August 2024

1a

Environmental management accounting

“Resilience” describes the capacity or ability of an organisation to anticipate and mitigate environmental risks and costs and recover from their adverse effects in a timely and efficient manner. This is because the external environment has a significant impact on the business activities and financial performance of an organisation.

With reference to environmental management accounting (EMA), identify THREE countermeasures that each of the following techniques could provide to build resilience and adaptation to environmental cost identification and allocation:

(i) Environmental life cycle costing.

(ii) Environmental inflow-outflow analysis.

1b

Planning and decision making techniques

With reference to decision making criteria under uncertainty, explain the meaning of the following decision criteria:

(i) Minimax criterion.

(ii) Maximin criterion.

1c

Pricing decisions

Optima Gas Limited has two divisions; Beta division and Optima division which operate as profit centres. Beta division makes a component known as “token metre” which is a prepaid “pay as you use” token device used by Optima division to make “Optima Gas Cylinder” to optimise digital payment. Prior to Beta division being established, Optima division outsourced the component on the external market at a price of Sh.1,600 per token metre.

Beta division has an external market for the “token metre” and also transfers to Optima division. Optima division uses one “token metre” to produce a gas cylinder which is sold externally. There are no other products produced and sold by these divisions. The forecast annual sales, associated costs and capacity level for the divisions are as follows:

Division	Beta division Sh.	Optima division Sh.
Market price per “token metre”	1,500
Transfer price per token metre to Optima division	900
Market price per gas cylinder		6,500
Variable costs per gas cylinder		2,500
Direct labour cost per labour hour	150
Direct material cost per token metre	250
Variable overheads per labour hour	100	-
Fixed cost per annum	150,000,000	392,000,000

Additional information:

1.	The variable cost for a gas cylinder excludes the cost of the “token metre”.
2.	The first unit of a token metre will take 20 labour hours to produce. However, it is known that the work of direct labour is subject to an 85% learning curve rate. This will apply to all 260,000 “token meter” production capacity.
3.	Optima division will continue to outsource 40,000 token metres from an external supplier at a price of Sh.1,600 to eliminate the deficiency from internal transfer.
4.	Optima division has a target profit of Sh.180 million.
5.	The forecast external sales and production capacity level for the division are as follows:

5.		External sales	Production capacity
	Beta division	100,000 token metres	260,000 token metres
	Optima division	200,000 cylinders	300,000 cylinders

Required:

(i) The learning curve coefficient.

(ii) In a columnar format, prepare profit statement showing the operating net profit for Beta division and Optima division and indicate whether Optima division target profit will be achieved.

2a

Budgetary control techniques

A zero base budgeting (ZBB) emerged in an attempt to overcome the limitations encountered by managers under incremental budgeting approach. It entails preparing the budgets of each cost centre from “scratch or zero”.

Required:

With reference to the above statement, outline SIX benefits of ZBB to an organisation.

2b

Cost estimation and interpretation

Plasma Electronics Ltd. supplies digital decoders and Liquid Electronic Display (LED) television sets for high end users. Customers contract Plasma Electronics Ltd. with requests for maintenance of their terrestrial signal frequency. To estimate the service cost, Plasma Electronic Ltd. wish to predict their installation time in hours (the dependent variable) necessary for each maintenance request.

Installation time is believed to be related to two factors; the number of months since the last maintenance services and the type of maintenance problem, whether digital or analogue.

The following is a summary of data analysis for time versus months and type:

Regression Analysis: Time versus months, Type

Predictor	Coefficient	SE Coef	t
Constant	0.93050	0.3670	\(X_a\)
Months	0.38762	\(X_b\)	6.20
Type	\(X_c\)	0.3141	4.02

S = 0.459048

R – Sq = 85.94%

R Sq (adj) = 81.9%

Analysis of variance (ANOVA)

Source	DF	SS	MS	F
Regression	2	9.0009	\(X_d\)	21.36
Residual error	7	\(X_e\)	0.2107
Total	9	10.4760

Required:

(i) Write down the linear regression equation model.

(ii) Find the missing values for \(X_a, X_b, X_d\) and \(X_e.\)

(iii) Explain the statistical meaning of the standard error of estimate, R squared and F statistic ratio.

(iv) Using the economic plausibility tests, is the regression model significant as a predictor model?

3a

Inventory control decisions

Rahisi Supermarket uses different ordering policies to acquire its inventory. Due to uncertainty of supply of product “X”, the management accountant is evaluating the optimal order size for this product to set for the coming year 2025.

The relevant data on the ordering policy is provided as follows:

Order policy	Units of product “X” ordered
Order twice monthly	500 units per order
Order monthly	1,000 units per order
Order quarterly	3,000 units per order
Order semi-annually	6,000 units per order
Order annually	12,000 units per order

Additional information:

It is ascertained that the purchase price per unit of product “X” is Sh.500 for deliveries up to 2,500 units.
A 5% discount is offered by the supplier of product “X” on the whole order where deliveries are 2,501 up to 5,000 units.
A 10% discount on total order for deliveries in excess of 5,000 units is guaranteed.
Each purchase order incurs fixed requisition costs of Sh.1,200 per order.
The carrying cost is Sh.20 per unit per year plus 12% opportunity cost of the purchase price.
The purchasing lead time is 3 weeks. Rahisi Supermarket is open 48 weeks per annum. Each year has 12 months.

Required:

(i) Economic order quantity (EOQ) for product “X”.

(ii) Advise the management of Rahisi Supermarket on the optimum order size of product “X”.

(iii) The optimal reorder level of product “X”.

3b

Budgetary control techniques

Mavazi Ltd. is a clothes making firm that makes men’s attire. Mavazi Ltd. makes three main products using the same resources, but in different amounts of material. The three types of clothes made are shirts, suits and jeans.

Budgeted information per unit for the month of September 2024 is as follows:

Type of clothes made	Shirts “Sh. Per unit”	Suits “Sh. Per unit”	Jeans “Sh. Per unit”
Selling price	1,600	10,000	4,000
Direct material (Sh.800 per \(\text{m}^2\))	400	4,000	1,200
Direct labour (Sh.480 per hour)	480	1,440	1,080
Variable overheads (Sh.120 per machine hour)	120	360	280
Budgeted demand in September 2024 (units)	6,000	2,000	4,000

Additional information:

The budgeted total fixed costs amount to Sh.13,700,000 per month.
Mavazi Ltd. has received a special order from Fashion Ltd. who has ordered 1,000 units each of shirts, suits and jeans for delivery in September 2024.
The budgeted demand above does not include this special order from Fashion Ltd.
In September 2024, there will be limited resources available. Direct material will be limited to 14,500 square meters (\(\text{m}^2\)).
There will be no opening inventory of material, work-in-progress and finished goods in September 2024.
The special order from Fashion Ltd. must be supplied in full.

Required:

(i) Prepare a statement that shows the optimal production mix and the resultant profit or loss for September 2024.

(ii) Advise the management on whether or not to accept the special offer.

4a

Strategic management accounting information

One of the roles of management accounting is to provide information that is useful for managers of an organisation of various departments, in decision making.

In line with this statement, explain THREE types of accounting information a management accountant could communicate to a human resource manager.

4b

Planning and decision making techniques

The finance director of Lengo Training Institute is considering a proposal by the board of directors to launch a new course nationwide. The potential enrollment of the course is classified as either being high, medium or low. The net present value under each of the three conditions is estimated to be; Sh.50 million, Sh.10 million and (Sh.20 million) respectively. The marketing director of the institute estimates that there is a 0.40 probability that the enrollment will be high, 0.25 probability that it will be medium and 0.35 probability that it will be low. The objective of the institute is to maximise the expected net present value.

Required:

(i) Evaluate whether or not the new course should be launched.

(ii) Determine the expected value of perfect information.

4c

Planning and decision making techniques

The finance director of Lengo Training Institute proposed an alternative option, that is, instead of proceeding directly with the nationwide launch, the institute could test the market. This would delay the nationwide launch and together with other outlays associated with testing the market, would lead to costs having a net present value of Sh.0.5 million. The test marketing would yield information indicating whether the nationwide launch is likely to be successful or unsuccessful. The following table shows the reliability of each of the possible indications:

		Probability	High	Medium	Low
Test	Successful.launch	0.60	0.60	0.15	0.25
marketing	Unsuccessful.launch	0.40	0.10	0.40	0.50

Required:

Represent the information in (b) and (c) above in a decision tree and calculate:

(i) Value of imperfect information.

(ii) Advise the finance director as to whether or not Lengo Training Institute should test the market.

5a

Strategic performance measurement

Greenlight Ltd. is a government energy generating company. The company is segmented into subunits. The following is the selected divisional annual information for its two targets subunits. These are subunit X and subunit Y.

Division	Subunit X Sh.“000”	Subunit Y Sh.“000”
Sales turnover	875,000	1,368,000
Less cost of sales:
Variable costs	(342,500)	(454,000)
Contribution	532,500	914,000
Controllable fixed cost	(450,000)	(800,000)
Operating income	82,500	114,000
	Sh.“000”	Sh.“000”
Average total assets	250,000	456,000
Current liabilities	(62,000)	(268,000)
Capital employed	188,000	188,000
Cost of capital	12%	12%
Target rate of return	16%	16%
Tax rate	30%	30%

Four measures are used to evaluate the performance of the subunit managers. Based on the data above, the budgeted performance measures for the subunits are as follows:

Division	Subunit X	Subunit Y
Residual income	Sh.30 million	Sh.30 million
Return on investment	25%	20%
Economic value added	Sh.33 million	Sh.55 million
Asset turnover ratio	2.36	4.12

Required:

Calculate and comment on each of the following financial performance measures for each subunit:

(i) Return on investment (ROI).

(ii) Residual income (RI).

(iii) Economic value added (EVA).

(iv) Assets turnover ratio.

5b

Environmental management accounting

Trans Africa Airline Company is a manufacturing company of the world’s biggest air buses. By the end of the year 2023, the environmental manager indicated that the company had made significant improvement in its environmental performance by reducing the carbon emissions of contaminating residues of all types.

The following is the environmental cost report for the years 2022 and 2023:

	2022 Sh.“000”	2023 Sh.“000”
Sales revenue	13,000,000	20,000,000
Evaluating and selecting suppliers	154,000	600,000
Treating and disposing of toxic materials	500,000	800,000
Inspecting process for regulatory conformance	450,000	300,000
Restoration cost of carbon emissions	1,350,000	1,200,000
Recycling scrap cost	550,000	300,000
Testing for contaminants	88,000	100,000

Required:

(i) Classify the above costs as: prevention, detection, internal failure and external failure costs.

(ii) Prepare an environmental cost of quality report for the year 2023 where costs are expressed as a percentage of sales revenue.

August 2024

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