUIRED
Consider whether the company should cease production and sale of Rooks under each of the
scenarios in (a) and (b) above.

QUESTION 22
MAN. ACC. Question Day 06
TP produces two products P and Q. details both products are as follows

P Q
GHS GHS
Selling price 120 140

Materials 20 18
 Labour (at GHS 8 per hour) 24 42
Variable overheads 16 14

Fixed overhead 15 30

Profit 45 36

Maximum demand (units) 1,200 900

The maximum labour hours available is 5850 hours. An extra 120 hours become at the standard rate
of GHS 8 per hour.
Required

a) Using Throughput Accounting calculate the (BEFORE and AFTER the additional
labour hours)
i) Optimum production units
ii) Throughput accounting ratio for each product
iii) Determine the total net profit
b) Using contribution approach calculate the (BEFORE and AFTER the additional
labour hours)
iv) Optimum production units
v) Determine the total net profit

QUESTION 22
P Co makes two products – P1 and P2 – budgeted details of which are as follows:

P1 P2
GHS GHS
Selling price 10·00 8·00
Cost per unit:
Direct materials 3·50 4·00
Direct labour 1·50 1·00
Variable overhead 0·60 0·40
Fixed overhead 1·20 1·00
Profit per unit 3·20 1·60
Budgeted production and sales for the year ended 30 November 2015 are:
Product P1 10,000 units

Product P2 12,500 units

The fixed overhead costs included in P1 relate to apportionment of general overhead costs only.
However, P2 also includes specific fixed overheads totalling GHS 2,500.
If only product P1 were to be made, how many units (to the nearest unit) would need to be sold in
order to achieve a profit of GHS 60,000 each year?

QUESTION 23
Higgins Co (HC) manufactures and sells pool cues and snooker cues. The cues both use the same type
of good quality wood (ash), which can be difficult to source in sufficient quantity. The supply of ash is
restricted to 5,400 kg per period. Ash costs GHS 43.20 per kg.
The cues are made by skilled craftsmen who are well known for their workmanship.
HC’s craftsmen are generally only able to work for 12,000 hours in a period. The
craftsmen are paid GHS 18 per hour.
HC sells the cues to a large market. Demand for the cues is strong and the company has
estimated that up to 15,000 pool cues and 12,000 snooker cues can be sold in any period.
The selling price for pool cues is GHS 41 and the selling price for snooker cues is GHS
69.
Manufacturing details for the two products are as follows.
Pool cues Snooker
Craftsmen time per cue 0.5 hours cues
0.75 hours
Ash per cue 250 g 250 g
Other variable costs per cue GHS 1.20 GHS 4.70
HC does not keep inventory.

a) Calculate the maximum contribution that HC could earn if ash and labour were not constraints.
b) Calculate the number of pool and snooker cues HC would manufacture if demand for both
types of cue was not a constraint and assuming HC continues to manufacture both types of cue.

c) If the amount of ash available was increased to 7,000 kg and the amount of skilled labour
available was increased to 16,000 hours, determine the bottleneck resouce, assuming
maximum demand for pool cues was 15,000 and maximum demand for snooker cues was
12,000?

d) Assume that the constraints that limit HC are the constraints on labour available and the
demand for snooker cues. Under these constraints 6,000 pool cues are made. The
contribution for snooker cues has recently increased to GHS 45 per cue and for pool cues to
GHS 25 per cue.
Some of the craftsmen have offered to work overtime, provided that they are paid double
time for the extra hours over the contracted 12,000 hours. HC has estimated that up to 1,200
hours per period could be gained in this way.
Calculate the shadow price of labour.
QUESTION 24
a) A business makes two components which it uses to produce one of its products. Details are:

Component Component
A B
Per unit information: GHS 14 GHS 17
Buy in price

Material 2 5
Labour 4 6
Variable overheads 6 7
General fixed overheads 4 3
Total absorption cost 16 21
Which components should the company buy in from outside in order to
maximise its contribution?

b) A company has the following production planned for the next four weeks. The
figures reflect the full capacity level of operations. Planned output is equal to the
maximum demand per product.

Product A B C D
GHS per GHS per GHS per GHS per
Selling price unit 160 214
unit 100
unit 140
unit
Raw material cost 24 56 22 40
Direct labour cost 66 88 33 22
Variable overhead cost 24 18 24 18
Fixed overhead cost 16 10 8 12
Profit 30 42 13 48
Planned output 300 125 240 400
Direct labour hours per unit 6 8 3 2

The direct labour force is threatening to go on strike for two weeks out of the coming four. This means
that only 2,160 hours will be available for production rather than the usual 4,320 hours.
If the strike goes ahead, which TWO products should be produced if profits are to be
maximised?

c) Conrad Co manufactures two products, X and Y. Details of both products are as follows:
Product X product Y
GHS GHS

Selling price 105 136

Materials 18 16
Labour (at GHS 10 per hour) 30 45
Variable overhead 12 15
Fixed overhead 20 25
Profit per unit 25 35

Maximum demand (units) 800 1,500

It has selected the optimal production plan to maximise profit for the month based on 4,650 labour
hours. An extra 90 hours have become available at the standard rate of GHS 10 per hour.
How much additional profit can be earned in the month?

LONG TERM DECISION MAKING TECHNIQUE (INVESTMENT APPRAISAL)

 Net Present Value

 Internal Rate of Return
 Accounting Rate of Return
 Payback Period
 Lease or buy

QUESTION 25
(a) TarGet plc has undertaken market research at a cost of GHS200,000 in order to forecast the future
cash flows of an investment project with an expected life of four years, as follows:

Year 1 2 3 4
Sales revenue (GHS 000) 1,250 2,570 6,890 4,530
Costs GHS 000) 500 1,000 2,500 1,750

These forecast cash flows are before taking account of general inflation of 4·7% per year. The capital
cost of the investment project, payable at the start of the first year, will be GHS 2,000,000. The
investment project will have zero scrap value at the end of the fourth year. The level of working
capital investment at the start of each year is expected to be 10% of the sales revenue in that year.

Capital allowances would be available on the capital cost of the investment project on a 25% reducing
balance basis.
TarGet plc pays tax on profits at an annual rate of 30% per year, with tax being paid one year in
arrears. TarGet plc has a nominal (money terms) after-tax cost of capital of 12% per year.
Required:
i) Calculate the net present value of the investment project in nominal terms and
comment on its financial acceptability. (6 marks)

ii) Calculate the net present value of the investment project in real terms and comment
on its financial acceptability. (4 marks)

iii) Explain ways in which the directors of TarGet plc can incorporate in the investment
appraisal technique and conduct sensitivity analysis on the cost of investment and cost
of capital. 5 MARKS

QUESTION 26
Argnil Co is appraising the purchase of a new machine, costing GHS 1·5 million, to replace an
existing machine which is becoming out of date and which has no resale value. The forecast levels
of production and sales for the goods produced by the new machine, which has a maximum
capacity of 400,000 units per year, are as follows:
 Year 1 2 3 4
Sales volume (units/year) 350,00 380,000 400,00 400,00
0 0 0
The new machine will incur fixed annual maintenance costs of GHS 145,000 per year. Variable costs
are expected to be
GHS 3·00 per unit and selling price is expected to be GHS 5·65 per unit. These costs and selling
price estimates are in current price terms and do not take account of general inflation, which is
forecast to be 4·7% per year.
It is expected that the new machine will need replacing in four years’ time due to advances in
technology. The resale value of the new machine is expected to be GHS 200,000 at that time, in
future value terms.
The purchase price of the new machine is payable at the start of the first year of the four-year life
of the machine. Working capital investment of $150,000 will already exist at the start of the four-
year period, due to the operation of the existing machine. This investment in working capital is
expected to increase in nominal terms in line with the general rate of inflation.
Argnil Co pays corporation tax one year in arrears at an annual rate of 27% and can claim 25%
reducing balance tax-allowable depreciation on the purchase price of the new machine. The
company has a real after-tax weighted average cost of capital of 6% and a nominal after-tax
weighted average cost of capital of 11%.

Required:
a) Using a nominal terms net present value approach, evaluate whether purchasing the new
machine is financially acceptable. (10 marks)

b) Discuss the reasons why investment finance may be limited, even when a company has attractive
investment opportunities available to it. (5marks)

QUESTION 27
Consolidated Oil wants to explore for oil near the coast of Ruritania. The Ruritanian government is
prepared to grant an exploration licence for a five-year period for a fee of GH¢300,000 per annum.
The licence fee is payable at the start of each year. The option to buy the licence must be taken
immediately or another oil company will be granted the licence.
However, if it does take the licence now, Consolidated Oil will not start its explorations until the
beginning of the second year.
To carry out the exploration work, the company will have to buy equipment now. This would cost
GH¢10,400,000, with 50% payable immediately and the other 50% payable one year later. The
company hired a specialist firm to carry out a geological survey of the area. The survey cost
GH¢250,000 and is now due for payment.
The company’s financial accountant has prepared the following projected statements of profit or loss.
The forecast covers years 2-5 when the oilfield would be operational.

Projected statements of profit or loss

Year
 2 3 4 5
GH¢ GH¢ GH¢ GH¢
000 000 000 000
Sales 7,400 8,300 9,800 5,800
Minus expenses:
Wages and salaries 550 580 620 520
Materials and consumables 340 360 410 370
Licence fee 600 300 300 300
Overheads 220 220 220 220
Depreciation 2,100 2,100 2,100 2,100
Survey cost written off 250 - - -
Interest charges 650 650 650 650
4,710 4,210 4,300 4,160
Profit 2,690 4,090 5,500 1,640
(i) The licence fee charge in Year 2 includes the payment that would be made at the beginning of
year 1 as well as the payment at the beginning of Year 2. The licence fee is paid to the Ruritanian
government at the beginning of each year.
(ii) The overheads include an annual charge of GH¢120,000 which represents an apportionment of
head office costs. The remainder of the overheads are directly attributable to the project.
(iii) The survey cost is for the survey that has been carried out by the firm of specialists.
(iv) The new equipment costing GH¢10,400,000 will be sold at the end of Year 5 for
GH¢2,000,000.
(v) A specialised item of equipment will be needed for the project for a brief period at the end of
year 2. This equipment is currently used by the company in another long-term project. The
manager of the other project has estimated that he will have to hire machinery at a cost of
GH¢150,000 for the period the cutting tool is on loan.
(vi) The project will require an investment of GH¢650,000 working capital from the end of the first
year to the end of the licence period.
The company has a cost of capital of 10%
Required
Calculate the NPV

QUESTION 28
GH Co, a house-building company, plans to build 100 houses on a development site over the next four
years. The purchase cost of the development site is GH¢ 4,000,000, payable at the start of the first year of
construction. Two types of house will be built, with annual sales of each house expected to be as follows:

Year 1 2 3 4
Number of small houses sold: 15 20 15 5
Number of large houses sold: 7 8 15 15
Houses are built in the year of sale. Each customer finances the purchase of a home by taking out a
long-term personal loan from their bank. Financial information relating to each type of house is as
follows:
 Small house Large house
Selling price: GH¢ 200,000 GH¢ 350,000
Variable cost of construction: GH¢ 100,000 GH¢ 200,000
Selling prices and variable cost of construction are in current price terms, before allowing for selling price
inflation of 3% per year and variable cost of construction inflation of 4·5% per year.
Fixed infrastructure costs of GH¢1,500,000 per year in current price terms would be incurred. These
would not relate to any specific house, but would be for the provision of new roads, gardens, drainage and
utilities. Infrastructure cost inflation is expected to be 2% per year.
GH Co pays profit tax one year in arrears at an annual rate of 30%. The company can claim capital
allowances on the purchase cost of the development site on a straight-line basis overthe four years of
construction.
GH Co has a real after-tax cost of capital of 9% per year and a nominal after-tax cost of capital of 12% per
year.New investments are required by the company to have a before-tax return on capital employed
(accounting rate of return) onanaverage investment basis of 20% per year.

Required:
(a) Calculate the net present value of the proposed investment and comment on its
financial acceptability. Work to the nearest GH¢1,000. (13 marks)

(b) Calculate the before-tax return on capital employed (accounting rate of return) of the
proposed investment on an average investment basis and discuss briefly its financial
acceptability. (5marks)

QUESTION 29
Spot Co is considering how to finance the acquisition of a machine costing GH¢ 750,000 with an
operating life of five years. There are two financing options.
(c) Option 1
The machine could be leased for an annual lease payment of GH¢155,000 per year, payable at the end
of each year.
(d) Option 2
The machine could be bought for GH¢750,000 using a bank loan charging interest at an annual
rate of 7% per year. At the end of five years, the machine would have a scrap value of 10% of the
purchase price. If the machine is bought, maintenance costs of GH¢20,000 per year would be
incurred.
Tax is paid one year in arrears at a rate of 20% and Spot Co can claim a capital allowance of
25% per annum on reducing balance method.
Required:
Evaluate whether Spot Co should use leasing or borrowing as a source of finance, explaining the
evaluation method which you use. (10 marks)

QUESTION 30
 a) Kwame after his National Service and with no hope of securing a job in the formal sector has
decided to run a taxi service. The following forecast has been made for the operation of a service
between Abisim andSunyani.
i) Revenue totaling GH¢300 a week for 52 weeks in a year. This is net of fuel and
other variable costs.
ii) Tyres; four pieces for a year at GH¢120 per unit.
iii) Maintenance and servicing; GH¢120 per month.
iv) Salaries GH¢3,000 per year
v) Insurance GH¢350 per year

The net cash flow will increase at 5% per annum for the next five years due to inflation. The
cost of the vehicle is estimated at GH¢28,000. The project appears quite profitable based on
the NPV criteria using the Government policy rate of 26%. However the banks are offering
rates far higher than the policy rate.
Required:
You are to calculate the break-even rate for the project. (10 marks)

BUDGET AND BUDGETORY CONTROL

QUESTION 30
You have recently been appointed as an assistant management accountant in a large
company, PC Co. When you meet the Production Manager, you overhear him speaking
to one of his staff, saying:
Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford
but it doesn’t keep us from buying it. It simply makes us invent new ways of
manipulating figures. If all levels of management aren’t involved in the setting of the
budget, they might as well not bother preparing one.’
Required:
a) Identify and explain SIX objectives of a budgetary control system. (9 marks)

b) Discuss the concept of a participative style of budgeting in terms of the six objectives
identified in part (a). (11 marks) (20 marks)

QUESTION 31
The main budget categories and cost driver details for October are set out below, excluding
direct material costs:

Budget category GH¢ Cost driver details

Direct labour 128,000 8,000 direct labour hours
Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month
Other overhead costs 32,000 absorbed by direct labour
hours
* A quality test is performed after every 75 units produced
The following data for Product Z is also provided:
Direct materials: budgeted cost of GH¢21·50 per unit
Direct labour: budgeted at 0·3 hours per unit
Batch size: 30 units
Set-ups: 2 set-ups per batch
Budgeted volume for October: 150 units

REQIURED
a) Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using a
direct labour-based absorption method for all overheads.
b) Calculate, to the nearest $0.01, the budgeted unit cost of Product Z for October using an
activity-based costing approach for all overheads.
c) Kenneth Co is currently using an incremental approach to budgeting, but its
Finance Director wishes to switch to a zero-based approach.
State the advantages of the incremental approach to budgeting?
d) Define zero base budgeting and explain the steps in zero-based budgeting approach?
e) State TWO disadvantages and TWO disadvantages of the zero-based approach to budgeting?

QUESTION 32
Corfe Co is a business which manufactures computer laptop batteries and it has
developed a new battery which has a longer usage time than batteries currently available
in laptops. The selling price of the battery is forecast to be GH¢ 45.
The maximum production capacity of Corfe Co is 262,500 units. The company’s
management accountant is currently preparing an annual flexible budget and has
collected the following information so far:

Production (units) 185,000 225,000 200,000

GH¢ GH¢ GH¢
Material costs 740,000 800,000 900,000
Labour costs 1,017,500 1,100,000 1,237,500
Fixed costs 750,000 750,000 750,000
In addition to the above costs, the management accountant estimates that for each
increment of 50,000 units produced, one supervisor will need to be employed. A
supervisor’s annual salary is GH¢35,000.
The production manager does not understand why the flexible budgets have been
produced as he has always used a fixed budget previously.
Required
a) Assuming the budgeted figures are correct, what would the flexed total
production cost be if production is 80% of maximum capacity?
b) The management accountant has said that a machine maintenance cost was not included in
the flexible budget but needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was
previously used for a product which has now been discontinued. The management accountant
estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and
maintenance costs for the machine for the last four years have been as follows:

Machine time Maintenance costs

 (hours) (GH¢’000)
Year 1 5,000 850
Year 2 4,400 735
Year 3 4,850 815
Year 4 1,800 450
What is the estimated maintenance cost if production of the battery is 80% of maximum
capacity (to the nearest GH¢’000)?
c) In the first month of production of the new battery, actual sales were 18,000 units and the
sales revenue achieved was GH¢702,000. The budgeted sales units were 17,300.
Determine the effect on the variances

QUESTION 33
(a) Budgeting is an effective management tool in business decision making. Explain four
(4) reasons why budgeting is important and state four (4) conditions necessary for
effective budgeting. (4 marks)
(b) Budgeting is an effective management tool in business decisions. Explain four (4)
reasons why budgeting is important and state four (4) conditions necessary for
effective budgeting. (4 marks)

(c) Chobo Ltd has just employed you as its Management Accountant. The following
forecast information for the third quarter of the year 2010 has been provided to
you:

October November December

Sales expected 10,000 units 12,000 units 15000 units
Price per unit GHS20 GHS20 GHS20
Closing stock GHS20,000 GHS15,000 GHS25,000
Percentage of gross profit on sales 40% 40% 40%
Debtors GHS15,000 GHS30,000 GHS15,000
Creditors GHS25,000 GHS20,000 GHS28,000

Balances shown above are at the end of each month.

In addition the desired balances projected for the end of September 2010 are shown below:

GHS
Fixed Assets 500,000
Depreciation 120,000
Stock 18,000
Cash balances expected 80,000
Unpaid tax at the end of the month 3,000
Debtors 25,000
Creditors 30,000

The following information has also been provided for your use,
 i. The company rents part of its apartment at a monthly rental of GHS25,000
and this is expected to remain the same for the next two years.

ii. Selling and distribution expenses are expected to be 25% of each month’s
sales value.

iii. Administration and general expenses are expected to be GHS20,000 per

month but this will grow upwards according to the growth in sales revenue.

iv. Fixed asset is depreciated at 2% per month on cost.

v. The company has agreed to purchase additional fixed asset at a cost of

GHS100,000 in November.

vi. The company has plans to borrow GHS80,000 from a friend of the director in
November which is payable in a year’s time without interest.

vii. The company pays tax at 10% on net profit every month. This payment is
actually done in the month after the month in which profit was declared.

You are required to prepare:

a. The Budgeted Statement of Comprehensive Income per month in columnar form for
October, November and December 2010.
(8 marks)

b. Budgeted Statement of Financial Position in columnar form for each of the months
of October, November and December. (4
marks)

c. The Cash Budget in columnar form for the months of October, November and
December 2010. (4 marks)

QUESTION 34
(a) Albe Limited was incorporated some five years ago. The financial position
as at 31st December, 2018 was as follows:
 EQUITY AND LIABILITIES GHC GHC
Stated capital:
Ordinary share [40,000 at GHC12.50 each] 500,000
Preference shares [20,000 at GHC8.00 each] 160,000
660,000
Long term capital 140,000
800,000
NON-CURRENT ASSETS
Building and Land 400,000
Equipment 182,000
Motor Vehicles 48,000
630,000
CURRENT ASSETS 40,000
Inventory 20,000
Accounts Receivables 124,000
Cash at bank 184,000

CURRENT LIABILITIES (14,000)

Accounts payable 170,000
TOTAL ASSETS 800,000

The Company has produced the following estimates:

1) The accounts payable figure of GHC14,000 stated in the financial statement

would be paid in January, 2019.

The following credit purchases are settled a month after the month of purchase, after
deducting two percent (2%) discount.
GHC
January 28,000
February 42,000
March 36,000
April 45,000
May 41,000
June 37,000

2) Sales for January will be GHC51,300 and will increase at the rate of 20% per
 month until March. In April, sales will rise to GHC80,000 and this will rise
by10% per month thereafter.

Sales will be divided equally between cash and credit sales. Credit customers
are expected to pay two months after the sales.70% of sales will be generated
by sales agents who will receive 10% commission on sales.

The commission is payable one month after the sales.

3) The company intends to purchase further equipment in August for GHC45,000.

However, a deposit of 20% is supposed to be made in June.

4) Accounts receivable as at 31/12/2018 will be settled in January, 2019.

5) Other overheads will be GHC6,500 per month for the first three months and
GHC8,400 thereafter. Wages and salaries will be GHC16,000 per month. Both
types of expense will be payable when incurred.

6) Depreciation is to be provided at the rate of 10% per annum on land and

building and 20% per annum on equipment (depreciation has not been
included in the overheads mentioned above).
Required:
Prepare a monthly Cash Budget for Albe Ltd for January 2019 to June 2019. (15marks)

QUESTION35
Osei Bamfo has been working for a textile manufacturing company for the past 25 years.
At his present age of 50, he decided to go into the business of buying and selling as the
future looks bleak for him. He provides you with the following information:

1. His savings over the 25 years was shares in a listed company at a cost of GHC5,000
whose present market value is GHC4,200. This has to be realised for the purpose of
his intended business.
2. Osei was promised sales orders amounting to GHC54,000 and GHC90,000 respectively
for the first two quarters of 2013. From July onwards, sales are expected to be steady
at the rate of GHC150,000 per quarter.
3. He will maintain inventory of goods costing GHC40,000 which have to be delivered in
December 2012 if the business is to start in January 2013.
4. The goods will be sold, on average, at a gross profit margin of 20%.
5. A delivery van will be purchased and paid for in January 2013 for GH12,000. It is
expected to last for 5 years and be worth about GHC4,000 at the end of that period.
6. Osei will arrange for monthly supplies of goods sufficient to replace items sold. The
supplier will allow two months credit for all supplies, including the initial stocks to be
delivered in December 2012. He will offer similar credit period to his
 customers.
7. He will conduct most of his business from home but will rent a warehouse to store
the goods. He will pay 2 years rent of GHC5,400 payable half yearly in equal amounts
for the two years commencing January 2013.
8. One Sales Executive will be employed on an annual salary of GHC3,600 payable
monthly.
9. Telephone bill which is at present GHC150 per quarter which he will continue to pay
privately will rise to GHC400 per quarter as a result of running the business from
home. Other incidental expenses are estimated at GHC250 per quarter payable in
cash.
10. Osei will require his bank to meet all his other cash needs if the business is
undertaken.

Required:

Prepare (a) a cash budget for each of the four quarters of 2013. (10 marks)

(b) a budgeted income statement for the year 2013. (5 marks)

(c) a reconciliation of the forecast change in the cash position over the 12
months with the estimated profit figure. (5 marks)

QUESTION 36

Abotrehene who retired from public service in September, 2019 and received his gratuity
amounting to GH¢ 66,000 decided to start his own business under the trading name Abotreye
Enterprise.

Abotreye intends to buy a piece of machine, costing GH¢ 49,500 out GH¢ 66,000 to be used
for business. This machine is to be bought on 5 November 2019 and has an estimated useful
life of five years from November 2019.

The following information is relvant:

1. Production will begin on 15 November 2019 and its expected that the whole of the first
month’s sales units and 25% of the following month’s sales units will be manufactured
in September 2019.

In each month, thereafter, the production for the month will consist of 75% of the
current moth’s sales and 25% of the following month sales.

2. Estimated sales units and total sale value for selected months in 2018 are as follows:

Units GH¢

November 2,600 66,000

 December 2,900 74,200

January 3,300 82,500

February 3,300 82,500

March 3,500 90,000

3. Variable production cost per unit is given below

GH¢

Direct material 5

Direct wages 4

Variable 1
overheads

10

4. Purchase of 50% of the materials required for the following month’s production will be
made in each month. The other 50% will be purchase in the month of production.
Payment for raw material s will made in full the of purchase.

5. Direct workers have agreed that their wages should be paid in the last week of each
month in respect of that month’s wages.

6. Variable production overhead is paid as follows:

i) 60% to be paid in the month in which it was incurred

ii) 40% to be paid one month later

7. Fixed production overheads are GH¢3,300 per month. One quarter of this is paid in the
month its incurred, one half in the following month and the remainder represents
depreciation on the second-hand machinery.

8. Sales revenue is to be received as follows:

i) 10% cash discount is allowed for payment in the current month and 25% of each
months sales qualify for this payment.

ii) 50% of each month sales are received in the following month

iii) 20% of each month sales are received in the second month.
 iv) The balance of 5% bad debt represents anticipated bad debts.
Required:

a) Prepare a monthly cash budget for the month of November, December for 2019 and
January 2020 16 marks
b) Analyse the cash budget you have prepare advice the customer 4 marks
QUESTION 37
The management of Cashpoint Ltd. has prepared its functional budgets for 2014 and the
Management Accountant has gathered the following information for the preparation of the
Cash Budget and the Master Budget.

{a} Creditors to give one month credit.

{b} General Expenses GH¢2,000/month.

{c} Salaries and wages GH¢4,000/month.

{d} Depreciation on Motor Car to be 10% per annum.

{e} Rent GH¢1,000/month to be paid one month in arrears.

{f} Motor Car to be acquired in March 2014, cost GH¢30,000.

{g} Purchasing of merchandise to be so arranged that sufficient quantity will be

purchased to meet each month’s sales. Cost/unit is GH¢16.00.

{h} For 2014, Debtors are to settle their debts in the second month following the
month after that in which sales take place.

{i} Sales in December 2013 (receipts expected in January 2014) is GH¢40,000.

{j) Sales (Units): 3,000/month for the first two months and 4,000 units/month for the
rest of the year.

{k} Selling Price: GH¢20/unit for the first month and GH¢24/unit for the rest of the year.

{l} Cash/Bank Balance at 31/12/13 is expected to be GH¢16,000 and the balance at

the end of every month next year should not be less than GH¢20,000.

You are required to prepare the following budgets for 2014 financial year

(a) Monthly cash budget for 2014

(b) Budgeted income statement for 2014

(c) Budgeted statement of financial position as at 31st December 2014

 (20 marks)

QUESTION 38
Brofre limited retails fertilizer to farmers in Ghana. The company has approached its Bankers to
provide funding for next year’s operations and three months master budget has been requested for
review by the bankers.

You have been approached by the management as a consultant to prepare the 1st quarter budget for
the banker’s consideration for its next year’s operations.
End of Accounting year December 2014
GHS

Debtors 23,000
Bank balance 55,000
Fixed asset at cost 698,000
Provision for depreciation balance 98,000
Creditors Balance 48,000
Operating expenses for the month December 60,000
Sales for the month of December 2014 400,000
December Ending inventory 20,000
Retained earnings 120,000

The following additional information was also provided to assist your work.

i) Depreciation is provided at the rate of 5% on cost of non-current assets

ii) Closing inventory is expected to increase by GHS 2000 in January from December levels.
This is expected to increase by the same figure in February from the projected figure in
January. It is expected that in March closing inventory is desired to be GHS 26,000
iii) The company makes a profit of 25% on its sales.
iv) Operating expenses is expected to increase by 10% from that of December and this is
projected to increase at the same growth rate to March.
v) Sales is projected to grow by 15% from December until March.
vi) The Debtors figure is desired to be proportional to the sales values.
 vii) Creditors value for the three months are expected to be as follows
January - GHS 50,000; February – GHS 46,000 and in March – GHS 52,000

You are required as a consultant for Brofre Company limited to prepare for their Bankers
a) The budgeted income statement for the three months. ( 7 marks)
b) The budgeted statement of financial Position for the three months. (7marks)
c) The cash budget for the three months.(6marks) (Total=20 marks)

VARIANCE
QUESTION 39
Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates
are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labour for
each batch is GHS 6·00 and the standard labour time for each batch is half an hour. In November, Truffle
Co had budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour
hours were used to complete the work and there was no idle time. All workers were paid for their actual
hours worked. The actual total labour cost for November was GHS 136,800. The production manager at
Truffle Co has no input into the budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the choice of either
accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to
accept the 5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was
implemented immediately and made the chocolates more difficult to shape. When recipe changes such as
these are made, it takes time before the workers become used to working with the new ingredient mix,
making the process 20% slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the system
outside of this.

Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the
standard cost provided above. (4 marks)

(b) Analyse the total labour rate and total labour efficiency variances into component parts for
planning and operational variances in as much detail as the information allows. (8 marks)

(c) Assess the performance of the production manager for the month of November. (8 marks)

QUESTION 40
Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-in-time
system and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m2. Each
bed sheet uses 2 m2 of cotton and each pillowcase uses 0·5 m2. Production levels for bed sheets and
pillowcases for November were as follows:
Budgeted production Actual
levels (units) production
Bed sheets 120,000 120,000
levels (units)
Pillowcases 190,000 180,000

The actual cost of the cotton in November was $5·80 per m2. 248,000 m2 of cotton was used to make
the bed sheets and 95,000 m2 was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning of
the month, the hotel chain made an unexpected request for an immediate design change to the
pillowcases. The new design required 10% more cotton than previously. It also resulted in production
delays and therefore a shortfall in production of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues which occur,
although he is not responsible for the setting of standard costs.

Required:
(a) Calculate the following variances for the month of November, for both bed sheets and
pillow cases, and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance.(3 marks)

(b) Assess the performance of the production manager for the month of November. (8
marks)

QUESTION 41
The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The
standard cost card for one batch of soap for the month of September was as follows:

Material Kilograms Price per

Lye 0·2 1 ($)
kilogram
Coconut oil 0·6
5 04
Shea butter 0·5 3
The budget for production and sales in September was 120,000 batches. Actual production and
sales were 136,000 batches. The actual ingredients used were as follows:

Material Kilogra
Lye 34,080
ms
Coconut oil 83,232
 Shea butter 64,200

Required:

(a) Calculate the total material mix variance and the total material yield variance for
September. (8
marks)

(b) The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is
with the Girls’ Private School Trust (GPST), which has 35 schools across the country, all with the same
school uniform.
After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been re-
designed to incorporate a dropped waistband. Each new dress now requires 2·2 metres of material, which is
10% more material than the previous style of dress required. However, a new material has also been chosen
by the GPST which costs only $2·85 per metre which is 5% cheaper than the material used on the previous
dresses. In February, the total amount of material used and purchased at this price was 54,560 metres.
The design of the new dresses has meant that a complicated new sewing technique needed to be used.
Consequently, all staff required training before they could begin production. The manager of the sewing
department expected each of the new dresses to take 10 minutes to make as compared to 8 minutes per
dress for the old style. SU Co has 24 staff, each of whom works 160 hours per month and is paid a wage of
$12 per hour. All staff worked all of their contracted hours in February on production of the GPST dresses and
there was no idle time. No labour rate variance arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units) 30,000
Actual production and sales (units) 24,000
The production manager at SU Co is responsible for all purchasing and production issues which occur. SU Co
uses standard costing and usually, every time a design change takes place, the standard cost card is updated
prior to production commencing. However, the company accountant responsible for updating the standards
has been off sick for the last two months. Consequently, the standard cost card for the new dress has not yet
been updated.

Required:
(i) Calculate the material variances in as much detail as the information allows for the month of
February.
(7 marks)

(ii) Calculate the labour efficiency variances in as much detail as the information allows for
the month of February. (5
marks)

(iii) Assess the performance of the production manager for the month of February. (8
marks)

(20 marks)
QUESTION 42
Bee Ltd produces Cocoa drink in Accra by mixing three ingredients; K, Y, and Z in the proportions 5:3:2
respectively.
The production process does not always mix the ingredients in these proportions, but the drink can be sold if
the mixture is within certain limits. The standard prices for the ingredients are:-

K - GHC 2.40 per litre

Y - GHC 2.00 per litre
Z - GHC 2.88 per litre

There is 10% normal loss during the process, so that the expected yield is 90%. During

the last period, the output of the cocoa drink was 184,000 litres.

The inputs were:

92,000 litres of K at GHC 2.52 per litre
68,000 litres of Y at GHC 1.88 per litre
42,000 litres of Z at GHC 2.92 per litre

Calculate the following variance:

(a) (i) Materials mix variance (3 marks)

(ii) Material yield variance (3 marks)

(iii) Material usage variance (3 marks)

(b) Explain the following variances

(i) Planning variance (2½ marks)

(ii) Operational variance (2½ marks)

(c) State two (2) advantages and two (2) disadvantages of variance analysis using planning and
operating variances. (6 marks)

QUESTION 43
a) The underlisted data relate to actual output, costs and variances for the monthly accounting
period of a company that makes only one product. Opening and closing work in progress were
the same.

Variances: GH₵
Direct materials price 30000 F
Direct materials usage 18000 A
Direct labour rate 16000 A
Direct labour efficiency 32000 F
Variable production overhead expenditure 12000 A
Variable production overhead efficiency 8000 F

Variable production overhead varies with labour hours worked.

 A standard marginal costing system is operated.

Actual production of product BM 36,000 units

Actual costs incurred:

Direct materials purchased and used (300,000 kg) GH₵420,000
Direct wages for 64000 hours GH₵272,000
Variable production overhead GH₵76,000

Required:
i. Calculate the standard cost of materials and standard rate per labour hour.
ii. Prepare a standard product cost sheet for one unit of product BM.
iii. Determine the budget production units. 12 marks
b) You are the Management Accountant of ABS Limited. The following computer printout shows details
relating to June 2017.
Actual Budget
Sales volume 4,900 units 5,000 units
Selling price per unit GH¢11.00 GH¢10.00
Production volume 5,400 units 5,000 units
Direct materials
Quantity 10,600kg 10,000kg
price per kg GH¢0.60 GH¢0.50
Direct labour
hours per unit 0.55 0.50
rate per hour GH¢3.80 GH¢4.00
Fixed overhead
Production GH¢10,300 GH¢10,000
Administration GH¢3,100 GH¢3,000

ABS Limited uses a standard absorption costing system. There was no opening or closing work-in-
progress

Required
Prepare a statement which reconciles the budgeted profit with the actual profit for June 2017,
showing individual variances in much detail. (15 marks)

QUESTION 43

a) With regard to variance analysis for all production costs (direct material, direct labour, and
overhead), it is important to note that each variance does not represent a separate and distinct
problem to be handled in isolation. All variances in one way or another are interdependent.

Required:
i) Explain what you understand by the term “inter-relationship between variances”. (2 marks)
 ii) Explain possible reasons for inter-relationship between material variances and labour variances.
Support your answer with examples. (4 marks)
b) Ghana National Gas Company is a gas processing company and has its plant located in Atuabo in
Western Region. The Plant produces three gas products – Lean Gas (LG), Liquefied Petroleum
Gas (LPG) and Natural Gas Condensate (NGC).

The standard time for the production of the products are:

LG - 40 minutes per metric tonne, LPG - 30 minutes per metric tonne, NGC – 45 minutes per
metric tonne

The budget for the month of February is as follows:

LG – 45,000 metric tonnes, LPG – 25,000 metric tonnes, NGC – 30,000 metric tonnes

The actual data for the month were as follows:

Labour hours 70,000 hours
Production: LG – 48,000 metric tonnes, LPG – 27,000 metric tonnes, NGC– 25,000 metric tonnes

Required:
Compute and interpret the following:
i) The efficiency ratio. (3 marks)
ii) The capacity ratio.(3 marks)
iii) The production volume or activity ratio. (3 marks) (Total: 15 marks)

QUESTION 44
The Organic Bread Company (OBC) makes a range of breads for sale direct to the public. The production process
begins with workers weighing out ingredients on electronic scales and then placing them in a machine for mixing. A
worker then manually removes the mix from the machine and shapes it into loaves by hand, after which the bread is
then placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged up and made ready for
sale. Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as follows:
$
White flour 450 grams at $1·80 per
kg 0·81 Wholegrain
flour 150 grams at $2·20 per
kg 0·33
Yeast 10 grams at $20 per kg 0·20
–––– ––––
Total 610 grams 1·34
–––– ––––
Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual production was
only 950 units. The total actual quantities used and their actual costs were:
Kg $ per kg
White flour 408·5 1·90
Wholegrain flour 152·0 2·10
Yeast 10·0 20·00
––––––
Total 570·5
––––––
 Required:
(a) Calculate the total material mix variance and the total material yield variance for OBC for the last
quarter.
(7 marks)

(b) Using the information in the question, suggest THREE possible reasons why an ADVERSE MATERIAL
YIELD variance could arise at OBC. (3 marks) (10 marks

PERFORMANCE MANAGEMENT
 Return on investment/ capital employed
 Residual income
 Transfer pricing
QUESTION 44
Y and Z are two divisions of a large company that operate in similar markets. The divisions are treated
as investment centres and every month they each prepare an operating statement to be submitted to the
parent company. Operating statements for these two divisions for October are shown below:

Operating statements for October

Y Z
GHS000 GHS000
Sales revenue 900 555
Less variable costs 345 312
–––– ––––
Contribution 555 243
Less controllable fixed costs (includes
depreciation on divisional assets) 95 42
–––– ––––
Controllable income 460 201
Less apportioned central costs 338 180
–––– ––––
Net income before tax 122 21

Total divisional net assets GHS 9.76m GHS 1.26m

The company currently has a target return on capital of 12% per annum. However, the company
believes its cost of capital is likely to rise and is considering increasing the target return on capital. At
present the performance of each division and the divisional management are assessed primarily on the
basis of Return on Investment (ROI).
Required:
i) Calculate the annualised Return on Investment (ROI) for divisions Y and Z, and
discuss the relative performance of the two divisions using the ROI data and other
information given above. (6 marks)
ii) Calculate the annualised Residual Income (RI) for divisions Y and Z, and explain the
implications of this information for the evaluation of the divisions’ performance.(3
marks)
 iii) Briefly discuss the strengths and weaknesses of ROI and RI as methods of assessing
the performance of divisions. Explain two further methods of assessment of divisional
performance that could be used in addition to ROI orRI. (3 marks)

QUESTION 46
Cardale Industrial Metal Co (CIM Co) is a large supplier of industrial metals. The company is split into two
divisions: Division F and Division N. Each division operates separately as an investment centre, with each
one having full control over its non-current assets. In addition, both divisions are responsible for their own
current assets, controlling their own levels of inventory and cash and having full responsibility for the
credit terms granted to customers and the collection of receivables balances. Similarly, each division has
full responsibility for its current liabilities and deals directly with its own suppliers.
Each divisional manager is paid a salary of GHS 120,000 per annum plus an annual performance-related
bonus, based on the return on investment (ROI) achieved by their division for the year. Each divisional
manager is expected to achieve a minimum ROI for their division of 10% per annum. If a manager only
meets the 10% target, they are not awarded a bonus. However, for each whole percentage point above 10%
which the division achieves for the year, a bonus equivalent to 2% of annual salary is paid, subject to a
maximum bonus equivalent to 30% of annual salary.
The following figures relate to the year ended 31 August 2015:
Division Division
F N
Sales ¢’000 ¢’000
Controllable profit 2,645
14,500 1,970
8,700
Less apportionment of Head Office costs (1,265) (684)
––––––– –
Net profit 1,380 1,286–
––––––– –
Non-current assets 9,760 14,980–
Inventory, cash and trade receivables 2,480 3,260–
Trade payables 2,960 1,400–

During the year ending 31 August 2015, Division N invested ¢6·8m in new equipment including a
technologically advanced cutting machine, which is expected to increase productivity by 8% per annum.
Division F has made no investment during the year, although its computer system is badly in need of
updating. Division F’s manager has said that he has already had to delay payments to suppliers (i.e.
accounts payables) because of limited cash and the computer system ‘will just have to wait’, although the
cash balance at Division F is still better than that of Division N.

Required:
(a) For each division, for the year ended 31 August 2015, calculate the appropriate closing
return on investment (ROI) on which the payment of management bonuses will be
based. Briefly justify the figures used in your calculations.
Note: There are 3 marks available for calculations and 2 marks available for discussion.(5 marks)

(b) Based on your calculations in part (a), calculate each manager’s bonus for the year
ended 31 August 2015.
 (3 marks)

(c) Discuss whether ROI is providing a fair basis for calculating the managers’ bonuses and
the problems arising from its use at CIM Co for the year ended 31 August 2015
(7 Marks)
QUESTION 46
The Biscuits division (Division B) and the Cakes division (Division C) are two divisions of a large,
manufacturing company. While both divisions operate in almost identical markets, each division operates
separately as an investment centre. Each month, operating statements must be prepared by each division
and these are used as a basis for performance measurement for the divisions.
Last month, senior management decided to recharge head office costs to the divisions. Consequently, each
division is now going to be required to deduct a share of head office costs in its operating statement before
arriving at ‘net profit’, which is then used to calculate return on investment (ROI). Prior to this, ROI has
been calculated using controllable profit only. The company’s target ROI, however, remains unchanged at
20% per annum. For each of the last three months, Divisions B and C have maintained ROIs of 22% per
annum and 23% per annum respectively, resulting in healthy bonuses being awarded to staff. The company
has a cost of capital of 10%.
The budgeted operating statement for the month of July is shown below.
B C
¢000 ¢000
Sales revenue 1,300 1,500
Less variable costs (700) (800)
Contribution 600 700
Less controllable fixed costs (134) (228)
Controllable profit 466 472
Less apportionment of head office costs (155) (180)
Net profit 311 292

Divisional net assets ¢23.2m ¢$22.6

m

Required:
a) Calculate the expected annualised Return on Investment (ROI) using the new method as
preferred by senior management, based on the above budgeted operating statements, for each
of the divisions. (2 marks)

b) The divisional Managing Directors are unhappy about the results produced by your
calculations in (a) and have heard that a performance measure called ‘residual income’ may
provide more information.
Calculate the annualised residual income (RI) for each of the divisions, based on the net profit
figures for the month of July. (3 marks)

c) Discuss the expected performance of each of the two divisions, using both ROI and RI, and
making any additional calculations deemed necessary. Conclude as to whether, in your
opinion, the two divisions have performed well. (6 marks)

d) Division B has now been offered an immediate opportunity to invest in new machinery at a
cost of $2.12 million.
The machinery is expected to have a useful economic life of four years, after which it could
be sold for $200,000. Division B’s policy is to depreciate all of its machinery on a straight-
 line basis over the life of the asset. The machinery would be expected to expand Division B’s
production capacity, resulting in a 10% increase in contribution per month.

Recalculate Division B’s expected annualised ROI and annualised RI, based on July’s
budgeted operating statement after adjusting for the investment. State whether the Managing
Director will be making a decision that is in the best interests of the company as a whole if
ROI is used as the basis of the decision.

e) Explain any behavioural problems that will result if the company’s senior management insist
on using solely ROI, based on net profit rather than controllable profit, to assess divisional
performance and reward staff.

QUESTION 47
(a) Explain the meaning of each of the underlisted measures which may be used for divisional
performance measurement. Discuss the advantages and problems associated with the use of
each.

i. Return on capital employed

ii. Residual income (10 marks)

(b) Dromo Ltd is a divisional company. It has two divisions called Naa and Hewo. Naa’s
operations include milling and dealings in the grain market. Hewo operates a number of
bakeries.

The following data relate to the year ended 30 October, 2009:

Naa Hewo
(GHS000) (GHS000)
Sales 56,000 35,000
Gain on sale of plant - 1,100
56,000 36,100

Direct material 28,400 11,800

Direct labour 9,100 8,150
Divisional overheads 5,850 4,750
Depreciation 720 990
Head office costs (allocated) 480 310
44,550 26,000

Fixed assets (at cost less accumulated depreciation) 8,000 10,000

Stocks 6,550 2,100
Trade receivables 4,550 1,800
Cash at back 1,700 -
Bank overdraft - 850
Trade payables 3,200 2,350
 Divisional management (DMs) are given authority to spend up to GHS25,000 on capital
items as long as total spending remains within an amount provided for small projects in
the annual budget. Larger projects, as well as sales and assets with book values in excess
of GHS25,000 must be submitted to central management (CM).

Decision has been made that DM performance should be appraised on the basis of
controllable profit, this measure would exclude depreciation and gain or losses on sales
of assets, treating investment in fixed assets as a CM responsibility.

The cost of capital of Dromo Ltd is 20% per annum.

Required:

Calculate for both divisions the following three measures:

(i) Return on capital employed

(ii) Residual income

(10 marks)
(iii) Controllable profit.
QUESTION 48
(a) Discuss three (3) methods that can be used to fix transfer pricing in a company.
(6 marks)

(b) Global Imex has two divisions; one located at Tema and the other in Kumasi.

The following is an extract from the annual report for the 2010 financial year.

Tema Kumasi
GHC GHC
Profit before depreciation 450,000 620,000
Depreciation 120,000 130,000
Non-current assets 1,200,000 1,300,000
Current Assets 750,000 1,000,000
Current Liabilities 350,000 400,000

The company’s cost of capital is 20%.

Required:

(i) Using Return on Investment (ROI) and Residual Income, comment on the
performance of the divisions.

(ii) The Kumasi branch intends to sell one of the non-current assets with book value of
 GHC120,000 and make a profit of GHC60,000. Tema also wants to acquire another
asset costing GHC90,000 that will generate a profit of GHC40,000. To what extent will
the decisions affect the performance of the divisions?
(14 marks)

QUESTION 49
Thatcher International Park (TIP) is a theme park and has for many years been a successful
business, which has traded profitably. About three years ago the directors decided to capitalise
on their success and reduced the expenditure made on new thrill rides, reduced routine
maintenance where possible (deciding instead to repair equipment when it broke down) and
made a commitment to regularly increase admission prices. Once an admission price is paid
customers can use any of the facilities and rides for free.
These steps increased profits considerably, enabling good dividends to be paid
to the owners and bonuses to the directors. The last two years of financial
results are shown below.

20X4 20X
$ 5
Sales 5,250,000 $
5,320,000
Less expenses:
Wages 2,500,000 2,200,000
Maintenance – routine 80,000 70,000
Repairs 260,000 320,000
Directors’ salaries 150,000 160,000
Directors’ bonuses 15,000 18,000
Other costs (including depreciation) 1,200,000 1,180,000
Net profit 1,045,000 1,372,000
Book value of assets at start of year 13,000,000 12,000,000
Dividend paid 500,000 650,000
Number of visitors 150,000 140,000

Required:
a) Assess the performance of TIP using the information given above.
(14 marks)
QUESTION 50
Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse (R).
The company has two divisions: the assembly division, and the retail division.
The company’s policy is to transfer the machines from the assembly division to the retail division
at full cost plus 10%. This has resulted in internal transfer prices, when S and R are being
transferred to the retail division, of
¢220·17 and ¢241·69 respectively. The retail division currently sells S to the general public for
¢320 per machine and R for ¢260 per machine. Assume it incurs no other costs except for the transfer
price.
The retail division’s manager is convinced that, if he could obtain R at a lower cost and therefore
reduce the external selling price from ¢260 to ¢230 per unit, he could significantly increase sales of
 R, which would be beneficial to both divisions. He has questioned the fact that the overhead costs
are allocated to the products on the basis of labour hours; he thinks it should be done using machine
hours or even activity based costing.
You have obtained the following information for the last month from the assembly division:
Product S Product R
Production and sales (units) 3,200 5,450
Materials cost ¢117 ¢95
Labour cost (at ¢12 per hour) ¢6 ¢9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail 64 80
division
Overhead costs: ¢
Machine set-up 306,435
costs
Machine maintenance costs 415,105
Ordering costs 11,680–
Delivery costs 144,400–
Total 877,620–
–

Required

Required:
i) Using traditional absorption costing, calculate new transfer prices for S and R if
machine hours are used as a basis for absorption rather than labour hours.
Note: round all workings to 2 decimal places. (3 marks)

ii) Using activity based costing to allocate the overheads, recalculate the transfer
prices for S and R.
Note: round all workings to 2 decimal places. (8 marks)

iii) Calculate last month’s profit for each division, showing it both for each product
and in total, if activity based costing is used. (3 marks)

Process Co is becoming increasingly concerned that environmental costs may be increasing within the
company. However, the company has not yet developed a structured way for accounting for these
costs. It has heard of a number of different management accounting techniques which can be used to
account for environmental costs, including ‘input/output analysis’, ‘flow cost accounting’,
‘environmental activity-based costing’ and ‘life cycle costing’.

Required:
Briefly describe TWO of these techniques in the context of environmental management
accounting.
(5 marks)