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(a) Large – scale service organizations have a number of features that have been identified as
being necessary to drive significant benefits from the introduction of ABC:
i. They operate in a highly competitive environment
ii. They incur a large proportion of indirect costs that cannot be directly assigned to
specific cost objects.
iii. Products and consumers differ significantly in terms of consuming overhead resources.
iv. They market many different products and services.
Furthermore, many of the constraints imposed on manufacturing organizations, such as also having
to meet financial accounting stock valuation requirements, or a reluctance to change or scrap existing
systems, do not apply. Many services organizations have only recently implemented cost systems for
the first time. This has occurred at the same time as when the weaknesses of existing systems and the
benefits of ABC systems were being widely publicized. These conditions have provided a strong
measure for introducing ABC systems.
(b) The following may create problems for the application of ABC.
i. Facility sustaining costs (such as property rents etc) represent a significant
proportion of total costs and may only be avoidable if the organization ceases
business. It may be impossible to establish appropriate cost drivers
ii. It?s often difficult to define products where they are of an intangible
nature. Cost objects can therefore be difficult to specify;
iii. Many service organizations have not previously had a costing system and much of
the information required to set up an ABC system will be non-existent. Therefore
introducing ABC is likely to be expensive.
(c) The uses for ABC information for service industries are similar to those for manufacturing
organizations:
i. It leads to more accurate product costs as a basis for pricing decisions when cost plus
pricing methods are used;
ii. It results in more accurate product and customer profitability analysis
statements that provide a more appropriate basis for decision-making.
iii. ABC attaches costs to activities and identifies the cost drivers that cause the costs.
Thus ABC provides a better understanding of what causes costs and highlights
ways of performing activities more effectively by reducing cost driver transactions.
Costs can therefore be managed more effectively in the long term. Activities can be
analyzed into value added and non-value added activities alteration is drawn to areas
where there is a potential for cost reduction without reducing the products
service potentials to customers.
Kavungya answered the question on May 5, 2021 at 18:13
- Tritech Ltd. has semi-automatic machine process in which a number of tasks are performed.
A system of standard costing and budgetary control is in operation. The...(Solved)
Tritech Ltd. has semi-automatic machine process in which a number of tasks are performed.
A system of standard costing and budgetary control is in operation. The process is
controlled by machine attendants who are paid a fixed rate per hour of process time. The
process has recently been reorganized as part of an ongoing total quality management
programme in the company.
The nature of the process is such that the machines incur variable costs even during nonproductive
(idle time) hours. Non-productive hours include time spent on the rework of
products.
(Note: Gross machine hours = productive hours + non-productive hours)
The standard data for the machine process are as follows:
1. Standard non-productive (idle time) hours as a percentage of gross machine hour is
10%.
2. Standard variable machine cost per gross hour is Sh.270.
3. Standard output productivity is 100% that is one standard hour of work is expected in
each productive machine hour.
4. Machine costs are charged to production output at a rate per standard hour sufficient to
absorb the cost of the standard level of non-productive time.
Actual data for the period August to November 2002 have been summarized below:
Required:
a) Calculate the machine variances for productivity, excess idle time and expenditure for
each of the two months of September and October.
b) In order to highlight the trend of variances in the months from August to
November 2002, express each as a percentage term as follows:
i Productivity variance as a percentage of standard cost of production achieved.
ii Excess idle time variance as a percentage of expected idle time.
iii Expenditure variance as a percentage of hours paid for all standard machine cost.
c) Comment on the trend of variances in the August to November period and possible
inter-relationships. Particularly in the context of the total quality management
programme which is being implemented.
Date posted: May 5, 2021. Answers (1)
- A company has determined that the EOQ for its only raw material is 2000 units every 30
days. The company knows with certainty that a four-day...(Solved)
A company has determined that the EOQ for its only raw material is 2000 units every 30
days. The company knows with certainty that a four-day lead time is required for
ordering. The following is the probability distribution of estimated usage of the raw
material for the month of December 2002.
Stock-outs will cost the company Sh.100 per unit and the average monthly holding cost
will be Sh.10 per unit
Required
i Determine the optimal safety stock
ii Compute the probability of being out of stock.
Date posted: May 4, 2021. Answers (1)
- Explain the advantages and disadvantages of the Just-In-Tie (JIT) inventory system.(Solved)
Explain the advantages and disadvantages of the Just-In-Tie (JIT) inventory system.
Date posted: May 4, 2021. Answers (1)
- In all the Republic of Ramuka there are five coal mines, which have the following outputs and production costs:
Required:
a) Determine how the output of each...(Solved)
In all the Republic of Ramuka there are five coal mines, which have the following outputs and production costs:
Required:
a) Determine how the output of each mine should be allocated to the three preparation plants.
b) Following the installation of a new equipment at coal mine No.3, the production
cost is expected to fall to Sh.3,000 per tonne.
What effect, if any, will have on the allocation of coal to the preparation plant?
c) It is planned to increase the output of coal mine No.5 to 180 tonnes per day, which
can be achieved without any increase in production cost per tonne.
How will this affect the allocation of coal to the preparation plants?
Date posted: May 4, 2021. Answers (1)
- Zimco Media Group has three major divisions: Newspapers. Television. Film studios.
The manager of each division has an annual bonus plan based on his division's
return on...(Solved)
Zimco Media Group has three major divisions: Newspapers. Television. Film studios.
The manager of each division has an annual bonus plan based on his division's
return on investment (ROI). The company defines ROI as operating income divided by total
assets. Senior executives from divisions reporting increases in the division's ROI from
the prior year are automatically eligible for a bonus. Senior executives of division reporting a
decline in ROI have to provide persuasive explanations for the decline. In order to be
eligible for any bonus, and they are limited to 50% of the bonus paid to the division
managers reporting an increase in ROI.
J. Kanyama, manager of the newspapers division is considering a proposal to invest Sh. 200
million in a fast speed printing process with colour options. The estimated increment to year
2002 operating income would be Sh. 30 million. The media group has a 12% required rate of
return for investments in all three divisions.
Required:
a. Use the Dupont Method to explain differences among the three divisions in their
2001 ROI. (Use 2001 total assets as the denominator).
b. Explain whether J Kanyama should undertake the fast-speed printing press
investments proposal.
c. T. J. Zimco the Chairman of the media group, has received a proposal to base senor
executive compensation in each division on Residual Income (RI) defined as
operating income less imputed interest charge. Compute the residual income (RI) of
each division in the year 2001
d. Would adoption of the residual income (RI) basis change J. Kanyama's decision on the acceptance of the fast-speed printing press investment proposal?
Date posted: May 4, 2021. Answers (1)
- Computer Games Ltd. (CGL) makes and sells three types of computer games for which the following budget/standard and actual information is available for a week...(Solved)
Computer Games Ltd. (CGL) makes and sells three types of computer games for which the following budget/standard and actual information is available for a week period:
Required:
a) Prepare a summary of sales variances for quantity, mix and volume for each model
and in total, where individual product standard contribution per unit is used as the
variance valuation base.
b) Prepare an alternative summary giving the same range of variances as in (a) above,
but using the budgeted weighted averaged contribution per unit as the variance valuation
base.
c) Prepare a report to the management which specifically comments on each of the
following points:
i. Similarities between the variances calculated in (a) as compared with those calculated
in (b) above.
ii. The arguments which may be put in favour of the individual product quantity and mix
variances as calculated in (b) above.
iii. The relevance of the individual product, quantity and mix variances to management.
Date posted: May 4, 2021. Answers (1)
- “If a manager searches for a system that will provide the „true costs? of each service produced by his firm he is attempting the impossible”....(Solved)
“If a manager searches for a system that will provide the „true costs‟ of each service produced by his firm he is attempting the impossible”. Discuss.
Date posted: May 4, 2021. Answers (1)
- State the major characteristics of modern businesses that necessitate the introduction of a strategic cost management system(Solved)
State the major characteristics of modern businesses that necessitate the introduction of a strategic cost management system
Date posted: May 4, 2021. Answers (1)
- Discuss the three main elements of strategic costs management.(Solved)
Discuss the three main elements of strategic costs management.
Date posted: May 4, 2021. Answers (1)
- Kisumu Municipal council operates a mini-bus service to take shoppers and tourist from the bus and the railway stations to various locations in the Municipality....(Solved)
Kisumu Municipal council operates a mini-bus service to take shoppers and tourist from the bus and the railway stations to various locations in the Municipality. The following data have been collected for the arrival of passengers at the bus stop outside the railway station:
Time between successive arrivals 0 1 2 3 4 5 6
(minutes)
Probability 0.04 0.16 0.24 0.28 0.16 0.10 0.02
The mini-buses are scheduled to run every 10 minutes but variation in traffic conditions
results in the following distribution.
Time between successive buses 8 10 12 14 16
(minutes)
Probability 0.10 0.38 0.28 0.15 0.09
The number of empty seats on the bus is found to follow the distribution below:
Number of empty seats 0 1 2 3 4 5 6
Probability 0.06 0.18 0.27 0.34 0.11 0.03 0.01
Required:
i. Simulate the arrival of to passengers at the bus stop assuming that the simulation clock
begins at time zero. Use the following random numbers:
18262318624207384092976446757444417165809
i i. Estimate the average time a passenger must wait for a bus and the average length of queue
Date posted: May 4, 2021. Answers (1)
- Describe the advantages and disadvantages of using simulation to investigate queuing situations compared with the use of queuing formulae.(Solved)
Describe the advantages and disadvantages of using simulation to investigate queuing situations compared with the use of queuing formulae.
Date posted: May 4, 2021. Answers (1)
- New Books Publishers (NBP) Ltd. are planning to introduce a new management accounting text
book. The company's management accountant estimates that the initial distribution
for likely sales...(Solved)
New Books Publishers (NBP) Ltd. are planning to introduce a new management accounting text
book. The company's management accountant estimates that the initial distribution
for likely sales is normal with a mean of 20,000 books. In addition, it has been determined that
there is a probability of 0.5 that the likely sales will lie between 16,000 and 24,000 books.
The textbooks will sell for Sh.1,000 per copy but the publishing company pays the author
10% of revenue in royalties while the fixed costs of printing and marketing the book are
calculated at Sh.2.5 million. Using current printing facilities, the variable production costs are
Sh.400 per book, however the NBP Ltd. Has the option of hiring a special machine for
Sh.1.4 million which will reduce the variable production costs to Sh.250 per book.
Required:
a) Show the standard deviation of likely sales is approximately 6,000.
b) Using standard deviation = 6000, determine the probability that the company will at least break even if:
i Existing printing facilities are used.
ii The special machine is hired.
c) By comparing expected profits, decide whether or not the publishing company should
hire the special machine.
d) By using the normal distribution, it can be shown that he following probability
distribution may be applied to the book sales.
Sales Sh „000‟ 0 – 10 10 - 16 16 – 20 20 – 24 24 – 30 30 - 40
Probability 0.05 0.20 0.25 0.25 0.20 0.05
By assuming that the actual can only take the mid-points of theses classes, determine the
expected value of perfect information and interpret it.
Date posted: May 4, 2021. Answers (1)
- Madoadoa Limited is a multi-division manufacturing company. The manufacture of M101.
One of the company?s finished products involves two divisions; Mwanzo and
Mwisho.Mwanzo division manufactures the chassis...(Solved)
Madoadoa Limited is a multi-division manufacturing company. The manufacture of M101.
One of the company‟s finished products involves two divisions; Mwanzo and
Mwisho.Mwanzo division manufactures the chassis for M101 and transfers it to Mwisho
division where it is reworked, fitted and assembled into the finished product. The two
divisions are housed in the same building whose lease is due to expire in two years‟ time.
Data on the operations of the two divisions for the year just ended is as follows:
Mr. Makini, the general manager of Mwisho division, has been considering the possibility of
sourcing the chassis from outside suppliers. He has received a quotation from Samawati
Ltd., a competitor of Mwanzo division offering to supply a minimum of 30,000 and a
maximum of 40,000 units of chassis per year for two years with adequate guarantees as to
quality and continuity of suppliers. The unit price would be Sh.22,000. Mr.Makini is of the
opinion that his division should be allowed to take all its requirement (30,000 units per year)
of chassis from Samawati Ltd., unless Mwanzo division agrees to cut the unit transfer price
to Sh.22,000. He suggests that if Mwanzo division cannot reduce the price it would be better
for it to cease operations and the space it now occupies be taken up by Mwisho division,
which is currently seeking extra warehouse space.
The summarized profit and loss accounts of the divisions for the past year ended 31
October 2001 is as follows:
You have been asked to investigate and advise on Makini‟s proposal. You have
gathered the following additional information:
The limitation of the proposed contract with Samawati Ltd. To a two-year period would be
agreeable to Madoadoa Ltd. As the lease for the factory is unlikely to be renewed in two years‟
time and there is no wish to enter into firm commitments beyond that date. If
Mwanzo division is closed, most of the work force could be productively absorbed by other
divisions of Madoadoa Ltd., which operate in the vicinity at no additional cost to those
divisions.
The manager of Mwanzo division complains that his division has to bear exceptionally
heavy depreciation charges and fixed overheads (including central office charges) which are
beyond his control. Without these expenses, he believes that Mwanzo division could match
price quoted by Samawati Ltd., and still make a reasonable profit. He also believes that with
a price of Sh.22,000, it should be possible to operate at full capacity, selling 25% of the
output in the open market. The additional output would increase the direct materials cost
and variable overhead proportionately but he estimates that the total direct labour cost
would only increase by 10%.
The plant used by Mwanzo division has a book value of Sh.150,000,000. Its current resale is
probably Sh.50,000,000. in two years it is estimated that it will have negligible value.
The storage space required by Mwisho division will probably cost Sh.10,000,000 per annum if rented.
Mwanzo division has in stock sufficient raw material for nine months‟ production if
production is continued at the same level as he has achieved last year. If this raw material is
sold off (following the decision to close Mwanzo division), it would probably fetch 25% of
its cost.
Required:
a) Mwanzo division‟s combined profit and loss account for the ensuring two-year
period on the assumption that the division continues to operate after reducing its
transfer price to Sh.22,000 and operating at full capacity as expected.
b) A statement of costs and benefits to Madoadoa Ltd. If a decision to adopt the
proposal made by Mr. Makini rather than the plan put forward by the manager of
Mwanzo division is taken.
Date posted: May 4, 2021. Answers (1)
- Mega Techniques Ltd. makes special purpose equipment according to customer
specifications. During the past year, one of its loyal customers, Pawa Ltd., ordered a
specialized equipment to...(Solved)
Mega Techniques Ltd. makes special purpose equipment according to customer
specifications. During the past year, one of its loyal customers, Pawa Ltd., ordered a
specialized equipment to be fabricated for it. Mega Techniques Ltd. Finished construction the equipment only to be notified that Pawa Ltd. Had recently gone into
liquidation and will not therefore take the equipment.
The original price to Pawa Ltd. had been agreed at Sh.9,108,000 which included an
estimated normal profit mark-up of 10 per cent on total costs. The costs incurred to
manufacture the machine were
The following additional information is provided:
2. In the original machine, there were three types of basic materials:
i Type P could now be sold to a scrap merchant for Sh.540,000.
ii Type Q could be sold to a scrap merchant for Shs. 360,000 but it would take 120
hours of labour paid at Shs. 270 per hour to put it into a suitable condition for
sale.
iii Type R would need to be scrapped at a cost to Mega Techniques Ltd. of
Shs.108,000
3. The materials for the conversion are at present in stock. If not needed for the
conversion they could be used in the production of another machine in place of
materials that would currently cost Sh.684,000.
4. The conversion would be carried out in two departments:
Department X is currently extremely busy and it is estimated that its contribution
overheads and profits is Sh.2.50 for every Sh.1 of labour.
Department Y has idle staff, for organizational reasons its labour force cannot be
reduced below its present level of four employees, all of whom are paid at the
standard rate of Sh.21,600 per week.
5. The designs and specifications of the original machine could be sold in a neighbouring
country for a sum of Sh.270,000 if the machine is scrapped.
6. An additional temporary supervisor would have to be engaged for the conversion work
at a cost of Sh.162,000. It is the company‟s normal practice to charge
supervision to fixed overhead.
7. Pawa Ltd. Had paid Mega Techniques Ltd. A non-returnable deposits of 12% of the
selling price.
Required:
a) The minimum price that Mega Techniques Ltd. should accept from Zimwi Systems Ltd.
for the converted machine. Explain clearly how you arrive at your figure.
b) State clearly any assumptions that you have made in arriving at your conclusions in (a) above.
Date posted: May 4, 2021. Answers (1)
- Kamau and Njoroge are two cousins specializing in hawking business along River
road. Kamau specializes in second hand shirts while Njoroge specializes in cheap
electronic goods. However,...(Solved)
Kamau and Njoroge are two cousins specializing in hawking business along River
road. Kamau specializes in second hand shirts while Njoroge specializes in cheap
electronic goods. However, sales have been decreasing partly due to the harsh
economic condition in Kenya and partly due to restrictions by the City Council.
Each of the cousins is considering expanding to include in their lines of business,
items on which their rivals now have a monopoly. Each knows that the other is
considering this expansion and this influences each of their decisions.
Kamau figures out that if he does not expand his business and his cousin does, it will
hurt his trade by Sh.500 of profit per day. If neither of them expands inventory to
include the extra product, Kamau thinks it will boost his net profit by Sh.500 per day
due to his superior location. If he expands and his cousin does also, he believes the
combination of location and expanded inventory will increase his profits by Sh.1,000
per day. However, if he alone expands and his cousin does not, this will result in no
net increase in business.
Required:
i Prepare a game matrix and show that a pure strategy does not exist.
ii Solve the above game to determine the average winnings (or losses) each of the cousins would expect.
Date posted: May 4, 2021. Answers (1)
- Briefly explain four ways in which competitive situations (or games) can be classified.(Solved)
Briefly explain four ways in which competitive situations (or games) can be classified.
Date posted: May 4, 2021. Answers (1)
- Boots Ltd. manufactures a range of five similar products, A, B, C, D and E. the table below shows the quantity of each of the...(Solved)
Boots Ltd. manufactures a range of five similar products, A, B, C, D and E. the table below shows the quantity of each of the required inputs necessary to produce one unit of each product, together with the weekly inputs available and selling prices of each product.
Required:
a) Formulate this problem as a Linear Programming problem.
b) The problem has been solved using a computer package and the following final table of a simplex solution has been produced:
Where A, B, C, D and E are the weekly production levels for the five products; X is the
amount of raw material that falls short of the maximum available; S, T an U are the
respective number of hours short of maximum weekly input of forming, firing and packing
time.
i Use this table to find the optimum weekly production plan.
ii Describe the implications of using this plan in terms of unused resources and overall
contribution to profit.
iii In the context of this problem explain the meaning of “The dual or shadow price of a resource”
iv There is a proposition that the company manufactures an additional product which would sell at Sh.50 per unit. Each unit will need 6 kg of raw material, one hour of forming time, five hours of firing time and one hour of packing time. Is it a worthwhile proposition?
Date posted: May 4, 2021. Answers (1)
- Kiko Ltd. is a large cash and carry warehouses which sells electronics. Kiko Ltd. Purchases
the most popular model of calculators (FX 100) directly form the...(Solved)
Kiko Ltd. is a large cash and carry warehouses which sells electronics. Kiko Ltd. Purchases
the most popular model of calculators (FX 100) directly form the manufacturer at a cost of
Sh.250 each. Average sales per a 300 day year are 475 calculators. Whenever an order with
the manufacturers is placed, Kiko Ltd, Incurs a cost of Sh.50. The stock holding costs are
estimated at Sh.12.50 plus 10% opportunity cost of capital. The lead-time is three days.
During the last 50 stock cycles, the demand during the lead-time has generated the following
frequency distribution:
Lead time demand 0 1 2 3 4 5 6 7 8
Number of stock cycles 1 2 6 8 10 8 8 5 2
Each time the warehouses runs out of stock, an emergency order is placed with an extra cost
of Sh.20 per calculator.
Required:
a) The economic order quantity (EOQ) and the reorder level.
b) The total annual relevant costs for the order quantity in (a) above.
Date posted: May 4, 2021. Answers (1)
- Mount Sinai Health Centre specializes in the provision of sports/exercise and
medical/dietary advice to clients. The service is provided on a residential basis and
clients reside for...(Solved)
Mount Sinai Health Centre specializes in the provision of sports/exercise and
medical/dietary advice to clients. The service is provided on a residential basis and
clients reside for whatever number of days that suit their needs.
Budgeted estimates for the year ending 300 June 2002 are as follows:
1. The maximum capacity of the center is 50 clients per day for 350 days in the year.
2. Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with
the client fee level per day and is estimated at different percentages of maximum
capacity as follows:
3. Variable costs are also estimated at one of the three levels per client day. The high
most likely and low levels per client per day are Sh.1,900, Sh.1,700 ad Sh.1,400
respectively.
4. The range of cost levels reflects only the possible effect of the purchase prices of
goods and services.
Required:
i. A summary which shows the budgeted contribution to be earned by Mount Sinai Health
Centre for the year ended 30 June 2002 for each of the nine possible outcomes.
ii. State the client fee strategy for the year to end 30 June 20002 which will result from the use
of each of the following decision rules.
(a) Maximax;
(b) Maximin;
(c) Minimax regret.
Date posted: May 4, 2021. Answers (1)
- Skyline Ltd. operates daily round-trip flights on the Nairobi-Mogadishu route using a fleet of
three light aircraft. These three aircraft are Skyline 1, “Skyline 2 and...(Solved)
Skyline Ltd. operates daily round-trip flights on the Nairobi-Mogadishu route using a fleet of
three light aircraft. These three aircraft are Skyline 1, “Skyline 2 and Skyline 3. The
standard quantity of fuel used on each round-trip over this twelve-month period has a mean
of 100 KL and a standard deviation of 10 KL. (1 KL = 1,000 litres)
James Thuo, the operations manager of Skyline Ltd., uses a statistical quality control (SQC)
approach in deciding whether to investigate the variances from the standards fuel usage per
round-trip flight. He investigates all those flights with fuel usage greater than two standard
deviations from the mean. In addition, James Thuo monitors trends in the SQS charts to
determine if additional investigations decisions should be made.
James Thuo received the following reports for round-trip fuel usage for the month of May
2001 from the pilots of the three planes operating on the Nairobi-Mogadishu route:
Required:
a) Using the +-2 rule, indicate the variance investigation decisions which should be made.
b) Present the SQC charts for round-trip fuel usage by each of the three aircraft I May 2001.
c) What inferences can be made from the three SQC charts developed in (b) above?
Date posted: May 4, 2021. Answers (1)