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The Uganda Bank (E.A.) Ltd has only two-branches. The head office branch is in the center
of Kampala and the Kagera branch outside Kampala. The head office staff consists of the
managing director and finance manager. With minor exceptions, the branch managers are
permitted to conduct their affairs like the heads of two independent banks. The planning
and control system centers on branch income statements prepared by the Finance Manager.
The Kagera branch, on the other hand, is located outside Kampala in a large and growing
retirement community and as primary retail branch. Mr. Obok, the manager, is in his first
year with the Uganda Bank. In his attempts to sell the bank‟s services to the
Kagera residents, he has found that his only success is the area of foreign deposits. Loan
business, on the other hand, is both competitive and scarce.
The interest rate he can charge is constrained by the fact that the manager of the local
competing branch of the other bank while not actively soliciting loan business is apparently
charging rates below the prevailing Kampala prime rate. Additionally, there seems to be
fundamental resistance in the part of the Kagera residents to the idea of borrowing even at
the 12% rate Obok has been offering.
The Kampala branch located in the growing central business district, serves primarily
commercial customers. The manger, Mr. Kamau, has found in recent years that while he
faces a number of vigorous competitors the principal constraint on his ability to generate
new loan business is lack of supporting deposits. The only alternative source of lending
funds is the purchase of Euro currency, which are foreign deposits held in a bank outside
Africa.
This opinion is considered less than acceptable by Kamau, as the 22% interest he would
have to pay for such funds is higher than the rate he is able to charge loan customers
currently at 20%.
In spite of his frequent lectures on the merits of leverage, the best Obok has been able to do
is to generate a few goll-carat installment and social security cheque receivable loans. As a
result, he finds himself with substantial excess savings deposits, which he has to keep in the
vault to satisfy the government‟s 20% cash reserve requirement, the vault
additionally contains excess lendable funds equal to almost 70% of total savings deposits.
The finance manager has suggested that he lends these funds to Kamau at the Kampala
branch. This was acceptable to both managers, although some disagreement arose as to the
interest rate appropriate for such a loan. The argument was finally settled by the finance
manger, who indicated that the theoretically correct rate was the rate Obok was paying on
savings deposits, 10%. It has been further agreed that if Obok could find additional loans,
any or all of the funds lent to Kamau would be returned.
Required:
a) Evaluate the 10% interbranch loan rate and suggest appropriate changes in relation to
the following criteria:
i Motivating managers to act in a manner consistent with the best interests of the
bank as a whole.
ii Evaluating the performance of individual branches.
b) Would your answer change if the Kagera branch loan rate were to rise to 14%, while all
other rates as well as the level of loan demand at Kampala b ranch, remained the same?
c) Would your answer change if all rates were the same as in (a) above except that he cost
of Euro currency dropped to 18%.
d) Based on your answers to the above, what general statements can you make about the
interbranch loan rate appropriate for evaluation of individual managers?
Date posted:
May 8, 2021
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Siku Kuu Ltd. Manufactures and distributes a line of Christmas gifts. The company had
neglected to keep its gifts line current. As a result, sales have decreased to approximately 25,000
units per year fro a previous high of 125,000 units. The gifts have been redesigned recently and
is considered by company officials to be comparable to its competitors‟ models.
The company plans to redesign the gifts each year in order to compete effectively. Kama
Kawaida, the Sales Manager, is not sure how many units can be sold next year, but she is willing
to place probabilities on her estimates. Kama Kawaida's estimates of the number of
units that can be sold during the next year and the related probabilities are as follows:
Required:
a) Prepare a payoff table for the different sizes of production runs required to meet the four
sales estimates prepared by Kama Kawaida for Siku Kuu Ltd.
If Siku Kuu Ltd. relied solely on the expected monetary value approach to make
decisions, what size of production run would be selected?
b) Identify the seven basic steps that are taken in any decision process. Explain each step by
reference to the situation presented by Siku Kuu Ltd. and your answer to requirement (a)
Date posted:
May 8, 2021
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A company makes a lotion that is manufactured through two processes, A and B. on the 1 November 1995, work in process consisted of the following:
Process B into finished goods while 4000 units remained in progress, 100% complete as to
direct materials and 50% complete as to direct labour and overheads.
All inventories are valued on the weighted average cost basis and transfers from process A
to Process B are treated as part of direct material cost.
Required:
The cost accounts for both processes for the month of November 1995.
Show all supporting computations including the inventory flow through each process.
Date posted:
May 8, 2021
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The Finance Director of Africa Problems Ltd. is considering developing a flexible-budget
formula for the manufacturing overhead costs.
The accounting staffs have suggested that simple linear regression be used to determine the
cost behaviour pattern of the overhead cost. They consider that this method would provide
a good and quick estimate of the costs that can be expected to be incurred each month. The
actual direct-labour hours and corresponding manufacturing overhead costs for each month
between 1996 and 1999 were used in the linear-regression analysis.
The following occurrences during the period are considered unusual:
1. Production was reduced in one month during 1997 due to wildcat strikes related to
political changes in one of the countries.
2. In 1998, production was reduced in one month because of material shortages and
materially increased (overtime scheduled) during two-months to meet the units
required for one-time sales order.
3. Employee benefits were raised significantly in December 1998 as a result of a labour
agreement.
4. Production during 1999 was not affected by any special circumstances.
The accounting staff raised the following issues:
Some members question whether historical data should be used at all to form the basis
for a flexible-budget formula.
Some members believe that he use of data from all 48 months would provide a more
accurate portrayal of the cost behaviour. While they recognized that any of the monthly
data could include efficiencies, they believed these would tend to balance out over a
long period of time.
Still other members felt that only the most recent 12 months should be used because
they were the most current.
Other members of the accounting staff suggested that only those months that were
considered normal should be used so that the regression would not be distorted.
The accounting department ran two regression analyses of the data, one using the data from
all 48 months and the other using only the data from the last 12 months.
The results were as follows:
a)
i Formulate the flexible-budget equation that can be employed to estimate monthly
manufacturing-overhead costs.
ii Calculate the estimate of overhead costs for a month when 37.500 direct labour
hours are worked.
b) Using only the results of the two regression analysis above, explain which of the two
results is more appropriate as a basis for the flexible-budget formula.
c) Evaluate and explain how each of the four issues raised by the accounting department
staff influence our willingness to use the results of the statistical analyses as the basis for
the flexible-budget formula.
Date posted:
May 8, 2021
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Samaki Ltd., a company based in Mombasa, exports vital fishing hooks to Madagascar.
The demand for the hooks is constant and Samaki Ltd., is able to predict the annual
demand with considerable accuracy. The predicted demand for the next couple of year is
200,000 hooks per year.
Samaki Ltd. purchases its hooks from a manufacturer in Mombasa at a price of Sh.400
per hook. In order to transport the purchases from Mombasa to Madagascar, Samaki Ltd.
must charter a ship. The charter services usually charge Sh.20,000 per trip plus Sh.40 per
hook (this includes the cost of loading the ship). The ships have a capacity of 10,000
hooks. The placing of each order including arranging for the ship requires 5 h ours of
employee time. It takes about a week for an order to arrive at the Samaki Ltd. warehouse
in Madagascar. The warehouse has a capacity of 15,000 hooks.
When a ship arrives at the Samaki warehouse, the hooks can be unloaded at a rate of 25
hooks per hour per employee. The unloading equipment used by each employee is rented
from a local supplier at a rate equivalent to Sh.100 per hour. Supervisory time for each
shipload is about 4 hours. The employees working in the warehouse have several tasks:
i Placing the hooks into storage, after they are unloaded which can be done at the
rate of about 40 per hour.
ii Checking, cleaning etc. of the hooks in inventory requires about one-half hour
per hook per year.
iii Removing a hook from inventory and preparing it for shipments to a customer
requires about one-eighth of an hour.
iv Security guards general maintenance, etc. require about 10,000 hours per year.
The average cost per hour of labour is equivalent to Sh.200 (including fringe benefits).
Samaki Ltd. has developed the following prediction equation for its general overhead
(excluding shipping materials, fringe benefits, and equipment rental):
Predicted overhead for the year = Sh.20,000,000 + (Sh.160 x Total labour hours)
The materials used to ship one hook to a customer costs Sh.20 and the delivery costs
average out to about Sh.40 per hook.
The company requires a before-tax rate of return of 20 per cent on its investment.
The ordering policy from the manufacturers by Samaki Ltd., is based on an EOQ. Model,
which is determined by the demand for hooks in Madagascar.
Required
a) Determine the quantity that should be ordered each time and the re-order level
b) If the true overhead prediction equation is:
Sh.16,000,000 + (Sh.240 x Total labour hours), what is the cost of the prediction error?
Date posted:
May 8, 2021
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Mwito Club is a charitable organization based in Nairobi. For the last 20 years, the
club has held an annual dinner and dance event with the primary aim of raising
funds to help the less fortune members of the society.
This year, there is concern that an economic recession may adversely affect the
success of the event with a fall in the number of guests attending and sale of
advertising space in the published events programme.
A study of past experience, current prices and quotations shows that the following
costs and revenues will apply for the event:
Revenue
Dinner and dance
Required:
(i) The expected profit from the event. (Assume one raffle ticket and one
photograph per attendant).
(ii) Describe how cost-volume-profit (C-V-P) analysis can be applied in
absorption costing.
Date posted:
May 7, 2021
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Angels of Mercy Mission Hospital operates on charity basis. The hospital‟s board
of directors has recently complained about the increasing size of the cost budget insisting that
the management should cut down on costs.
The major concern of the board is the cost of maintaining patients at the intensive care unit
(ICU).
The following information is available on the operations of the hospital:
1. The average cost of maintaining a patient at the ICU per week is Shs. 200,000 compared
to Shs. 100,000 per week incurred in maintaining a patient at the high dependency unit
(HDU) and Shs. 50,000 per week of maintaining a patient at the general ward (GW).
2. Past information on patients indicates that:
(i) 50% of the patients in ICU at the beginning of the week will remain in ICU
at the end of the week and 50% will be transferred to HDU by the end of the
week.
(ii) 10% of the patients in HDU at the beginning of the week will be transferred
to ICU, 50% will remain in HDU, and 40% will be transferred to GW.
(iii) 85% of the patients in the GW at the beginning of the week will remain in
GW at the end of the week, 10% will be transferred to HDU and 5% to ICU.
3. The board of directors believe that the criteria for maintaining patients in the ICU is too
strict and should be relaxed so that only 40% of the patients in ICU at the beginning of
the week remain there at the end of the week while 60% are transferred to HDU.
4. The staff at the hospital insist that if the proposed criterion is adopted:
(i) 20% of patients in HDU at the beginning of the week will be transferred to
ICU, 50% will remain in HDU while only 30% will be transferred to GW.
(ii) No changes will be expected in the GW.
5. Past hospital records indicate that the hospital serves an average of 4,000 patients
weekly.
Required:
(a) The steady state weekly costs under the current policy.
(b) The steady state weekly costs under the proposed policy.
(c) Advise the board on the best policy.
(d) State the assumptions of the quantitative technique used in solving problems (a) and
(b) above.
Date posted:
May 7, 2021
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Pwani Marine Ltd., a boat construction company, has developed a new type
of speed boat called “Speed Surf.”
The following information has been availed to you:
1. Boat construction is a continuous assembling process carried out at
the company‟s yard.
2. Boat assembling is labour intensive involving the use of two classes of
labour namely:
Skilled labour at a standard rate of Shs. 1,250 per hour.
Semi-skilled labour at a standard rate of Shs. 950 per hour.
3. Experience on boat construction from other models indicates that the use of
skilled labour is associated with an 80% learning curve effect whereas use of
semi-skilled labour is associated with a 90% learning curve effect.
4. Labour usage for the first speed boat assembled was as follows:
Skilled labour – 952 hours.
Semi-skilled labour – 650 hours.
5. In October 2005, the sixth and the seventh speed boats were assembled
from start to finish. During the month, the following labour usage and costs
were recorded:
Skilled labour – 680 hours at a total cost of Shs. 800,400.
Semi-skilled labour – 1,256 hours at a total cost of Shs. 1,281,200.
The management of Pwani Marine Ltd. is concerned about the cost variances and
would like to learn more on the composition of the variances.
Required:
(i) Calculate the standard labour cost of the month of October 2005.
(ii) Reconcile the standard cost with the actual cost for the month of October
2005 showing the labour rate and labour efficiency variances.
(iii) Express the labour efficiency variance in terms of labour mix and labour
output variances. (Value the labour mix variances using standard rates).
Date posted:
May 7, 2021
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Explain the applications of the learning curve.
Date posted:
May 7, 2021
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Kutwa Ltd. is a manufacturing company with two divisions; A and B. Division A
manufactures a single standard product K, some of which is sold externally and the
remainder used as an input in division B in the manufacture of product M.
The unit production costs of product K are given below:
The manager of division B suggests that based on the above results, a transfer price of Shs.
120 would offer division A a reasonable contribution towards its fixed cost and earn
division B a reasonable profit. This would lead to an increase in the output and overall
profitability of the company.
Required:
( a) Calculate the effect of the existing transfer pricing system on the company‟s profits.
( b) Calculate the effect of adopting the transfer price of Shs. 120 on the company‟s
profits.
Date posted:
May 7, 2021
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Nairobi Manufacturers Ltd. produces component X on machine Y at a rate of 4,000
units per month. Machine Z uses component X at the rate of 1,000 units per month,
the remainder being put into stock. It costs Shs. 2,000 to set up machine Y while the
stock holding cost is estimated at Shs. 2.50 per unit per annum plus a 20% opportunity
cost of capital per annum. Each component costs Shs. 25 to produce.
Required:
(i) Compute the optimal batch size that should be produced using machine Y.
(ii) Assume that the actual set-up cost of machine Y is Shs. 1,000 instead of
Shs. 2,000. Calculate the cost of prediction error.
Date posted:
May 7, 2021
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Manukato Ltd. produces a designer perfume called “Hint of Elegance.”
Production of the perfume involves the use of two ingredients, X1 and X2
represented by the production function given below:
Required:
(i) Calculate the daily expected profit of the company.
(ii) Simulate the company‟s profit for 10 days using the following
random numbers:
58, 71, 96, 30, 24, 18, 46, 23, 34, 27, 85, 13, 99, 24, 44, 49,
18, 09, 79, 49, 74, 16, 32, 23, 02, 56, 88, 87, 59, 41, 06
Date posted:
May 7, 2021
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Shadow prices may be used in the setting of transfer prices between divisions in a
company, where the intermediate products being transferred are in short supply.
Required:
Explain why the transfer prices thus calculated are more likely to be favoured by the
management of the divisions supplying the intermediate products rather than the
management of the divisions receiving the intermediate products.
Date posted:
May 7, 2021
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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 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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State four objectives of a transfer pricing system.
Date posted:
May 7, 2021
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State the limitations of the use of fame theory in decision making.
Date posted:
May 7, 2021
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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 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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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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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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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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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
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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 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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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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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
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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 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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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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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
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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 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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State the factors to be taken into consideration when establishing the length of a budget period.
Date posted:
May 6, 2021
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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 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