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Advanced Management Accounting Question Paper
Advanced Management Accounting
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2008
UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 303- A: ADVANCED MANAGEMENT ACCOUNTING
DATE: DECEMBER 2008 TIME: 2 Hours
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) Describe the main elements in corporate failure models and discuss the main
limitations of these models. (10 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)
(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
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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.
(10 Marks)
QUESTION TWO
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:
Year ending 30 November
2006 2007 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
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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.
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)
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(b) Explain how the use of SWORT analysis may be of assistance to the management of
Diverse Holdings plc (3 Marks)
(c) Using ONLY the above information, assess the competitive position of Diverse
Holdings plc (7 Marks)
(d) Explain THREE strategies that might be adopted in order to improve the
future prospects of Diverse Holdings plc. (6
Marks)
(20 Marks)
QUESTION THREE
Moffat ltd, which commenced trading on 1 December 2005, supplies and fits tyres and
exhaust pipes and services motor vehicles at thirty locations. The directors and middle
management are based at the head office of Moffat ltd. Each location has a manager who is
responsible for day-to-day operations and is supported by an administrative assistant. All
other staff at each location are involved in fitting and servicing operations.
The directors of Moffat ltd are currently preparing a financial evaluation of an investment
of shs20 million in a new IT system for submission to its bank. They are concerned that
sub-optimal decisions are being made because the current system does not provide
appropriate information throughout the organization. They also aware that not all of the
benefits from the proposed investment will be quantitative in nature.
Required:
a) Explain the characteristics of three types of information required to assist in
decision-making at different levels of management and on differing timescales
within Moffat ltd, providing two examples of information that would be
appropriate to each level. (10 Marks)
b) Identify and explain three approaches that the directors of Moffat ltd might
apply in assessing the qualitative benefits of the proposed investment in a new
IT system. (6 Marks)
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c) Identify two qualitative benefits that might arise as a consequence of the
investment in a new IT system and explain how you would attempt to assess
them. (4 Marks)
QUESTION FOUR
The following information relates to preston Financial services, an accounting practice. The
business specializes in providing accounting and taxation work for dentists and doctors. In
the main the clients are wealthy, self employed and have an average age of 52.
The business was fonded by and and is wholly owned by Richard Preston, a dominant and
aggressive sole practitioner. He feels that promotion of new products to his clients would
be likely to upset the conservative nature of his dentists and doctors and as a result, the
business has been managed with similar products year on year.
You have been provided with financial information relating to the practice in appendix 1.
In appendix 2, you have been provided with non-financial information which is based on
the balanced scorecard format.
Appendix 1: Financial information
Current year Previous year
Turnover (shs’000) 945 900
Net profit (shs’000) 187 180
Average cash balances (shs’000) 21 20
Average debtor/trade receivables (industry average 30 days) 18 days 22 days
Inflation rate (%) 3 3
Appendix 2: Balanced scorecard (extract)
Internal Business process
Current year Previous year
Error rates in jobs done 16% 10%
Average job completion time 7 weeks 10 weeks
Customer knowledge
Current year Previous year
6
Number of customers 1220 1500Average
fee level (shs) 775 600
Market share 14% 20%
Learning and Growth
Current year Previous year
Percentage of revenue from non-core work 4% 5%
Industry average of the proportion of revenue from non-core work
in accounting practices 30% 25%
Employee retention rate 60% 80%
Notes
1. Error rates measure the number of jobs with mistakes made by staff as a proportion of
the number of clients serviced.
2. Core work is defined as being accountancy and taxation. Non-core work is defined
primary as pension advice and business consultancy. Non core work is traditionally
high margin work.
Required:
a) Using the information in appendix 1 only, comment on the financial performance of the
business (briefly consider growth, profitability, liquidity and credit management).
(8Marks)
b) Using the data given in appendix 2 comment on the performance of the business.
Include comments on internal business processes, customer kwowledge and
learning/growth, separately, and provide a concluding comment on the overall
performance of the business.
(12Marks)
QUESTION FIVE
(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
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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 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.
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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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