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Advanced Management Accounting Question Paper
Advanced Management Accounting
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CAA 303-A: ADVANCED MANAGEMENT ACCOUNTING (SATURDAY)
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer ALL questions
QUESTION ONE
a) Edward Co assembles and sells many types of radio. It is considering extending its 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 the 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 Co is considering a target costing approach for its new digital radio product.
Required:
i.) Briefly describe the target costing process that Edward Co should undertake.
(5 Marks)
ii.) Assuming a cost gap was identified in the process, outline possible steps Edward Co could
take to reduce this gap. (5 Marks)
b) A selling price of Shs44 has been set in order to compete with a similar radio on the Market that
has comparable features to Edward Co’s intended product. The board have agreed that the
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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 Shs4·10 each. They are bought in
batches of 4,000 and additional delivery costs are Shs2,400 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 Shs0·50 per metre to buy.
Other material – other materials cost Shs8·10 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 the business. It takes 30 minutes to assemble a radio and the assembly workers are paid
Shs12·60 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 1 620,000 19,000
Month 2 700,000 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:
i.) Calculate the expected cost per unit for the radio and identify any cost gap that might
exist. (10 Marks)
( Total 20 Marks)
QUESTION TWO
Moffat Ltd, which commenced trading on 1 December 2008, 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
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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 Shs2
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
organisation. They are 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 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.
(5 Marks)
(15 Marks)
QUESTION THREE
GE Railways plc (GER) operates a passenger train service in Holtland. The directors have always
focused solely on the use of traditional financial measures in order to assess the performance of GER
since it commenced operations in 1995. The Managing Director of GER has asked you, as a
management accountant, for assistance with regard to
the adoption of a balanced scorecard approach to performance measurement within GER.
Required:
a) Prepare a memorandum explaining the potential benefits and limitations that may arise from the
adoption of a balanced scorecard approach to performance measurement within GER.
(4 Marks)
b) The following information is available in respect of GER for the years ended 31 May 2010 and
2009:
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(1) Summary financial statements
Profit and Loss Account
2010 2009
Shs000 Shs000
Sales 33,000 30,525
Cost of sales (14,850)
(14,652)
Gross Profit 18,150 15,873
Operating expenses (8,250) (7,293)
Depreciation (3,300)
(3,300)
Net Profit
6,600
5,280
Balance Sheet
2010 2009
Shs000 Shs000
Fixed Assets (net book value) 33,160 29,500
Net Current Assets
9,360 6,420
Net Assets 42,520 35,920
Financed by:
Ordinary Share Capital (Shs1 each) 22,500 22,500
Retained Earnings 20,020 13,420
Capital Employed 42,520 35,920
(2) Other information relating to GER
Sales revenue (Shs000) 2010 2009
Existing routes 25,080 24,420
New routes 7,920 6,105
Current Assets and Current Liabilities (Sh000)
Stocks 6,610 4,950
Debtors 2,560 3,550
Creditors 3,960 3,300
Other statistics:
Number of new routes (planned) 4 6
Number of new routes (actual) 6 4
Number of customer ticket enquiries received 1,375,000 1,271,875
Number of customer tickets sold 1,100,000 1,017,500
Number of routes in operation 36 30
Number of routes producing 80% of total
revenue
20
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Number of trains in operation 15 15
Average number of days in use 320 335
5
Number of passenger miles 66,000,000 61,000,000
Average train occupancy 80% 78%
Number of times trains were 100% occupied 120 39
Number of train journeys 4,000 3,900
Number of train station ‘stops’ 10,000 9,500
Number of late arrivals at train station ‘stops’ 200 285
Number of employees 254 250
Number of hours of employee training 2,159 2,000
(3) Each new route introduced required a cash investment in capital equipment of
Shs660, 000.
Required:
(i) Using only the above information, prepare a statement (in columnar format) which shows
goals, measures (one of which must be cash flow) and statistics for each of the four
perspectives of the balanced scorecard in respect of GER. Your answer should include TWO
goals, measures and statistics relating to each perspective of the balanced scorecard.Insofar as
possible you should show statistics for 2009 and 2010. (13 Marks)
(ii) Suggest THREE other performance measures (not applied in (i)) which might be used to
assess the customer perspective of the balanced scorecard of GER. (3 Marks)
(20 Marks)
QUESTION FOUR
The directors of Blaina Packaging Co (BPC), a well-established manufacturer of cardboard boxes, are
currently considering whether to enter the cardboard tube Market. Cardboard tubes are purchased by
customers whose products are wound around tubes of various sizes ranging from large tubes on which
carpets are wound, to small tubes around which films and paper products are wound. The cardboard
tubes are usually purchased in very large quantities by customers. On average, the cardboard tubes
comprise between 1% and 2% of the total cost of the customers’ finished product.
The directors have gathered the following information:
1. The cardboard tubes are manufactured on machines which vary in size and speed. The lowest
cost machine is priced at Shs300,000 and requires only one operative for its operation. A oneday
training course is required in order that an unskilled person can then operate such a
machine in an efficient and effective manner.
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2. The cardboard tubes are made from specially formulated paper which, at times during recent
years, has been in short supply.
3. At present, four major manufacturers of cardboard tubes have an aggregate Market share of
80%. The current Market leader has a 26% Market share. The Market shares of the other three
major manufacturers, one of which is JOL Co, are equal in size. The product ranges offered by
the four major manufacturers are similar in terms of size and quality. The Market has grown by
2% per annum during recent years.
4. A recent report on the activities of a foreign-based multinational company revealed that
consideration was being given to expanding operations in their packaging division overseas.
The division possesses large-scale automated machinery for the manufacture of cardboard
tubes of any size.
5. Another company, Plastic Tubes Co (PTC) produces a narrow, but increasing, range of plastic
tubes which are capable of housing small products such as film and paper-based products. At
present, these tubes are on average 30% more expensive than the equivalent sized cardboard
tubes sold in the Marketplace.
Required:
a) Using Porter’s five forces model, assess the attractiveness of the option to enter the Market for
cardboard tubes as a performance improvement strategy for BPC. (9 Marks)
JOL Co was the Market leader with a share of 30% three years ago. The managing director of JOL Co
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 organisation and therefore we must address this issue
immediately’.
Required:
b) (Discuss the statement of the managing director of JOL Co and discuss six performance indicators,
other than decreasing Market share, which might indicate that JOL Co might fail as a corporate
entity. (6 Marks)
(15 Marks)
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