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Agbm 231:Management Accounting Question Paper
Agbm 231:Management Accounting
Course:Agribusiness Management
Institution: Chuka University question papers
Exam Year:2011
INSTRUCTIONS:
1. Answer Question ONE and ay other TWO questions. 2. Show all your workings. 3. Do not write on the question paper.
QUESTION ONE
(a) Discuss briefly the role of the Management Account in the Management Process. [3 marks]
(b) Management Accounting is aimed at helping the management make informed decisions. Describe the decision making process giving examples in each of the elements of the decision making, planning and control process. [7 marks]
(c) An appreciation of the cost structure of a business is critical to its strategic and operational success. Even in hard times, managing and protecting a cost base can deliver superior performance. A case in point is that of low-cost airline companies like Kenya Airways. Despite largely uncontrollable events like terrorist threats and high oil prices, Kenya Airways continue to deliver high profit and growth figures while mainstream airlines struggle. Such growth and profit can only be maintained through a continuous focus on all costs of the company. Such a focus requires a complete understanding of operations and associated costs. For the 2009/2010 financial year, Kenya airways allegedly reported a 20 per cent increase in passenger traffic, a 22 per cent increase in turnover and a 10 per cent increase in after tax profit. Costs were reduced by 6 per cent, fuel excluded.
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Examples of cost saving initiatives by Kenya Airways were web-based check-in and aircraft winglet modification. Web-based check-in with associated baggage charges has encouraged passengers to travel with fewer bags thereby reducing handling costs and improving fuel efficiency. A small modification to its standard Boeing 737 aircraft – a winglet at the end of each wing has reduced fuel consumption by 2 percent. Mike the CEO comments that low cost model adopted by Kenya Airways will allow continued growth when many competitors are reporting losses.
Required:
(i) Can you identify fixed and variable costs which might be incurred at a company like Kenya Airways. [5 marks]
(ii) Would you agree that a business can do nothing about costs which are beyond its internal control? Support your answer. [5 marks]
(d) John has taken out lease on a shop for a down payment of Shs.5,000. Additionally, the rent under the lease amounts to Shs.5,000 per annum. If the lease is cancelled, the initial payment of Shs.5,000 is forfeited. Mrs John plans to use the shop for the sale of clothing and has estimated operations for the next twelve months as follows:
Shs. Shs. Sales 115,000 Less Value added tax (VAT) 15,000 Sales less VAT 100,000 Costs of goods sold 50,000 Wages and wages related costs 12,000 Rent including the down payment 10,000 Rates, heating, lighting & Insurance 13,000 Audit, legal and general expenses 2,000 87,000 Net profit before tax 13,000 ======
In the figures no provision has been made for the cost of Mrs. John but it is estimated that one half of her time will be devoted to the business. She is undecided whether to continue with her plans, because the shows that she can sublet the shop to a friend for a monthly rent of Shs.550 if she does not use the shop herself.
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Required:
(i) Explain and identify the ‘sunk’ and ‘opportunity’ costs in the situation above. (ii) State what decisions Mrs. John should make according to the information given, supporting your answer with a financial statement. [11 marks]
QUESTION TWO
(a) Identify and discuss briefly FIVE assumptions underlying the cost-volume-profit analysis. [10 marks]
(b) Chuka Holdings manufactures various products and uses CVP analysis to establish the minimum level of production to ensure profitability. Fixed costs of Shs.500,000 have been allocated to a specific product but are expected to increase to Shs.1,000,000 once the product exceeds 300,000 units, as a new factory will need to be rented in order to produce the extra units. Variable costs per unit are stable at Shs.50 per unit over all levels of activity. Revenue from this product will be Shs.70.50 per unit.
Required:
(i) Formulate the equations for the total cost at:
(a) Less than or equal to 300,000 (b) More than 300,000 units [2 marks]
(ii) Prepare a break-even chart and clearly identify the breakeven points or point. [6 marks]
(iii) Discuss the implications of the results from hour graph in (ii) with regard to Chuka Holdings production plans. [2 marks]
QUESTION THREE
(a) Discuss briefly how information concerning the cost of individual jobs can be used. [6 marks]
(b) The following data are extracts from the books of Kenya Machines Engineering. IT has received an order (Job No.989) to install one Chilling Machine for Brookside Dairy Ltd.
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Estimated cost for the job is:
Shs. Direct materials purchased 295,900 Stores issued to job 989 139,920 Materials returned to supplier 13,200 Materials returned to store 26,620 Direct labour: Machining 299,200 Turning 52,360 Assembly, packing etc 110,440 Installation cost: Labour & other expenses 47,520
Absorb factory overhead to jobs at 662/3% of total factory wages and selling and administration overheads at 25% factory production costs (including installation charges).
Delivery Overheads Shs. Carriage & Insurance (actual) 40,700 Sales price (Customer quotation) 1,705,000
Required:
Prepare a Job-order account and show total costs and net profit on selling price. [14 marks]
QUESTION FOUR
(a) Briefly discuss three advantages and three disadvantages of marginal costing approach. [6 marks]
(b) You have been appointed manager of Farmers hotel, which has 300 available bedrooms, let at a flat rate of Shs.450 per night. After a month you find that occupation of the hotel bedrooms is rarely more than 50% capacity. Examination of last year’s records discloses that sales revenue from rooms was 20,000,000. The daily rate has not been changed for 18 months. Fixed costs associated with the letting for the year amounted to Shs.10,000,000 while variable cost for the year which varied in direct proportion to room, usage totaled to Shs.4,000,000.
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Required:
(i) The break-even point in shillings (assuming no change since last year).
(ii) Assuming that the hotel operated for 365 days last year, determine the break-even point in the number of rooms occupied.
(iii) You wish to increase the previous year’s profit by Shs.2,000,000 this year (assuming no changes in costs or rates charged). Calculate:
(a) The sales revenue required to achieve the higher profit. (b) The additional number of rooms let per night beyond the average number occupied per night last year.
QUESTION FIVE
(a) Explain the meaning of the term ‘standard cost’ and elucidate on the difficulties encountered when setting standard costs. [4 marks]
(b) State and briefly discuss the budget making stages. [5 marks]
(c) The Mitheru Tea Factory had a long history of using bonuses that were specifically tied to performance. Minimal inventories of any kind were kept. The purchasing manager was given a bonus of 5% of the favourable purchase price variance for the year. The production manager was given a bonus of 5% of the favourable direct material efficiency for the year plus additional bonuses regarding labour overhead variances. In 2007, the performance regarding material AXZ, an important chemical ingredients was:
Standard kilograms allowed per finished unit – 1kg at Shs.10.00 Actual kilograms used were 5,000,000 Actual production was 5,200,000 finished units Actual unit purchase is Shs.9.
Required:
(i) Compute the material price and efficiency variance.
(ii) As the purchasing manager, would you be pleased by the favourable efficiency variance? Why or why not? Would your attitude change if the actual unit price were Shs.11? [11 marks]
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