KASNEB Advanced Management Accounting - Question 1a

With reference to responsibility accounting, examine FOUR types of responsibility centres. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Management Accounting - Question 2a

Discuss FOUR salient features of just-in-time (JIT) inventory system. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Management Accounting - Question 3a

Distinguish between “sunk costs” and “opportunity costs” as used in decision making. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Management Accounting - Question 4a

Explain TWO benefits of product life cycle costing. ... [Click to view full question and step-by-step solution]

April 2025

1a

With reference to responsibility accounting, examine FOUR types of responsibility centres.

1b

Planning and decision making techniques

Zeko Television Ltd. is considering launching a new television set branded “mega” to complement its existing product line. Currently it makes “viva” television set which it intends to retain.

The company has the following options:

Option.1:	Continue making product “viva”. In this case, the number of customers would be expected to remain at Sh.6,000 per annum. Operational costs would stay at current level of Sh.16,000 per television set per annum. The selling price per television set is Sh.38,000. This profit margin is expected to continue.
Option.2:	Zeko Television Ltd. can acquire perfect information from consultants at a cost of Sh.50 million before launching “mega”. The expected profits are as follows under the three states of nature:

Option 2:	States of nature	Probability	Profit/(loss) (Sh.“000”)
	Optimistic	0.6	200,000
	Most likely	0.3	150,000
	Pessimistic	0.1	100,000

Option.3:

Zeko Television Ltd. can launch “mega” television without market survey. If this occurs, there is a 75% chance that there is competition from rival firms. The company aims to achieve a target profit of Sh.180 million per annum from this option. The management accountant estimates annual profits in this situation would be as follows:

Option.3:		With competitors		Without competitors
	State of nature	Probability	Profit/(loss) (Sh.“000”)	Probability	Profit/(loss) (Sh.“000”)
	Optimistic	0.3	220,000	0.5	200,000
	Most likely	0.4	200,000	0.3	150,000
	Pessimistic	0.3	(80,000)	0.2	100,000

Required:

Using decision tree approach and ignoring time value of money, determine the:

(i) Expected value (EV) and recommend the optimal option to choose.

(ii) Probability of failing to break-even for option 3 only.

(iii) Probability that the company will at least achieve the target profit for option 3 only.

2a

Inventory control decisions

Discuss FOUR salient features of just-in-time (JIT) inventory system.

2b

Strategic management accounting information

Maziwa Sacco Ltd. is a company that buys and processes milk and milk products. Maziwa Sacco Ltd. also sells these milk and milk products internationally. The company has two divisions: Local Branch Division is located in Country Kei where it buys milk from local farmers and processes it. The processed milk is exported to Overseas Branch Division and external customers. Overseas Branch Division is located in country Tee. Overseas Branch Division is where the milk is further processed into powdered milk and rebranded. The powdered milk is then sold to external customers.

The functional currency of country Kei is Shillings (Ksh.) while that of country Tee is Shillings (Tsh.). The two countries use different taxation rates but double taxation relief applies to both countries to eliminate double taxation effect.

The budgeted information for the month of April 2025 is as follows:

	Division
	Local Branch “Ksh.”	Overseas Branch “Tsh.”
Market selling price of powder milk per litre		4,000
External selling price of processed milk per litre	70
Cost of rebranding processed milk per litre		2,100
Variable cost per litre	40
Monthly fixed costs	1,500,000	24,000,000
External demand for processed milk	320,000 litres
Demand from Overseas Branch Division	250,000 litres
Production capacity	400,000 litres
Sales of rebranded powdered milk		200,000 litres

Additional information:

The currency of country Tee will be translated into the functional currency of country Kei for external reporting purposes.
The prevailing exchange rate applicable between the two countries is Ksh.1 = Tsh.20.
The production of one litre of powdered milk requires an input of one-and-a-quarter (1¼) litres of processed milk.
Transfer pricing policy of Maziwa Sacco Ltd. is that Local Branch Division must satisfy demand from Overseas Branch Division for processed milk before selling any to external customers.
Local Branch Division transfer price for the processed milk is at marginal cost plus 10% mark-up per litre.
The corporation rate of taxation on company net profits is 30% in country Kei and 28% in country Tee.

Required:

In columnar format, prepare a profit statement that shows the budgeted post tax net profit in Ksh. if marginal cost-plus mark-up transfer pricing policy is adopted.

Your profit statement should show sales and costs split into external sales and internal transfer where appropriate.

3a

Planning and decision making techniques

Distinguish between “sunk costs” and “opportunity costs” as used in decision making.

3b

Pricing decisions

Trendy Enterprise is a manufacturer of hand made beaded bangles. The firm is currently operating at 80% of its capacity of 7,500 direct labour hours per month.

The firm’s production cost per bangle is as follows:

	Sh.
Materials	25
Direct labour (30 minutes)	30
Manufacturing overheads	20
Total cost	75

Additional information:

1. Variable manufacturing overhead cost is Sh.15 per direct labour hour and the firm allocates fixed manufacturing overhead to units produced based on their direct labour time. 2. The selling price of each bangle is Sh.105.

3. The firm has enough demand to run at the current operating level for the next six months.

4. The company’s current policy does not allow for overtime and therefore any special orders whose labour time extends the current capacity will either be rejected or would affect normal production.

Required:

(i) Trendy Enterprise has received a special order of 10,000 bangles to be delivered within two months at Sh.75 per unit. Advise the management of Trendy Enterprise on whether the order should be accepted.

(ii) Based on your answer in (b) (i) above at what price per unit should Trendy Enterprise be indifferent as to whether to accept or reject the order?

4a

Strategic management accounting information

Explain TWO benefits of product life cycle costing.

4b

Cost estimation and interpretation

Global Logistics Ltd. has two operating segments; Longonot Division and Nzoia Division. Longonot Division orders most of its consignment of intermediate product from Nzoia Division using economic order quantity (EOQ) model. The managers of each division are given considerable autonomy in transfer pricing policies. Longonot Division managers want to use multiple linear regression analysis to evaluate the significance of independent variables on material handling cost of its consignment.

The finance director of Global Logistics Ltd. has availed the following data for Longonot Division for the past 10 months.

Month	Material handling cost (Y)	Number of orders	Number of kilograms ordered
	“Sh.000”	\(\mathbf{(X_1)}\)	\(\mathbf{(X_2)}\)
June 2024	2,000	100	6,000
July 2024	3,090	125	15,000
August 2024	2,780	175	7,800
September 2024	1,990	200	6,000
October 2024	7,500	500	29,000
November 2024	5,300	300	23,000
December 2024	4,300	250	17,000
January 2025	6,300	400	25,000
February 2025	5,600	475	12,000
March 2025	6,240	425	22,400

The computer output is as follows:

1.	Summary output of regression statistics:
	Multiple R	0.999420
	R Square	0.998841
	Adjusted R Square	0.998509
	Standard Error	75.76272
	Observations	10

2.	The analysis of variance (ANOVA) table:
		df	SS	MS	F-statistics
	Regression	2	34613020	17306510	3015.076722
	Residual	7	W	5739.99
	Total	9	34653200

3.	The parameter estimate table is as follows:
	Variable	Coefficients	Standard error	t-ratio value
	Intercept	507.3097	57.3225	8.850098
	X variable 1	7.835162	Z	33.47672
	X variable 2	0.107181	0.003742	28.6464286

Required:

(i) Write down the multiple linear regression function; \(Y = a + b_1x_1 + b_2x_2\)

(ii) Suppose in the month of April 2025, Longonot Division expected to have 350 orders with 17,000 kilograms of material ordered, predict the total material handling cost for April 2025.

(iii) Compute the values of missing letters W and Z.

(iv) Explain the significance of regression statistic output of R Square of 0.998841.

(v) Based on t-ratio value, explain whether the number of orders or number of kilograms ordered is more significant in predicting the total material handling cost.

4c

Cost estimation and interpretation

Matrix Motors Ltd. is a leading producer of high-quality executive motor cars. The company is developing a new model branded “zillion” that is expected to be very advanced.

Additional information:

Matrix motors Ltd. expects the manufacture of the first car to take 72 assembly hours.
It is anticipated there will be a 90% learning curve that will continue until all 110 cars have been produced.
Direct labour is paid at a rate of Sh.30,000 per hour.
Direct material costs are expected to be Sh.3,750,000 per car. This will apply to all 110 cars produced.
There are no product-specific fixed costs associated with this new car.
Matrix Motors Ltd. is going to use a target costing approach for the new car model. Based on the market research it has undertaken, Matrix Motors Ltd. plans to sell each car for Sh.6,400,000.
Matrix Motors Ltd. requires a target profit margin of 25% of the selling price over the life of this new car model.
The learning curve index for a 90% learning curve is -0.152.

Required:

Calculate the value of any cost gap between the target cost of 110 cars and the expected cost of 110 cars.

5a

Budgetary control techniques

Usafi Council has been awarded a street cleaning contract against other competing private firms. The contract price is Sh.6,200 per kilometre of road and the budget and actual results are as follows:

For the year ended 31 March 2025
Budget	Sh.“000”	Sh.“000”
12,500 kilometres of cleaning each at Sh.6,200	-	77,500
Direct labour (3,200 hours each at Sh.7,000)	22,400
Direct materials (1,250Kgs each at Sh.5,000)	6,250
Variable overheads (3,200 hours each at Sh.4,500)	14,400
Fixed overheads (3,200 hours each at Sh.8,000)	25,600	(68,650)
Budget surplus	-	8,850
Actual	Sh.“000”	Sh.“000”
11,750 kilometres cleaned each at Sh.6,200	-	72,850
Direct labour (3,050 hours each at Sh.7,100)	21,655
Direct materials, (1,160Kgs each at Sh.5,000)	5,800
Variables overheads	13,945
Fixed overheads	25,100	(66,500)
Actual surplus	-	6,350

Required:

Reconcile the budget and actual surpluses.

5b

Strategic performance measurement

The Board of Directors of Roadways Coaches Ltd. is considering two mutually exclusive models of buses to purchase for its booming business; Diesel-driven bus and Electric-driven bus. Both bus models necessitate buying new buses and both buses are expected to have a useful life of 5 years.

Diesel-driven bus model:

This model has already been appraised. Details of the model are:

• Initial investment needed is Sh.4.5 million.

• Average return on investment (ROI) is 12.5%.

Electric-driven bus model:

Expected revenue and operating costs of Electric-driven bus model are:

Year	2025 Sh.“000”	2026 Sh.“000”	2027 Sh.“000”	2028 Sh.“000”	2029 Sh.“000”
Revenue per year	3,900	4,900	5,400	5,350	5,950
Operating expenses	3,200	3,700	3,900	4,100	4,250
Depreciation expenses	1,100	1,100	1,100	1,100	1,100

Additional information:

The initial cost of purchase of the Electric driven bus is Sh.5,500,000.
Depreciation is calculated on straight-line basis over useful life of the asset of 5 years. Both buses have no salvage values.
When computing the financial measures, the company uses operating profits only and not cashflows.
In calculating divisional return on investment, divisional written down values (WDVs) are valued at net book values at the beginning of each year.
Operating expenses and depreciation expenses are written off in determination of annual profits.
The expected values are in present values. Ignore inflation and tax.

Required:

(i) Evaluate the average return on investment (ROI) on the Electric-driven bus model.

(ii) Advise the Board of Directors of Roadways Coaches Ltd. on the model of the bus to purchase based on the ROI.

April 2025

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