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(i) To provide information that motivates divisional managers to make good economic
decisions. This will happen when actions that divisional managers take to improve the
reported profit of their divisions also improves the profits of the company as a whole.
(ii) To provide information that is useful for evaluating the managerial and economic
performance of the divisions.
(iii) To intentionally move profits between divisions or locations.
(iv) To ensure that divisional autonomy is not undermined.
Kavungya answered the question on May 7, 2021 at 06:20
- State the limitations of the use of fame theory in decision making.(Solved)
State the limitations of the use of fame theory in decision making.
Date posted: May 7, 2021. Answers (1)
- Topcom Kenya International Limited (TKIL) is a telecommunications company
situated in Nakuru. Recently, the company was faced with a workers strike which
necessitated a renegotiation of the...(Solved)
Topcom Kenya International Limited (TKIL) is a telecommunications company
situated in Nakuru. Recently, the company was faced with a workers strike which
necessitated a renegotiation of the workers‟ salaries through their union.
The management with the help of a consultant, has prepared the pay-off matrix
shown below:
A positive sign represents a wage increase while a negative sign represents a wage decrease.
Required:
(i) Advise the management on the best strategies.
(ii) The value of the game
Date posted: May 7, 2021. Answers (1)
- Makazi Ltd. manufactures a hedge-trimming tool which has been selling at Shs.
1,600 per unit for a number of years. The selling price is to be...(Solved)
Makazi Ltd. manufactures a hedge-trimming tool which has been selling at Shs.
1,600 per unit for a number of years. The selling price is to be reviewed and the
following information is available on costs and the likely demand:
1. The standard variable cost of manufacturing the tool is Shs. 1,000 per unit and
an analysis of the cost variances in the past 20 months shows the following
pattern which the production manager expects to continue in the future.
Adverse variances of 10% of the standard variables cost occurred in ten
of the twenty months.
Nil variances occurred in six of the twenty months.
Required:
(i) Based on the information given above, advise the management of Makazi Ltd.
on whether they should change the selling price. Indicate the price you would
recommend.
(ii) The expected profit at the price you have recommended in (i) above and the
resulting margin of safety expressed as a percentage of expected sales
(iii) Comment on the method of analysis you have used to deal with the
probabilities given in the question.
(iv) Explain briefly how the use of a computer program would improve your
analysis.
Date posted: May 7, 2021. Answers (1)
- Nyali Ltd. is a distributor of an industrial chemical in the South Coast. The chemical is
supplied in drums which have to be stored at a...(Solved)
Nyali Ltd. is a distributor of an industrial chemical in the South Coast. The chemical is
supplied in drums which have to be stored at a controlled temperature. The
company‟s objective is to maximize profits, however the management team disagrees on
the stock control policy and holds the following different views:
The Managing Director's view:
The company's managing director (MD) wishes to improve the stock holding
policy by applying the economic order quantity (EOQ) model. Each drum of the chemical
costs Shs. 5,000 from a supplier and is sold for Shs. 6,000. The annual demand is estimated
to be 10,000 drums which the MD assumes to be evenly distributed over the 300 working
days in a year. The cost of delivery is estimated at Shs. 2,500 per order and the annual
variable holding cost per drum at Shs. 4,500 plus 10% of the purchase price.
Using these data, the MD calculated the EOQ and proposes that it should be used as the
basis for future purchasing decisions of the industrial chemical.
The Purchasing Manager‟s view:
Provided in the employment contract of the company‟s purchasing manager (PM), is a
clause stating that he will receive a bonus (rounded at the nearest Shs. 100) calculate as follows:
b = [1,000,000 – (OC + HC)] x 0.1
where: b is the annual bonus.
OC is the annual ordering cost.
HC is the annual holding cost.
Using the same assumption as the MD, the PM points out that in making his calculation, the
MD has not only ignored the bonus but also the fact that suppliers offer quantity discounts
on purchase orders, where if the order size is 200 drums or above, the price per drum for an
entire consignment is only Shs. 4,990 compared to Shs. 5,000 when the order is between 100
and 199 drums and Shs. 5,010 when an order is between 50 and 99 drums.
The Finance Director's view:
The company's finance director (FD) accepts the need to consider quantity
discounts and pay a bonus, but he also holds the view that the MD‟s approach is too
simplistic. He points out that there is a three days lead time for an order and that demand has
not been entirely even over the past year. Moreover, if the company has no drums of the
chemical in stock, it will lose specific orders as potential customers will source the chemical from
competitors. He gives the frequency of lead time demand over the last year as follows:
Under the circumstances, the MD decided that he would seek further advice on the
course of action to be taken by the company.
Required:
(a) The EOQ as originally determined by the company‟s managing director.
(b) Determine the optimum order quantity, taking into consideration the MD‟s
assumptions and after allowing for the purchasing manager‟s bonus and
supplier quantity discount.
(c) The safety stock the company should maintain after applying the finance director‟s
assumptions and assuming further that the supplier‟s contract requires
that the order quantity be constant for all the orders in a year.
(d) As a consultant, write a brief report to the managing director on the
company‟s stock ordering and stock holding policies, referring where necessary to
your answers in (a) to (c) above. The report should refer to other factors that should be
considered when making the final decisions on stock ordering and holding policies.
Date posted: May 7, 2021. Answers (1)
- Tony Kichumi, a financial analyst at Green City Bus Company Ltd. is examining the
behaviour of the company?s monthly transportation costs for budgeting purposes.
The transportation costs...(Solved)
Tony Kichumi, a financial analyst at Green City Bus Company Ltd. is examining the
behaviour of the company‟s monthly transportation costs for budgeting purposes.
The transportation costs are a sum of a two types of costs:
1) Operating costs, such as fuel and labour.
2) Maintenance costs, such as overhaul of engines and spraying.
Kichumi collects monthly data on items 1 and 2 above and the distance covered by the
buses. Monthly observations for the year ended 31 December 2004 were as follows:
Required:
(a) Evaluate the three linear regression equations using:
(i) Economic plausibility.
(ii) Goodness of fit
(iii) Significance of independent variables.
(iv) Specifications analysis criteria
(Use a 95% confidence level where applicable).
(b) List three variables, other than distance covered, that could be important drivers of
the company's operating costs.
(c) Suggest an alternative database that Kichumi could have used to examine the drivers
of the company‟s maintenance costs.
(d) Explain three limitations of the linear regression analysis used by the company.
Date posted: May 7, 2021. Answers (1)
- Equi -solutions Ltd. was formed ten years ago to provide business equipment solutions tolocal business. It has separate divisions for research, marketing, product design, technologyand...(Solved)
Equi -solutions Ltd. was formed ten years ago to provide business equipment solutions to
local business. It has separate divisions for research, marketing, product design, technology
and communication services, and now manufactures and supplies a wide range of business
equipment. To date the company has evaluated its performance using monthly financial
reports that analyze profitability by type of equipment. The managing director of Equi solutions
Ltd. has recently returned from a course in which it has been suggested that the
“Balanced Scorecard” could be a useful way of measuring performance.
Required:
a) Explain the “Balanced Scorecard” and how it could be used by Equi-solutions Ltd. to
measure its performance.
b) The managing director of Equi-solutions Ltd. also overheard someone mention how the
performance of their company had improved after they introduced “Bench marking.”
Required:
Explain “Bench-marking” and how it could be used to improve the performance of
Equi -solutions Ltd.
Date posted: May 7, 2021. Answers (1)
- Best Sell Ltd. has decided to launch a new product in addition to its range of
products. The following information is available:
1. The new product may...(Solved)
Best Sell Ltd. has decided to launch a new product in addition to its range of
products. The following information is available:
1. The new product may be distributed through any combination of the two
company warehouses W1 and W2.
2. The available monthly production capabilities for the new products are:
1000 units at plant A
2000 units at plant B
1000 units at plant C
3. Three major concentration points of customer demand are at locations E, F
and G which are estimated to have a monthly demand of:
900 units at E
800 units at F
900 units at G
4. The unit production costs amount to Sh.30, Sh.40, Sh.10 at A, B and C
respectively.
5. The unit handling costs at the warehouses amount to Sh.20 and Sh.30 at W1
and W2.
6. The unit transportation costs from plant to warehouse and unit delivery cost
from warehouse to customers are as shown below:
Required:
Determine the optimum production and distribution schedule to minimize total cost.
Date posted: May 7, 2021. Answers (1)
- Explain the following terms as applied in competitive situations:
i) Degeneracy
ii) Pure strategy
iii) Mixed strategy
iv) Dominance rule(Solved)
Explain the following terms as applied in competitive situations:
i) Degeneracy
ii) Pure strategy
iii) Mixed strategy
iv) Dominance rule
Date posted: May 7, 2021. Answers (1)
- 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)