When the supplying division does not have sufficient capacity to meet all the demands
placed upon it, linear programming can be used to determine the optimum production
level. The transfer price that will induce the supplying division to produce the optimum
output level can be derived from the linear programming model. The transfer price is
determined by adding the shadow prices of the scarce resources (as indicated by output
from the linear programming model) to the variable costs of the resources consumed by
the intermediate product. This transfer price will result in the supplying division being
credited with all of the contribution arising from the transfers and the receiving division
earning a zero contribution. The allocation of zero contribution to the receiving
division will have a negative motivational influence, and result in a loss of divisional
autonomy and a reported performance that does not reflect the economic performance
of the division.
Kavungya answered the question on May 7, 2021 at 06:23
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Transfer pricing of products between processes in a manufacturing company can be done at:
1. Cost or
2. Sales value at the point of transfer.
Required:
Discuss how each...
(Solved)
Transfer pricing of products between processes in a manufacturing company can be done at:
1. Cost or
2. Sales value at the point of transfer.
Required:
Discuss how each of the above methods could be used effectively in the operations
of a responsibility accounting system.
Date posted:
May 7, 2021
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Answers (1)
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State four objectives of a transfer pricing system.
(Solved)
State four objectives of a transfer pricing system.
Date posted:
May 7, 2021
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Answers (1)
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State the limitations of the use of fame theory in decision making.
(Solved)
State the limitations of the use of fame theory in decision making.
Date posted:
May 7, 2021
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Answers (1)
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Topcom Kenya International Limited (TKIL) is a telecommunications company
situated in Nakuru. Recently, the company was faced with a workers strike which
necessitated a renegotiation of the...
(Solved)
Topcom Kenya International Limited (TKIL) is a telecommunications company
situated in Nakuru. Recently, the company was faced with a workers strike which
necessitated a renegotiation of the workers‟ salaries through their union.
The management with the help of a consultant, has prepared the pay-off matrix
shown below:
A positive sign represents a wage increase while a negative sign represents a wage decrease.
Required:
(i) Advise the management on the best strategies.
(ii) The value of the game
Date posted:
May 7, 2021
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Answers (1)
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Makazi Ltd. manufactures a hedge-trimming tool which has been selling at Shs.
1,600 per unit for a number of years. The selling price is to be...
(Solved)
Makazi Ltd. manufactures a hedge-trimming tool which has been selling at Shs.
1,600 per unit for a number of years. The selling price is to be reviewed and the
following information is available on costs and the likely demand:
1. The standard variable cost of manufacturing the tool is Shs. 1,000 per unit and
an analysis of the cost variances in the past 20 months shows the following
pattern which the production manager expects to continue in the future.
Adverse variances of 10% of the standard variables cost occurred in ten
of the twenty months.
Nil variances occurred in six of the twenty months.
Required:
(i) Based on the information given above, advise the management of Makazi Ltd.
on whether they should change the selling price. Indicate the price you would
recommend.
(ii) The expected profit at the price you have recommended in (i) above and the
resulting margin of safety expressed as a percentage of expected sales
(iii) Comment on the method of analysis you have used to deal with the
probabilities given in the question.
(iv) Explain briefly how the use of a computer program would improve your
analysis.
Date posted:
May 7, 2021
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Answers (1)
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Equi -solutions Ltd. was formed ten years ago to provide business equipment solutions tolocal business. It has separate divisions for research, marketing, product design, technologyand...
(Solved)
Equi -solutions Ltd. was formed ten years ago to provide business equipment solutions to
local business. It has separate divisions for research, marketing, product design, technology
and communication services, and now manufactures and supplies a wide range of business
equipment. To date the company has evaluated its performance using monthly financial
reports that analyze profitability by type of equipment. The managing director of Equi solutions
Ltd. has recently returned from a course in which it has been suggested that the
“Balanced Scorecard” could be a useful way of measuring performance.
Required:
a) Explain the “Balanced Scorecard” and how it could be used by Equi-solutions Ltd. to
measure its performance.
b) The managing director of Equi-solutions Ltd. also overheard someone mention how the
performance of their company had improved after they introduced “Bench marking.”
Required:
Explain “Bench-marking” and how it could be used to improve the performance of
Equi -solutions Ltd.
Date posted:
May 7, 2021
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Answers (1)
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Best Sell Ltd. has decided to launch a new product in addition to its range of
products. The following information is available:
1. The new product may...
(Solved)
Best Sell Ltd. has decided to launch a new product in addition to its range of
products. The following information is available:
1. The new product may be distributed through any combination of the two
company warehouses W1 and W2.
2. The available monthly production capabilities for the new products are:
1000 units at plant A
2000 units at plant B
1000 units at plant C
3. Three major concentration points of customer demand are at locations E, F
and G which are estimated to have a monthly demand of:
900 units at E
800 units at F
900 units at G
4. The unit production costs amount to Sh.30, Sh.40, Sh.10 at A, B and C
respectively.
5. The unit handling costs at the warehouses amount to Sh.20 and Sh.30 at W1
and W2.
6. The unit transportation costs from plant to warehouse and unit delivery cost
from warehouse to customers are as shown below:
Required:
Determine the optimum production and distribution schedule to minimize total cost.
Date posted:
May 7, 2021
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Answers (1)
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Explain the following terms as applied in competitive situations:
i) Degeneracy
ii) Pure strategy
iii) Mixed strategy
iv) Dominance rule
(Solved)
Explain the following terms as applied in competitive situations:
i) Degeneracy
ii) Pure strategy
iii) Mixed strategy
iv) Dominance rule
Date posted:
May 7, 2021
.
Answers (1)
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Industrial Chemical Ltd. (ICL) produces chemical Y. the standard ingredients of 1 kilogram
of Y are:
0.65 kilograms of ingredient F @ Sh. 40 per Kg
0.30 kilograms...
(Solved)
Industrial Chemical Ltd. (ICL) produces chemical Y. the standard ingredients of 1 kilogram
of Y are:
0.65 kilograms of ingredient F @ Sh. 40 per Kg
0.30 kilograms of ingredient D @ Sh. 60 per Kg.
0.20 kilograms of ingredient N @ Sh. 25 per Kg.
The following additional information is provided:
1. Production of 4,000 kilograms of chemical Y was budgeted for October 2004.
2. The production of chemical Y is entirely automated and production costs attributed to
its production comprise only direct materials and overheads.
3. ICL‟s production process works on a just-in-time (JIT) inventory system and
no ingredients or inventories of chemical Y are held.
4. Overheads budgeted for the production of Y in the month of October 2004 were as
follows:
5. In October 2004, 4,200 kilograms of Y were produced and the cost details were as
follows:
Materials used
2,840 kilograms of F, 1,210 kilograms of D and 860 kilograms of N at a total cost of
Sh. 203,800.
Actual overhead costs
12 supply deliveries at a cost of Sh.48,000 and 38 customer dispatches at a cost of
Sh. 78,000 were made.
6. ICL‟s budget committee met recently to discuss the preparation of the cost
control report for October 2004 and the following discussion took place:
Chief accountant: “the overheads do not vary directly worth output and
are therefore by definition „fixed‟. They should be analyzed and reported
accordingly”.
Management accountant: “the overheads do not vary with output, but they
are certainly not fixed. They should be analyzed and reported on an activity based
basis.”
Required:
Having regard to this discussion,
a) Prepare a variance analysis of the production costs of Y in October 2004. (Separate the
material cost variance into price, mixture and yield components and the overhead cost
variance into expenditure, capacity and efficiency components using consumption of
ingredient F as the overhead absorption base).
b) Prepare a variance analysis of the overhead production costs on Y in October 2004 on
an activity based basis.
Date posted:
May 7, 2021
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Answers (1)
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Maisha Meta Products Ltd. has prepared a schedule of estimated overhead costs for the
coming year. The schedule was prepared on the assumption that production would...
(Solved)
Maisha Meta Products Ltd. has prepared a schedule of estimated overhead costs for the
coming year. The schedule was prepared on the assumption that production would amount
to 800,000 units. Costs have been classified as either fixed or variable according to the
judgement of the financial controller. The following overhead cost items and their
classification as either fixed or variable form the basis for the overhead cost schedule:
Required:
a) Determine the cost estimation equation using the account analysis method
b) Use the high-low method to estimate the cost of 800,000 units of production expected
in the coming period.
c) Using the simple linear regression, estimate the cost of 800,000 units of production.
d) Use the multiple regression results to prepare an estimated cost for the 800,000 units in
the incoming period.
e) Comment on which of the methods is more appropriate under the above circumstances.
Date posted:
May 6, 2021
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Answers (1)
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The Marima Manufacturing Company produces four products; W, X, Y and Z using
the same plant and processes.
The following information relates to the company:
Required:
(i) Unit costs...
(Solved)
The Marima Manufacturing Company produces four products; W, X, Y and Z using
the same plant and processes.
The following information relates to the company:
Required:
(i) Unit costs per product using activity-based costing tracing costs to production units by
means of cost drivers.
(ii) Comment briefly on the differences disclosed between overheads traced by the present
system and those traced by activity based costing.
Date posted:
May 6, 2021
.
Answers (1)
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The current thinking in Management Accounting contends that Activity-Based
Costing (ABC) provides better information concerning products costs and decision
making than traditional management accounting techniques.
However, whereas ABC...
(Solved)
The current thinking in Management Accounting contends that Activity-Based
Costing (ABC) provides better information concerning products costs and decision
making than traditional management accounting techniques.
However, whereas ABC may give a different impression of product costs, it is not
necessarily a good idea and it may be advisable to continue improving traditional
cost accounting techniques before moving to ABC.
Required:
(i) Explain cost behaviour issues underlying the use of ABC.
(ii) Explain why ABC might, be more suitable for modern manufacturing
environment than traditional cost accounting techniques?
(iii) Comment on the reported claim that ABC gives better information as a
guide to decision making than the traditional product costing techniques.
Date posted:
May 6, 2021
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Answers (1)
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Mwamba Development Group (MDG) plans to undertake a project consisting of eleven (11)
tasks. The expected completion time of each task is uncertain and this makes...
(Solved)
Mwamba Development Group (MDG) plans to undertake a project consisting of eleven (11)
tasks. The expected completion time of each task is uncertain and this makes the project
completion time uncertain. MDG has approached a consultancy firm for advice on the
expected project completion time.
The consultancy firm intends to use simulation analysis to deal with the uncertainty of the
project completion time. The following data were obtained by the consultancy firm, for the
purpose of simulation analysis:
Required:
(a) Explain the basic steps that can be used to solve this type of problem simulation
technique.
(b) Draw the network for the project and determine the critical path of the project. Use the
activity‟s expected time to determine the expected completion time of the
project.
(c) Carry out four simulation runs for each activity and using the results of the
simulation, determine the expected project completion time.
(d) State two advantages and two disadvantages of the simulation technique.
Use the following random numbers.
95, 30, 59, 93, 28, 72, 09, 54, 66, 95, 36, 98, 56, 23, 60, 79, 14, 50, 61, 81, 84, 14, 24,
75, 85, 49, 05, 09, 53, 45, 60, 98, 90, 86, 74, 55, 69, 09, 10, 96, 40, 27, 15, 83
Date posted:
May 6, 2021
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Answers (1)
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Kenya Fashions Ltd. sells a wide range of high quality customized outfits. One
particular outfit is bought at Sh.800 and sold at Sh.1,300. Mean holding costs...
(Solved)
Kenya Fashions Ltd. sells a wide range of high quality customized outfits. One
particular outfit is bought at Sh.800 and sold at Sh.1,300. Mean holding costs per
season per outfit amounts to Sh.50 and it costs Sh.8,000 to order and receive goods
into stock. The manufacturers require orders in advance and once a batch has been
made, it is not possible to place a repeat order. Further, it is not possible for
delivery to be staggered over the fashion season.
When a customer buys an outfit, she has a fitting, any alterations or adjustments are
made, and then she collects the outfit a day or so later. Generally if an outfit is out
of stock at one branch, it can be readily obtained from another branch, usually in a
matter of hours. However, if the company as a whole runs out of an item, then the
cost of the stock out is Shs. 200 per item. If the company over buys for a season,
then it is expected that it will be able to dispose of the surplus outfits at Sh.500 each.
The problem facing the management accountant of the company is to decide how many
outfits to order for the season ahead in order to maximize expected profit, bearing in mind
the penalties for over and under ordering.
Required:
(i) Determine the number of outfits to order to maximize expected profits.
(ii) Compare and contrast the model that you have developed with the classical economic
quantity model.
Date posted:
May 6, 2021
.
Answers (1)
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From past experience, a company operating a standard cost accounting system has
accumulated the following information in relation to variances in its monthly
management accounts:
1. Its variances...
(Solved)
From past experience, a company operating a standard cost accounting system has
accumulated the following information in relation to variances in its monthly
management accounts:
1. Its variances fall into two categories:
2. For the first category corrective action has eliminated 70% of the variances,
but the remainder have continued unchanged.
3. The cost of an investigation averages Sh.3,500 and that of correcting
variances averages sh.5,500.
4. The average cost of any variance not corrected is Sh.5,250 per month and
the company's policy is to assess the present value of such costs at 2% per
month for a period of five months.
Required:
(i) Two decision trees to represent the position if an investigation is carried
out and the position when an investigation is not carried out.
(ii) Recommend with supporting calculations, whether or not the company
should follow a policy of investigating variances as a matter of routine.
(iii) Explain briefly two types of circumstances that would give rise to variances
in the first category and two types of circumstances that would give rise to
variances in the second category.
Date posted:
May 6, 2021
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Answers (1)
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State the factors to be taken into consideration when establishing the length of a budget period.
(Solved)
State the factors to be taken into consideration when establishing the length of a budget period.
Date posted:
May 6, 2021
.
Answers (1)
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In preparing the cash budget for the next year, Kericho Tea Farm Limited finds that
it has limited surplus funds of Sh.70,000,000 which the managing directors...
(Solved)
In preparing the cash budget for the next year, Kericho Tea Farm Limited finds that
it has limited surplus funds of Sh.70,000,000 which the managing directors wishes
to spend on one of two schemes.
Scheme A - Pay Sh.70,000,000 immediately to reputable sales promotion agency which
would provide extensive advertising and planned „reminder‟ advertising over
the next ten years. This is expected to increase the net operational cash flows
by sh.200,000,000 per annum for the first five years and Sh.100,000,000 for
the following five years. Thereafter, the effect would be zero.
Scheme B - Buy immediately labour saving machinery at a cost of Sh.70,000,000 which
would reduce the operating cash outflows by sh.150,000,000 per annum for
the next ten years, at the end of which the equipment will have a salvage
value of zero.
Required
(i) The average accounting rate of return (ARR) per annum for each scheme over 10 years.
(ii) The net present value (NPV) for each scheme assuming the desired rate of return is 18%.
(iii) The internal rate of return (IRR) for each alternative.
Date posted:
May 6, 2021
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Answers (1)
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Marashi Company Ltd. is a merchandising company selling a 40ml bottle of perfume in four
zones within Kenya. The variable cost per bottle is Sh.70 but...
(Solved)
Marashi Company Ltd. is a merchandising company selling a 40ml bottle of perfume in four
zones within Kenya. The variable cost per bottle is Sh.70 but the selling price is different in
each of the four zones. The difference in the selling price is due to the transportation costs
involved. The company has four salesmen available for an assignment in the four zones. The
zones are not equally good in their sales potential. It is estimated that a typical salesman
operating in each zone would bring the following annual sales:
The objective of Marashi Company Ltd. is to maximize contribution from each zone.
Required:
(a) Determine how the four salesmen can be assigned to the zones in order for the
company to maximize the total contribution.
(b) Calculate the total contribution of the company after the assignment.
Date posted:
May 6, 2021
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Answers (1)
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Nzewani Electronic Ltd. manufactures and sells a brand of television sets called LD-TVs.
The three closest competitor brands in the market are SUM-TVs, SON-TVs. Because of...
(Solved)
Nzewani Electronic Ltd. manufactures and sells a brand of television sets called LD-TVs.
The three closest competitor brands in the market are SUM-TVs, SON-TVs. Because of the
custom manufacturing process and their inherent high costs, no other competitor has any
effect on the current market. The year 2002 was an exceptionally good year in terms of gain loss
trade offs. The year's activity is summarized in the following table:
Required:
(a) Advise the management of Nzewani Electronic Ltd. on the expected market share
for each brand at the end of December 2002.
(b) Assuming the same pattern of switching persists, what would be the long run
market share for each brand?
(c) What are the assumptions of the technique you have used in (a) and (b) above?
Date posted:
May 6, 2021
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Answers (1)
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Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio
of 3:1 at the split-off point. The two products are...
(Solved)
Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio
of 3:1 at the split-off point. The two products are taken to the mixing plant for blending and
refining after the split off point. The following information is also provided:
The joint process costs are 70% fixed and 30% variable whereas the mixing plant costs are
30% fixed and 70% variable. There are only 5000 hours available in the mixing plant. Usually
4000 hours are taken in processing of Product P1 and P2, 2000 hours for each product while
the remaining 1000 hours are used for other work that generates a contribution of
Sh.100,000 per hour.
The company is now planning to change the production mix of the joint process to 3:2 for
product P1 and P2 respectively. This change will result in an increase in the joint cost by
Sh.500 for each additional litre of P2produced.
Required:
(a) Advise the company on whether to change the production mix.
(b) Explain other qualitative factors that are important to consider before changing the production mix.
Date posted:
May 6, 2021
.
Answers (1)