WEDNESDAY: 23 August 2023. Afternoon Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
1. Explain TWO benefits of each of the following concepts as used in environmental management accounting:
Environment life cycle costing. (4 marks)
Environmental activity-based costing (EABC). (4 marks)
2. 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:
Required:
The linear regression equation in the form Y = a + bx. (2 marks)
Predict the total cost of repair if 14 hours are used. (2 marks)
Compute the values of the missing letters X and Y. (4 marks)
Explain the explanatory power of the model using the coefficient of determination. (2 marks)
Explain if the independent variable is economically plausible as a predictor variable. (2 marks)
(Total: 20 marks)
QUESTION TWO
1. Summarise FOUR limitations of the Just-In-Time (JIT) inventory system. (4 marks)
2. Identify FOUR applications of learning curve model. (4 marks)
3. 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:
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:
Marginal costing transfer pricing. (6 marks)
Market based transfer pricing. (6 marks)
(Total: 20 marks)
QUESTION THREE
1. 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:
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:
A budgeted profit statement. (2 marks)
Actual profit statement. (2 marks)
A reconciliation statement of actual profit and budgeted profit. (Show all planning and operating
variances). (8 marks)
2. 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:
Required:
The number of sandwiches to sell to satisfy maximin criterion. (2 marks)
The number of sandwiches to sell to satisfy maximax criterion. (2 marks)
The number of sandwiches to sell to maximise the expected monetary value (EMV). (2 marks)
The maximum amount payable by Oreq Ltd. to acquire perfect information. (2 marks)
(Total: 20 marks)
QUESTION FOUR
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:
Evaluating each scenario, advise the management on the most economical scenario using learning curve
analysis. (12 marks)
Using target costing approach, compute the cost savings of the most economical scenario identified in (a)
above. (4 marks)
Explain FOUR non-financial factors that may have a bearing on the decision for the special order by the
management of Green Coaches Ltd. (4 marks)
(Total: 20 marks)
QUESTION FIVE
1. 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:
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:
The optimal safety stock in units. (8 marks)
The probability of being out of stock. (2 marks)
2. 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:
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:
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:
Compute the shortfall of the limiting factor. (2 marks)
Determine the optimal production mix indicating the products and quantity to outsource from
external supplier. (5 marks)
Based on your recommendations in (b) (ii) above, determine the net profit for the period
31 August 2023. (3 marks)
(Total: 20 marks)
