CPA Advanced Management Accounting December 2022 Past Paper with Answers (PDF)

1a

Environmental management accounting

In the context of environmental management accounting, explain FOUR types of environmental costs.

1b

Budgetary control techniques

Trans Ltd. has provided the following operating statement, which represents an attempt to compare the actual performance for the quarter which has just ended with the budget:

	Budget	Actual	Variance
Number of units sold (“000”)	640	720	80
	Sh.“000”	Sh.“000”	Sh.“000”
Sales	1,024	1,071	47
Cost of sales:
Direct materials	168	144	24
Direct labour	240	288	(48)
Overheads	32	36	(4)
	440	468	(28)
Fixed labour cost	100	94	6
Selling and distribution costs:
Fixed	72	82	(11)
Variable	144	153	(9)
Administrative costs:
Fixed	184	176	8
Variable	48	54	(6)
	548	560	(12)
Net profit margin	36	43	7

Required:

(i) Using flexible budgeting approach, redraft the operating statements so as to provide a more realistic indication of the variances.

(ii) Discuss TWO problems associated with the forecasting of figures which are to be used in flexible budgeting.

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2a

Planning and decision making techniques

Lengo Ltd. is considering marketing a new product. The fixed cost of this product will amount to Sh.5,000,000. There are three uncertain factors namely; selling price, variable cost and annual sales volume.

The product has a life of only one year and the various possible levels of these factors together with estimated probabilities are given below:

Selling Price Sh.	Probability	Variable cost Sh.	Probability	Annual Sales volume Units	Probability
400	0.3	200	0.1	40,000	0.4
450	0.5	250	0.6	50,000	0.5
500	0.2	300	0.3	60,000	0.1

Additional information:

1.	Assume that the three factors are statistically independent.
2.	The company uses cost-volume-profit (CVP) analysis to make decisions.

3.	The following random numbers are provided:
	Selling price:	8	0	6	1	3	5	1	3	9	1
	Variable costs:	0	4	3	4	6	7	2	8	5	9
	Sales volume:	6	3	9	4	0	9	7	6	8	5

Required

Using CVP analysis criteria, simulate the problem and determine the average profits.

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2b

Planning and decision making techniques

Jikaze Ltd. is organised into divisions. Divisional managers are rewarded through a remuneration package which is linked to accounting rate of return (ARR) performance measures. Venus Division of Jikaze Ltd. is currently investigating two mutually exclusive investment proposals namely MX and JX. If the proposals are viable, Venus Division wishes to assign priority in the event that funds may not be available to cover both proposals.

Details of the two mutually exclusive proposals are:

	Investment proposal
	MX Sh. “000”	JX Sh. “000”
Initial cash outlay on non-current assets	192,000	192,000
Net cash inflow:
Year 1	67,200	32,000
Year 2	67,200	64,000
Year 3	67,200	96,000
Year 4	67,200	128,000

Additional information:

1.	The management assesses the cost of capital to the company at 16%.
2.	The Accounting Rate of Return (ARR) calculation is based on the accounting profit which is computed by adding back depreciation to net cash inflow of each year.
3.	Depreciation is on straight-line basis over the assets’ useful life.
4.	Net present value (NPV) method is used to estimate the most viable project when using project life cycle costing.
5.	Ignore tax and residual value.

6.	The present value interest factor (PVIF) of the proposal is as follows:
	Year	1	2	3	4
	Present value at 16%	0.8621	0.7432	0.6407	0.5523

Required:

Advise the management of Jikaze Ltd. on the most viable investment proposal using the following performance appraisal measures:

(i) Product life cycle costing.

(ii) Accounting rate of return (ARR).

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3a

Strategic performance measurement

The complex environment in which most businesses operate today makes it virtually impossible for most firms to be controlled centrally. This is because it is not possible for central management to have all the relevant information and time to determine the detailed plans for all the organisation. Some degree of decentralisation is essential for all but the smallest firms. Organisations decentralise by creating responsibility centres.

Required:

In the context of the above statement, identify FOUR responsibility centres.

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3b

Cost estimation and interpretation

Maono Ltd. is investigating the financial viability of a new product branded “Zem”. Product Zem is a short life product of six months. The following estimated information is available in respect of product Zem:

1. Sales should be 10,000 units per month in batches of 100 units on a just-in-time production basis.

2. An average selling price of Sh.120,000 per batch of 100 units is expected for a six-month life cycle.

3. An 80% learning curve will apply for the six months’ life-cycle period.

4. The labour requirement for the first batch in month 1 will be 500 hours at Sh.500 per hour.

5. Variable overhead will be absorbed at a rate of Sh.200 per labour hour.

6. Direct material input will be Sh.50,000 per batch of product Zem for the first 200 batches. The next 200 batches are expected to cost 90% of the initial batch cost. All batches thereafter will cost 90% of the batch cost for each of the second 200 batches.

7. Product Zem will incur directly attributable fixed costs of Sh.1,500,000 per month.

8. The initial investment for the new product will be Sh.7,500,000 with no residual value irrespective of the life of the product.

9. A target cash flow required over the life of the product must be sufficient to provide for a 331/3% target return for a six-month life cycle.

10. The learning curve formula is Y = ax^b

Where:

Y = Cumulative average time per batch
a = time taken to produce initial batch
x = cumulative units of batches
b = learning curve index

Required:

(i) The learning curve index and model.

(ii) Compute the cost gap or cost savings in the target cash flow of product Zem over its six-month life cycle.

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4

Inventory control decisions

Huruma Ltd. is a client of ABX National Bank. The Managing Director of Huruma Ltd. visited the bank’s offices to seek for an additional line of credit. In the ensuing discussions, the bank credit officer noticed that Huruma Ltd. could save a substantial amount of money by improving on its inventory management.

The credit officer invited the Management Accountant of the company for further consultation. From the conversation, it emerged that the company holds a substantial quantity of a particular raw material in its warehouse. The Management Accountant provided the following information on the raw material:

Invoice cost per unit	Sh.1,200
Shipping charges	Sh.25 per unit plus Sh.140,000 per shipment
Inventory insurance	Sh.10 per unit per year
Annual handling and inspection cost of the raw material:
Warehouse utilities
Warehouse rental	Sh.26 per unit plus Sh.150,000 per year
Unloading costs for units received (paid to shipper)	Sh.9,800 per month
Receiving supervisor’s salary:	Sh.115,000 per month
Processing invoices and other purchase documents
	Sh.8 per unit
	Sh.176,000 per month
	Sh.1,860 per order.

The company’s policy is to order 5,000 units each time and maintain a safety stock of 3,000 units. The annual demand for the raw material is 45,000 units. The lead time for an order is 10 working days.

The Management Accountant has also indicated that if there is a stock-out, it would be necessary to obtain the raw material by a special courier service at an additional cost of Sh.81,000 per stock-out.

The probabilities of a stock-out at various safety stock levels were given as follows:

Safety stock (units)	Probability for stock-out
500	0.25
1,000	0.08
1,500	0.02
2,000	0.01

Additional information:

1. The company’s cost of capital is 10%.

2. You are advised that there are 250 working days in a year.

3. The raw material is ordered in multiples of 250 units.

4. For analysis purposes, a stock-out probability of 0.02 would be reasonable for order cost determination in an optimal inventory policy.

Required:

(a) The annual cost of the company’s present inventory policy.

(b) Recommend an optimal order quantity for the company based on the information provided.

(c) Recommend an optimal safety stock level.

(d) Advise the management of the firm on the savings to be realised from the optimal order quantity and optimal safety stock level in (b) and (c) above.

(e) The reorder level for the company.

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5a

Planning and decision making techniques

Explain THREE conceptual differences between the following concepts as applied in strategic management for short term decision making:

(i) Throughput accounting.

(ii) Limiting factor analysis.

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5b

Budgetary control techniques

Timiza Ltd. makes spectacles for a variety of customers. The spectacles pass through several production processes. The first process is fitting and the standard costs for fitting lenses on spectacles are as follows:

	Standard cost per unit	Sh.
Direct material Q	7 kilograms at Sh.70 per kilogram	490
Direct labour	5 hours at Sh.50 per hour	250
Overheads (fixed and variable)	5 hours at Sh.66 per hour	330
		1,070

Additional information:

1.	The overhead allocation rate is based on direct labour hours and comprises an allowance for both fixed and variable overhead costs.
2.	With the aid of regression analysis, the fixed element of overhead cost has been estimated at Sh.90,000 per week and the variable overhead costs have been estimated at Sh.6 per direct labour hour.
3.	The fitting department comprises its own premises, and all of the department’s overhead costs can be regarded as being the responsibility of divisional managers.
4.	In week 5, the division casted 294 spectacles and actual costs incurred were:

4.		Sh.
	Direct material Q (2,030 kilogram used)	141,250
	Direct labour (1,520 hours worked)	78,540
	Overhead expenditure	102,000

5.	The 1,520 hours worked by direct labour included 40 hours overtime, which is paid at a rate of 50% above the normal pay rates.

Required:

A reconciliation statement of actual cost and the standard cost. (Show all planning and operating variances).

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CPA Advanced Management Accounting – December 2022 Past Paper & Answers

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CPA Advanced Management Accounting – December 2022 Past Paper & Answers

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