KASNEB Advanced Management Accounting - Question 1a

Discuss FOUR benefits of using rolling budgets in an organisation. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Management Accounting - Question 3a

Explain THREE reasons why firms hold inventory. ... [Click to view full question and step-by-step solution]

KASNEB Advanced Management Accounting - Question 5a

Explain FOUR internal transfer pricing methods. ... [Click to view full question and step-by-step solution]

December 2024

1a

Budgetary control techniques

Discuss FOUR benefits of using rolling budgets in an organisation.

1b

Cost estimation and interpretation

The management of Mario Processing Company Ltd. wishes to obtain a better cost estimate to evaluate the company’s operations more effectively.

The following information is provided to you for analysis:

Year 2023	Equivalent production	Overheads
Month	Units “000”	Sh.“000”
January	1,425	12,185
February	950	9,875
March	1,130	10,450
April	1,690	15,280
May	1,006	9,915
June	834	9,150
July	982	10,133
August	1,259	11,981
September	1,385	12,045
October	1,420	13,180
November	1,125	11,910
December	980	10,431

Required:

(i) Using high-low method, formulate the overhead cost function in the form Y = a + bx.

(ii) Using the regression method, estimate the overhead cost function.

(iii) The coefficient of determination \((r^2)\) has been determined to be 0.913. Interpret this result.

2a

Environmental management accounting

Simtel Ltd. is a small and medium-sized enterprise (SME) seeking opportunity in emerging business in mobile telephone innovation and digital marketing platform. However, the company is experiencing challenges in navigating the regulatory requirements such as compliance with Electronic Waste (e-waste) Management and Disposal Act. The project manager has proposed to the Management Accountant that they should implement e-waste management and disposal policy when disposing of its electronic waste for sustainable waste management.

Required:

Explain THREE sustainability issues that Simtel Ltd. could leverage on when implementing e-waste disposal policy.

2b

Strategic management accounting information

With reference to international transfer pricing, explain the meaning of the following transfer pricing methods:

(i) The “comparable uncontrolled price” method.

(ii) The “resale price” method.

2c

Pricing decisions

Skyview Technologies Ltd. has two divisions; Motherboard Division and Smart TV Division. Motherboard Division is a profit centre which manufactures three intermediate components that are used to make smart televisions. The three components are U, S and B. Each component has an external market, but also transfers to Smart TV Division. Pertinent data about the three components is as follows:

Component	U Sh.	S Sh.	B Sh.
External market price per unit	2,400	2,300	2,000
Unit variable production cost in motherboard division	1,650	1,200	1,400
Fixed production cost per unit	3,500	2,800	1,900
Labour hours required per unit in motherboard division	3	4	2
Maximum external sales demand (units)	8,000	5,000	3,000

Additional information:

Motherboard Division has received a special order to transfer 3,000 units of Component “S” to Smart TV Division. Smart TV Division has then sought the management of Motherboard Division to quote the transfer price for the supply of the 3,000 units.
Instead of receiving transfers of Component “S” from Motherboard Division, Smart TV Division could outsource similar component in the open market at a slightly cheaper price of Sh.2,200 per unit.
The total labour hours in the current period for Motherboard Division are limited to 56,000 labour hours.
Motherboard Division transfers the special order at a marginal cost plus opportunity cost.
Divisional managers are autonomous and will sacrifice the component that has the lowest priority ranking.

Required:

(i) The optimum production mix units under limiting factor analysis.

(ii) The transfer price to be set by Motherboard Division for the special order in order to maximise profits at the optimum production mix

3a

Inventory control decisions

Explain THREE reasons why firms hold inventory.

3b

Nehema Ltd. Stores’, Chief Executive Officer believes that the company is holding excessive inventory. He has requested you, the Management Accountant, to carry out an investigation. Information on the two items held by Nehema Ltd. Stores is given below:

Inventory item	Purchase price per unit	Cost of administration per order	Annual demand (units)	Holding cost per year as a percentage (%) of purchase price
	Sh.	Sh.
F	200	80	15,000	13.33
G	25	28	2,800	8

The company’s stock ordering policy is based on the economic order quantity (EOQ).

Required:

(i) Determine the number of orders per year that the company will place for inventory item F.

(ii) Determine the annual holding cost of the inventory item G.

3c

Strategic performance measurement

Southend Ltd. has two divisions namely; A and B, whose respective performances are under review. Division A is currently earning a profit of Sh.35 million and has net assets of Sh.150 million. Division B currently earns a profit of Sh.70 million with net assets of Sh.325 million. Southend Ltd. has a current cost of capital of 15%.

Required:

(i) Using the information above, determine return on investment (ROI) and residual income for the two divisions.

(ii) State which of the two performance evaluation methods used in (c) (i) above would be more useful when comparing divisional performance and why.

(iii) Outline general aspects of performance measures, that would be appropriate for a service sector company

4a

Cost estimation and interpretation

Agrovet Group is a multidivisional agrochemical firm that deals in multiple products. Delta Division, one of its subsidiaries makes three products branded Betax, Zetay and Alphaz. The management is contemplating changing the sales mix in scenario I to a new sales mix in scenario II in order to maximise the net profit.

The two scenarios are envisaged as below:

Scenario I

The sales, cost and output data for original sales mix for the year 2024 for three products are as follows:

Product	Betax	Zetay	Alphaz	Total
Sales mix	40%	30%	30%
	Sh.“per unit”	Sh.“per unit”	Sh.“per unit”	Sh.
Selling price	2,000	3,000	2,500
Variable cost	1,000	1,800	1,500
Total fixed costs				15,664,000
Total sales revenue				45,000,000

Scenario II

Agrovet Group’s estimated sales, costs and new sales mix are as follows:

Product	Betax	Zetay	Alphaz	Total
Sales mix	50%	20%	30%
	Sh.“per unit”	Sh.“per unit”	Sh.“per unit”	Sh.
Selling price	2,000	2,800	2,500
Variable cost	1,000	1,680	1,500
Total fixed costs				15,664,000
Total sales revenue				45,000,000

Additional information:

1. Management performance measures are based on cost volume profit (CVP) analysis.

2. The weighted average contribution margin ratio of each scenario is determined based on its sales mix.

Required:

(i) Compute both the break-even point in sales value and the net profit for each scenario.

(ii) By comparing the break-even point and net profit, advise the management of Agrovet Group whether it is worthwhile to change the sales mix.

4b

Planning and decision making techniques

Lambda Investment Ltd. is a real estate firm. Recently, the company acquired a piece of land in a metropolitan area with prospective investment opportunities to develop. The investment centre manager is to make a decision on which of the three mutually exclusive projects to invest in the next year. Each project is considered to be an investment centre. The three investment centres are; corporate offices, shopping malls and residential estate.

The projected annual payoffs per project under the three economic states of nature are as follows:

		Decision alternatives
Economic state	Probability	Corporate offices Sh.	Shopping mall Sh.	Residential estate Sh.
Optimistic	30%	100,000,000	110,000,000	90,000,000
Most likely	40%	70,000,000	90,000,000	120,000,000
Pessimistic	30%	130,000,000	90,000,000	70,000,000

Required:

The investment centre to invest in so as to:

(i) Satisfy the maximax criterion.

(ii) Minimise the expected opportunity loss (EOL).

4c

Planning and decision making techniques

Lambda Investment Ltd. is contemplating acquiring perfect information from an investment research firm about the viability of the investment opportunities. The investment research firm is willing to provide perfect information about the investment project at a cost of Sh.30 million.

Required:

Using suitable computations, advise Lambda Investment Ltd. on whether or not to acquire the perfect information from the investment research firm.

5a

Strategic management accounting information

Explain FOUR internal transfer pricing methods.

5b

Budgetary control techniques Cost estimation and interpretation

Plasmaz TV Ltd., makes smart television sets. The company operates a standard absorption costing system. The following data has been collected for the year ended 30 November 2024:

Actual cost incurred:	Sh.
Direct material used (165,000 kilograms)	15,675,000
Direct labour (80,000 hours)	5,800,000
Variable production overheads	16,800,000
Fixed production overheads	6,750,000

The variance reconciliation statement was prepared to investigate the main cause of difference between budgeted profit and actual profit. The following planning and operating variances were disclosed from the analysis:

	Favourable	Adverse
Planning and operating variances	Sh.	Sh.
Direct material price variance	825,000
Direct material usage variance		1,500,000
Direct labour rate variance		200,000
Direct labour efficiency variance		350,000
Variable production overhead:
Expenditure variance		800,000
Efficiency variance		1,000,000
Fixed production overhead:
Expenditure variance	1,250,000
Volume variance	6,250,000

Additional information:

1. Variable production overheads are absorbed based on actual hours worked.

2. There was no significant difference in opening and closing work-in-progress.

3. Actual production was 1,500 television set units for the year ended 30 November 2024.

Required:

Calculate the following:

(i) Standard material cost per unit.

(ii) Standard labour cost per unit.

(iii) Standard variable overhead absorption rate per unit.

(iv) Standard fixed overhead absorption rate per unit.

December 2024

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