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Caa 303: Advanced Management Accounting Question Paper
Caa 303: Advanced Management Accounting
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
THIRDYEAR STAGE I EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 303: ADVANCED MANAGEMENT ACCOUNTING
DATE: AUGUST 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer All Questions
QUESTION ONE
Edward company assembles and sells many types of radio. It is considering extending it’s product
range to include digital radios. These radios produce a better sound quality than traditional radios and
have a large number of potential additional features not possible with previous technologies (station
scanning, more choice, one touch tuning, station identification text and song identification text etc).
A radio is produced by assembly workers assembling a variety of components. Production overheads
are currently absorbed into product costs on an assembly labour hour basis.
Edward Company is considering a target costing approach for it’s new digital radio product.
Required:
a) Briefly describe the target costing process that Edward Co should undertake. (3 marks)
b) Explain the benefits to Edward Co of adopting a target costing approach at such an early stage
in the product development process. (4 marks)
c) Assuming a cost gap was identified in the process, outline possible steps Edward Co could
take to reduce this gap. (5 marks)
2
A selling price of shs440 has been set in order to compete with similar radio on the market that has
comparable features to Edward Co’s intended product. The board has agreed that the acceptable
margin (after allowing for all production costs) should be 20%.
Cost information for the new radio is as follows:
Component 1 (circuit board) – these are bought in and cost shs41 each. They are bought in batches
of 4,000 and additional delivery costs are shs24, 000 per batch.
Component 2 (wiring) – in an ideal situation 25 cm of wiring is needed for each completed radio.
However there is some waste involved in the process as wire is occasionally cut to the wrong
length or is damaged in the assembly process. Edward Co estimates that 2% of the purchased wire
is lost in the assembly process. Wire costs shs5 per metre to buy.
Other material – other materials cost shs81 per radio.
Assembly labour – these are skilled people who are difficult to recruit and retain. Edward Co has
more staff of this type than needed but is prepared to carry this extra cost in return for the security
it gives to the business. It takes 30 minutes to assemble a radio and the assembly workers are paid
shs126 per hour. It is estimated that 10% of hours paid to the assembly workers is for idle time.
Production overheads – recent historic cost analysis has revealed the following production
overhead data:
Total production overhead Total assembly labour hours
Shs
Month 1 6,200,000 19,000
Month 2 7,000,000 23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal annual
activity levels. In a typical year 240,000 assembly hours will be worked by Edward Co.
Required:
d) Calculate the expected cost per unit for the radio and identify any cost gap that might exist.
(13 marks)
3
QUESTION TWO
You are responsible for managing the preparation of all revenue and cost budgets for a motor
component manufacturer. You are aware that the external environment has a significant impact on the
business activity and financial performance of your company and that the current information systems
are underdeveloped and ineffective in this respect.
Required:
a) Identify which aspects of the external environment you are likely to consider and give reasons for
your choice. (12 marks)
b) Identify where you may find the relevant sources of information. (8 marks)
c) Suggest how an external environment information system could be introduced into your company.
(5 marks)
QUESTION THREE
Mack-King, a long established Kenyan fast food chain expanded its operations for the first time in
Uganda in 2006. Although the Kenyan business is much larger than the new operation in Uganda,
they both operate as semi-autonomous business divisions with their own performance targets.
Compared with the Kenyan, the Uganda business environment is characterized by significant political
uncertainty and limited general awareness of Mack-King products and outlet locations.
Financial data (shs’M) for Mack-King
2007 2008
Ken Ug Total Ken Ug Total
Turnover 780 70 850 845 106 951
Less:
Labour 200 10 210 216 12 228
Materials 150 20 170 165 24 189
Other operating
Costs 80 5 85 85 5 90
430 35 465 466 41 507
Marketing 60 30 90 70 70 140
Interest (Group) - - 14 - - 41
Depreciation and
Amortization 100 8 108 100 16 116
160 38 212 170 86 297
Total costs 590 73 677 636 127 804
Profit 190 (3) 173 209 (21) 147
4
NBV of Fixed
Assets (year end) 520 40 560 520 90 610
(Includes capital
Expenditure in the
Year)
Capital expenditure
in year 90 30 120 100 66 166
Long-term Debt
(Group) - - 140 - - 340
Capital and reserve 600 744
Required:
a) Provide an assessment of the total corporate financial performance of Mack-King and of the
contribution made towards it by each of the two divisions between 2007 and 2008.
(17 marks)
b) Suggest two separate measures of performance that would be appropriate for a fast food chain,
for each of the following areas:
Service Quality;
Marketing effectiveness;
Personnel;
Food preparation. (8 marks)
QUESTION FOUR
The specialist clothing company ltd (SCC ltd) is a manufacturer of a wide range of clothing. Its
operations are organized into five divisions which are as follows:
i) Fashion
ii) Industrial
iii) Leisure
iv) Children
v) Footwear
The fashion division manufacturers a narrow range of high quality clothing which is sold to a leading
retail store which has branches in every major city in it’s country of operation. The products have very
short life cycles.
5
The industrial division manufactures a wide range of clothing which has been designed for use in
industrial environments. In an attempt to increase sales volumes, SCC ltd introduced the sale of these
products via mail order with effect from 1 June 2007.
The leisure division manufactures a narrow range of clothing designed for outdoor pursuits such as
mountaineering and sky diving, which it markets under it’s own, well established “Elite” brand label.
The children division manufactures a range of school and casual wear which is sold to leading retail
stores. The footwear division manufactures a narrow range of footwear.
The management accountant of SCC ltd has gathered the following actual and forecast information
relating to the five divisions:
Year ending 31 may 2006 2007 2008 2009 2010
Actual Actual Actual forecast forecast
Fashion
Market size (shs’M) 200.00 240.00 280.00 305.00 350.00
Revenue (shs’M) 10.00 14.40 22.40 30.50 35.00
Industrial
Market size (shs’M) 150.00 158.00 166.00 174.00 182.00
Revenue (shs’M) 5.00 5.10 5.20 5.30 5.40
Leisure
Market size (shs’M) 20.00 20.50 21.00 21.50 21.80
Revenue (shs’M) 13.60 14.20 14.70 15.00 14.20
Children
Market size (shs’M) 60.00 70.00 80.00 90.00 100.00
Revenue (shs’M) 2.00 2.10 2.20 2.30 2.40
Footwear
Market size (shs’M) 20.00 20.20 20.40 20.60 21.00
Revenue (shs’M) 0.50 0.52 0.54 0.52 0.50
6
The management accountant has also collected the following information relating to the market share
held at 31 may 2008 by the market leader or nearest competitor in the markets in which each division
operates:
(%) Market share held by market
leader/nearest competitor
Division
Fashion 8
Industrial 15
Leisure 70
Children 28
Footwear 33
Required:
a) Use the Boston Consulting Group matrix in order to assess the competitive position of SCC ltd.
(19marks)
b) Advice the management of SCC ltd of THREE strategies that should be considered to improve
the future performance of SCC ltd. (6 marks)
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