THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL
PERFORMANCE MANAGEMENT
MOCK EXAMINATIONS – NOV. 2022
TIME ALLOWED: 3 HOURS

ALL QUESTIONS ARE COMPULSORY

QUESTION 1
Give Division is an important supplier to take division in a group in which divisions are operated as
autonomous profit centres. The group has established the following rules for calculating transfer prices:

a. If the product is being sold to customers outside the group, the average price for the past six
months is to be used as the transfer price;
b. If the product is not sold to outside customers, the transfer price to be used is the standard
variable cost plus fixed overhead at minimum budgeted volume plus a 10% profit margin on
cost.

The following data are available regarding each division:

Give Division: This division produces three products, A, B and C whose variable costs per unit and
apportioned fixed costs per annum are:

A B C

N N N

Variable manufacturing cost, per unit 6 13 18

Fixed cost per annum 75,000 105,000 180,000

The direct labour hour content of each of these three products is 3 direct labour hours per unit, but the
materials used are different. The production capacity of the factory is 180,000 direct labour hours and it
is a requirement that at least 45,000 direct labour hours be used on each product. The remaining
capacity can be used for any combination of three products.

The division has been selling 40% of its output of product A to customers outside the group and the
average price over the past 6 months has been N13 per unit. Product A has also been sold to Take
Division as has all Give Division’s output of products B and C.

Take Division: This division has three products: Theta, Sigma and Omega which use products A, B and C
from Give Division as follows:

Take Division’s product Number of units of Give Division’s products used:

A B C
1 unit of Theta uses 5 5 -
1 unit of Sigma uses 3 5 2
1 unit of Omega uses 2 - 8
The unit selling prices of this division’s products, their other unit variable costs ( i.e. excluding those
from Give Division) and apportioned fixed costs per annum are:
Theta Sigma Omega
N N N
Selling price, per unit 280 295 340
Other variable costs, per unit 30 25 45
Fixed cost, per annum 60,000 90,000 120,000

Take Division has no difficulty in making sales at the above prices and it must sell at least 1,500 per
annum of each product. However, because product A is being sold by Give Division to customers outside
the group, Take Division has complained that they are operating considerably below capacity.
The group planning executive has therefore intervened and instructed Give Division to stop selling
outside the group.
You are required, on the basis that all Give Division’s production must be sold exclusively to Take
Division:
a. As general manager of Give Division, to:
i. State what production pattern you would adopt in your sales to Take Division;
ii. Calculate what profit per annum would be earned from those sales. (7marks)
b. As general manager of Take Division, to:
i. State what quantities of products A, B and C you would order from Give Division:
ii. Calculate what profit per annum would be earned from your sales. (7marks)
c. as group planning executive, to:
i. State what production pattern you would recommend to maximize group profit;
ii. Calculate what profit per annum would be earned from that pattern. (7marks)

B. The production engineers of Give Division discover a method of increasing the capacity of the factory
beyond the present limits of 180,000 direct labour hours, but additional costs would be incurred as
follows:
Increase in capacity (in thousands of direct labour hours) 9 19 27 36
Total additional cost, per annum (N’000) 15 55 125 210
Increases can only be made in steps of 9,000 direct labour hours to be spread evenly over all three
products and the maximum increase is 36,000 direct labour hours.
Assuming that:
a. All other data are as given earlier; and
b. The increase must be divided equally among Theta, Sigma and Omega
You are required, as group planning executive, to calculate what increased production, if any, would
optimize group profit.

SOLUTION 1

A. (a) Transfer Price:

A B C
Budgeted fixed costs N75,000 N105,000 N180,000
Minimum budgeted volume (45,000hrs,
3hrs per unit) 15,000 15,000 15,000
Fixed cost per unit N5 N7 N12
 N N N
Standard variable cost 6 13 18
Fixed cost 5 7 12
Full cost 11 20 30
Profit 2 2 (10%) 3 (10%)
Transfer price N13 N22 N33
N N N
Transfer price 13 22 33
Standard variable cost 6 13 18
Contribution per unit N7 N9 N15
Hours per unit 3 hours 3 hours 3 hours
Contribution per hour* N2.33 N3 N5
Ranking 3rd 2nd 1st

*Since labour hours are the production limiting factor, profits will be maximised by earning the
greatest contribution per hour worked.

The production pattern of Give Division would be: Contribution

Per unit Contribution
Hours Units N N
A (minimum) 45,000 15,000 7 105,000
B (minimum) 45,000 15,000 9 135,000
C (balance) 90,000 30,000 15 450,000
180,000 N60,000 690,000
Less fixed costs 360,000
Divisional profit N330,000

(b) Units costs Theta Sigma Omega

N N NN N N
Materials at transfer price:
A ( x 13) 65 39 26
B (x 22) 110 110 0
C (x 33) 0 66 264
175 215 290
Other variable costs 30 25 45
Total variable costs 205 240 335
Contribution 280 295 340
N75 N55 N5
Units of raw material (A, B, & C)
Consumed, per unit of output 10units 10units 10units
Contribution per unit of raw material N7.5 N5.5 N0.5
Ranking 1st 2nd 3rd

The purchasing pattern of Take Division (for 60,000units) would be:

Contribution per Total
end product unit Contribution
 Units of Units of
end product raw material N N
Sigma (minimum) 1,500 15,000 5 75,500
Omega (minimum) 1,500 15,000 55 82,500
Theta (balance) 3,000 30,000 75 225,000
6,000 N60,000 315,000
Less fixed costs 27,000
Divisional profit N45,000

(c) Product A could be sold on the open market at a contribution of N7 per unit

Theta Sigma Omega

N N NN N N
Variable costs of manufacture:
A ( x 6) 30 18 12
B (x 13) 65 65 0
C (x 18) - 36 144
95 119 156
Other variable costs 30 25 45
Total variable costs 125 144 201
Sales Price 280 295 340
Contribution N155 N151 N139

Contribution per unit of raw material N15.5 N15.1 N13.9

Since the contribution earned by producing raw materials for internal transfer exceeds the
contribution from sale of A on the open market, all output of Give division should be transferred.
Since sales are limited by the production constraint to 6,000units, the company’s optimum
production schedule is:

Contribution Total
per unit Contribution
Units N N
Sigma (minimum) 1,500 151 226,500
Omega (minimum) 1,500 139 208,500
Theta (balance) 3,000 155 465,000
6,000 900,000
Less fixed costs 630,000
Profit N270,000

(At this level of output, the profit of Give Division would be N225,000 and of Take Division
would be N45,000)

B. The contribution from each product is: Contribution Contribution per 100units
Unit of end product
Product: N N
Theta 155 15,500
Sigma 151 15,100
Omega 139 13,900
 N44,500

For every 100units of each product sold (i.e. 300 units in total) we would need 3,000units of raw
material, or 9,000hours of production in Give Division. The incremental contribution would be
N44,500.

Increase Increase in Increase in Increase/Decrease in

Hours Contribution Fixed Costs profit
N N N
9,000 44,500 15,000 29,500
18,000 89,000 55,000 34,000*
27,000 133,500 125,000 8,500
36,000 178,000 210,000 (32,000)

Group profit would be optimised by working 18,000 additional hours. Beyond this volume of
output, incremental costs exceed incremental revenue, so that profits would decline

QUESTION 2
Spoldget Limited has a contract to supply annually 3,600 tonnes of product A at N24 tonne and
4,000 tonnes of product B at N14.50 a tonne. The basic components for these products are
obtained from a joint initial distillation process. From this joint distillation residue is produced
which is processed to yield 380 tonnes of by-product Z. By-product is sold locally at N5 a tonne
and the net income is credited to the joint distillation process. The budget for the year ending 30th
June, 19x1 includes the following data:

Joint process Separable costs

Product A Product B By-product Z
Variable cost per tonne of 5 11 2 1
input, in N
Fixed costs for year, in N 5,000 4,000 8,000 500
Evaporation loss in process as
percentage of input 6% 10% 20% 5%
Since the budget was compiled it has been decided that an extensive five-week overhaul of the
joint distillation plant will be necessary during the year. This will cost an additional N17,000 in
repair costs and reduce all production in the year by 10%. Supplies of the products can be
imported to meet the contract commitment at a cost of N25 a tonne for A and N15 a tonne for B.
Experiments have also shown that the joint distillation plant operations could be changed during
the year such that either:
i. The output of distillation for product A would increase by 200 tonnes with a
corresponding reduction in product B distillate. This change would increase the joint
distillation variable costs for the whole of that operation by 2%.
Or
ii. The residue for by-product Z could be mixed with distillate for products A and B
proportionate to the present output of these products. By intensifying the subsequent
processing for products A and B acceptable quality could be obtained. The intensified
operation would increase product A and B separable fixed costs by 5% and increase
 the evaporation loss for the whole operation to 11% and 21% respectively.
You are required to:
a. Calculate on the basis of the original budget:
i. The unit costs of products A and B; and
ii. The total profit for the year;
b. Calculate the change in the unit costs of products A and B based on the reduced
production;
c. Calculate the profit for the year if the shortfall of production is made up by imported
products;
d. Advise management whether either of the alternative distillation operations would
improve the profitability calculated under (c) and whether you recommend the use of
either.

SOLUTION 2

10,000 tonnes input

Joint process loss 6%

400tonnes

4,000tonnes 5,000tonnes Z

A B Loss 5%

Loss 10% Loss 20%

380 tonnes of Z

3,600 tonnes of A 4,000 tonnes of B

Net income from Z N N

Revenue (380 tonnes x N5) 1,900
Less variable costs (400 tonnes x N1) 400
Fixed costs 500 900
Net income 1,000

We are not told how the joint production costs should be apportioned between A and B; therefore
a units basis of apportionment has been chosen. N

Joint processing costs

Variable costs (10,000 x N5) 50,000
Fixed costs 5,000
55,000
Less net income from Z 1,000
Costs 54,000
Apportioned to A (4,000 tonnes) N24,000
B (5,000 tonnes) N30,000
 Product A Product B Total
N N N
Net joint processing costs 24,000 30,000 54,000
Further processing costs
Variable 44,000 10,000 54,000
Fixed 4,000 8,000 12,000
Total costs 72,000 48,000 120,000
Sales 86,400 58,000 144,400
Profit 14,400 10,000 24,400

Units costs per tonne of output A N20 (for 3,600 tonnes)

B N12 (for 4,000 tonnes)

b) If output is reduced by 10%, the contribution from by-product Z would be 90% of N(1,900 –
400) = N1,350, and net income from Z would be N850.

Joint process costs N

Variable costs (9,000 x N5) 45,000
Fixed costs (5,000 + 17,000) 22,000
67,000
Less income from Z 850
Net costs 66,150

Apportioned to A (3,600 tonnes) N29,400

B (4,500 tonnes) N36,750

Product A Product B Total

N N N
Net joint processing costs 29,400 36,750 66,150
Further processing costs
Variable (3,600 x 11) 44,000 (4,500 x 2) 9,000 48,600
Fixed 4,000 8,000 12,000
Total costs 73,000 53,750 126,750
Units of output 3,240 tonnes 3,600 tonnes

Unit costs per tonne N22.53 N14.93

c. N

Costs of own production (above in (b)) 126,750

Purchase cost of 360 tonnes of A (at N25) 9,000
and 400 tonnes of B (at N15) 6,000
141,750
Sales revenue 144,400
Profit 2,650

d. (i) If output of distillate A is increased by 200 tonnes and of B is reduced by 200 tonnes

A B
Distillate 3,800 tonnes 4,300 tonnes
Loss in processing 10% 20%
Output from future processing 3,420 tonnes 3,440 tonnes
Variable costs of further processing A (3,800 x N11) 41,800
B (4,300 x N2) 8,600
50,400

Without the With the Difference

Change change
N N N
Joint processing variable costs 45,000 45,900 (900)
Further processing variable costs 48,600 50,400 (1,800)
Purchases of A 9,000 4,500* 4,500
Purchases of B 6,000 8,400* (2,400)
108,600 109,200 (600)

*180 tonnes of A at N25 and 560 tonnes of B at N15

The scheme is not justifiable because it would lose N600 in profits.

ii. Residue for by-product Z is 90% of 400 tonnes = 360 tonnes, mixed between A and B in the
proportions of their output from joint processing.

Product A Product B
Output from joint processing 3,600 tonnes 4,500 tonnes
Residue for Z (360 tonnes) 160 tonnes 200 tonnes
Revised input to further processing 3,760 tonnes 4,700 tonnes
Loss 11% 21%
Output from further processing 3,346.4 tonnes 3,713 tonnes
Costs with change
N
Joint processing variable costs 45,000
Further processing variable costs A (3,760 x N11) 41,360
B (4,700 x N2) 9,400
Purchases of A (253.6 tonnes at N25) 6,340
Purchase of B (287 tonnes at N15) 4,305
106,405
Loss of revenue from Z 1,710
108,115
Savings in further processing Z N
Variable costs (360 x N1) 360
Fixed costs (if directly attributable) 500 860
107,255
Cost without the change (as in (c) (i)) 108,600
Benefits from the change N1,345
The scheme is justifiable, since it would increase profits by up to N3,055. If the fixed costs of
further processing Z are not avoidable, the increase in profit would be N2,555.
QUESTION 3
EduPro Publishers Limited is considering launching a new monthly magazine at a selling price of
N100 per copy. Sales of the magazine are expected to be 500,000 copies per month, but it is
possible that the actual sales could differ quite significantly from estimate. Two different methods
of producing the magazine are being considered and neither would involve any additional capital
expenditure. The estimated production costs for each of the two methods of manufacture, together
with the additional marketing and distribution costs of selling the new magazine, are summarized
below:

Method X Method Y
Variable costs N55 per copy N50 per copy
Specified fixed costs N8,000,000 N2,000,000
Per month per month
Semi-variable costs:
The following estimates have been obtained:
350,000 copies N5,500,000 N4,750,000
Per month per month
450,000 copies N6,500,000 N250,000
Per month per month
650,000copies N8,500,000 N6,250,000
Per month per month
It may be assumed that the fixed cost content of the semi-variable costs will remain constant
throughout the range of activity shown.
The company currently sells a magazine covering related topics to those that will be included in
the publication and consequently it is anticipated that sales of this existing magazine will be
adversely affected. It is estimated that for every ten copies of the new publication, sales of the
existing magazine will be reduced by one copy.
Sales and cost data of the existing magazine are show below:
Sales 220,000copies per month
Selling price N85 per copy
Variable costs N35 per copy
Specific fixed costs N8,000,000 per month
Required:
a. Calculate, for each production method, the net increase in company profits which will
result from the introduction of the new magazine, at each of the following levels of activity:
500,000copier month 400,000 copies per month 600,000copies per month
b. Calculate, for each production method, the amount by which sales volume of the new
magazine could decline from the anticipated 500,000 copies per month, before the
company makes no additional profit from the introduction of the new publication.
c. Briefly identify any conclusions which may be drawn from your calculations.
SOLUTION 3

1. The semi-variable costs must be analysed into their fixed and variable portions,
using the high/low method

Method A Method B
N’000 N’000
Total cost of 650,000 units 8,500 6,250
Total cost of 350,000 units 5,500 4,750
Variable cost of 300,000 units 3,000 1,500
Variable cost per unit N10 N5
N’000 N’000
Total cost of 650,000units 650 8,500 650 6,250
Variable cost of 6,500,000units x N10 6,500 x N5 3,250
2,000 3,000

2. Contribution loss from existing magazine

N
Selling price 85
Variable costs 35
Contribution per unit 50

Contribution on existing magazine loss per unit of new magazine is 1 x N50 = N5

3. Summary of annual fixed costs

A B
N’000 N’000
Fixed components of semi-variable costs 2,000 3,000
Fixed costs per question 8,000 12,000
Total 10,000 15,000

4. Contribution per copy N N

Selling price per unit 100 100
Variable costs:
- Per question (55) (50)
- From semi-variable cost (w 1) (10) (5)
- Loss contribution (w 2) (5) (5)
Contribution per unit 30 40

EduPro Publishers Limited

Projected net increase in profits from introduction of New monthly magazine

Method A
Output (000 units) =Q= 500 400 600
N’000 N’000 N’000
Total contribution (Q x N30) 15,000 12,000 18,000
Less total fixed cost (w 3) 10,000 10,000 10,000
Incremental profit 5,000 2,000 8,000

Method B
Output (000 units) =Q= 500 400 600
N’000 N’000 N’000
Total contribution (Q x N40) 20,000 16,000 24,000
Less total fixed cost (w 3) 15,000 15,000 15,000
Incremental profit 5,000 1,000 9,000

b. What is required here is the margin of safety for each of the methods.
X Y
Total fixed costs (F) N10,000,000 N15,000,000
Contribution/ unit © N30 N40
Break-even point (F ÷ C) 333,333 copies 375,000 copies
Expected sales 500,000 copies 500,000 copies
Margin of safety 166,667 copies 125,000 copies

Conclusion
i. At the expected volume of sales of the new magazine, it should be introduced to the
market, and either method X or method Y used.
ii. If the expected volume of sales of the new magazine is more likely to exceed 500,000
than to fall short of 500,000 method Y would be more profitable than method X.
iii. If the expected volume of sales is more likely to fall short of 500,000 than to exceed it,
method X would be more profitable and also more ‘safe’ than Method Y.
iv. If sales are less than 333,333units, the company would suffer a loss of profits, even using
Method X.

QUESTION 4
The budgeted balance sheet data at 1 March 2021 of ICANOnline Ltd is as follows
Depreciation
Cost to date Net
N N N
Fixed assets
Land and building 500,000 - 500,00
Machinery and equipment 124,000 84,500 39,500
Motor vehicles 42,000 16,400 25,600
666,000 100,900 565,100
Working Capital
Current assets
Stock of raw materials (100 units) 4,320
Stock of finished goods (110 units) 10,450
Debtors (Jan N7,680, Feb N10, 400) 18,080
Cash and bank 6,780
39,640
Less current liabilities
Creditors (raw materials) 3,900
35,740
600,840
Represented by
Ordinary share capital (fully paid) N1 shares 500,000
Share premium 60,000
Profit and loss account 40,840
600,840
*The stock of finished goods was valued at marginal cost
The estimated for the next three-month period are as follows.
March April May
Sales (unit) 80 84 96
Production (unit) 70 75 90
Purchases of raw materials (units) 80 80 85
Wages and variable overheads
At N65 per unit N4,550 N4,875 N5,850
Fixed overheads N1,200 N1,200 N1,200
The company intends to sell each unit for N219 and has estimated that it will have to pay N45 per
unit for raw materials. One unit of raw materials is needed for each unit finished product.
All sales and purchases of raw materials are on credit. Debtors are allowed two month’s credit and
suppliers of raw materials are paid after one month’s credit. The wages, variable overheads and
fixed overheads are paid in the month in which they are incurred.
Cash from a loan secured on the land and buildings of N120,000 at an interest rate of 7.5% is due
to be received on 1 May. Machinery costing N112, 000 will be received in April and paid for in
May.
The loan interest is payable half yearly from September onwards. An interim dividend to 31 March
2021 of N12,500 will be paid in May.
Depreciation for the three months, including that on the new machinery, is as follows;
Machinery and equipment N15, 733
Motor vehicles N3,500
The company uses the FIFO method of stock valuation, Ignore taxation
Required
(a) Calculate and present the raw materials budget and finished goods budgets in terms of
units, for each month from March to May inclusive.
(b) Calculate and present the corresponding sales budgets, the production cost budgets and
the budgeted closing debtors, creditors and stocks in terms of value.
(c) Prepare and present a cash budget for each of the three months.
(d) Prepare a master budget i.e. a budget trading, profit and loss account for the four months
to 30 May 2021, and budgeted balance sheet as at 30 May, 2021
(e) Advise the company about possible ways in which it can improve its cash management

SOLUTION 4
Raw materials budget for March-May 2005
March April May Total
Units Units Units Units
Opening stock 100 110 115 100
Add: Purchase 80 80 85 245
180 190 200 345
Less: To production (70) (75) (90) (235)
Closing stock 110 115 110 110
Finished goods budget for March-May 2005
March April May Total
 Units Units Units Units
Opening stock 110 100 91 110
Add: Units produced 70 75 90 235
180 175 181 345
Less: Units sold (80) (84) (96) (260)
Closing stock 100 91 85 85

Sales budget for March – May 2005

March April May Total
Units sold 80 84 96 260
Sales (N) at N17,520 N18,396 N21,024 N56,940
N219/unit
Production cost budget for March-May 2005
March April May Total
Units produced 70 75 90 235
Raw material usage
Units at N43.20 70 30 100
Units at N45.00 0 45 90 135
Cost N3,024 N3,321 N4,050 N10,395
Wages and variable
Costs N4,550 N4,875 N5,850 N15,275
Total production N7,574 N8,196 N9,900 N25,670

Budgeted closing debtors at 31 May, 2005

Debtors are allowed two months credit. Closing debtors will therefore be the sum of April and
May sales.
N
April 18,396
May 21,024
Total 39,420

Budgeted closing creditors at 31 May, 2005

One month credit is taken from suppliers. Closing creditors will therefore equal the total of May
raw materials purchases.

Closing stocks at 31 May, 2005

Raw material stocks are valued at particular cost (FIFO basis). Finished goods are valued at
marginal cost (i.e. raw materials and labour plus variable overhead).
Units Price Value
N N
Raw materials 110 45 4,950
Finished goods 85 (45+65) 110 9,350
Total closing stock value 14,300

c) Cash budget for the three months to 31 May, 2005

March April May
Receipts:
Debtors (2 months credit) 7,680 10,400 17,520
Loan 120,000
Total 7680 10,400 137,520
Payments:
Creditors (1 months credit) (3,900) (3,600) (3,600)
Wages and variable overheads (4,550) (4,875) (5,850)
Fixed overheads (1,200) (1,200) (1,200)
Machinery (112,000)
Interim dividend (12,500)
Total (9,650) (9,675) (135,150)
Net cashflow (1,970) 725 2,370
Opening cash 6,790 4,820 5,545
Closing cash 4,820 5,545 7,915

d) Master budget
Budgeted trading and profit and loss account for March to May 2005
N N N
56,940
Sales
Cost of goods sold:
Opening stock of finished goods 10,450
Add: Production cost 25,670
36,120
Less: Closing stock (9,350)
26, 770
30,170
Gross profit
Expenses:
Fixed overheads 3,600
Depreciation:
Machinery and equipment 15,733
Motor vehicles 3,500
19,233
Interest (1 month at 7.5%
On #120,000) 750
23,583
Profit before tax and dividuals 6,587
Dividend 12,500
Loss for period (5,913)

Budgeted balance sheet as at 31May 2005

Depreciation
Cost to date Net
Fixed assets N N N
Land and buildings 500,000 500,000
Machinery and equipment 236,000 (100,233) 135,767
Motor vehicle 42,000 (19,900) 22,100
Total 778,000 120,133 657,867
Working capital
Current assets
Stock of raw materials 4,950
Stock of finished goods 9,350
Debtors 39,420
Cash and bank 7,915
61,635
Less current liabilities
Creditors (raw materials) 3,825
Loan interest payable 750
4,575
 57,060
714,927
Represented by: N
Ordinary share capital (fully paid) N1 shares 500,000
Share premium 60,000
Profit and loss account (N40,840 - N5,913) 34,927
594,927
Secured loan (7.5%) 120,000
714,927
e)The means that the company could use to improve its cash management fall into four main
categories:
i) Effective use of the cash budget ii) Tight control of working capital
ii) Changing the capital structure iv) Operational factors

QUESTION 5
You work for a large multinational company which manufactures weedkillers. It has been decided
to introduce zero based budgeting in place of the more traditional incremental budgeting. The
manager of the research and development department has never heard of zero based budgeting.

Required

Write a report to the manager of research and development department which explains the
following.

(a) How zero based budgeting techniques differ from traditional budgeting
(b) How ZBB may assist in planning and controlling discretionary costs
(c) How ZBB will help to control budgetary slack
(d) The types of budgets we have with clear illustrations
(e) Distinction between cash budget and activity based budget
(f) Difference between real cashflow and nominal cashflow
(g.) TADEFO Limited is a manufacturing company which produces and assembles car
components. The company has two main production departments: Machining and Assembling.
Each of the two departmental managers is responsible for producing annual budgets based on
targets set by the management. From last year’s budget, TADEFO Limited hoped to turn an
expected 10 percent rise in total revenue into a 20 percent increase in the company’s profits.

The following budgeted information relates to TADEFO Limited for the forthcoming period:
Products
ACQ BEZ CFJ
Sales and production (units) 30,000 50,000 40,000
N N N
Selling price (per unit) 73 45 95
Prime cost (per unit) 65 32 84
Hours Hours Hours
Machine Department (machine hours per unit) 4 2 5
Assembly Department (direct labour hours per unit)2 7 3

Overheads can be re-analysed into ‘cost pools’ as follows:

Cost pool N‘000 Cost driver Quantity for the period
 Machine services 359 Machine hours 425,000
Assembly services 328 Direct labour hours 532,000
Set-up costs 36 Set-ups 720
Order processing 165 Customer orders 34,000
Purchasing 88 Suppliers’ orders 12,400
976
You have also been provided with the following estimates for the period:

ACQ BEZ CFJ

Number of set-ups 220 130 210
Customers orders 18,000 10,000 10,000
Suppliers’ orders 5,200 3,600 4,200
Required:
a. Prepare and present a profit statement using activity-based costing.
b. What would you consider to be the weaknesses of an incremental budgeting system for a
company such as TADEFO Limited?
c. Describe Activity-Based Budgeting (ABB) and comment on the advantages of its use by
TADEFO Limited.
d. Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees.
e. “Encouraging employee participation in budget setting is beneficial” Discuss.

SOLUTION 5
REPORT
To: Managing Director
From: Management accountant
Date: 01.01.2022
Subject: Zero based budgeting
(a) Zero based budgeting and traditional budgeting
The traditional approach to budgeting works from the premise that last year’s activities will
continue at the same level or volume and that next year’s costs plus an extra amount to
allow for expansion and inflation. The term ‘incremental’ budgeting is often used to
describe this approach.

Zero based budgeting(ZBB) quite literally works from a zero base. The approach
recognizes that every activity has a cost and insists that there must be quantifiable benefits
to justify the spending. ZBB expects managers to choose the best method of achieving each
task by comparing costs and benefits. Activities must be ranked in order of priority.

(b) A discretionary cost is not vital to the continued existence of an organization in the way
that, say, raw materials are to be a manufacturing business. ZBB was developed originally
to help management with the difficult task of allocating resources in precisely such areas.
Research and development is a frequently cited example; others are advertising and
training.

Within a research and development department ZBB will establish priorities by ranking the
projects that are planned and in progress. Project managers will be forced to consider the
benefit obtainable from their work in relation to the costs involved. The result may be an
overall increase in R&D expenditure, but only if it is justified.
( c) Budgetary slack may be defined as the difference between the minimum necessary costs
and that costs built into the budget or actually incurred. One of the reasons why, under
traditional budgeting, an extra amount is added to last year’s budget may be because
managers are overestimating costs to avoid being blamed in the future for overspending
and to make targets easier to achieve. Slack is a protective device and it is self-fulfilling
because managers will subsequently ensure that their actual spending rises to meet the
(overestimated) budget, in case they are blamed for careless budgeting.

In an R&D department a further incentive to include slack is the nature of the work.
Managers may well have ‘pet’ projects in which their personal interest is so strong that
they tend to ignore the benefit or lack of benefit to the organization which is funding them.

The ZBB approach, as described in (a) above, clearly will not accept this approach: all
expenditure has (in theory) to be justified in cost-benefit terms in its entirely in order to be
included in next year’s budget. In practice it is more likely that managers will start from
their current level of expenditure as usual, but ZBB requires them to work downwards,
asking what would happen if any particular element of current expenditure and current
operations were removed from the budget.
a) TADEFO LIMITED
b)
Incremental budgeting is a form of budgeting in which a budget is based on the current year’s
results plus an extra amount for estimated growth or inflation in the following year. It is
administratively easy to prepare but it is inefficient because it encourages slack and wasteful
spending to creep into budgets, hence making it to become a normal feature of actual spending.
Car components manufacturing operates in a highly competitive environment.
Continuous improvement is very important and driving down of costs to the lowest level is
essential as much as possible. It is therefore unlikely that incremental budgeting will provide the
necessary tools for such an environment.
Incremental budgeting approach will be adequate only if current operations are effective, efficient
and economical as much as possible without alternative options available to TADEFO Limited.
Traditional incremental budgeting do not take into account alternative options neither does it look
for ways of improving performance.
c) Activity Based Budgeting (ABB) is the use of costs determined by using activity based costing
as a basis for preparing budgets. It involves defining the activities that underlie the financial figures
in each function and using the level of activity to decide how much resource should be allocated
to that function, how well it is being managed and to explain variances from budget. Its principle
is that activities drive costs and the objective is to control the causes of costs rather than the costs
themselves.
The essence is that in the long run, costs will be better managed and understood.
Activities must be examined and split up according to their ability to add value because it is not
all activities that are value adding. Activity Based Budgeting (ABB) ensures that an organisation’s
overall strategy, any actual or likely changes in that strategy is taken into account because it
attempts to manage the business as the sum of its inter-related parts.

Activity Based Budgeting (ABB) implementation leads to the realization that the business as a
whole needs to be managed with a great reference to the behavior of activities and cost drivers
identified. The set up costs for TADEFO Limited’s assembly line are clearly identified and hence
can be budgeted for and controlled.
d) Zero Based Budgeting (ZBB) can motivate employees because they do not set targets based on
historical data but on those consistent with their future objectives and those of the organization. It
ensures that employees benefit by re-thinking an activity from the scratch, though it calls for extra
work.
Zero Based Budgeting (ZBB) aims to eliminate slack, hence, employees raise the expectations of
their own achievement and through increasing job satisfaction, enhance their motivation. It also
encourages goal congruence through increasing flexibility especially if incentives schemes are
based on the budget setting process.
e) Encouraging employee participation in budget setting has several advantages.
Budgets should be realistic and acceptable to employees. Employees who are familiar with specific
operations will provide the information for the budget and knowledge spread among several levels
of management is pulled together.
Morale and motivation are improved as it is hard for people to be motivated to achieve targets set
by others. Operational managers’ commitment to organizational objectives is increased and co-
ordination between units is improved.

QUESTION 6
Olasco Ltd, manufactures a single profit. The company’s fixed costs amount to 2,550 per week.
It is estimated that the variable cost per unit is given by the expression:

1.6 + 0.040Q

Where Q is the quantity (in units) produced and sold.

The marketing function considers that there is a linear relationship between the quantity demanded
and the selling price per unit, such that each time the selling price is increased by N0.30, the
quantity demanded falls by one unit, and vice-versa for decrease in selling price. The current
selling price is N51.60 and resultant demand is for 60 units per week.

You are required to calculate:

(a) The weekly profit or loss achievement at the current level of output and sales
(b) The optimal selling price per unit, output and resultant profit
(c) On the assumption that Olasco Ltd now intends to maximize revenue, calculate the
output in units which will maximize total revenue, the corresponding selling price and
net profit.
SOLUTION 6
a) Existing VC/Unit = 1.6+ 0.04 (60) = N4
Existing contribution per unit = N51.60 – 4 = N7.60
Using π = qC – F = 60(47.60) – 2550 = N306.00
This means that the company is currently making a profit of N306 per week

b) (i) Determine price function

The price function is given by:
P = a + bq
Again we need to derive the value of ’a’and ‘b’
When P = 51.60, q=60 and
When P = 51.90 (51.60 + 0.30), q=59 (60 – 1).
Thus:
51.60 = a + 60q ………………… (1)
51.90 = a + 59q ………………… (2)
(2) – (1) 0.30 = -1q
 Q = -0.30
Subst. for equ. (1):
= a + 60 (-0.30)
= 69.60
Then P = 69.60 – 0.30q
(ii) Total Revenue (TR) = P.q
i.e. TR = (69.60 – 0.30q)q
TR = 69.60q – 0.30q2

(iii) MR = dTR = 69.60 – 0.60q

Dq
(iv) Determine total cost (TC)
TC = TFC + TVC but
TVC = (VC/Unit) (q)
= (1.6 + 0.4q) (q)
= 1.6q + 0.04q2

(v) Determine MC
MC = Dtc = 1.6 + 0.08q
Qp
i.e. -0.68q = -68
q = 100
Optimal selling price
P = 6960 – 0.30 (100) = #39.60
Unit VC = 1.6 + 0.04 (100) = N5.60
Unit contribution N34.00
Using optimal profit is
Π = qc – F = 100(34) – 2550= N850

(c ) At the point where revenue is maximized

MR = 0 i.e.
69.60 – 0.60q = 0
-0.60 = 69.60
Q = 116 units
Price (P) = 69.60 – 0.30 (116) = N34.80
VC/units = 1.6 + 0.04 (116) = N6.24
Unit contribution 34.80 – 6.24 = N28.56
Π = 116 (28.56) -2550
QUESTION 7

a) As a management accountant, list at least six items you will bear in mind to ensure
effective communication and maximum motivation of the recipient of management
reports.
b) State four types of management reports.
c) State five indicators of business failure
d. Unilever Limited manufactured three joint products at a joint cost of N600,000. These
products were processed further and sold as follows-

Additional processing cost

Product Sale (N) (N)

A 400,000 100,000

B 700,000 320,000

C 300,000 130,000

1,400,000 550,000

If the company had pursued its opportunity to sell at split-off directly to other processors, sales
would have been A = N250,000, B = N400,000 and C = N100,000. The company expects to
operate at the same level of production and sales in the forthcoming year.
On the assumption that all the costs incurred after split-off are variable, which products should
be processed further and which should be sold at split-off?

SOLUTION 7
QUALITITES OF MANAGEMENT INFORMATION
Information will be of no use if the expected user does not find any need for it. Management
information must be useful in order to justify the resources and time spent in generating it. If the
management is not prepared to make use of information, it should not request for such information.
However, even if the management were prepared and willing to make use of information, it would
nevertheless not use such information unless the information provided is qualitative. For
information to be useful, it must be:
a) Timely:The main aim of requiring information is that it would be used to achieve an
objective. This means requiresthat the information must be available as and when needed.
A well presented but late information is a useless exercise. The management accountant,
while endeavouring to present a beautiful report, must ensure that such a report is timely
and submitted on time so that it could be used for the purpose for which it is intended.
b) Accurate and verifiable: The management information must be as accurate as possible.
The management accountant must ensure that errors are minimised as much as possible.
A report that is full of avoidable errors cannot be relied upon for decision-making. It should
be noted, however, that there is no such thing as absolute accuracy. What is required is a
report prepared according to agreed principles, which could be relied upon for the
purposefor which it is intended. This may mean that a realistic speedily prepared estimate
may be more useful than a more precise answer produced some time later.
c) Complete: When report is presented, it must address the areas for which it is required.
Where a report is not complete the management will be frustrated, as it cannot take any
decision based on the report. Any decision based on such information would not be an
optimal decision. May it be added, however, that it is better to provide a fairly complete
report on time than to attempt to present an exhaustively complete report and so turn in a
late report.
d) Concise: Managers have no time and are very impatient at reading voluminous reports. So
the reporter should present a concise report that should reflect enough details for the
decision on ground. Only useful information should be provided rather than allowing the
manager to sieve what he requires from a whole lot of apparently unwanted details.
e) Clear and not ambiguous: Managers need not be of a specific stock or skill. They are of
diverse orientations. As much as possible, the reporter should avoid the use of ambiguous
and special languages in reports. If however, such special terms are inevitable, the terms
should be fully explained when used. Unless this is done, the report will not be useful.
Some of the ways to enhance clarity of reports include the following:
i) avoid unexplained terminologies;
ii) use charts and other diagrams where appropriate
iii) produce neat and well laid out reports;
iv) use a reasonable but not excessive, amount of redundancy aimed at eliciting the
recipient’s views;
v) the language structure should enhance readership and understanding.
f) Presented to show trend or comparative figures: Where necessary, comparative figures
may be shown to enable the manager to establish trends of performance over time. This is
most expected in financial reports. This will engender motivation and increase
performance.
g) More valuable than the cost of preparing it: there should be a cost-benefit analysis for every
report before it is prepared. The cost of generating the report should not overwhelm the
benefits derivable from such a report. If it would cost N100 to provide a report on over
expenditure of N50, of what use would that report be? Therefore, the cost of generating the
report vis a vis the benefits derivable from the use of such a report should guide the
production of reports.
h) Relevant: A report must fulfil a need and relevant for the intended purposes. A report
should not be prepared for the fun of it because for every report cost is incurred. If a report
is not being used in any form, its further production should be stopped.
i) Economically realistic: The report must reflect the current economic reality. Therefore,
accounting information, which may cloud the current economic reality, should be adjusted
to show the effective situation based on the current economic reality.
j) Communicated through a familiar medium: Information should be presented in the medium
that is familiar to the user. If the user desires, for instance, that a report be presented in
diskettes or in a hard printed copy, it should be presented in that medium. Again, a manager
may desire to have his or her report presented to him or her in another language to enhance
understanding, this should be done if possible. The purpose is to ensure that the user makes
optimal use of the report.
TYPES OF REPORTS
The main classes of reports of interest to the management include the following:
 a. Routine Report: This type of report is produced on short-term regular basis e.g daily,
weekly or monthly. Examples of this report include cash flow report, daily production
report, daily cash disbursements, weekly budget balance report, daily or weekly sales or
purchases analysis, etc.
b. Exceptional Report: This type of report is produced to call the attention of the manager
to areas of deviations so that immediate action can be taken to address them. It is an
extension of the philosophy of management by exception whereby only deviations are
reported on.
c. Special Report: this is a report on special circumstances, e.g. to investigate a loss, fraud,
a continuous deviation or variances, labour unrest, etc. This type of report is usually carried
out through a formally constituted committee with definite terms of reference and specified
scope. It may also be carried out by a unit of an organization that which has the skill to do
so.
d. Statutory Periodic Report: This report is required to be presented in accordance with
legal or statutory requirements. Examples of this report include annual audited accounts,
company returns to the Corporate Affairs Commission, the banks returns to the Central
Bank, the returns of the insurance companies to the National Insurance Commission.
e. On demand report: These reports are provided on demand by the management. Examples
of this class of reports will be details on customer’s balances, supplier’s account balances,
stock levels, etc.

NOTE THE FOLLOWING

METHODS OF REPORTING
Reports may be presented to management using any of the following methods:
a. Printed descriptive texts: Most reports are presented in printed text form on papers.
This is the most popular method of presenting reports to management for deliberation
and decision.

b. Printed graphs and tables: Information could be presented in the form of graphs such
as pie chart, bar charts and tables for management use. This method is used when
management desires to have a pictorial or tabular view of information for clarity and
reduce reading time.

c. Visuals: This method requires the display of information on visuals only either using
slides, projectors or on computer screens. Information may be saved in diskettes or
CDs and displayed on the screens to be observed. This method is mostly adopted in
highly computerized environments and where it is preferable to present same motion
pictures.

d. Memos: Memos are used to communicate urgent information usually between

departmental managers. Such memos are usually used to communicate immediate
changes in procedures, which are intended to be for a short term or to culminate into
policies later.
BUSINESS FAILURE INDICATORS
Divisionalisation/decentralisation, has indicated that the performance of the firm cannot only be
measured using quantitative financial criteria.A company that is either progressing or receding can
e known by considering some externalindicators withoutcrunching the figures, which are often
‘doctored’ favourably to support the objectives of the firm.
Some of the indicators of a company showing signs of failure include the following:
i. Increase in staff turnover – the company starts to lose its very skilled staff and finds it difficult to
replace them.
ii. Unkempt and poor office environment – a company with very untidy working environment,
non-functional vehicles, failing equipment, outstanding rent payments on property, etc, may be
facingdistress.
iii. Increasing debt burden- inability to settle suppliers of raw materials, staff salaries, non-payment of
taxes, etc.
iv. No advertisement of service – no publicity, reduction in customer’s patronage, etc
v. Law suits against the company by staff and management staff, in-fighting between directors and
major shareholders, etc
vi. Inability to meet either statutory or self-imposed targets, and other corporate requirements and
objectives,
vii. Mass disposal of assets and non-replacement of faulty ones,
viii. Closure of operations
ix. Negotiating sale with other prospective investors at very low consideration
x. Fall of the share price if quoted on the stock exchange.

UNILEVER
Calculation of net benefit or loss from processing further
Products A B C
Sale after further processing 400,000 700,000 300,000
Less Sale at split-off 250,000 400,000 100,000
Incremental income 150,000 300,000 200,000
Less additional processing cost 100,000 320,000 130,000
Net benefit or (loss) 50,000 (20,000) 70,000
From the computation above, it is economical to process products A and C further, while
product B should be sold at split-off.

QUESTION 8

a. Give Two examples each of Internal and External sources of information.

b. Briefly explain interdependence between today's organisations and information systems.
c. Discuss five (5) challenges that the use of computer based information system (CBIS) is
imposing on the business world today.
d. MTN provides GSM network service for voice call and data, as well as customer service;
identify Three critical success factors (CSFs) and corresponding key performance indicators
(KPIs)
e. CAROSSI Limited makes quality wooden products such as tables, chairs, benches and doors.
Historically, the company has used mainly financial performance measures to assess the
performance of the company as a whole. The company’s Chief Executive Officer has just been
informed of the ‘Balanced Scorecard Approach’ and is eager to learn more.
CAROSSI Limited has two Divisions X and Y, each with its own cost and revenue streams.
Each Division is managed by a divisional manager who has the power to make all investment
decisions within the Division. The cost of capital for both Divisions is 15 percent. Historically,
investment decisions have been made by calculating the Return on Investment (ROI) of any
opportunities and presently, the return on investment of each Division is 18 percent.
 A recently appointed manager for Division X strongly feels that using Residual Income (RI)
to make investment decisions would result in better ‘goal congruence’ throughout
theorganisation. Each Division is currently considering the following separate investments:
Division X Division Y
Capital required for investment N88.2m N46.0m
Revenue generated from investment N46.4m N28.1m
Net profit margin 30 percent 35 percent

The company is seeking to maximise shareholders’ wealth.

Required:
a. Describe the Balanced Scorecard Approach to performance measurement.
b. Determine both the return on investment and residual income of the new
investment for each of the two divisions. Comment on these results and take
into consideration the manager’s views about residual income.

SOLUTION 8

a. Internal and External sources of information, with Two examples each.

Internal sources: these are the set of data/information that are generated in the course of an
organisation’s business operations. Examples:

i. Sales invoice/receipts ii. Marketing records

iii. Personnel records iv. Finances records
v. Production records vi. Asset records
vii. Stock/inventory viii. Purchases records
ix. Company policy x. Transaction records
External sources: these are data/information obtained from the environment surrounding the
organisation. Examples:(½ mk each x any 2 = 1 mk)

i. Government legislation ii. Competitors iii. Public opinions

iv. Textbooks v. Internet vi. Mass media
vii. Published articles by regulatory bodies and research institutes e.g. Central Bank of Nigeria,
Government ministries and agencies, Federal Office of Statistics (Now National Statistics
Bureau)
viii. Customers/Clients
ix. Suppliers
b. Information system is having tremendous impact on contemporary organisations and
business enterprises; how business and management decisions are made, as well as what
products and services to produce depend so much on information, which are provided by
information systems. The interdependent relationship between business organisations and
information systems is noticeably increasing to the point that information system has
become a strategic instrument in any organisation, such that the survival of any
organisation in the nearest future depends on what its information system will be able to
do. Increasing market share, producing high quality or low cost products, developing new
products, developing niche market, and increasing employee productivity depend more on
the kind and quality of information system used in the organisation. (4mks)
c. Challenges imposed on business world today by the use of information system include:
i. Information explosion/overload: IS has made it easier to produce and distribute
information, which has led to proliferation and explosion of information, such that
 filtering, sorting, compiling, analysing and disseminating these data/information have
become a daunting task.
ii. Rapid development in Information System technology: Information Technology is a
rapidly evolving field, users of computer-based Information Systems must align
themselves with the new technologies so that they can flow along with the changes and
be able to cope with the challenges.
iii. Staff redundancy: Although Information System can bring about increased employee
productivity and efficiency, it can also lead to staff redundancy; since 1 employee using
computer-based Information System can handle the job of 5 employees using manual
system.
iv. Digital divide: computer-based Information System technology has brought about a
division between ‘information-rich’ and information-poor’. Bridging this digital divide
requires that business organisations must organise regular refresher training for their
staff to brace up with new inventions in the IT world.
v. Deadly cost of system error: As ability to create and distribute data is increasing, the
number of people directly affected by a system error has also grown enormously.
Consider how many lives will be lost by a single error in the software controlling airplane
flight.
vi. Piracy challenges caused by magnification: as it has become easier for music/movies
industry to reproduce their products, the same technology is being used to pirate the
products.
vii. Strategic business challenge: mere automation will not bring the expected business
productivity without aligning business goals and objectives with Information strategy.
viii. Globalisation challenge: The rapid growth in international trade and emergence of global
economy demand information system that can support both the production and selling
of goods in many different countries.
ix. Information Technology infrastructure challenge: the business concern here is how to
develop an Information System infrastructure that supports business goals.
x. Information System investment challenge: the challenge here is how to determine and
ensure commensurate business value of Information System.
xi. Conflicting Information System development requirements: it is generally impossible to
develop a system of highest quality, within a short time scale, and at a low cost.

S/N CSF KPI

1. Quality voice call Reduced network downtime;

Reduced network interference during calls;

2. Quality data delivery Smooth (i.e. non-breaking) data download;

Increased download rate.

3. Customer satisfaction Quick response to customer’s questions;

Reduced customer complaints;

4. Value added customer service Low call/data rate; bonus air time or data.
 5. Sustained competitive advantage Use Customer Relationship Management (CRM) to
obtain, analyse, and retain customers.

E.
a) The Balanced Scorecard Approach to performance measurement emphasises the need to provide
management with a set of information which covers all relevant areas of performance in an
objective and unbiased manner. The information provided cover both financial and non-financial
aspects such as profitability, customer satisfaction, innovation and internal efficiency. It focuses
on four different perspectives:
(i) Customer perspective – This considers how new and existing customers view the organisation.
It should identify targets that matter to customers such as cost, quality, delivery etc.
(ii) Internal perspective – This makes an organisation to consider what processes it must excel at,
to achieve financial and customers’ objectives. This perspective aims to improve internal processes
and decision making.
(iii) Innovation and learning perspective – This requires the organisation to consider how it can
continue to improve and create value. The organization must acquire new skills and develop new
products to maintain a competitive position in their respective market(s) and provide a basis from
which the other perspectives of the balanced scorecard can be achieved.
(iv) Financial perspective – This considers whether the organisation meets the expectations of its
shareholders and how it creates value for them. It focuses on traditional measures such as growth,
profitability and cost reduction.

b) Division X
(i) Return on Investment (ROI)
Net profit = 46.4m x 30% = 13.92m
ROI = Net Profit/ Capital Employed X100%
= N13.92m x 100% = 15.78%
N88.2m
Residual Income (RI)
Imputed interest charge = capital employed x cost of capital
N88.2m x 15% = N13.23m
RI = Net profit - input interest charge
Net profit = N13.92m, Imputed interest charge = N13.23m

RI = N13.92m – N13.23m= N0.69m

(ii) Division Y
Return on Investment (ROI)
Net profit = N28.1m x 35% = N9.835m
ROI = Net profit x 100%
Capital employed
= N9.835m x 100% = 21.38%
N46.0m
Residual Income:
Net profit = N9.835m, capital employed = N46.0m
Imputed interest charge = N46.0m x 15%= N6.9m
R.I = N9.853m – N6.9m = N2.935m

(iii) The current return on investment (ROI) of each division is 18 percent. It is likely that the
manager of Division X will reject any proposal based solely on ROI as the Division X investment
only has a ROI of 15.78%. The proposed investment would reduce Division X’s ROI by 2.22
percentage points.
Division Y manager will likely accept the proposal as the Division’s investment has a ROI of
21.38%. The proposed investment would increase Division Y’s ROI by 3.38 percentage points.
Division Y equally has a more healthy RI unlike Division X. The use of ROI as a sole decision
tool by the organisation would lead to a lack of goal congruence between Division X and the
company as a whole.
The use of RI as an investment measure helps divisions to make decisions that are in the best
interest of the organisation.

QUESTION 9

a. Ozoigbondu Nigeria Limited is a company that is into buying and selling of plasticcontainers.
The company is financed by a capital of N15million inclusive of reserves ina mix of 30% and
70% of debt and equity respectively.
The Company has been in trading business for the past six years and has consistentlyadhered to its
corporate policy on sales, purchases and inventory management.
The company’s policy on sales is to ensure that sales are collected as follows:
(i) Cash sales is 40% of the monthly sales.
(ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on purchases is in agreement with the supplier’s policy which is to pay forall supplies
in the month following. The company’s stock policy is to reserve 30% ofthe month’s purchases as
closing inventory.
The following information is available for the five years 2010 to 2014:
2010 2011 2012 2013 2014
Monthly Sales 3,400,000 3,600,000 4,200,000 4,800,000 7,200,000
Monthly Purchases 2,000,000 2,400,000 2,800,000 3,200,000 4,800,000
Monthly Salaries 350,000 350,000 430,000 430,000 480,000
Monthly Rent 100,000 100,000 100,000 100,000 100,000
Monthly Cash Expenses200,000 220,000 240,000 280,000 360,000

Additional information:
(i) The company purchased a motor vehicle in July 2013 which was paid for inSeptember 2013.
The cost of the motor vehicle was N5,000,000.
(ii) Annual depreciation for the motor vehicle is 20%.
(iii) The Cash Balance as at 31st December 2011 was N4,000,000.
(iv) The company’s salaries, rent and expenses were paid in the month they weredue.
Required:
i. Prepare a Profitability Statement for 2012, 2013 and 2014.
ii. Prepare a Cash Flow Statement for 2012, 2013 and 2014.
iii. Determine and comment on the liquidity ratio (current ratio) for 2014.
iv. Compute the gearing ratio

B. The use of internet has made the entire universe a global village. Managers can comfortably sit
in their offices connected to the internet and the world wide web to obtain all necessary information
for their business needs.
Required:
a. Discuss the concept of globalisation and how management information system
has enhanced effective management performance.
b. What arguments will you advance against globalisation as it relates to
management performance?
c. List Five Internet technology tools that could be used for performance management.
d. Briefly explain the concept of "Change management in IT implementation".
e. List Four proactive approaches to Change management.
f. State Five impacts of Internet on business.
g. Briefly explain five barriers to e-business.
h. Describe the push and pull strategy of e-business.
i. List Six project management tools.

SOLUTION 9

a) OZOIGBONDU NIGERIA LIMITED

Ozoigbondu Nigeria Limited’s current ratio is higher than the approved standard of 2:1. Meaning
that the company is carrying too much cash. A cash level of N33,800,000 is on the high side. This
cash should be put into productive or investment ventures to generate profit.

The ratio concentrates on the longer term stability of the organization in the area of its finances.

B.

a)
Globalisation refers to the process of denationalization of clusters of political, economical and
social activities. It is an evolution which is systematically restructuring interactive phase among
nations, by breaking down barriers in the area of culture, commerce, communication and several
other fields of endeavour.
Globalisation is a growing worldwide interdependence of people and countries made possible as a
result of huge advances in technology. Barriers in trade are broken down and the world major
financial markets are integrating as a result of globalisation. It is a world without frontiers where
business, products, people and their ideas are freely disseminated and diffused. It makes global
exchange of knowledge, commerce and culture to freely interact.
With the aid of satellite communications, internets, fibre optics cable, digital information
transactions, and high speed computers, management of any organization can safely monitor the
activities and trend of their company’s performance. It ensures strong economic integration.
Globalisation makes possible the wide spread of materials, wealth, knowledge and culture.
Corporate work places can be effectively managed online. It has equally made it easier to open up
other countries market, thereby leading to expansion of trade. Internet technology has
revolutionized communication. It enhances easy, cheap and quick access to people and information
worldwide.
Globalisation has given rise to global market value system, global marketing, access to
international financial market and it has effectively removed the world trade barriers.
Hence, with the attendant benefits that come with globalization, managers of organizations can
increase their entities productivity from any remote area of the world and receive information as
and whenever required.
Management Information System (MIS) is the effective use of information to aid the activities of
managers. The activities of managers include:
• Presentation of materials which is enhanced by the use of word processing equipment such as
word processors. The use of spreadsheets also aid the presentation and preparation of
accounting information.
• Teleconferencing, which involves conferencing of managers in different locations also aid the
effectiveness of managers.
• Electronic Commerce (e-Commerce) is another area of MIS where wide varieties of goods and
services are made available to enhance the activities of the managers.
• The production of good information also enables the company to gain more competitive
advantage over rivals of the same line of business and it encourages specialization by
managers.
• Globalisation enables companies to gain more competitive advantage over rivals in the same
line of business. Wide varieties of goods and services are made available. Specialization is
enhanced as excess products have markets.
b) The criticisms against globalization
• Despite the numerous benefits of globalization, it is not without criticisms. It has been argued
that globalization has widened the gap between the rich and the poor. Though global wealth
has increased, it is held in fewer hands, organizations and countries.
• Globalisation brought about environmental degradation. The quest for growth and profitability
by orgasniations has made many of the companies to abandon or ignore environmental
protection and sustenance. Environmental pollution is rampant and environmental offenders
are daily increasing.
• Though globalization has enriched the world scientifically, economically, politically and
socio-culturally, there appears to be no global government to regulate globalization.
• Globalisation has made different countries and cities of the world to be under one roof, but
democracy is literarily eroded and seeds of stability eroded in most countries. This has negative
effect on organizations performance.
• Human animal and plant diseases can spread more quickly through globalization. Economic
depression in one country can trigger adverse reaction across the globe. It can lead to capital
flight where funds are moved from country where interest on return on investment is low to a
country where the interest is high.
• Companies are faced with greater competition. This can put smaller organisations at a
disadvantage as they do not have resources to compete on global scale.
• Globalizations do not maximize sustainable economic growth. With globalisation comes the
activities of fraudsters, hackers etc.

c. Five Internet technology tools for performance management.

i. Intranet
ii. Extranet
iii. Enterprise Resource Planning (ERP) system
iv. Human Resource Management (HRM) System
v. Expert System
vi. Cloud computing
vii. Online Analytic Processing (OLAP)=
d. The use of ICT in business operations involves a major organisational change. People are a major
focus of organisational change. A new way of doing things generate some resistance from people
affected. For example, the implementation of new work support technologies can generate fear
and resistance to change in employees. People and technology are resource partnership that
should be well managed for best results. The success of Information and Communication
Technology (ICT) implementation depends on human beings. Therefore human factor is a
fundamental consideration of ICT applications in business processes. (2 marks)
e. SIX proactive approaches to Change management. (½ mk x any 6 = 3 marks)
i. Be discerning enough to understand the causes of resistance to change.
ii. Employing resilient individuals: that is, employ persons that can adapt to change with
minimum inconvenience.
 iii. Ensuring that employees understand the processes of change through awareness education
and training.
iv. Implementing mechanisms which control the volume and pace of change.
v. Developing and implementing regular and effective change management methodologies –
policies, procedures, processes, approaches, frameworks, tools, and guidelines.
vi. Creating a new climate of change by constantly rewarding useful ideas put into action.
vii. Involve as many people (users) as possible in ICT project planning, development and
implementation.
viii. Make constant change an expected part of the organisational culture.
f. Five impacts of Internet on business:
i. Competitive rivalry
ii. Threat of new entrants
iii. Increased bargaining power of suppliers
iv. Increased bargaining power of customers
v. Business operational effectiveness
vi. Business operational efficiency
vii. Business globalisation
viii. Easy access to business and customer information
g. 5 barriers to e-business are: (1mk each x 5 = 5 mks)
i. Set-up costs. It can be fairly expensive for a small company to establish a website for selling
its products and taking payment by credit card, debit card, Interswitch or PayPal. For example,
it will be expensive for a small company to set up a website showing an online catalogue with
photographs, keeping records of inventory balances, and with the facility to
debit customer credit cards.

ii.
Type of business. Some products and services are easier to sell on the internet than others.
For example, computer firms sell products very successfully over the internet as their products
can be perfectly specified in writing. However, it is much more difficult to sell items of
clothing.
iii. On-going operating costs. A website has to be updated frequently, to keep it interesting (and
accurate), and it might be necessary to keep making special offers to encourage customers to
revisit the site.
iv. Time to establish the system. It takes time to establish a website that customers know about
and want to visit. There is need to advertise your business website.
v. No in-house skills. A company might not employee individuals with the knowledge or skills
to maintain a website. However, this should not be a serious barrier to e-business, especially
if the employer is prepared to give suitable training to staff.
h. In push strategya company uses the internet to try to persuade customers to buy its products or
services. To use a push strategy, a company needs to identify customers or potential customers, and
send out a marketing communication. Typically, companies acquire a customer list and send out e-
mail marketing messages to the e-mail addresses on the list. In pull strategy the company sell goods
through the internet.
i. 6 project management tools are:
i. Work breakdown structure (WBS)
ii. Critical path analysis (or Network analysis)
iii. Gantt chart
iv. Resource histogram
v. Microsoft Project
 vi. PrInCE2 (Projects In Controlled Environments version 2)

QUESTION 10

Pakex is a division of an automobile group that has five years remaining on a leasedpremises in
which it sells self-assembled motorcycles. The management is proposingan investment of
N48million on immediate improvements to the interior of thepremises in order to stimulate sales
by creating a more effective selling environment.
The following information is available:
(i) The expected increase in revenue following the improvements is N40million perannum. The
average contribution to sales ratio is expected to be 40%.
(ii) The cost of capital is 16% and the division has a target Return on CapitalEmployed of 20%
based on the net book value of the investment at thebeginning of the year.
(iii) At the end of the five year period, the premises improvements will have a NILresidual value.
(iv) The management staff turnover at Pakex division is high. The division’sinvestment decisions
and management performance measurement are currentlybased on the figures for the first year of
the proposal.
In addition to the above information, there is an alternative proposal thatsuggests a forecast of the
increase in revenue per annum from the premisesimprovements as follows:
Year 1 2 3 4 5
Nm Nm Nm Nm Nm
Increase in Revenue 56 40 40 24 16

All other factors are expected to remain the same.

Required:
a. Prepare a summary of the statement of the management’s investment proposal
for years 1 to 5 showing Residual Income and Return on Capital Employed for
each year using the straight line depreciation method.
b. Comment on the use of the figures from the Statement in (a) above as a
decision-making and management performance measure.
c. Calculate the Residual Income and Return on Capital Employed for year 1 using the alternative
proposal.

SOLUTION 10

PAKEX DIVISION STATEMENT SUMMARY

b)
Management is motivated to focus only on the outcomes of the first year for any new project
because of the criterion used for performance measurement and investment decisions. Using
straight-line depreciation, Residual Income is negative and the Return on Capital employed
(ROCE) of 13.3% is less than the target return of 20%. Therefore, if the focus is only on the
performance measures for the first year the project will be rejected even though Residual Income
and ROCE rise steadily throughout the five-year period.

c)
Year 1
N‘000
Investment at beginning of year 48,000
Net cash flow (40% x N56million) 22,400
Less: Depreciation 9,600
Profit 12,800
Less: Interest on capital 7,680
Residual Income 5,120
ROCE 26.7%

Workings
Net cash flows per annum = 40% of N40,000,00= N16million
Depreciation on straight line = N48,000,000
5
= N9,600,000
Interest on capital at 16% p.a.
N
Year 1 = N48,000,000 X 0.16 = 7,680,000
Year 2 = N38,400,000 x 0.16 = 6,144,000
Year 3 = N28,800,000 x 0.16 = 4,608,000
Year 4 = N19,200,000 x 0.16 = 3,072,000
Year 5 = N9,600,000 x 0.16 = 1,536,000

ROCE for each year is based on = profit/ Investment