KASNEB Advanced Management Accounting - Question 2a

Summarise FOUR limitations of the Just-In-Time (JIT) inventory system ... [Click to view full question and step-by-step solution]

KASNEB Advanced Management Accounting - Question 2b

Identify FOUR applications of learning curve model. ... [Click to view full question and step-by-step solution]

August 2023

1a

Environmental management accounting

Explain TWO benefits of each of the following concepts as used in environmental management accounting:

(i) Environment life cycle costing.

(ii) Environmental activity-based costing (EABC).

1b

Cost estimation and interpretation

Motorcar Repairs Ltd is in the process of estimating the fixed cost and variable cost components associated with the company’s repair activity using the cost estimation equation in the form Y = a + bx, where Y is the total repair cost, a is the fixed component, b is the variable component and x is the level of repair activity in hours.

Additional information:

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

	Summary of output Regression statistics
	Parameter	Output
	Multiple R	0.984523
	R square	0.969285
	Adjusted R square	0.961607
	Standard Error	32.196570
	Observations	6
2.	The analysis of variance (ANOVA) output was as follows:

Predictor	df	SS	MS	F	Significance F
Regression	1	130853.5	130853.5	126.2311	0.000357
Residual	4	4146.476	X
Total	5	135000
Variable	Coefficients	Standard error	t-statistic	P-value	Lower 95%	Upper 95%
Intercept	509.9119	45.55789	Y	0.000363	383.4227	636.4011
Variable X	29.40529	2.617232	11.23526	0.000357	22.13867	36.6719

Required:

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

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

(iii) Compute the values of the missing letters X and Y.

(iv) Explain the explanatory power of the model using the coefficient of determination.

(v) Explain if the independent variable is economically plausible as a predictor variable.

2a

Inventory control decisions

Summarise FOUR limitations of the Just-In-Time (JIT) inventory system

2b

Cost estimation and interpretation

Identify FOUR applications of learning curve model.

2c

Budgetary control techniques

Aloe Vera Group has two operating divisions; Aloe division and Vera division. Aloe division produces a high quality fabric that is used in making curtains. The budgeted cost per unit of the fabric is made up as follows:

Variable costs:	Sh.
Direct labour	33
Direct material	77
Marginal cost	110
Fixed costs:
Production overheads	100
Full cost	210

Additional information:

1. The budgeted output for Aloe division is 450,000 units each year and the market price for the fabric is Sh.250 per unit.

2. Vera division makes curtains and uses 1.1 metres of this fabric to make one curtain. The budgeted output for Vera division is 200,000 units of curtains.

3. The management of Aloe Vera Group insists that Aloe division must sell to Vera division as much of the fabric as is required to meet its needs and any surplus output can then be sold to external customers.

4. The management of Aloe Vera Group also insists that Vera Division must buy all its requirements for this fabric from Aloe division.

5. Vera division sells its output at Sh.310 per unit. In addition to the cost of fabric, it incurs fixed costs at the rate of Sh.40 per unit of the budgeted output.

Required:

The budgeted profit for both Aloe division and Vera division, assuming a transfer pricing policy is based on:

(i) Marginal costing transfer pricing.

(ii) Market based transfer pricing.

3a

Budgetary control techniques

Zeta Ltd. manufactures one standard product branded “Boma” and operates a system of variance analysis using a fixed budget. As the assistant management accountant, you are responsible for preparing the monthly operating statements.

The budgeted information of product “Boma” for the month ended 31 July 2023 was as follows:

		Sh.
Selling price per unit		880
Cost per unit:
Direct material: A	(2 kgs at Sh.100 per kg)	200
Direct.material:.B	(1 litre at Sh.150 per litre)	150
Direct labour	(3 hours at Sh.90 per hour)	270
Variable overhead	(3 hours at Sh.20 per direct labour hour)	60

Additional information:

1.	Zeta Ltd. budgeted sales and production for the month of July 2023 was 10,000 units.
2.	Annual budgeted fixed overheads were Sh.14,400,000 which are assumed to be incurred evenly throughout the year.
3.	The company uses marginal costing system for internal profit measurement purposes.

4.	The actual data for the month of July 2023 were as follows:
	Actual production and units sold	9,000 Units
	Selling price	Sh.900
	Direct materials consumed:
	A: 19,000 kgs consumed at a cost of Sh.2,090,000
	B: 10,100 litres consumed at a cost of Sh.1,414,000
	Direct labour incurred 28,500 hours at a cost of Sh.2,736,000
	Variable overheads incurred	Sh.520,000
	Fixed overheads incurred	Sh.1,160,000

Required:

(i) A budgeted profit statement.

(ii) Actual profit statement.

(iii) A reconciliation statement of actual profit and budgeted profit. (Show all planning and operating variances).

3b

Planning and decision making techniques

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

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

	Net profit/(loss)
Market conditions	Poor	Fair	Good
Probability of market states	30%	40%	30%
Number of sandwiches sold:	Sh.	Sh.	Sh.
100,000	100,000	300,000	300,000
200,000	(100,000)	600,000	600,000
300,000	0	700,000	900,000
400,000	(300,000)	600,000	1,200,000

Required:

(i) The number of sandwiches to sell to satisfy maximin criterion.

(ii) The number of sandwiches to sell to satisfy maximax criterion.

(iii) The number of sandwiches to sell to maximise the expected monetary value (EMV).

(iv) The maximum amount payable by Oreq Ltd. to acquire perfect information.

4

Planning and decision making techniques

Green Coaches Ltd. is an electric-bus assembly company. The company has received a special order from Transland Bus Company to supply 15 executive electric buses for bus rapid transport (BRT) project at a target price of Sh.8 million per bus.

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

Scenario 1:

To work overtime and deliver the 15 buses within stipulated period.

Scenario 2:

To complete 14 buses using overtime and deliver 1 bus late.

Scenario 3:

To assemble and deliver the 13 buses without overtime and deliver 2 buses late.

Additional information:

1. The target profit margin is 20% of the target price per bus.

2. The contract allows for 92 working days without overtime for the assembly and delivery of buses and stipulates a penalty of Sh.1.5 million for each bus delivered late.

3. The time taken to complete the first bus is 10 days.

4. Direct labour cost is Sh.180,000 per day for the normal working days per month and overtime premium rate is double the normal rate.

5. Overheads will be allocated to the special order at a rate of Sh.30,000 per normal working day and no overheads will be allocated for overtime working.

6. The management accountant’s estimate of direct material cost per bus is Sh.2,500,000.

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

8. The learning curve model is in the form of \(Y = ax^{-b}\).

Required:

(a) Evaluating each scenario, advise the management on the most economical scenario using learning curve analysis.

b) Using target costing approach, compute the cost savings of the most economical scenario identified in (a) above.

(c) Explain FOUR non-financial factors that may have a bearing on the decision for the special order by the management of Green Coaches Ltd.

5a

Sanitiza Ltd. sells sanitiser bottles. The company finds that it runs out of stock on occasions and thus loses the contribution on missed sales. Sanitiza Ltd. works a five-day week for 48 weeks a year. The demand figures have been analysed for the last 20 weeks.

Additional information:

1.	The estimated demand is 60,000 bottles per year.
2.	The opportunity cost of running out of stock is Sh.55.
3.	The lead-time is 5 days guaranteed.
4.	The cost of holding a bottle is Sh.50 per year.
5.	The number of orders per annum are 10 orders.

6.	The demand figures for the last 20 weeks are as follows:
	Sanitiser bottles sold	Number of days the level of sales occurred
	150	7
	200	14
	250	35
	300	35
	350	28
	400	14
	450	7

7.	At present, Sanitiza Ltd. uses a re-order level of 250 sanitiser bottles and does not carry any safety stock because of the guaranteed delivery time.

Required:

(i) The optimal safety stock in units.

(ii) The probability of being out of stock.

5b

Planning and decision making techniques

Rona Enterprise manufactures three products namely; A, B and C. The current sales, cost and selling price details and processing time requirements are as follows: The standard selling price and standard cost per unit for each product for the period ending 31 August 2023 are as follows:

	Product A	Product B	Product C
Annual sales (units)	6,000	6,000	1,000
Selling price (Sh.)	200	320	400
Unit cost (Sh.)	180	240	300
Processing time required per unit (hours )	1	1.5	2

Additional information:

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

5.	Product	Expected maximum demand (Units)	Quoted price (Sh.)
	A	11,000	175
	B	8,000	240
	C	2,000	320

6.	In the period commencing 1 September 2022 and ending 31 August 2023, the company budgeted for production fixed overheads of Sh.2,000,000.
Required:
(i)	Compute the shortfall of the limiting factor.
(ii)	Determine the optimal production mix indicating the products and quantity to outsource from external supplier.
(iii)	Based on your recommendations in (b) (ii) above, determine the net profit for the period 31 August 2023.

August 2023

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