- Farmers Limited had received an order for a piece of special machine from Naivasha
Flowers Limited. Just as farmers completed the machine, Naivasha Flowers Limited was
declared...(Solved)
Farmers Limited had received an order for a piece of special machine from Naivasha
Flowers Limited. Just as farmers completed the machine, Naivasha Flowers Limited was
declared bankrupt, defaulted on the order, and forfeited 10% deposit paid on the selling
price of Sh. 72,000,000. Farmers Limited engineering department manager identified the
costs already incurred in the production of the special machine for Naivasha Flowers limited
as follows:
10. Farmers Limited normally sells a sufficient number of standard models for the company
to operate at a volume in excess of a breakeven point.
11. Farmers Limited does not consider the time value of money in the analysis of special
orders and projects whenever the time period is less than one year because the effect is
not significant.
Required:
(a) Determine the total contribution in shillings for each of the three alternatives
(b) If Narok Corporation makes a counter offer, what is the lowest price farmers
limited should accept for the reworked machine from Narok Corporation?
Explain your answer.
(c) Discuss the influence that fixed factory overhead costs should have on the sales
quoted by Farmers Limited for special orders when:
(i) A firm is operation at or below the breakeven point
(ii) A firm‟s special orders constitute efficient utilization of unused
capacity above the breakeven volume.
Date posted: May 7, 2021. Answers (1)
- Industrial Chemical Ltd. (ICL) produces chemical Y. the standard ingredients of 1 kilogram
of Y are:
0.65 kilograms of ingredient F @ Sh. 40 per Kg
0.30 kilograms...(Solved)
Industrial Chemical Ltd. (ICL) produces chemical Y. the standard ingredients of 1 kilogram
of Y are:
0.65 kilograms of ingredient F @ Sh. 40 per Kg
0.30 kilograms of ingredient D @ Sh. 60 per Kg.
0.20 kilograms of ingredient N @ Sh. 25 per Kg.
The following additional information is provided:
1. Production of 4,000 kilograms of chemical Y was budgeted for October 2004.
2. The production of chemical Y is entirely automated and production costs attributed to
its production comprise only direct materials and overheads.
3. ICL‟s production process works on a just-in-time (JIT) inventory system and
no ingredients or inventories of chemical Y are held.
4. Overheads budgeted for the production of Y in the month of October 2004 were as
follows:
5. In October 2004, 4,200 kilograms of Y were produced and the cost details were as
follows:
Materials used
2,840 kilograms of F, 1,210 kilograms of D and 860 kilograms of N at a total cost of
Sh. 203,800.
Actual overhead costs
12 supply deliveries at a cost of Sh.48,000 and 38 customer dispatches at a cost of
Sh. 78,000 were made.
6. ICL‟s budget committee met recently to discuss the preparation of the cost
control report for October 2004 and the following discussion took place:
Chief accountant: “the overheads do not vary directly worth output and
are therefore by definition „fixed‟. They should be analyzed and reported
accordingly”.
Management accountant: “the overheads do not vary with output, but they
are certainly not fixed. They should be analyzed and reported on an activity based
basis.”
Required:
Having regard to this discussion,
a) Prepare a variance analysis of the production costs of Y in October 2004. (Separate the
material cost variance into price, mixture and yield components and the overhead cost
variance into expenditure, capacity and efficiency components using consumption of
ingredient F as the overhead absorption base).
b) Prepare a variance analysis of the overhead production costs on Y in October 2004 on
an activity based basis.
Date posted: May 7, 2021. Answers (1)
- Maisha Meta Products Ltd. has prepared a schedule of estimated overhead costs for the
coming year. The schedule was prepared on the assumption that production would...(Solved)
Maisha Meta Products Ltd. has prepared a schedule of estimated overhead costs for the
coming year. The schedule was prepared on the assumption that production would amount
to 800,000 units. Costs have been classified as either fixed or variable according to the
judgement of the financial controller. The following overhead cost items and their
classification as either fixed or variable form the basis for the overhead cost schedule:
Required:
a) Determine the cost estimation equation using the account analysis method
b) Use the high-low method to estimate the cost of 800,000 units of production expected
in the coming period.
c) Using the simple linear regression, estimate the cost of 800,000 units of production.
d) Use the multiple regression results to prepare an estimated cost for the 800,000 units in
the incoming period.
e) Comment on which of the methods is more appropriate under the above circumstances.
Date posted: May 6, 2021. Answers (1)
- Various attempts have been made in the public sector to achieve a more stable, long-term
planning base in contrast to the traditional short-term annual budgeting approach,...(Solved)
Various attempts have been made in the public sector to achieve a more stable, long-term
planning base in contrast to the traditional short-term annual budgeting approach, with its
emphasis on flexibility.
Required:
(a) Explain the deficiencies of the traditional approach to planning which led to the
attempts to introduce planning programming budgeting system (PPBS).
(b) Give an illustration of how PPBS plan could be drawn up in respect of one sector
of public authority activity.
(c) Discuss the problems which have made it difficult in practice to introduce PPBS.
Date posted: May 6, 2021. Answers (1)
- The Marima Manufacturing Company produces four products; W, X, Y and Z using
the same plant and processes.
The following information relates to the company:
Required:
(i) Unit costs...(Solved)
The Marima Manufacturing Company produces four products; W, X, Y and Z using
the same plant and processes.
The following information relates to the company:
Required:
(i) Unit costs per product using activity-based costing tracing costs to production units by
means of cost drivers.
(ii) Comment briefly on the differences disclosed between overheads traced by the present
system and those traced by activity based costing.
Date posted: May 6, 2021. Answers (1)
- The current thinking in Management Accounting contends that Activity-Based
Costing (ABC) provides better information concerning products costs and decision
making than traditional management accounting techniques.
However, whereas ABC...(Solved)
The current thinking in Management Accounting contends that Activity-Based
Costing (ABC) provides better information concerning products costs and decision
making than traditional management accounting techniques.
However, whereas ABC may give a different impression of product costs, it is not
necessarily a good idea and it may be advisable to continue improving traditional
cost accounting techniques before moving to ABC.
Required:
(i) Explain cost behaviour issues underlying the use of ABC.
(ii) Explain why ABC might, be more suitable for modern manufacturing
environment than traditional cost accounting techniques?
(iii) Comment on the reported claim that ABC gives better information as a
guide to decision making than the traditional product costing techniques.
Date posted: May 6, 2021. Answers (1)
- Mwamba Development Group (MDG) plans to undertake a project consisting of eleven (11)
tasks. The expected completion time of each task is uncertain and this makes...(Solved)
Mwamba Development Group (MDG) plans to undertake a project consisting of eleven (11)
tasks. The expected completion time of each task is uncertain and this makes the project
completion time uncertain. MDG has approached a consultancy firm for advice on the
expected project completion time.
The consultancy firm intends to use simulation analysis to deal with the uncertainty of the
project completion time. The following data were obtained by the consultancy firm, for the
purpose of simulation analysis:
Required:
(a) Explain the basic steps that can be used to solve this type of problem simulation
technique.
(b) Draw the network for the project and determine the critical path of the project. Use the
activity‟s expected time to determine the expected completion time of the
project.
(c) Carry out four simulation runs for each activity and using the results of the
simulation, determine the expected project completion time.
(d) State two advantages and two disadvantages of the simulation technique.
Use the following random numbers.
95, 30, 59, 93, 28, 72, 09, 54, 66, 95, 36, 98, 56, 23, 60, 79, 14, 50, 61, 81, 84, 14, 24,
75, 85, 49, 05, 09, 53, 45, 60, 98, 90, 86, 74, 55, 69, 09, 10, 96, 40, 27, 15, 83
Date posted: May 6, 2021. Answers (1)
- Kenya Fashions Ltd. sells a wide range of high quality customized outfits. One
particular outfit is bought at Sh.800 and sold at Sh.1,300. Mean holding costs...(Solved)
Kenya Fashions Ltd. sells a wide range of high quality customized outfits. One
particular outfit is bought at Sh.800 and sold at Sh.1,300. Mean holding costs per
season per outfit amounts to Sh.50 and it costs Sh.8,000 to order and receive goods
into stock. The manufacturers require orders in advance and once a batch has been
made, it is not possible to place a repeat order. Further, it is not possible for
delivery to be staggered over the fashion season.
When a customer buys an outfit, she has a fitting, any alterations or adjustments are
made, and then she collects the outfit a day or so later. Generally if an outfit is out
of stock at one branch, it can be readily obtained from another branch, usually in a
matter of hours. However, if the company as a whole runs out of an item, then the
cost of the stock out is Shs. 200 per item. If the company over buys for a season,
then it is expected that it will be able to dispose of the surplus outfits at Sh.500 each.
The problem facing the management accountant of the company is to decide how many
outfits to order for the season ahead in order to maximize expected profit, bearing in mind
the penalties for over and under ordering.
Required:
(i) Determine the number of outfits to order to maximize expected profits.
(ii) Compare and contrast the model that you have developed with the classical economic
quantity model.
Date posted: May 6, 2021. Answers (1)
- From past experience, a company operating a standard cost accounting system has
accumulated the following information in relation to variances in its monthly
management accounts:
1. Its variances...(Solved)
From past experience, a company operating a standard cost accounting system has
accumulated the following information in relation to variances in its monthly
management accounts:
1. Its variances fall into two categories:
2. For the first category corrective action has eliminated 70% of the variances,
but the remainder have continued unchanged.
3. The cost of an investigation averages Sh.3,500 and that of correcting
variances averages sh.5,500.
4. The average cost of any variance not corrected is Sh.5,250 per month and
the company's policy is to assess the present value of such costs at 2% per
month for a period of five months.
Required:
(i) Two decision trees to represent the position if an investigation is carried
out and the position when an investigation is not carried out.
(ii) Recommend with supporting calculations, whether or not the company
should follow a policy of investigating variances as a matter of routine.
(iii) Explain briefly two types of circumstances that would give rise to variances
in the first category and two types of circumstances that would give rise to
variances in the second category.
Date posted: May 6, 2021. Answers (1)
- Nairobi Enterprise Ltd. (NEL) is a divisionalized enterprise. Among its divisions, are South
and North. Both of these divisions have a wide range of independent activities....(Solved)
Nairobi Enterprise Ltd. (NEL) is a divisionalized enterprise. Among its divisions, are South
and North. Both of these divisions have a wide range of independent activities. One
product, Xcel, is made by South division for North division. South division does not have
any external customers for the product.
The central management of NEL delegates all pricing decisions to divisional managers and
the pricing of Xcel has been a contentious issue. It has been suggested that South division
should give a transfer price schedule for the supply of Xcel based on South
division‟s own production costs and that all goods transferred would be made at
South division‟s marginal costs. The North division would then order the quantity it
requires each month. South estimates its monthly total costs (TC) in shillings for producing
Xcel using the following equation:
Required:
(a) (i) The quantity of Xcel which would maximize profits for NEL.
(ii) The transfer price in shillings corresponding to the maximum production in (i)
above if South division‟s marginal cost are adopted for transfer pricing. Show the
resulting profit for each division.
(b) (i) The quantity of Xcel which North division would take (at South division's marginal
costs) if it wanted to maximize its own profits.
(ii)The transfer price in shillings corresponding to the quantity of Xcel that would
maximize the profits of North division, and the resulting profit for each division.
Date posted: May 6, 2021. Answers (1)
- State the factors to be taken into consideration when establishing the length of a budget period.(Solved)
State the factors to be taken into consideration when establishing the length of a budget period.
Date posted: May 6, 2021. Answers (1)
- The paradox is that, “while cost plus pricing is devoid of any theoretical justification, it is widely used in practice”.
Discuss the possible justification for its...(Solved)
The paradox is that, “while cost plus pricing is devoid of any theoretical justification, it is widely used in practice”.
Discuss the possible justification for its use.
Date posted: May 6, 2021. Answers (1)
- In preparing the cash budget for the next year, Kericho Tea Farm Limited finds that
it has limited surplus funds of Sh.70,000,000 which the managing directors...(Solved)
In preparing the cash budget for the next year, Kericho Tea Farm Limited finds that
it has limited surplus funds of Sh.70,000,000 which the managing directors wishes
to spend on one of two schemes.
Scheme A - Pay Sh.70,000,000 immediately to reputable sales promotion agency which
would provide extensive advertising and planned „reminder‟ advertising over
the next ten years. This is expected to increase the net operational cash flows
by sh.200,000,000 per annum for the first five years and Sh.100,000,000 for
the following five years. Thereafter, the effect would be zero.
Scheme B - Buy immediately labour saving machinery at a cost of Sh.70,000,000 which
would reduce the operating cash outflows by sh.150,000,000 per annum for
the next ten years, at the end of which the equipment will have a salvage
value of zero.
Required
(i) The average accounting rate of return (ARR) per annum for each scheme over 10 years.
(ii) The net present value (NPV) for each scheme assuming the desired rate of return is 18%.
(iii) The internal rate of return (IRR) for each alternative.
Date posted: May 6, 2021. Answers (1)
- Marashi Company Ltd. is a merchandising company selling a 40ml bottle of perfume in four
zones within Kenya. The variable cost per bottle is Sh.70 but...(Solved)
Marashi Company Ltd. is a merchandising company selling a 40ml bottle of perfume in four
zones within Kenya. The variable cost per bottle is Sh.70 but the selling price is different in
each of the four zones. The difference in the selling price is due to the transportation costs
involved. The company has four salesmen available for an assignment in the four zones. The
zones are not equally good in their sales potential. It is estimated that a typical salesman
operating in each zone would bring the following annual sales:
The objective of Marashi Company Ltd. is to maximize contribution from each zone.
Required:
(a) Determine how the four salesmen can be assigned to the zones in order for the
company to maximize the total contribution.
(b) Calculate the total contribution of the company after the assignment.
Date posted: May 6, 2021. Answers (1)
- Nzewani Electronic Ltd. manufactures and sells a brand of television sets called LD-TVs.
The three closest competitor brands in the market are SUM-TVs, SON-TVs. Because of...(Solved)
Nzewani Electronic Ltd. manufactures and sells a brand of television sets called LD-TVs.
The three closest competitor brands in the market are SUM-TVs, SON-TVs. Because of the
custom manufacturing process and their inherent high costs, no other competitor has any
effect on the current market. The year 2002 was an exceptionally good year in terms of gain loss
trade offs. The year's activity is summarized in the following table:
Required:
(a) Advise the management of Nzewani Electronic Ltd. on the expected market share
for each brand at the end of December 2002.
(b) Assuming the same pattern of switching persists, what would be the long run
market share for each brand?
(c) What are the assumptions of the technique you have used in (a) and (b) above?
Date posted: May 6, 2021. Answers (1)
- A sugar manufacturing company has two plants, one in Bungoma and the other one in
Busia, producing equivalent grades of sugar. The Bungoma plant has been...(Solved)
A sugar manufacturing company has two plants, one in Bungoma and the other one in
Busia, producing equivalent grades of sugar. The Bungoma plant has been operating at 75%
of its producing 270,000 tonnes of sugar per month. The Busia plant has been operating at
60% of its capacity producing 360,000 tonnes of sugar per month. The major raw material
used in producing sugar is cane. For each 800 tonnes of sugar, 1000 tonnes of care is
required. At the Bungoma plant, the local cane costs are Sh.1,875 per tonne but the supply is
limited to 144,000 tonnes per month. At Busia plant, local cane costs sh.3000 per tonne and
is limited to 400,000 tonnes per month. Additional cane must be purchased through brokers
at sh.2,750 per tonne (delivered at either plant). The cost schedules for a typical month‟s
production are as follows:
Required:
(a) (i) If the total combined production of both plants is to be maintained at a rate of
630,000 tonnes per month, would there be any apparent advantage in shifting part
of the schedule production from one plant to the other? If so, which plant's
production should be increased and by how much?
(ii) What is the amount of the cost saving as a result of this switch?
(b) If production requirements increased to 910,000 tonnes, how much would you
recommend to be produced at each plant?
Date posted: May 6, 2021. Answers (1)
- Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio
of 3:1 at the split-off point. The two products are...(Solved)
Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio
of 3:1 at the split-off point. The two products are taken to the mixing plant for blending and
refining after the split off point. The following information is also provided:
The joint process costs are 70% fixed and 30% variable whereas the mixing plant costs are
30% fixed and 70% variable. There are only 5000 hours available in the mixing plant. Usually
4000 hours are taken in processing of Product P1 and P2, 2000 hours for each product while
the remaining 1000 hours are used for other work that generates a contribution of
Sh.100,000 per hour.
The company is now planning to change the production mix of the joint process to 3:2 for
product P1 and P2 respectively. This change will result in an increase in the joint cost by
Sh.500 for each additional litre of P2produced.
Required:
(a) Advise the company on whether to change the production mix.
(b) Explain other qualitative factors that are important to consider before changing the production mix.
Date posted: May 6, 2021. Answers (1)
- Two manufacturers compete in a market for a specialized calculator. Company A
controls 75% of the market while company B controls 25% of the market. Company...(Solved)
Two manufacturers compete in a market for a specialized calculator. Company A
controls 75% of the market while company B controls 25% of the market. Company A
is considering a vigorous annual marketing campaign which will cost Sh.35,000,000. The
total market for the specialize calculator is 100,000 units per year. The profit
contribution per unit is Sh.3,000.
Company B is debating how much money to invest in research and development every
year. It is considering three alternatives: Sh.25,000,000, Sh.50,000,000 and Sh.80,000,000.
It is estimated that if company A runs a vigorous annual marketing campaign, its share
of the market after one yea will be either 79% or 73%, depending on company B‟s
investment in research and development (Sh.25,000,000, 50,000,000 and
Sh.80,000,000 respectively).
On the other hand, if company A does not run the marketing campaign, company
B‟s share of the market will decrease by 1% of the total market if it invests Sh.25,000,000 in
research and development, increase by 1% if it invests Sh.50,000,000 in research and
development and increase by 3% if Sh.80,000,000 is invested.
Required:
i Using the share of the market percentages only, convert the above into a zero sum game, and hence solve for the optimal strategies for both companies.
ii Obtain a pay off table consisting of contribution to profit in monetary terms, and hence solve the game.
Date posted: May 6, 2021. Answers (1)
- Aberdares Company Ltd. is a manufacturing company which produces and sells a single
product known as T1 at a price of Sh.10 per unit. The company...(Solved)
Aberdares Company Ltd. is a manufacturing company which produces and sells a single
product known as T1 at a price of Sh.10 per unit. The company incurs a variable cost of Sh.6
per unit and fixed costs of Sh.400,000. Sales are normally distributed with a mean of 110,000
units and a standard deviation of 10,000 units. The company is considering producing a
second product, T2 to sell at Sh.8 per unit and incur a variable cost of Sh.5 per unit with
additional fixed costs of Sh.50,000. The demand for T2 is also normally distributed with a
mean of 50,000 units and standard deviation of 5,000 units. If T2 is added to the production
schedule, sales of T 1 will shift downwards to a mean of 85,000 units and standard deviation
of 8,000 units. The correlation coefficient between sales of T1 and T2 is – 0.9.
Required:
i The company‟s break-even point for the current and proposed production schedules.
ii The coefficient of variation for the two proposals.
iii Based on your computation‟s in (i) and (ii) above advise the company on whether to add T2 to its production schedule.
Date posted: May 6, 2021. Answers (1)
- High-tex Engineering Company Limited wishes to set flexible budgets for each of its operating departments. A separate maintenance department performs all routine and major repair...(Solved)
High-tex Engineering Company Limited wishes to set flexible budgets for each of its operating departments. A separate maintenance department performs all routine and major repair works on the company‟s equipment and facilities. The company has determined that maintenance department performs all routine and major repair works on the
company's equipment and facilities. The company has determined that maintenance cost is
primarily a function of machine hours worked in the various production departments.
The maintenance cost incurred and the actual machine hours worked during the months of
January, February, March and April 2003 were as follows:
Required:
a) Determine the cost estimation function using:
i High-low method.
ii Regression analysis
b) Using the regression function estimate:
i The maintenance costs that would have been incurred if the machine hours were expected to be 900 in the month of May 2003.
ii The maximum machine hours that would have been worked If the maintenance cost incurred had been limited to Sh.400,000 for the month of May 2003.
c) Assuming that in the month of May 2003 machine hours were 900, establish a 95% confidence interval for this point estimate. (Assume tc = 2.7764 and standard error of estimate, se = 63.25).
Date posted: May 6, 2021. Answers (1)