SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT

AFIN317: ADVANCED MANAGEMENT ACCOUNTING

MID SEMESTER EXAMINATION

TUESDAY 25TH
APRIL 2017
14:00- 17:00 HOURS

Time allowed: 3 HOURS plus 5 minutes reading time

Instructions to Candidates:

1. Check that you have the correct examination paper in front of you.
2. There are FIVE (5) questions in this paper. Answer FOUR (4) questions.
Answer question ONE (1) in Section A which is COMPULSORY and ANY
THREE (3) from section B.
3. All questions must be answered in the answer booklet provided only.

4. Write down the number of questions that you have answered on the cover
of the examination answer booklet.

5. Begin each question on a new page.

6. Electronic calculators are permitted in this examination.

7. There shall be NO communication between students during the

examination. Any students caught doing this will be disqualified.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.

1
SECTION A: COMPULSORY
QUESTION ONE
Kubo limited produces a range of products at seven separate sites. Each site produces
a maximum of four products. The directors have decided to introduce Activity Based
Costing (ABC) and have asked each site manager to obtain and analyse the relevant
data for their site. Product costs are currently calculated using absorption costing, with
overheads being absorbed on a machine hour basis.

As part of the process of introducing ABC, the directors wish to assess the profitability
of individual products, with the possibility that the product range may be reduced. You
are the Manager of the Zoom site and you have obtained the following data:

Product A B C

ZMW ZMW ZMW

Selling price per unit 300 530 435

Direct material per unit 55 67 98

Direct labour per unit 41 54 57

Overheads per unit 117.20 293 117.20

Total cost per unit 213.20 414 272.20

Budgeted production volume 600 units 400 units 200 units

Machine hours per unit 0.6 1.5 0.6

Production runs in period 32 40 25

Number of sales orders 19 5 15

Number of deliveries of material 8 2 16

2
The budgeted overheads of the site for the period are:

Machine running costs ZMW 78,560

Set up costs ZMW 82,900

Material handling costs ZMW 49,500

Machine hours are limited to 1,140 hours per period

Required:

i) Calculate the cost of each product using ABC. [12 marks]

ii) Draft a memo to the Managing Director which:

a) Using the ABC information indicate which product(s) should no longer be

manufactured and justifies your recommendation; [4 Marks]

b) Discusses the other factors that should be considered before a final decision is
made. [4 Marks]

[Total: 25 Marks]

3
SECTION B

ANSWER ANY THREE QUESTION

QUESTION TWO

a) Enervate limited has been asked to quote a price for a one-off contract. The
company’s management accountant has asked for your advice on the relevant costs for
the contract. The following information is available:

Materials
The contract requires 3,000 kg of material K, which is a material used regularly by the
company in other production. The company has 2,000 kg of material K currently in stock
that had been purchased last month for a total cost of ZMW 19,600. Since then the
price per kilogram for material K has increased by 5%.

The contract also requires 200 kg of material L. There are 250 kg of material L in stock,
which are not required for normal production. This material originally cost a total of
ZMW 3,125. If not used on this contract, the stock of material L would be sold for
ZMW 11 per kg.

Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid ZMW 9.50 per
hour. There is a shortage of skilled labour and all the available skilled labour is fully
employed in the company in the manufacture of product P. The following information
relates to product P:
ZMW per unit ZMW per unit
Selling price 100
Less
Skilled labour 38
Other variable costs 22
––– (60)
–––
40

4
Required:

(i) Prepare calculations showing the total relevant costs for making a decision about the
contract in respect of the following cost elements: Materials K and L; and Skilled labour.
[7 Marks]
(ii) Explain how you would decide which overhead costs would be relevant in the
financial appraisal of the contract. [5 Marks]

b) There are three reasons why implementing an environmental management

accounting system makes sense- cost savings, improved environmental reporting and
minimizing environmental risk.

Required:

(i) Explain the objectives of environmental management accounting. [4 Marks]

(ii) Explain how “good” environmental behavior may help an organization to achieve
each of the following:

 Cost savings;

 Improved environmental reporting;

 Minimising environmental risk. [9 Marks]

[Total:25 Marks]

5
QUESTION THREE

a) The strategic management process encompasses three phases-strategy formulation,

implementation, and evaluation and control. Discuss role of each of the following
functional levels in the strategic planning process:

i) Corporate level

ii) Tactical level

iii) Operational level

[12 Marks]

b) Discuss the four elements of the BCG Matrix in the context business and how it can
be applied to turn the fortunes of a for profit organisation around and thus lead to
improving its overall performance. [8 marks]

C) As a Management Accountant briefly explain the importance of an information

system to an organisation.
[5 Marks]

[Total: 25 Marks]

6
QUESTION FOUR

(a) Sonic limited assembles and sells many types of radio. It is considering extending
its product range to include digital radios. These radios produce a better sound quality
than traditional radios and have a large number of potential additional features not
possible with the previous technologies (station scanning, more choice, one touch
tuning, station identification text and song identification text etc).A radio is produced by
assembly workers assembling a variety of components. Production overheads are
currently absorbed into product costs on an assembly labour hour basis. The company
is considering a target costing approach for its new digital radio product.

Required:

(i) Briefly describe the target costing process that the company should undertake.

[3 Marks]

(ii) Explain the benefits to the company of adopting a target costing approach at such

an early stage in the product development process. [4 Marks]

(iii) Assuming a cost gap was identified in the process, outline possible steps the
company could take to reduce this gap. [5 Marks]

(b) A selling price of ZMW44 has been set in order to compete with a similar radio on
the market that has comparable features to the company’s intended product. The board
has agreed that the acceptable margin (after allowing for all production costs) should be
20%.

Cost information for the new radio is as follows:

Component 1 (Circuit board) – these are bought in and cost ZMW4.10 each. They are
bought in batches of 4,000 and additional delivery costs are ZMW2, 400 per batch.

Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each

completed radio. However, there is some waste involved in the process as wire is
occasionally cut to the wrong length or is damaged in the assembly process. The
company estimates that 2% of the purchased wire is lost in the assembly process. Wire
costs ZMW0.50 per metre to buy.

Other material – other materials cost ZMW 8.10 per radio.

7
Assembly labour – these are skilled people who are difficult to recruit and retain.
Edward Co has more staff of this type than needed but is prepared to carry this extra
cost in return for the security it gives the business. It takes 30 minutes to assemble a
radio and the assembly workers are paid ZMW 12.60 per hour. It is estimated that 10%
of hours paid to the assembly workers is for idle time.

Production Overheads – recent historic cost analysis has revealed the following
production

Overhead data:

Total production overhead ZMW

Month 1 620,000 Month 2 700,000

Total assembly labour hours

Month 1 19,000 Month 2 23,000

Fixed production overheads are absorbed on an assembly hour basis based on normal

annual activity levels. In a typical year 240,000 assembly hours will be worked by the
company.

Required:

Calculate the expected cost per unit for the radio and identify any cost gap that might
exist. [13 Marks]

[Total: 25 Marks]

8
QUESTION FIVE

A company manufactures a single product which has the following cost structure based
on a production budget of 10,000 units.

Materials is 4 kg at ZMW3/kg ZMW12

Direct labour is 5 hours at ZMW7/hour ZMW35

Variable production overheads are recovered at the rate of ZMW8 per direct labour
hour.

Other costs incurred by the company are:

ZMW
Factory fixed overheads 120,000
Selling and distribution overheads 160,000
Fixed administration overheads 80,000

The selling and distribution overheads include a variable element due to a distribution
cost of ZMW2 per unit.

The fixed selling price of the unit is ZMW129.

Required:
(a) Calculate how many units have to be sold for the company to breakeven.
[5 Marks]
(b) Calculate the sales revenue which would give a net profit of ZMW40, 000.
[6 Marks]
(c) If the company could buy in the units instead of manufacturing them, calculate how
much it would be prepared to pay if both:
(i) Estimated sales for next year are 9,500 units at ZMW129 each; and
(ii) ZMW197,500 of fixed selling, distribution and administrative overheads would still
be incurred even if there is no production (all other fixed overheads would be
saved). [14 Marks]

[Total: 25 Marks]

END OF EXAMINATION PAPER