Institute of Chartered Accountants Ghana (ICAG) Paper 2.2 Management Accounting

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1 Institute of Chartered Accountants Ghana (ICAG) Paper. Management Accounting Final Mock Exam Marking scheme and suggested solutions DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK EXAM

2 ii Management Accounting The Institute of Chartered Accountants Ghana First edition 05 ISBN All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. Published by BPP Learning Media Ltd BPP House, Aldine Place London W 8AA The Institute of Chartered Accountants Ghana 05

3 Final Mock Exam : Answers Question Marking scheme Marks (a) (i) System of symbols Classification Referencing 3 (ii) ½ marks for each 3 Sales value Joint cost apportionment 3 Statement 4 9 (c) (i) Correct justification Irrelevance of cost share (ii) Correct basis Correct conclusion Justification 5 0 (a) (i) Once costs have been classified, a coding system can be applied to make it easier to manage the cost data, both in manual systems and in computerised systems. A code is 'a system of symbols designed to be applied to a classified set of items to give a brief, accurate reference, facilitating entry, collection and analysis'. (ii) Note. Only two features need to be listed. The code must be easy to use and communicate. Each item should have a unique code. The coding system must allow for expansion. The code should be flexible so that small changes in a cost's classification can be incorporated without major changes to the coding system itself. The coding system should provide a comprehensive system, whereby every recorded item can be suitably coded. The coding system should be brief, to save clerical time in writing out codes and to save storage space in computer memory and on computer files. At the same time codes must be long enough to allow for the suitable coding of all items. The likelihood of errors going undetected should be minimised. Code numbers should be issued from a single central point. Different people should not be allowed to add new codes to the existing list independently. Codes should be uniform (that is, have the same length and the same structure) to assist in the detection of missing characters and to facilitate processing. The coding system should avoid problems such as confusion between I and, O and 0 (zero), S and 5 and so on. The coding system should, if possible, be significant (in other words, the actual code should signify something about the item being coded).

4 Final Mock Exam : Answers Gross profit statement If the code consists of alphabetic characters, it should be derived from the item's description or name (that is, mnemonics should be used). Product Y Product X GHS GHS Sales revenue 4,000 (,000 GHS) 56,000 (3,500 GHS6) Joint costs 5,600 (4/80 GHS5,000) 36,400 (56/80 GHS5,000) Gross profit 8,400 9,600 Per unit (c) (i) Joint costs are not separately identifiable until the split off point is reached, so they are apportioned, in this case, on the basis of weight of output. The issue is whether the joint process as a whole is profitable, not if each joint product is covering its apportioned cost. The decision as to whether or not to process the products further should be taken based on whether the incremental revenue is greater than the incremental cost. (ii) This is the correct test as to whether or not Product A should be processed further. GHS Incremental revenue from further processing ( ).50 Incremental cost.0 Benefit from further processing 0.40 Each kg of Product AA will generate extra profit of GHS0.40 so Product A should be processed further.

5 Final Mock Exam : Answers 3 Question Marking scheme Marks (a) If explained fully give max marks, else just. Key driver would be closing stock, but give credit to sensible suggestions Significance ie costs greater than return Suggestions to improve ratio mark per point eg reduce stock holding and therefore purchases, better cost control, train staff so more efficient, use lower grade of labour (if possible) increase selling price (only if market will take it) etc 3 (c) One mark per valid point eg profit driven by sales not production, better reflection of which costs are truly variable in the immediate term, recognises value only when a sale is made, focus on throughput prevents cash being tied up, maximising throughput will lead to maximising profit Max 3 (d) Meaning of value at point A Meaning of value at point B 4 (e) Calculation of Gross Contribution for each service in total Deduction of attributable fixed costs Calculation of general fixed costs Discussion of financial viability 8 0 (a) (c) Using profitability Division L looks to have the best performance whereas using throughput accounting the best performing division is actually Division O. The reason for this difference is most likely due to inventory. Cost of sales are reduced by any production that has happened which isn't then sold until a future period by deducting closing inventory. Divisions with a large stockholding (inventory) at the end of the period will therefore often appear to be very profitable. Throughput accounting however, does not carry costs forward in this manner. It deducts the cost of all materials purchased and spend on labour etc that has happened during the period. W's TPAR is less than this means that its costs are greater than its return and this is not therefore a viable position. W could look to improve its TPAR by reducing its stockholding and therefore reducing purchases. Stricter cost control and cost reduction initiatives would also help to improve this ratio. These could include: sourcing alternative cheaper suppliers, using cheaper labour or better trained labour that will be more efficient. An increase in selling price would also increase the TPAR but care would need to be taken here. If a rise in selling price results in a loss in quantity of units sold this may not be a wise move. A major concept underlying throughput accounting is that the majority of costs, with the exception of materials are fixed in the immediate term. In reality this is often the case as even labour costs can often not be changed in the very short term as such it is a measure which reflects reality. Profit recognises value as soon as an item is made. Throughput accounting on the other hand does not recognise any value being added to the business until a product is sold. This is a more prudent

6 4 Final Mock Exam : Answers (d) approach which is particularly appropriate for OWL given that its products have a limited shelf life. A build up of inventory could result in products becoming obsolete and being written off rather than being sold. Throughput accounting aims to maximise throughput. Such an approach prevents cash being tied up in inventory and the production process. Furthermore this approach should also lead to profit maximisation. Point A is the company's breakeven point on the assumption that the services are sold in order of their C/S ratio, all of the service with the highest C/S ratio (service D) being sold first, all of the service with the second highest C/S ratio (service E) second, and so on until the breakeven sales value is reached. We base the ratio on gross contribution (ie before any fixed costs). Point B is the average breakeven point for DEFG Ltd on the assumption that the services are sold in the ratio,000:,300:,450:,970 until the breakeven sales value is reached. (e) D E F G Per service Total Per service Total Per service Total Per service Total Overall total GHS GHS GHS GHS GHS GHS GHS GHS GHS Selling price Variable cost Gross contribution 0 0, ,800 () (,450) 7 3,790 36,40 Attributable fixed costs 4,400 3,700,650 0,750 Net contribution 5,600 0,00 (,450),40 5,390 General fixed costs (w) 8,930 Profit 6,460 Working Total fixed costs = (,000 GHS) + (,300 GHS3) + (,450 GHS) + (,970 GHS4) = GHS9,680 General fixed costs = GHS(9,680 4,400 3,700,650) = GHS8,930 The above table shows that services D, E and G are financially viable as they make a positive contribution towards the organisation's general fixed costs. Each unit of service F provided results in a negative contribution of GHS, and hence the service should not be offered unless there are other business reasons for continuing to provide it, such as a contract already in force.

7 Final Mock Exam : Answers 5 Question 3 Marking scheme Marks (a) Sales Variable costs Fixed costs Tax CA tax benefits Working capital Capital investment Discount factors at 5% NPV calculation Comment and conclusion Definition of ZBB Steps involved in ZBB mark per well explained point Max (a) Year GHS GHS GHS GHS GHS GHS Sales (W),08,500,686,990,458,500,5,70 Variable cost (W) (588,000) (934,90) (,389,000) (700,00) Fixed costs (350,000) (350,000) (350,000) ((350,000) Net cash flow 43,500 40,070 79,500 65,50 Tax at 30% (43,050) (0,6) (5,850) (49,656) CA tax benefits (W3) 75,000 56,50 4,88 7,563 Working capital (00,000) (0,000) (30,000) 40,000 0,000 Capital Investment (500,000) (500,000) 30,000 After-tax cash flow (600,000) (376,500) 404,00 695,9 0,858 97,907 Discount factors 5% Present values (600,000) (37,555) 305, ,395 58,63 48,660 GHS NPV (57,798) The NPV of the proposed project is negative and therefore should be rejected. Workings Year 3 4 Demand (units) 35,000 53,000 75,000 36,000 Selling price (GHS/unit) (30.03 n ) Sales (GHS/year),08,500,686,99,458,500,5,70 Year 3 4 Demand (units) 35,000 53,000 75,000 36,000 Variable cost (GHS/unit) (6.05 n ) Sales (GHS/year) 588, ,90,389, ,00

8 6 Final Mock Exam : Answers 3 Capital allowances Tax benefits GHS GHS,000, = 50,000 50, = 75,000 50, = 87,500 87, = 56, , = 40,65 40, = 4,88 4 By difference 578,5 39, = 7,563,000,000 30,000 39, ,5 = Zero based budgeting (ZBB) involves preparing a budget for each cost centre from a zero base. Effectively it as if each activity, to which the budget relates, is being done for the first time. Every item of expenditure has then to be justified in its entirety in order to be included in next year s budget. There is a four-step approach to ZBB. Specification of activities Firstly, managers should specify, for their responsibility centres, those activities that can be individually evaluated. Decision packages Each of the individual activities is then described in a decision package. The decision package should state the costs and revenues expected from the given activity. It should be drawn up in such a way that the package can be evaluated and ranked against other packages. Ranking Each decision package is evaluated and ranked usually using cost/benefit analysis. Allocation The resources are then allocated to the various packages based on the ranking outlined above.

9 Final Mock Exam : Answers 7 Question 4 Marking scheme Marks (a) (i) Materials price variance ( each material) 4 (ii) Materials usage variance ( each material) 4 (iii) Materials mix variance Actual actual mix Actual standard mix Variance in GHS (iv) Materials yield variance Standard actual quantity Standard standard quantity Variance in GHS Short formal report: Title Terms of reference/introduction Procedure/method Findings Conclusions Recommendation(s) Marks for other sensible suggestions; Contents, Appendices etc 4 Max 6 0 (a) (i) Materials price variance Standard Actual Actual price price Difference quantity Variance GHS per kg GHS per kg GHS per kg kg GHS K (F) (F) A (.0) (A) (A) B (.00) (A) (A) O (F) 39.0,70.8 (F),09.9 (F) (ii) Materials usage variance Standard usage for 930 units Actual Standard of output usage Difference price Variance kg kg kg GHS per kg GHS K (F) 04.00,59. (F) A (F) (F) B (F) 86.00,90. (F) O (.4) (A) 7.50 (0.5) (A),7.8, (F) 5,8. (F)

10 8 Final Mock Exam : Answers (iii) (iv) Materials mix variance K A B O Standard mix Actual Standard of actual usage mix Difference price Variance kg kg kg GHS per kg GHS (F) (F) (F) (F) (F) 86.00,30.00 (F) (7.) (A) 7.50,47.00 (A),4.4, (F) Materials yield variance Standard mix Actual Standard of actual usage mix Difference price Variance kg kg kg GHS per kg GHS K (F) 04.00,89.60 (F) A (F) (F) B (F) 86.00,68.0 (F) O (F) 7.50,45.50 (F),7.8, (F) 4, (F) Alternative calculation:,4.4 kg of input should yield 89.4 units of output.6 but did yield units Variance in kg 37.6 (F) standard price per unit of output GHS.7 Yield variance GHS4, (F) Short formal reports are used in formal contexts such as where middle management is reporting to senior management. Short formal reports should contain the following sections. Title At the top of every report (or on a title page, for lengthy ones) appears the title of the report (its subject) and, as appropriate, who has prepared it, for whom it is intended, the date of completion, and the status of the report ('Confidential' or 'Urgent'). Terms of reference or introduction Here is laid out the scope and purpose of the report: what is to be investigated, what kind of information is required, whether recommendations are to be made etc. Procedure or method This outlines the steps taken to make an investigation, collect data etc. Telephone calls or visits made, documents consulted, computations made etc should be briefly described, with the names of other people involved. Findings In this section the information itself is set out. The content should be clearly structured in chronological order, order of importance, or any other logical relationship. Conclusion(s) This section allows for a summary of main findings. Recommendation(s) Here, if asked to do so in the terms of reference, the writer of the report may suggest the solution to the problem investigated so that the recipient will be able to make a decision if necessary.

11 Final Mock Exam : Answers 9 Question 5 (a) Marking scheme Marks Up to marks per point Issues include: Wasted time Not being motivated Deliberately setting out to fail Being ignored 6 Balanced Scorecard approach: Stating what it is Financial perspective Customer perspective Internal perspective Learning & growth perspective 0 (c) Explanation of two factors with reference to the scenario (max marks each) 4 0 (a) Divisional partners appear to be involved in the budgeting process as they are required to submit a divisional cost budget to the senior partner. However, the senior partner amends each divisional budget without discussing the amendments and it is evident that the divisional partners do not have any real involvement in the process as they are unable to influence the final budget for the respective division. This is likely to have an adverse effect on divisional partner motivation, who will feel that they have wasted their time preparing a budget which has effectively been ignored. As such, divisional partners are unlikely to feel personally responsible for achieving the target costs bestowed upon them. They may even deliberately fail to achieve the budgeted costs to prove that their own budget was correct and that the amendments imposed by the senior partner were unrealistic. Balanced Scorecard The balanced scorecard is a strategic management technique for communicating and evaluating the achievement of the strategy and mission of an organisation. It comprises an integrated framework of financial and non-financial performance measures that aim to clarify, communicate and manage strategy implementation. It translates an organisation's strategy into objectives and performance measurements for the following four perspectives: Financial perspective The financial perspective considers how the organisation appears to shareholders. How can it create value for its shareholders? Kaplan and Norton, who developed the balanced scorecard, identified three core financial themes that will drive the business strategy: revenue growth and mix, cost reduction and asset utilisation. Customer perspective The customer perspective considers how the organisation appears to customers. The organisation should ask itself: 'to achieve our vision, how should we appear to our customers?' The customer perspective should identify the customer and market segments in which the business units will compete. There is a strong link between the customer perspective and the revenue objectives in the financial perspective. If customer objectives are achieved, revenue objectives should be too.

12 0 Final Mock Exam : Answers Internal perspective The internal perspective requires the organisation to ask itself the question 'What must we excel at to achieve our financial and customer objectives?' It must identify the internal business processes that are critical to the implementation of the organisation s strategy. Kaplan and Norton identify a generic process value chain consisting of three processes: the innovation process, the operations process and the post-sales process. Learning and growth perspective The learning and growth perspective requires the organisation to ask itself whether it can continue to improve and create value. If an organisation is to continue having loyal, satisfied customers and make good use of its resources, it must keep learning and developing. It is critical that an organisation continues to invest in its infrastructure ie people, systems and organisational procedures in order to provide the capabilities that will help the other three perspectives to be accomplished. (c) The firm could choose to measure staff experience. This could be achieved by monitoring staff turnover rate or analysing the qualification levels of newly recruited staff. Some information could be taken from internal sources but much would have to come from colleges or external recruiters. Exit interviews could also be used. Another NFPI that the firm could measure is competitiveness. This could be monitored through the size of customer base and market share by service or customer group. Regular market surveys drawing on both internal and external sources of information can be used to compile such reports. The firm could measure non-compliance with accountancy regulation; this would indicate problems with staff training.