KIMATHI UNIVERSITY LIBRARY

KIMATHI UNIVERSITY COLLEGE OF TECHNOLOGY

UNIVERSITY EXAMINATIONS 2011/2012

FORTH YEAR FIRST SEMESTER EXAMINATIONS FOR THE

DEGREE OF BACHELOR OF COMMERCE

HBC 2213: MANAGEMENT ACCOUNTING

DATE: 18th April 2012 TIME: 8.30am – 10.30am

INSTRUCTIONS: Answer question ONE and any other TWO questions

QUESTION ONE
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 from a previous high of 125,000 units. The gifts have been redesigned
recently and are 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:
Estimated
Sales in units probabilities
50,000 0.10
75,000 0.40
100,000 0.30
125,000 0.20
The units would be sold for sh.500 each. The inability to estimate the sales more precisely
is a problem for Siku Kuu Ltd. the number of units of this product is small enough to
schedule the entire year’s sales in one production run.The production and distributions cost
estimates are as follows:

Units manufactured
50,000 75,000 100,000 125,000

Variable costs (Sh) 9,900,000 14,850,000 19,800,000 24,750,000

Fixed costs (Sh) 7,700,000 7,700,000 8,800,000 8,800,8000
Total costs (Sh) 17,600,000 22,550,000 28,600,000 33,550,000

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The company intends to analyze the data to facilitate making a decision as to the proper size of the
production run.
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 tomake decisions, what size of production run would be
selected? (8 marks)
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)
(14 marks)
c) Explain the role of management accounting in decision making process (8 marks)

QUESTION TWO

A company sells two products A and B with contribution margin ratios of 40 and 30 per cent and
selling prices of sh.5 and sh.2.50 a unit. Fixed costs amount to sh.72,000 a month. Monthly sales
average 30,000 units of product A and 40,000 units of product B.
Required:
(a) (i) Assuming that three units of product A are sold for every four units of product B, calculate the sales
volume necessary to breakeven, in shillings and in units. (10 marks)
(ii) Calculate the margin of safety in sales shillings (5 marks)
(b) If the company spends an additional sh.9,700 on advertising, sales of product A can be
increased to 40,000 units a month. Sales of product B will fall to 32,000 units a month if this is
done. Should this proposal be accepted? (5 marks)

QUESTION THREE

Basic analysis ltd produces and sells one product only, the BBT, the standard cost for one unit being
as follows:
Sh.
Direct material A- 10 kg at Sh.20 per kg 200
Direct material B- 5 litres at Sh.6 per litre 30
Direct wages- 5hrs at Sh.6 per hour 30
Fixed production overhead 50
Total standard cost 310

The fixed overhead included in the standard cost is based on an expected monthly output of 900
units
During April Year 1 the actual results were as follows.
Production 800 units
Material A 7,800 kgs used, costing Sh.159,900
Material B 4,300 units used costing Sh.23,650
Direct wages 4,200 hrs worked for Sh.24,150
Fixed production overhead Sh.47,000
Required
Calculate price and usage variances for each material (6 marks)
Calculate labour rate and efficiency variances (6 marks)
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Calculate fixed production overhead expenditure and volume variances (8 marks)

QUESTION FOUR

Recent developments in the operating environments of businesses have prompted the use of new
performance measures. Discuss the balanced scorecard as an alternative performance measure and
explain its importance compared to other performance measures (20 marks)

QUESTION FIVE

Assume that a company has 3 subsidiaries A, B, and C and that the company does not allocate
corporate headquarters’ costs or interest on long-term debt to the subsidiaries. Summary of the
results are as follows.
£’000’ £’000’ £’000’ £’000’ £’000’
A B C H Total
Operating y income 240 300 480 1020
Variable cost of H 80
Fixed costs of H 120
Interest on L.T debt 400 (600)
Income before taxation 420
Taxes 150
Income after taxation 270

Average book values

Current assets 400 500 600 200 1700
Fixed assets 600 1500 2400 300 4800
6500
Required:
1. Compute the return on investment. ( 5 marks)
2. Compute residual income assuming that the company requires a 10% interest on total assets
of each subsidiary. ( 5 marks)
3. Assume that there is an asset available to subsidiary A which costs £100,000 but which has
an annual profit of £20,000. Advice the manager of A on whether to undertake the project
and comment on whether this decision is in line with the overall objective of the
organisation. (10 marks)

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