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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
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UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 303: ADVANCED MANAGEMENT ACCOUNTING
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) JOL co., was the Market leader in it’s industry with a share of 30% three years ago. The
managing director of JOL company stated at a recent meeting of the board of directors that:
“Our loss of Market share during the last three years might lead to the end of JOL co as an
organization and therefore we must address this issue immediately”.
Required: Discuss the statement of the managing director of JOL co and explain six
indicators, other than decreasing Market share, which might indicate that JOL co might fail as
a corporate entity. (8 Marks)
(b) A mixed economy operates a range of public services including fire, police, education and
health. The services are provided on a regional basis but are funded from central government
taxation. The government is endeavoring to improve the ‘overall performance’ of the services
and is considering a range of issues surrounding this objective.
(i) Explain the particular problems that are likely to occur in attempting to monitor the
performance of a public service that would not arise when assessing private sector
activities (6 Marks)
(ii) Suggest ways in which the problems that you have highlighted in (i) above may be
managed or overcome. (4 Marks)
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(c) 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.
Identify where you might find the relevant external sources of information. (7 Marks)
QUESTION TWO
The Health and fitness Group (HFG), which is privately owned, operates three centers in the
country of Mayland. Each centre offers dietary plans and fitness programmes to clients under the
supervision of dieticians and fitness trainers. Residential accommodation is also available at each
centre. The centers are located in the towns of Ayetown, Beetown and Ceetown.
The following information is available:
(1) Summary financial data for HFG in respect of the year ended 31March 2009.
Ayetown Beetown Ceetown Total
Shs’000 Shs’000 Shs’000 Shs’000
Revenue:
Fees received 1,800 2,100 4,500 8,400
Variable costs (468) (567) (1,395) (2,430)
Contribution 1,332 1,533 3,105 5,970
Fixed costs (936) (1,092) (2,402) (4,430)
Operation profit 396 441 703 1,540
Interest costs on long-term debt at 10% (180)
Profit before tax 1,360
Income tax expense (408)
Profit for the year 952
Assets:
Non-current assets 1,000 2,500 3,300 6,800
Current assets 800 900 1,000 2,700
Total assets 1,800 3,400 4,300 9,500
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Equity and liabilities:
Share capital 2,500
Retained earnings 4,400
Total equity 6,900
Non- current liabilities
Long-term borrowings 1,800
Total non-current liabilities 1,800
Current liabilities 80 240 480 800
Total current liabilities 80 240 480 800
Total liabilities 2,600
Total equity and liabilities 9,500
2 HFG defines Residual Income (RI) for each centre as operating profit minus a required rate of
return of 12% of the total assets of each centre.
3 At present HFG does not allocate the long-term borrowings of the group to the three separate
centers.
4 Each centre faces similar risks.
5 Tax is payable at a rate of 30%.
6 The Market value of the equity capital of HFG is Shs9million. The cost of equity of HFG is
15%.
7 The Market value of the long-term borrowings of HFG is equal to the book value.
8 The directors are concerned about the return on investment (ROI) generated by the Beetown
centre and they are considering using sensitivity in order to show how a target ROI of 20%
might be achieved.
9 The Marketing director stated at a recent board meeting that ‘The Group’s success depends on
the quality of service provided to our clients. In my opinions, we need only to concern
ourselves with the number of complaints received from clients during each period as this is the
most important performance measure for our business. The number of complaints received
from clients is a perfect performance measure. As long as the number of complaints received
from clients is not increasing from period to period, then we be confident about our future
prospects’.
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Required:
(a) The directors of HFG have asked you, as management accountant, to prepare a report providing
them with explanations as to the following:
i. Which of the three centers is the most ‘successful’? Your report should include a
commentary on return on investment (ROI), residual income (R I), and economic value
added (EVA) as measures of financial performance. Detailed calculations regarding
each of these three measures must be included as part of your report; (20 Marks)
ii. The percentage change in revenue, total costs and net assets during the year ended 31st
March 2009 that would have been required in order to have achieved a target ROI of
20% by the Beetown centre. Your answer should consider each of these three variables
in isolation. State any assumptions that you make. (5 Marks)
QUESTION THREE
Diverse holdings ltd has five wholly-owned subsidiary companies. These are:
i) Organic foods Ltd (OFL) which is involved in the production and sale of organically
grown fruit and vegetables. OFL has built up a very good reputation as a supplier of
quality produce.
ii) Haul-Trans Ltd (HTL) which was acquired on 1 December 2005 and is involved in
transporting a range of products on behalf of third parties.
iii) Kitchen Appliances Ltd (KAL) which is involved in the manufacture and sale of small,
manually-operated kitchen appliances. KAL has recently suffered from squeezed
margin as a consequence of competition from low cost imports.
iv) Paper supplies Ltd (PSL) which manufactures and sells a narrow range of stationery
products to two distributors.
v) Office products Ltd (OPL) which manufactures and sells computer workstations with
unique design features which are highly regarded by health and safety experts.
The management accountant of Diverse Holdings ltd has gathered the following actual and
forecast information relating to the five subsidiaries:
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Year ending 30 November
2003 2004 2008 2009 2010
Actual Actual Actual Forecast Forecast
(OFL)
Market size (ShsM) 100.0 120.0 150.0 180.0 225.0 Turn
over (ShsM) 5.0 8.0 10.0 13.5 18.0
Operating profit (ShsM) 1.0 1.8 2.5 3.0 3.6
(HTL)
Market size (shsM) unknown unknown unknown unknown unknown
Turnover (ShsM) 40.0 40.0 41.0 42.0 42.0
Operating profit (ShsM) 4.0 4.0 4.0 5.0 5.6
(KAL)
Market size (ShsM) 252.0 250.0 245.0 242.0 240.0
Turnover (ShsM) 37.5 37.5 35.5 32.0 29.0
Operating profit/(loss) (ShsM) 1.5 1.1 0.7 0.3 (0.2)
(PSL)
Market size (ShsM) 60.0 65.0 70.0 77.0 84.0
Turnover (ShsM) 2.0 2.0 2.0 2.0 2.1
Operating profit(Shs M) 0.6 0.6 0.6 0.5 0.5
(OPL)
Market size (ShsM) 200.0 220.0 240.0 260.0 280.0
Turnover (ShsM) 15.0 16.0 16.5 17.0 17.5
Operating profit (ShsM) 1.50 1.60 1.65 1.70 1.75
The management accountant has also collated the following information relating to the
Market share held at 30 November 2008 by the Market leader in those Markets in which each
subsidiary operates:
Subsidiary Market Market share(%)held by
Market leader
Organic foods ltd food production 6.66
Haul-Trans Ltd Transport unknown
Kitchen appliances Ltd Kitchen appliances 16
Paper supplies ltd Stationery 35
Office products Ltd Workstations 25
The management has decided not to undertake any further acquisitions during the next two
years due to shortage of funds.
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Required:
(a) Identify and comment on FOUR advantages that may be gained as a result of the adoption of a
formal system of strategic planning. (4 Marks)
(b) Explain how the use of SWOT analysis may be of assistance to the management of Diverse
Holdings plc (7 Marks)
(c) Using ONLY the above information, assess the competitive position of Diverse Holdings plc
(8 Marks)
(d) Explain THREE strategies that might be adopted in order to improve the future prospects of
Diverse Holdings plc. (6 Marks)
(25 Marks)
QUESTION FOUR
(a) SW is a member the SWAL Group of companies. SW manufactures cleaning liquid using
chemicals that it buys from a number of supplies. In the past SW has used a periodic review
inventory control system with maximum and re-order levels to control the purchase of the
chemicals and the economic order quantity model to minimize its costs.
The Managing Director of SW is considering a change by introducing a Just in Time (JIT) system.
Required:
As Management Accountant, prepare a report to the Managing Director that explains how a JIT
system differs from the system presently being used and the extent to which its introduction would
require a review of SW’s quality control procedures. (10 Marks)
(b) The X Group is a well-established manufacturing group that operates a number of companies
using similar production and inventory holding policies. All of the companies are in the same
country though there are considerable distances between them.
The group has traditionally operated a constant production system whereby the same volume of
output is produced each week, even though the demand for the group’s products is subject to
seasonal fluctuations. As a result there is always finished goods inventory in the group’s
warehouses waiting for customer orders. This inventory will include a safety inventory equal to
two weeks’ production.
Raw material inventories are ordered from suppliers using the Economic Order Quantity (EOQ)
model in conjunction with computerized inventory control system which identifies the need to
place an order when the re-order level is reached. The purchasing department is centralized for the
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group. On receiving a notification from the computerized inventory control system that an order is
to be placed, a series of quotation enquiries are issued to prospective suppliers so that the best
price and delivery terms are obtained for each order. This practice has resulted in there being a
large number of suppliers to the X Group. Each supplier delivers directly to the company that
requires the material.
The Managing director of the X Group has recently returned from a conference on World Class
Manufacturing and was particularly interested in the possible use of Just in Time (JIT) within the
X Group.
Required:
Write a report, addressed to the Managing Director of the X group, which explains how the
adoption of JIT might affect its profitability. (10 Marks)
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