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(i) Managers might be in a better position to control their organization?s own
inputs than the cost or usage efficiency of purchased material and services. If this is so,
value added statements focus attention on what managers can do something about.
They would also reflect the quality of such management's effort.
(ii) Value added statements also focus attention on how the benefits are shared out, and
in particular: -
Whether the employees are getting paid too much for what they are doing. If the
value added per unit of labour is declining, management will be made aware of
the need to keep labour costs under control. On the other hand, an improving
value added per shilling of labour cost would suggest that there is some scope
for rewarding employees more highly.
Whether enough funds are being returned in the business (depreciation plus
retained profits) to provide for asset replacement and internally –funded growth.
(iii) In organizations where the material cost content is a high proportion on total costs, the
total profit will be influenced by changes in material prices (largely outside management
control) and possibly also by occasional stock losses or profits when material prices alter
value added statements, by taking out material costs as a separate item, allow
alterations to be directed at activities within management?s control.
(iv) Value added in relations to labour effort and labour costs provides excellent
measures of productivity, and so far comprising the relative productivity of two or
more divisions.
Kavungya answered the question on May 3, 2021 at 13:53
- Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets...(Solved)
Some businesses which supply two or more separate markets from a single source may decide to charge a higher price for sales to home markets than for export sales. The businesses may justify their pricing policy by stating that they need to earn foreign exchange from foreign markets and recover their research and development costs, plus production overheads against home demand.
Required:
i Critically explain briefly the rationale for such a differential pricing policy.
ii Should earning of foreign exchange be a factor in a firm's pricing policy.
Date posted: May 3, 2021. Answers (1)
- Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000
units in the coming year. At this level of activity, his...(Solved)
Alvis Kiptoo has budgeted that output and sales of his single product will be 100,000
units in the coming year. At this level of activity, his unit variable costs are budgeted at
Sh.50 and his unit fixed costs at Sh.25. His sales manager estimates that the demand for
the product would increases by 1000 units for every decreased of Sh.1 in unit selling
price (and vice versa) and that at a unit selling price of Sh.200 demand would be nil.
Information about two price increases has just been received from suppliers: one is for
materials (which are included in Alvis Kiptoo‟s variable costs) and one is for
fuel (which included in his fixed costs). Their effect will be to increase both the variable
and fixed costs by 20% each over the budgeted figures.
Alvis Kiptoo aims at maximizing profits from his business.
Required:
a. Calculate before the cost increases the budgeted contribution and profit at the budgeted levels of 100,000 units.
b. Calculate the level of sales at which profits would be maximized and the amounts of these maximum profits before the cost increases.
c. Show whether and by how much Alvis Kiptoo should adjust his selling price in respect to increases in:
- Fuel costs.
- Material costs.
Date posted: May 3, 2021. Answers (1)
- The Executive Furnitures Ltd. (EFL) produces a unique type of computer desks. Four of
EFL?s main outlets are S1, S2,S3, and S4.These outlets already have requirements
in...(Solved)
The Executive Furnitures Ltd. (EFL) produces a unique type of computer desks. Four of
EFL‟s main outlets are S1, S2,S3, and S4.These outlets already have requirements
in excess of the combined capacity of its three production plants P1,P2, and P3. The
company needs to know how to allocate its production capacity to maximize profits.
Distribution costs (in Sh.) per unit from each production plant to each outlet are given in
the following table:
Since the four outlets are in different parts of the country and as there are differing
transportation costs between the production plants and the outlets along with slightly
different production costs at different production plants there is a pricing structure which
enables different prices to be charged at the four outlets. Currently, the price per unit
charged is Sh.2,300 at S1, Sh.2,350 at S2, Sh.2,250 at S3, and Sh.2,400 at S4. The variable unit
production costs are Sh.1,500 at plants P1 and P 3 and Sh.1,550 at plant P2. The demand at
S1,S2, S3 and S4 are 850, 640, 380 and 230 desks respectively while the plant capacity at plant
P1, P2 and P3are 625, 825 and 450 desks respectively.
Required:
Using the transportation algorithm, determine the contribution to profit for the optimal
allocation.
Date posted: May 3, 2021. Answers (1)
- Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs.(Solved)
Highlight how the transportation algorithm can be modified for profit maximization rather than minimization of costs.
Date posted: May 3, 2021. Answers (1)
- Sola Ltd. is a manufacturing company that requires component XLA20 in one of its production lines. The components are bought from outside suppliers. Form past...(Solved)
Sola Ltd. is a manufacturing company that requires component XLA20 in one of its production lines. The components are bought from outside suppliers. Form past experience, the company has determined that the demand for the component can be approximated by a normal distribution with a mean of 500 and a standard deviation of 10, over the range 470 to
530.
The unit is an initial stock of 2000 components and the company has decided to order in batches of 2500 whenever the stock level falls below 1500 components. Again, past experience indicates that the time between the order being placed and delivery varies as follows:
The unit cost of holding stock is Sh.5 per week applied to the total stock held at the end of
each week. The cost associated with placing an order is Sh.5.00 and the unit cost of being
out of stock is Sh.200 per week. The company does all its accounting at the end of the week
and all ordering and delivery occur at the beginning of a week.
Required:
Estimate the average cost per week of the above policy, using simulation analysis and the
following random numbers:
Date posted: May 3, 2021. Answers (1)
- A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss.(Solved)
A critic has suggested that budgets should be abolished because they introduce rigidity and hamper creativity. Discuss.
Date posted: May 3, 2021. Answers (1)
- In his study of: “the impact of budgets on people” C Argyris reported the following
comment by a financial controller on the practice of participation in...(Solved)
In his study of: “the impact of budgets on people” C Argyris reported the following
comment by a financial controller on the practice of participation in setting budgets in
his company:
“We bring in the supervisors of budget areas, we tell them that we want their frank
opinion, but most of them just sit there and nod their heads. We know they are not
coming out with exactly what they feel. I guess budget scares them”.
Explain why managers may be reluctant to participate fully in setting budgets, indicating
the negative side effects, which may arise from the imposition of budgets by senior management.
Date posted: May 3, 2021. Answers (1)
- Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site
in North Eastern Kenya. The Chief Engineer...(Solved)
Watt Lovell Ltd. (WLL) is trying to decide whether or not to drill for oil on a particular site
in North Eastern Kenya. The Chief Engineer has assessed the probabilities that there will be
oil as follow, based on past experience.
Oil 0.2
No oil 0.8
It is possible for WLL to hire a firm of international consultants to carry out a complete
survey of the site. WLL has used the firm many times before and has made the following
estimates:
1. If there really is oil, then there is a 95% chance that the report will be favourable.
2. If there is no oil then there is only a 10% chance that the report will indicate that there is oil.
The following additional information is also provided:
The cost of drilling is Sh.10 million.
The value of the benefits if oil is found is Sh.70 million
The cost of obtaining information is Sh.3 million.
Required:
a) Advise the company on whether to acquire additional information from the consultants
b) Compute the value of imperfect information.
Date posted: May 3, 2021. Answers (1)
- Muthothi Ltd. Operates a conventional stock control system based on re-order levels and
Economic Order Quantities (EOQ). The various control levels were set originally based on
estimates...(Solved)
Muthothi Ltd. Operates a conventional stock control system based on re-order levels and
Economic Order Quantities (EOQ). The various control levels were set originally based on
estimates which did not allow for any uncertainty and this has caused difficulties because, in
practice, lead times, demands and other factors to vary.
The company works for 360 days per year and it costs Sh.1,000 to place an order. The
holding cost is estimated at Sh.0.025 for storage plus 10% opportunity cost of capital. Each
unit is purchased at Sh.2. The re-order level for this part is currently 150,000 units and it can
be assumed that the demands would apply for the whole of the appropriate lead-time.
Required:
a) Calculate the level of buffer stock implicit in a re-order level of 150,000 units.
b) Calculate the probability of stock-outs.
c) Calculate the expected annual stock-outs in units.
d) Compute the stock-out costs per unit at which it would be worthwhile raising the reorder
level to 175,000 units.
e) Discuss the possible alternatives to a re-order level EOQ inventory system and their
advantages and disadvantages.
Date posted: May 3, 2021. Answers (1)
- A manufacturer produces and sells two products, A and B. The unit variable cost is sh.12
and sh.8 for A and B respectively. A review of...(Solved)
A manufacturer produces and sells two products, A and B. The unit variable cost is sh.12
and sh.8 for A and B respectively. A review of selling prices is in progress and it has
been estimated that, for each product and increase in the selling price would result in a
fall in demand of Sh.500 units per every Sh.1 increase in price and similarly a decrease of
Sh.1 in price would result in an increase in demand of 500 units.
Required:
Calculate the profit-maximizing price for reach product.
Date posted: May 3, 2021. Answers (1)
- The Z division of XYZ Ltd., produces a component which it sells externally, and can also
be transferred to other divisions within the organization. The division...(Solved)
The Z division of XYZ Ltd., produces a component which it sells externally, and can also
be transferred to other divisions within the organization. The division has set a
performance target for the coming financial year of residual income of Shs. 5,000,000.
The following budgeted information relating to Z division has been prepared for the
coming financial year.
1. Maximum production/sales capacity 800,000 units.
2. Sales to external customers: 500,000 units at Sh.37.
3. Variable cost per component Sh.25.
4. Fixed costs directly attributable to the division Sh.1,400,000.
5. Capital employed: Sh.20,000,000 with cost of capital of 13%
The X division of XYZ Ltd has asked Z division to quote a transfer price for units of the
component.
Required:
i Calculate the transfer price per component which Z division should quote to X
division so that its residual income target is achieved.
ii Explain why the transfer price calculated in (i) above may lead to sub -optimal
decision making from the point of view of XYZ Ltd taken as a whole.
Date posted: May 3, 2021. Answers (1)
- “Control theory offers valuable insights into the design and operation of management
accounting information systems, but only under circumstances where an organization?s
environment is stable and predictable...(Solved)
“Control theory offers valuable insights into the design and operation of management
accounting information systems, but only under circumstances where an organization‟s
environment is stable and predictable and outcomes are clearly measurable.”
Required:
Comment on the relevance and validity of this statement within the analysis or established
control theory systems within a business organization.
Date posted: May 3, 2021. Answers (1)
- A processing company, Timao Co. Ltd., is extremely busy. It has increased its output and
sales from 12,900 kg in 1st quarter of the year to...(Solved)
A processing company, Timao Co. Ltd., is extremely busy. It has increased its output and
sales from 12,900 kg in 1st quarter of the year to 17,300 kg in the 2nd quarter. Although
demand is still rising, it cannot increase its output more than an additional 5% from its
existing labour force, which is now at its maximum.
Data for its four products in 2nd quarter were:
The Kagocho Company has offered to supply 2000 kg of product Q at a delivered price of
90% of Timao‟s Co. Ltd. Selling price. Timao Co. Ltd., will then be able to
produce extra of product P instead of product Q to the plant‟s total capacity.
Required:
a) State with supporting calculations, whether Timao Co. Ltd should accept the Kagocho
Company‟s offer.
b) Which would be the most profitable combination of subcontracting 2000kg of one
product at a price of 90% of its selling price and producing extra quantities of another
product up to the plant total capacity?
Assume that the market can absorb the extra output.
Date posted: May 3, 2021. Answers (1)